Sunday, January 25, 2015

The most important thing to understand about the coming oil production cutbacks

What the current oil price slump means for world oil supply is starting to emerge. "Layoffs," "cutbacks," "delays," and "cancellations" are words one sees in headlines concerning the oil industry every day. That can only mean one thing in the long run: less supply later on than would otherwise have been the case.

But perhaps the most important thing you need to understand about the coming oil production cutbacks is where they are going to come from, namely Canada and the United States.

Why is this important? For one very simple reason. Without growth in production from these two countries, world oil production (crude oil plus lease condensate which is the definition of oil) from the first quarter of 2005 through the third quarter of 2014 would have declined 513,000 barrels per day. That's right, declined. Including Canada and the United States, oil production rose just under 4 million barrels per day.

That means substantial cutbacks in the development of new oil production in Canada and the United States could lead to flat or falling worldwide oil production.

But, why will any oil production cutbacks come primarily from Canada and the United States? For another very simple reason. Post-2005 oil production growth in these countries came from high-cost deposits in Canada's tar sands and in America's tight oil plays. New production from these high-cost resources simply isn't profitable to develop in most locations at current prices.

Of course, there are various figures floating around about what price level will allow new production to proceed profitably in these deposits. Some of those figures closely match current oil prices. But, we should look at what the oil companies are doing, not what they are saying. And, what they are doing is cutting back and cutting back drastically. Recent U.S. rig counts dropped the most since 1991, and rigs are being withdrawn from the very areas that were responsible for the tight oil boom.

Earlier in January Canada's largest oil company and a major oil producer in the tar sands, Suncor Energy Inc., announced layoffs, a cut in its capital budget and delays in new projects. Others are doing the same.

If the low prices continue, even more of the previously anticipated new production from these deposits will be delayed while production continues to shrink in the rest of the world. The twin North American engines for growth in the world's oil supply would stall.

If the world economy goes into a long-term slowdown or recession, then oil demand will ease further. That would mean lower prices would stick around for a while. But eventually, when growth accelerates, the pressure on constrained supplies may become acute and prices could spike.

By then, much of the workforce and machinery needed to increase production will be idle. But, probably more important, lenders and investors will be reluctant to risk money on tight oil and tar sands projects that only brought them grief the last time around. In all likelihood lack of capital will be the primary hurdle for Canadian and American operators when they attempt once again to ramp up production.

Even if oil prices recover soon to levels that would normally reassure lenders and investors, the growth in new production of U.S. tight oil and Canadian tar sands oil may only return to the hypercaffeinated rates of last summer several years from now after the memory of the recent financial carnage has faded.

Each day that oil prices stay low heightens the risk that the world will soon experience flat or falling worldwide oil production--something the oil supply optimists said simply couldn't happen with these new oil resources now available to us.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at


Steve Bean said...

Hi Kurt, do you happen to know whether the US and Canadian oil being produced is also lower in quality, i.e., BTU/barrel? I just posted something on FB a few days ago similar in message to your piece and wasn't sure if I could say that. In part I'm not clear whether calling tar sands and shale oil extraction "high cost" covers that already. I think it would be helpful to make the distinction if there is one.

Kurt Cobb said...


The end product of both U.S. and Canadian production is high quality light oil. The amount of energy expended (and thus money) to extract tight oil is what eats into its energy return. Still, its quality is very high; it is classified as light sweet crude which means it is low in sulfur and has excellent refining characteristics.

Canadian syncrude is upgraded bitumen, very energy intensive. But the mined bitumen must be classified as very low quality. The Canadian Encyclopedia describes it this way: "[C]ompared to conventional crude oil, bitumen contains more carbon than hydrogen, as well as many more impurities, such as nitrogen, sulphur and heavy metals."

Naturally, these impurities need to be removed and the bitumen "upgraded" in order to flow like conventional light oil.

So, the short answer is tight oil is very high in quality (but still somewhat energy intensive to extract.) Bitumen is very low in quality AND energy intensive to extract and process into something we call oil.

Steve Bean said...

Thanks for clearing that up for me. Is there any data that you're aware of on how much more energy the tight oil extraction requires (so as to calculate a net energy equivalent value)?

Kurt Cobb said...


Charlie Hall's students did some work on evaluating EROI for Bakken wells several years ago. I thought their research was summarized on The Oil Drum, but I can't find it now. You could email Charlie and he could direct you to the findings if they are on the web. I seem to recall EROI above 10. Not bad, but certainly not close to the EROI of Middle East oil or U.S. oil in the heyday of U.S. production growth many decades ago.

Anonymous said...

You have a pretty pessimistic view on the oil sector.

I however, will wait for the Buffet's and Icahn's to show what's really up in the oil sector.

Professor Chris Rhodes said...

Hi Kurt,

I'm not sure how reliable this is, but I presume the journalist has interviewed Charlie's student(Egan Waggoner)

Essentially, the claim is that the Bakken sweet spot has been drilled, with an EROEI of 12, but that drilling outside of there gives an EROEI = 4.

So, at best the Bakken is close to the U.S. average of 11, but lower than the world average of 17. These latter figures are from a paper by David Murphy in Phil.Transactions of the Royal Society of London.



Graham Wells said...

Recommend listening to this:

ChrisMartensondotcom - Peak Prosperity
Gail Tverberg: This Is The Beginning Of The End For Oil Production

Jeff Thatcher said...

Kurt, one thing for you to consider. We had the same cutback in rig counts for nat gas rigs in 08-09. I believe that gas rigs declined from 1500 or 1600 to 320ish today. With rig count decreasing by a factor of five, natural gas production has not declined - it has increased. In 2014 we increased daily production close to 8bcf per day, a record for the US. Rigs getting laid down does not necessarily mean that production will decline.

Kurt Cobb said...


Thanks for the link to the EROI article.


I think Art Berman explains in this post well why laying down rigs now in the tight oil plays will lead to a rather quick response in production. The short version is that pad drilling means each rig represents three times the wells that rigs did in 2008-2009.

wufnik said...

There's a natural gas analog to what Berman discusses wrt tight oil--Haynesville. In Early 2012, this was the largest producing shale gas play. Since then, production has declined over 40%, in spite of a significant increase in the number of producing wells--+36% in the Louisiana portion (which accounts for most of the production from this area.) Berman's argument that rig counts aren't as meaningful as they used to be is just as applicable to gas as it is to oil.

Tanima Raghuvanshi said...

"Layoffs," "cutbacks," "delays," and "cancellations" are words one sees in headlines concerning the oil industry every day.- I totally agree with your viewpoint only solution to this this countries become self reliant and demand less. Can you please write something about how O&G sector can make a difference in the growth of our nation.