Power Source 4 Share

Stuart Staniford at Early Warning has an update on Iraqi oil production - Iraqi Oil Production Reaches Post-Invasion High.

Well, its an exciting time to be blogging about "Risks to Global Civilization", what with Arab populations revolting against their dictators, nuclear power plants blowing up and spewing radioactivity, and now western militaries about to start bombing Libya any moment. I hardly know which way to turn.

However, its important not to lose track of the slower burning but equally important stories that affect the evolution of our global civilization. One of these is Iraqi oil production. Iraq is a country with enormous oil reserves that were rather under-exploited by regional standards due to the constant stream of wars and revolutions that have plagued the country for decades. The graph above shows the last decade and a bit of oil production - you can see the declining production in the early aughties (due to UN sanctions on Saddam Husseins regime), followed by the precipitous decline when the US invaded the country in 2003. After that, production rebounded to a low level, improved a bit with the increasing stability in the country associated with the Petraeus surge, but then plateaued at or below 2.5mbd.

Then in 2009, then oil minister Hussein al-Shahristani presided over an extremely ambitious plan to auction off contracts to manage Iraqs oil fields to the big international oil companies. All those contracts together sum to a total Iraqi production of around 12mbd, and they call for the operators to reach those plateaus in only seven years. This is enough oil, and soon enough, that it would have a fair chance of materially postponing the global peak of oil production, and thus reducing the pressure on the world to transform into new, yet unclear, political and economic configurations.

Almost no-one believed that large an increase in oil production would happen that fast, but skepticism ranged from those who thought the country would collapse back into civil war and produce less oil, rather than more, to those who thought that Iraq would eventually produce a great deal more oil, but that perhaps logistical bottlenecks would prevent it happening as fast as Dr al-Shahristani had contracted for, and perhaps the eventual plateau would be lower.

In any case, through most of 2010, Iraqi production languished at levels slightly below those achieved in 2009. Various stories came out as to this or that subcontract or drilling campaign, but it was too soon for it to translate into actual production. However, in December of 2010 (or January of 2011, depending on which data source you want to believe), we finally have an uptick of production that has taken it clearly above the post-surge plateau.

Whether this is the beginning of a long slow uneven ramp-up as the al-Shahristani plan begins to take effect, or whether continued instability will engulf the country, I leave the reader to decide. My guess is the former, but I acknowledge that huge uncertainty remains, so that reasonable people could differ.

Future Pundit points to a Bernstein Research paper describing the marginal cost of oil production - Marginal Oil Production Cost Nearing $92 Per Barrel.

Energy analysts at Bernstein say the marginal cost of oil production, already $92 per barrel, is nearing $100 per barrel.

The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.

Their analysis does not include OPEC or former Soviet Union producers. But this does not matter. Since the former SU and OPEC arent going to grow their production fast enough to meet rising world demand the marginal cost of the other producers will determine at what price rising demand and market price will meet.

This rapidly rising marginal cost of production is what Peak Oil looks like. Peak Oil is going to happen because marginal cost will go too high for the world economy to afford to pay what it takes to boost production. At that point oil production will start falling. I originally expected peak production to happen at a much higher price for oil. But the European debt crisis, the deceleration of Chinese economic growth, and the continued weak US economic recovery make me think peak global oil production will happen at a price not much higher than current oil prices.

The costs of tight shale oil is very high and high oil prices are needed to keep it flowing.

"The United States is producing an awful amount of oil from tight shale and tight sands reservoirs... If oil prices send a signal and drop below the $90-$80 level it is going to be uneconomic to drill those well. So drilling will stop immediately," said Michel Hulme, fund manager at Lombard Odier.

How high an oil price is needed to start world oil demand headed on a downward slope? Higher or lower than the current price range near $90-100?