I'm always a little dubious about Ambrose Evans-Pritchard but this column (wondering about the hype over Maugeri's mistaken analysis of peak oil) is worth a read - Peak cheap oil is an incontrovertible fact.

Brent crude jumped to $115 a barrel last week. Petrol costs in Germany and across much of Europe are now at record levels in local currencies. Diesel is above the political pain threshold of $4 a gallon in the US, hence reports circulating last week that the International Energy Agency (IEA) is preparing to release strategic reserves.

Barclays Capital expects a “monster” effect this quarter as the crude market tightens by 2.4m barrels a day (bpd), with little extra supply in sight. Goldman Sachs said the industry is chronically incapable of meeting global needs. “It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand,” said its oil guru David Greely.

This is a remarkable state of affairs given the world economy is close to a double-dip slump right now, the latest relapse in our contained global depression. ...

So we face a world where Brent crude trades at over $100 even in recession. Fears of an Israeli strike on Iran may have spiked the price a bit, though Intrade’s contract for an attack is well below levels earlier this year. Iranian sanctions may have cut supply by more than the extra 900,000 bpd pumped by Saudi Arabia. Japan’s increased reliance on oil since switching off most of its nuclear reactors has played its part.

Yet the deeper force at work is the relentless fall in output from the North Sea and the Gulf of Mexico, endless disappointment in Russia because of Kremlin pricing policies, and the escalating cost of extraction from deep sea fields.

Nothing has really changed since the IEA warned four years ago that the world must invest $20 trillion in energy projects over the next 25 years to feed the industrial revolutions of Asia and head off an almighty crunch. The urgency has merely been disguised by the Long Slump.

We learned in the 2006-2008 blow-off that China is now the key driver of global oil prices, with consumption rising each year by 0.5m bpd -- now a total 9.2m bpd in a world market of 90m bpd. Demand is broadly flat in Europe and America.

So what will happen when China latest spending blitz gains traction? The regions have unveiled a colossal new spree on airports, roads, aeronautics, and industrial parks: a purported $240bn each for Tianjin and Chongqing, $160bn for Guangdong, $130bn for Changsha, and so forth. Sleepy Guizhou has trumped them all with $470bn. Your mind goes numb.

What will happen too when car sales in China surpass 20m next year, as expected by the China Association of Automobile Manufacturers? ...

World opinion has swung a little too cavalierly from the Peak Oil panic four years ago to a new consensus that America’s shale revolution -- and what it promises for China, Argentina, and Europe -- has largely solved the problem.

Much has been made of “Oil: The Next Revolution” by Harvard’s Leonardo Maugeri, who forecasts an era of bountiful supply and cheap oil as global output capacity rises by almost 18m bpd to 110m bpd by 2020.

Sadad al-Huseini, former vice-president of Saudi Aramco, has a written a testy rebuttal, arguing that Dr Maugeri assumes a global decline rate of 2pc a year from oil fields compared to the IEA’s estimate of 6.7pc. There alone lies the gap between crunch and glut. ...

The shale revolution has profound implications for America’s role in the world and the global balance of power, but let us not get carried away. Oil experts noticed how many crews in the Bakken field were told to stand down when crude prices dipped earlier this summer. “Supposedly cheap shale turned out to be rather expensive shale in that, as soon as Brent fell to $90 per barrel, a large proportion of US shale oil in key regions seemed to lose all its rent,” said Paul Horsnell from Barclays Capital.

Leonardo Maugeri's recent paper Oil: The Next Revolution on the presumed future abundance of oil supplies rejects the pessimistic outlook of limited increases in oil capacity over the next decade. It suggests global oil capacity will exceed 110 million barrels per day by the end of the decade, putting an immediate end to concerns regarding constrained long-term oil supplies. This conclusion is based on an assessment of new projects with a reported capacity of 49 million b/d before a downward adjustment to 29 million b/d to allow for completion risks and reserves depletion. Maugeri holds two PhDs, one in Political Science and one in Economics, and has extensive executive experience with ENI in strategies and developments and in petrochemicals.

