Economy & Energy
  Year  I  - No 4
Sep/Out 1997

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Revised:
Tuesday, 22 July 2003.


Part 1

Part 2

 

Oil depletion

Carlos Feu Alvim
Omar Campos Ferreira
feu@ecen.com
English Version:
Frida Eidelman
frida@password.com.br

This paper was the base for a presentation at the Brazilian Association of Automotive Engineering in the Seminar  "The Future of Alcohol in a Free Market Scenario".

Introduction

 In the seventies the world lived in the perspective of scarce and expensive oil. More than that , it was believed that raw material would become more expensive , what effectively occurred for some time.

Brazil could afford to live its economical miracle in the seventies because the price of its products rose together with oil prices after the first price chock in 1973.

 

Figure 1: Terms of trade in Brazil compared with that of developed countries and other developing ones. Source: Brasil: O Crescimento Possível. Editora Bertrand do Brasil 1996

 

An analysis of the Terms of trade permit us to understand why Brazil could overcome without much trouble the 1973 chock. It is also possible to understand why the country faced a crisis with the second chock which came along with the devaluation of its products. The 1986 cold chock in oil prices diminished the difficulties but it did not solve the disadvantageous situation in the international terms of trade which came near to the previous plateau at the start of the nineties.

Oil discoveries

In figure 2 it is shown the decennial oil discoveries since 1935. It should be noted that the oil price chocks were not able to increase the oil discovery rates which decreased in the seventies and eighties. This figure was used by Omar Campos Ferreira to evaluate the inflection point of the logistic curve that would determine oil discoveries along the time.
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Figure 2

Indicative as well that one should not expect any significant change in the world reserves panorama is the evolution of the discovery of gigantic wells shown in the study carried out by Petroconsultants referred further ahead. This is so in spite of the advanced geological knowledge and prospecting methods that would allow for more certain evaluations of the reserves and the advanced exploration technology.

Comparison between the Petroconsultant study and the Logistic Method

The logistic method has been used to analyze the historical behavior of biological, physical, social and economical quantities with surprising success. The article Exhaustion of Petroleum Reserves in e&e No 2 mentions some examples and furnishes some bibliography.

This method has the advantage , on the other hand, to eliminate any volitive factor in data projection and indicates a total oil reserve of about 1630 Giga barrels (Gb). This methodology refers to the present technological and economical situation predominating in the studied decades which means that it evaluates the economically exploitable oil in the present market concept.

With a relatively sophisticated methodology, based on geological data and the discoveries’ behavior in several countries and world regions and a judicious assessment study of regions and countries, C. J. Campbell of Petroconsultants S.A estimates the economically exploitable oil (costing up to twice the present price) to be a total of 1800 Gb. The cost limit established looks realistic since it is the one which would make competitive the different oil substitutes.

The Petroconsultants’ study does not care to project the evolution of discoveries. We have used the logistic fitting to the limit of 1800 Gb suggested by that study and compared it to the one shown in O C. Ferreira’s study. Figure 3 shows the fitted data for the two hypothesis of total reserve. The best fit - not necessarily the best projection - corresponds naturally to the 1630 Gb limit determined in the e&e study based, by the way, on the best fit...

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Figure 3

By these estimates, 92% or 83% of economically exploitable oil would have been already discovered in 1992.

Oil production (and demand)

Oil production is regulated to satisfy demand while stock variation is of little importance. On the other hand, except in extremely grave situations ( wars or economical blockage), demand has been satisfied at the world level.

Therefore one may study together the evolution of both along the time. It should be noted that even the world wars have not altered significantly the evolution of the world demand (and production). Figure 4 shows the evolution of world oil production.

Figure 4

The data show eloquently the drastic change in behavior of the demand (and production) curve after the oil prices in 1973. This change in the consumption profile ( since there was oil available) contradicted the catastrophic expectations about the end of oil availability in the medium term.

After the " fright" of the seventies and the recession of the eighties, the nineties is characterized by a modest resume of growth ( economically as well as in oil consumption), intensive international trade and a strong unemployment crisis.

