Marshall Adkins is the Houston-based Managing Director of Energy Research for Raymond James & Associates, a full-service investment firm. ASPO-USA’s Steve Andrews caught up with him last week to follow up on his pivotal May 4, 2009 “Energy Stat of the Week”–Peak Oil in the Rearview Mirror: Why We Think Global Oil Production Peaked Over a Year Ago.”
Andrews: At our conference in Houston in October 2007, you responded to our question “when will world oil peak” by saying “between now and 2012.” Clearly you saw this coming. So it appears to have happened.
Adkins: It’s still a tad early to be certain, but if you include natural gas liquids–and some people will argue that that’s not crude–our numbers show that the peak was in 2008.
Q: What was the internal reaction within Raymond James to that Energy Stat on peak oil?
Adkins: Not much. Part of our long-term theme has been that it will be very difficult to increase supply at all. Most of our people have been plugged into the fact that we’re going to be in an oil-supply-constrained world for a long time.
Q: What about the external reaction, from your industry and others?
Adkins: I think most of the investment community gets it. The exact timing is always debatable, but very few investors that I meet with argue the point that it’s going to be a real challenge to increase oil supply.
Q: Have you gotten any specific pushback, and if so what were the objections?
Adkins: Very little. The only real legitimate pushback is the question: are there any pockets of oil around the world where technology could allow a surge in supply? The deepwater has been the most recent example of that. And people wonder if we can’t have something similar to the shale gas surge from application of horizontal drilling. That’s really been the only pushback.
Q: What about media response? Did this stimulate more calls and coverage than usual?
Adkins: There were a few people who called, but not more than normal. A lot of the media that I deal with is pretty energy savvy, and many of them get it, as opposed to the mainstream media.
Q: Any calls from the mainstream media?
Adkins: No. They’re really not paying attention to this. Those calls will come when gasoline is up to $4 a gallon and they’re pointing at the “evil oil empire,” even though it might be something like the cap & trade legislation that could be the cause of the price increase.
Q: Among the major players in the investment community, to date many have lagged behind you in stepping out and making as clear a statement as you have. Any thoughts there?
Adkins: Everyone in the industry knows it. I think a lot of analysts are reticent to call a spade a spade. At one end of the spectrum you have Matt Simmons who is very vocal and very up front. At the other end of the spectrum the people understand it but aren’t making a big deal out of it.
Q: Maybe the other end of the spectrum would be CERA [Cambridge Energy Research Assoc.]
Adkins: True. That’s a good point.
Q: Why do you think there is so much pushback from CERA on peak oil?
Adkins: First of all, I should say I just don’t know, because I don’t really know them and haven’t communicated with them. Generically, though, you can look at their client list. Often times you can get to the heart of why someone has one position or another by looking at their client list. It’s in the interests of Saudi Arabia and OPEC in general to calm the markets, lead the markets to believe there’s plenty of oil out there. Here I really don’t know, but that would be one place to look. Maybe they truly believe it and they’ve just done the math wrong. The way I approach the math is to ask: where are you going to get real sustained growth in non-OPEC oil supply? A couple of years ago you could come up with Canada, Brazil, West Africa, the Caspian Sea. With the economic, financial and oil-price meltdowns, pull Canada off the table. Pull the Caspian off because there is not going to be a lot of risk capital going in there. Risk capital in West Africa is going to be reduced dramatically. So maybe you get growth in Brazil; I just find it hard to be believe that Brazil’s going to offset the decline rates everywhere else in the world. Then it’s just a matter of working off OPEC’s excess capacity…which could take years. But why stick to your guns and say there’s no problem of oil production growing? Obviously, OPEC has some logical reasons to say that, so you could understand some misinformation coming out of them. But these other guys? I don’t know why.
Q: Has OPEC contacted you about your statements on peak oil?