In putting forth this optimistic thesis, Maugeri apparently sets aside a variety of technical realities, including the difference between natural gas liquids (NGLs) and conventional oil, reserves depletion versus capacity declines, and proven reserves as opposed to speculative resources.

The report mixes NGLs, which feed petrochemicals and domestic or industrial fuel applications, with conventional oil, which is the main source for transportation fuels. When fractionated, NGLs yield propane, butane and light naphtha. These products cannot replace oil distillates such as gasoline, diesel or jet fuel.

For example, NGLs grew from 7 million b/d in 2003 to an estimated 12 million b/d in 2011 but provided no relief to the demand for transportation fuels, which was surging across those years. The growth in NGLs is now forecast by the IEA to reach an ambitious 20 million b/d by 2030. Impressive as this may be, NGLs will remain at best marginally relevant to transportation applications until widespread changes occur in the technology and infrastructure of the auto and trucking industries. Given cost and complexities, there is no evidence that this is likely to happen within this decade.

In regard to capacity declines, the report appears to confuse oil reserves depletion with capacity declines. In the world of petroleum engineering, depletion quantifies residual reserves in the ground, while declines define a reservoir's ability to sustain a given level of production over time. Incremental reserves in modern discoveries are added early in a discovery's life while production declines are a subsequent development related to reservoir factors including changing fluid compositions and diminishing reservoir energy. Maugeri's suggestion that incremental reserves may offset capacity declines mixes up speculative exploration variables with reservoir engineering realities.

The report takes exception to the IEA's 2008 estimate of an average 6.7% global oil capacity decline and offers an equivalent estimate of less than 2% per year. This low estimate is apparently based on the observation of historical production rates from major oil producing countries. It is not clear how the author extracted the convoluted effects of offsetting market volatility, spare capacity utilization, natural production declines, and ongoing new capacity investments from such historical trends.

The IEA’s 2008 study, on the other hand, applies well-established petroleum engineering principles to 800 post-peak fields that make up the majority of global oil supplies. The natural decline rates of these fields were reported to average 3.4% for 54 supergiant fields, 6.5% for scores of giant fields and the 10.4% decline rate for hundreds of large fields. At the IEA's 6.7% level of capacity declines, the current 74 million b/d of conventional oil supplies (which exclude NGLs, biofuels, nonconventionals and various other liquids) would require 5 million b/d of supplemental new capacity annually just to maintain a flat level of supply. Based on these assessments, Maugeri’s 29 million b/d of "risked" new capacity would only replace declines through 2017. Even the full 49 million b/d of new projects would only extend current liquids production on a flat trajectory to 2021.

David Strahan has a look at George Monbiot's strange about face after Leonardo Maugeri's paper on peak oil was published - MONBIOT PEAK OIL U-TURN BASED ON DUFF MATHS.

In his column of July 2nd George Monbiot recanted peak oil, claiming “the facts have changed, now we must change too”. Much of the article was spent regurgitating a recent report by Leonardo Maugeri, a former executive with the Italian oil company Eni, which Monbiot breathlessly reported “provides compelling evidence that a new oil boom has begun”.

Plenty of ink has already been spilled by oil depletion experts exposing some of the wildly optimistic assumptions contained in Maugeri’s report. More damning is that the work is shot through with crass mistakes that render its forecast worthless.

When I interviewed him, Mr Maugeri was forced to admit a mathematical howler that would disgrace the back of an envelope, and it also became clear he did not understand the work of the other forecasters he attacks. It also looks as if he has double or even triple counted a vital component of his predicted oil glut.

Maugeri forecasts the global oil supply will soar by almost 18 million barrels per day to around 111mb/d by 2020, the biggest increase in production since the 1980s, which he claims could lead to prolonged overproduction and “a significant, stable dip of oil prices”. So, arrivederci peak oil.

