One of the most highly debated issues regarding oil production is peak oil theories. Marion King Hubbert developed the most widely accepted of these theories. Hubbert’s predecessors made it difficult for the public to accept his views on peak oil because there were several false predictions along the same lines. This notion speaks of why critics of these theories are so numerous. A peak oil estimate can’t be proven false until the time of the prediction has come and gone, but Hubbert’s theory was unique. Prior hypothesis on this subject was generally based on proven/probable reserves and production growth estimates. Hubbert added one more variable: discovery trends.
A large part of the Hubbert peak theory was that the easiest accessible oil is the first to be extracted from the Earth’s crust. In other words, the low hanging fruit is picked first. After the easy oil is removed, crude future production becomes more expensive. It takes higher crude prices to bring projects on the margin into production. A good representation of this is the massive oil reserve discovered off the coast of Brazil by oil and natural gas producer Petrobras Brasileiro. This oil field was located in the Santos Oil Basin and goes by the name of the Tupi discovery. Lack of super reserve discoveries such as Mexico’s Cantarell and the Saudi’s Gwahar fields is a significant component of popular peak theories and had become a growing concern for crude future production. Naysayers of peak oil theory were out in force following Petrobras’ 2007 announcement of the discovery, but this oil discovery was actually indicative of Hubbert’s theory. The Tupi discovery is a perfect example of high hanging fruit that’s expensive to produce. This oil field sits underneath the Atlantic Ocean.
(Visual courtesy of The Oil Drum: http://www.theoildrum.com/node/3269)
This is a graphic of the Tupi discovery. If Petrobras is to get production out of this reservoir, they will have to go through 6-7 km of water, rock and salt first. Petrobras’ CEO claims each well is going to have a cost range of $30 million to $250 million. In order to reach desired production levels from the Tupi field, it will require around 100 wells. That combined with all of the exploration and other development costs could mean the Tupi discovery will cost up to $100 billion to get online, and with production maintenance costs included, it might take 15-20 years for Petrobras to possibly just make its money back.
The greatest oil discovery in recent times is a great example of high hanging fruit. Some of the claims made by peak oil theorists are starting to show signs of having truth behind them. The potential implications of peak oil on crude future prices and the global economy would probably be dramatic.
(Tupi production costs from Wood Mackenzie: energy and metal production consulting).
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