How Technology Increases Oil Production: The Law Of Diminishing Returns  

My co-editor at TOD ANZ, Phil Hart, has a post up on How Technology Increases Oil Production.

How can you double something and still have ten times less than you started with?

The answer to this question will help us reassess claims that advances in oil field technology will postpone the peak in global oil production. The question itself arises from a case study of Enhanced Oil Recovery in the Handil Oil Field in Indonesia. ...

The Law of Diminishing Returns

Economists seem to have trouble understanding geological and technical limits to oil production, but they should understand the law of diminishing returns (Wikipedia):

According to this relationship, in a production system with fixed and variable inputs, beyond some point, each additional unit of variable input yields less and less additional output. Conversely, producing one more unit of output costs more and more in variable inputs.

In our case we have finite, bounded oil fields. Until the mid 1980s, discovery of new oil fields exceeded our consumption rate, so there was little need to increase recovery from existing fields. As the discovery rate declined, companies had greater motivation to extract more from their existing fields. While at first they found easy gains, in the last decade especially the amount of effort required has climbed and yet the returns are falling: is it any surprise that oil industry inflation is rampant?

Oil field reserves may have 'grown' 10-20 per cent since the Carmalt and St John assessment in 1986, but we should not expect the next 20 years to deliver the same gain. Discovery of new fields has tapered off to low levels and the easy pickings for increased recovery have already been had. Unconventional oil sources will yield similarly small returns for extraordinary amounts of effort. The numbers simply do not stack up for oil production continuing to expand for another decade against the decline in large mature conventional oil fields.

Summary

How can you double something and still have ten times less than you started with?

In the case of the Handil Oil Field, a concerted campaign to revitalize the field almost doubled production from 12,500 barrels per day in 2003 to 23,000 in 2007. Yet this field had once produced nearly two hundred thousand barrels per day.

This is a representative picture of the role of technology and enhanced oil recovery: merely extending the tail end of production in oil fields that are well past their own peak in production.

So while the Society of Petroleum Engineers and other optimists tell us that technology and enhanced oil recovery will delay peak oil, a more objective look at the data suggests that production declines are relentless and they are stacking up much faster than incremental technological gains.