Maugeri claims this looming glut has three legs: booming upstream investment by the oil industry; the rise and rise of unconventional production such as US shale oil; and a tendency among forecasters to over-estimate massively the rate at which production from existing oil fields declines. The first point is uncontroversial, the second is moot, but the third is the most important; without it, Maugeri’s glut evaporates.

All oilfields eventually peak and go into decline as production is sapped by falling reservoir pressures, and as water increasingly dilutes the flow of oil from the well. Measuring the impact of these declines on aggregate oil production is a complicated business, but vital to predicting the future oil supply. There have been two primary studies of decline rates in recent years: one by the International Energy Agency in its 2008 World Energy Outlook; and another by the oil consultancy IHS-CERA.

Maugeri cherrypicks numbers from the IEA study and misrepresents them to claim that “most forecasters” work on decline rates of 6 to 10 percent. He then argues this is incompatible with the observed growth of the oil supply over the last decade – and therefore must be wrong – and uses this conclusion to justify his inflated oil production forecast. But the whole thing is a straw man; an email he sent me revealed he simply doesn’t understand the IEA numbers. The IEA’s global decline rate is actually 4.1%, and CERA’s broadly agrees, at 4.5% (see here for more detail).

Even if we were to accept his 6 to 10 percent range, Maugeri has got his sums horribly wrong. In the key section of the report, he claims that even the lower end of the range “would involve the almost complete loss of the world’s “old” production in 10 years”. But this is laughable. A 6% annual decline over 10 years leaves you with 54% of your original production, because each year’s 6% decline is smaller volumetrically than the previous one. So over a decade the decline is 46% – and very far from an “almost complete loss”.

When I put this to him, Mr Maugeri seemed genuinely confused, and tried briefly to persuade me the loss was much larger. “If you have a 6% decline each year over a 10 year period, the loss of production is close to 80%”, he said, but then the penny dropped. It looks to me as if he compounded 6% in the wrong direction – for growth, not decline. “Maybe on this you are right”, he conceded sheepishly. So by his own admission, Mr Maugeri has overestimated the alleged overestimation of production decline by almost three-quarters(1).

Nowhere in his report does Mr Maugeri explicitly state his own decline rate assumptions. The closest he gets is the unsupported claim that “I did not find evidence of a global depletion rate of crude production higher than 2-3 percent when correctly adjusted for reserve growth”. And yet his actual assumptions appear to be far lower. By analysing Maugeri’s forecasts, Steven Sorrell of the Sussex Energy Group and Christophe McGlade, a doctoral researcher at UCL Energy Institute, have shown his actual global decline rate for 2011-2020 is just 1.4% – scarcely a third of the established estimates. Replacing this implicit rate with the IEA number eliminates the Maugeri glut entirely, slashing his production forecast for 2020 to below his estimate of current production capacity. Sorrell concludes “Since most analysts expect average decline rates to increase over this period, this projection must be considered optimistic”. So, buongiorno peak oil.

When I challenged Mr Maugeri about the discrepancy between the 2-3% decline rate and the 1.4%, he said the difference was explained by reserves growth – the tendency to squeeze more oil than originally expected from existing fields, through new technology, the exploitation of secondary reservoirs and so on. But in that case he seems to have counted it twice, to judge by his quote in the paragraph above. Or possibly even three times, since the notion of reserves growth is already accounted for in the existing estimates. Both the IEA and IHS-CERA numbers are observed overall decline rates: they reflect the actual loss of production that happened after – or in spite of – all the industry’s investment to boost flagging output at existing fields.

“If Maugeri has adjusted decline rates for future reserves growth, he has either double counted, because it’s already in the existing forecasts, or assumes a massive acceleration in reserves growth in future”, explains Richard Miller, an oil consultant who previously worked for BP, and was the first to spot Maugeri’s dodgy maths. “Either way, it’s not credible”. When I emailed Mr Maugeri to check if he understood the definition of the IHS-CERA decline number he had quoted, I received no reply.