Adkins. No. There are enough other guys in the press espousing what I’m saying that they’re not going to contact all of us. As for Saudi Arabia, we don’t know what their production capacity is. It is clearly in their interests to say “we have enough excess capacity to keep production under control,” and generally they’ve done a phenomenal job of stabilizing global oil markets by either increasing or reducing supply. But the only data point I would throw out that we know for sure is that when oil prices spiked in 2005-06, and when they spiked again last year, they got up to 9.6 million barrels a day of production, and the two peaks were exactly the same. Presumably, with oil prices going berserk last year, they had all the incentive in the world to open the taps to drive prices back down. Do they have 12 million barrels a day of capacity? I can’t sit here and say for sure they don’t, and neither can Matt.
Q: Where do you see Russian production going over the next few years?
Adkins: Numerous issues-lack of access to capital, the fact that they’ve picked most of their low-hanging fruit-lead me to believe their supply is going to fall off. Several new projects coming on line this year have allowed Russian production to hold up, but as you look out a year or two they don’t have those big projects to fill the gap. So I think you’re going to see Russian production start to roll over, not at the pace you see Mexico fall, but it will roll into decline.
Q: Speaking of Mexico, is there any prospect at all that the trend line we see now will be reversed over the next three to four years?
Adkins: It won’t be reversed, but the rate of decline has to slow almost by definition because the Cantarell field will soon finish with its fast depletion and will at some point stabilize. Pemex is spending more money, at places like the Chicontepec field. But the answer is not Chicontepec, which certainly isn’t going to replace Cantarell, even though it will help at the margin. I think the direction in Mexico will be downward for the foreseeable future-for oil, not natural gas.
Q: How about China? What do you think China’s production future looks like?
Adkins: China is putting a lot of money into production, so we’re going to model them with very modest growth. But I don’t see them coming up with massive increases, despite the investment. So they should be more or less flat going forward, without much change either way. They won’t be a major driver of non-OPEC supply.
Q: And what will those major drivers be?
Adkins: The major drivers are going to be the declines in the North Sea, in Alaska, in the U.S. deepwater-the latter offset by new deepwater projects coming on stream. On the upside, are prices going to rise enough to allow Canada to grow again? Maybe, maybe not; they need prices north of $70 a barrel. Certainly the Caspian and Africa hold a lot of potential, but you’re not going to see a lot of new risk capital in those areas any time soon. But people are taking a wait-and-see approach on crude prices. To me it looks like the only newer area that is going to get a lot of new capital flows is Brazil. And I just have a hard time envisioning Brazilian growth offsetting the production declines you’re getting elsewhere around the world. Yes you can go around the world and count up the new projects that will bring in more supply, but where most people miss is that they underestimate declines. So on a net basis, I have a hard time seeing new projects offsetting declines.
Q: Following up, what’s the most likely world oil production scenario going forward?
Adkins: I focus on oil that is refinable, producible, and marketable. Clearly there is a lot of excess capacity within OPEC today, and it’s going to take years to work that off, given the reduction we’ve seen in global oil demand. Can they grow that excess capacity? Maybe, in certain areas. We don’t know-it’s a black box. But what I do know for sure is that the stated excess capacity within OPEC is substantially overstated; a lot of the capacity they say they have is not really refinable or marketable. Nigeria is a great example of the latter. Is the capacity there? Of course. But can it get to market? No. So I don’t view that as real capacity. Iran and Venezuela tend to overstate their refinable capacity. Non-OPEC supply probably declines by a half-million to a million barrels a day over the next several years. If there is any resumption of demand, we get back into a situation where we’re in an under-supplied oil market. There are a few spots where one could grow supply within OPEC, which is very different from non-OPEC from a growth perspective. Bottom line: I suspect that when you add up all the potential growth within OPEC and non-OPEC, it’s not going to offset declines. So that’s why I think 2008 was probably the world peak in terms of refinable, consumable oil production.
ASPO-USA: Thanks very much for your time.