The strategic role of natural resources has been mocked by our authorities. Nevertheless, the developed countries demonstrated the importance of oil in their policies by reacting vigorously to Kuwait’s aggression. On the other hand, they kept the nuclear option in spite of the environmentalists’ opposition. Nuclear energy, conservation measures, additional energy sources, new oil products and the recession of the eighties made it possible to maintain relatively stable oil demand for oil and less dependent on the Middle East production.

The false question of the end of oil availability and the oil depletion

The question of the end of oil availability is a false question. Oil , in spite of being finite will never be completely exhausted since there will always be some oil that will not be extracted for purely economic reasons. The concept of oil reserves depletion would apply to the oil availability at viable prices compared to its substitutes of large energetic use. Oil for specific applications in which it cannot be substituted will probably continue to exist along the life of man on earth.

For a long time the reserve/production ratio was used as an indication of the reserves’ situation for it would give the time ( in years) during which the known reserves in the exploration rhythm at that year would last. This concept is much useful for natural resources of which the knowledge of its total availability is in the initial phase. The reserve/production ratio orients the reasonable efforts to be made in prospecting in order to maintain a supplied market and balanced prices. For a natural resource whose economical availability would be close to be exhausted, this concept is of no use at all. The reserve/production ratio is shown in figure 5.

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Figure 5

On the other hand, oil extraction follows for each well a determined routine due to economic reasons and extraction methods. In this process, production grows gradually, reaches a maximum or plateau and after that decreases. In the same way, a countries’ production where more than half of its possible production ( including the probable reserves to be discovered) has been exhausted follows a pattern that permits to foresee a possible production frame in other counties.

This production pattern seems not valid only for countries which , due their large production potential at lower costs, act as markets’ regulators in order to maintain prices within convenient limits for the set of producers. The Petroconsultants study identifies six countries as those able - due to their reserves’ volume and the low annual depletion rate, less than 2% - to play the regulating role. These important countries will participate in the total world reserves ( known and to be discovered) and are for some years close to reach the so called medium point of  reserves. These countries are:

  • Abu Dhabi
  • Iran
  • Kuwait
  • Neutral Zone (shared between Kuwait and South Arabia)
  • Saudi Arabia

It is supposed that in these countries are concentrated 755 Gb of the total reserves and 611 Gb of the remaining ones. That is, it is supposed that in these countries are concentrated 42% of the total reserves (1800 Gb) or 56% of the remaining reserves (1095 Gb) in the the year 1992. Besides that, the operational extraction costs are extremely low. With some participation of other OPEP countries they have been acting as demand regulators. The special situation of Iraq and Iran (and for some time, Kuwait) has limited the regulation of these countries, which has been mainly made by the remaining countries, notably Saudi Arabia.

The Petroconsultants study supposes that the remaining countries follow a utilization pattern of their reserves which reaches a maximum or plateau whose center coincides with the average point of their total reserves. Therefore, the production profile would be symmetrical in both cases relative to the medium point.

The study presents (see annex) some typical cases which illustrate this behavior as well as the future evaluation of their production. In summary, the countries with strategic preoccupation - which means that the state has direct or indirect means to control production - follow the plateau pattern. The countries purely subject to market laws would adopt the "peak " production process. A third group of countries ( the six previously mentioned) would act as market regulators , absorbing with the reduction of their production the excess of production of the other countries.

In the first group are the United States, the former Soviet Union and Hungary. In the second group, the typical case is of Trinidad Tobago whose production reached a peak at half of its estimated reserves and decreased rapidly afterwards. Other examples are Canada and Austria.

The third group has six countries which have about half of the world reserves. Saudi Arabia, for example, reduced about 40 % of its maximum production during some years and returned back close to its maximum production when Iraq and Iran had difficulties in their production and in the absence of Kuwait’s production during the Gulf War. Kuwait is one of the countries that act as market regulator (swing producer).

In the case of Brazil, it is considered that 40% of the reserves were still to be discovered in 1993 and that the total reserve would be about 20 Gb. Brazil will reach the average point of its reserves in the year 2008. Production would reach a peak in 1.5 million bbl per day in that year and would decrease in the same rhythm as that of production increase.

The production considered for Brazil, as for other developing countries, does not take into account any strategic behavior. It is even mentioned that privatization in the area will favor this behavior for the developing countries. For Argentina, the study foresees a decreasing production as that country has already surpassed the medium point in the reserves.

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