Perhaps it’s not so surprising. Maugeri is a long standing cornucopian, and has form in the slapdash stakes. In a previous article for the journal Science(2), he sought to disprove peak oil modelling using a graph of Egyptian oil production. Sadly, the graph he printed was not for Egyptian oil production. Worse, if it had been, it would have demolished the very point he was trying to make(3).

What is astonishing is that George Monbiot finds Maugeri’s work so “compelling”. How many times have I read Monbiot banging on about the importance of peer review? Strange then that he should gush that this report was “published by Harvard University” but fail to mention it had not appeared in any peer reviewed journal, and worse, had been funded by BP. I suspect both those organizations may live to regret their involvement. What about Monbiot? If he is as intellectually rigorous as he likes to make out, he will perform not one peak oil u-turn this month, but two.

James Hamilton at Econbrowser has a look at Leonardo Maugeri's paper on peak oil - Maugeri on peak oil

Carpe Diem, Reuters, FTalphaville, and WhaleOil are among those calling attention to a new paper by Leonardo Maugeri, senior manager for the Italian oil company Eni, and Senior Fellow at Harvard University, which concluded:

Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.

Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd. [After factoring in risk factors and depletion rates of currently producing oilfields], the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date.

Here I take a look at some of the details of Maugeri's analysis.

About half of Maugeri's calculated 17.6 mb/d in net additional production capacity comes from two countries-- the United States and Iraq (see his Table 2). I have earlier discussed the situation for the United States. To briefly recap, more than half of the increase in total U.S. oil production since 2005 has come from biofuels and natural gas liquids, neither of which should be added to conventional crude production for purposes of calculating the available supply. Another important contribution to recent U.S. production gains has come from shale/tight oil. I agree with Maugeri that this will be an important factor in the future, but it is not cheap, and there are some big uncertainties in extrapolating recent gains, about which I will have more to say below.

But first let's take a look at Iraq, which by itself accounts for 5.1 mb/d, or 29% of the net combined global gains that Maugeri is anticipating. His starting point for these calculations (see his Table 1) is the "production target" associated with a dozen oil fields for which the Iraqi government has signed contracts with oil companies. These targets call for these fields to reach maximum levels of production which, when added together, come to 11.6 mb/d. To win a contract, oil companies had to specify two key parameters: a "target" level of production and a remuneration per barrel, with awards going to the companies that specified the highest target and lowest remuneration. Some have characterized the announced targets simply as propaganda. Once awarded, there seems to be a separate process in which the production targets get renegotiated. Maugeri acknowledges the logistic and security challenges in meeting the targets, and accordingly cuts the official estimates in half. Doing so would still be a stunning achievement, requiring an Iraq that would be substantially more stable and successful over the next decade than it has been over the last three.

A separate issue is that new production from places like the U.S. and Iraq are needed in part to replace declining production flows coming from mature fields. A key question in any study like this is the assumed magnitude of that decline. As Stephen Sorrell notes, Maugeri does not state his assumed rate, and confuses the issue by mixing discussions of the depletion of an existing reservoir (for which purposes Maugeri is correct to raise the offsetting factor of additions to reserves) with the declining production flow rate from a given field (the relevant number for purposes of calculating the net addition that new fields bring to annual production). Sorrell suggests we can infer the implicit assumed decline rate from Maugeri's Table 2, which reports a difference between his adjusted gross additions and adjusted net additions of 11 mb/d. That seems to imply that Maugeri is assuming that the total decline in production from existing fields between now and 2020 will be 11 mb/d, which I calculate to correspond to a 1.4% annual decline rate (ln(82/93)/9 = -0.014). As Sorrell notes, this compares for example with the IEA's (2008) substantially less optimistic numbers:

Based on data for 580 of the world's largest fields that have passed their production peak, the observed decline rate-- averaged across all fields and weighted by their production over their whole lives-- is 5.1%. Decline rates are lowest for the biggest fields: they average 3.4% for super-giant fields, 6.5% for giant fields and 10.4% for large fields. The average rate of observed post-plateau decline, based on our data sub-set of 479 fields, is 5.8%.

... I agree with Maugeri that new production from places like the United States and Iraq is going to be very helpful. But I think he substantially overstates the case for optimism. If we are counting on sources such as shale/tight oil, oil sands, and deepwater to replace production lost from mature conventional oil fields, the days of cheap oil are never going to return.

Ugo at Cassandra's Legacy has a look at Leonardo Maugeri's paper on peak oil - Peak oil debunked? The mechanisms of denial at work.

In 1989, Ronald Bailey published an article in "Forbes" where he attacked the 1972 "Limits to Growth" study by saying that:

“Limits to Growth” predicted that at 1972 rates of growth the world would run out of gold by 1981, mercury by 1985, tin by 1987, zinc by 1990, petroleum by 1992, copper, lead and natural gas by 1993."

No such statement existed in the "Limits" book, nevertheless Bailey's attack had an incredible success. It went viral and was repeated over and over by people who never worried about checking it. Eventually, it generated the legend of the "mistakes of the Club of Rome", still alive and well today and still at the basis of the widespread negative opinion of the "Limits" study. (this story is described here, as well as in my book "The Limits to Growth Revisited.")

The demolition of the "Limits" study remains today a classic example of the mechanisms of denial in scientific communication, as described, for instance, by Naomi Oreskes and Eric Conway in "Merchants of Doubt." Similar mechanisms have been at work against climate science, studies on the health effects of smoking, pollution studies and more. However, the idea that we are close to the peak of the world's oil production ("Peak Oil") had remained so far relatively immune to this kind of denial.

That may be changing with the publication of Leonardo Maugeri's recent study titled "Oil: the next revolution" which has generated a true tsunami of posts and articles all based on the concept that "Peak Oil has been debunked." We may be seeing a snowballing effect similar to the one caused by Bailey's 1989 article that destroyed the credibility of "The Limits to Growth."

To make my point clear, let me state that Maugeri's work is a serious study. Surely, it can be criticized (e.g. here, here, and here), but it is far better than Bailey's piece of pure slander and other propaganda pieces aimed, for instance, against climate science. But that has little to do with the mechanisms of denial. The problem is that most people - including decision makers - have no time, no inclination, and no expertise to go in depth in issues such as resource depletion. So, when facing a complex and nuanced issue they tend to choose the interpretation that they like best - it is called "confirmation bias." Now, surely good news are better than bad news and for most people an apparently authoritative study that says that we are not running out of oil is preferable to the gloom and doom of most depletion studies.

The problem is that Maugeri's thesis is based on preciously little: mainly on a new assessment of the oil reserves that takes into account the so called "unconventional" resources. Lately, the growth in this sector has been remarkable, true, but all what this "oil revolution" could do so far is to stave off the decline that would have occurred if we were relying only on conventional oil. Still, the fact that we haven't seen a well defined peak in the world's oil production is sufficient to give weight to Maugeri's ideas. Paradoxically, the numerous attempts of criticizing the study may have been counterproductive in giving it a visibility that it hardly deserves.

A couple of decades ago people started referring to the "Limits to Growth" study as "Club of Rome's mistake". Are we going to see Peak Oil described as "ASPO's mistake"? It is too early to tell, but we can rule out this possibility. Especially if oil prices were to collapse in the near future - as they did in 2008 - most people would take that as a vindication of Maugeri's thesis. Never mind that the price collapse would also cause a decline in production - as Maugeri himself clearly states in his study. Most people perceive the problems with oil only in terms of prices, not of production. If we are going to see this kind of events unfolding, it will take a lot of time and effort to redress the public perception on Peak Oil, just as it is taking a lot of time and effort to fight the perception that the "Limits" study had been "wrong".

On the other hand, Maugeri's work may simply be forgotten when it will be clear that the "oil revolution" he predicts is not materializing. Communication is a field where prediction is always very difficult, even more than with oil production. The only thing we can say for sure is that we are sensible to the viral diffusion of legends. It is the way our mind works; it has not evolved for long range planning.