A SEMINAR REPORT ON

PEAK THEORY OF HUBBERT

Submitted by

HRISHIKESH RC: 08D17002

DEPARTMENT OF ENERGY SCIENCE AND ENGINEERING INDIAN INSTITUTE OF TECHNOLOGY, BOMBAY (IITB) POWAI, MUMBAI 400 076 APRIL 2012

TABLE OF CONTENTS

LIST OF FIGURES NOMENCLATURE 1. INTRODUCTION 2. HUBBERTS PEAK THEORY 3. APPLICATION OF THE PEAK THEORY 3.1 US 3.2 Former Soviet Union 3.3 World 4. CONCLUSION
5. REFERENCES

iii iv 1 2 5 7 8 9 11 12

LIST OF FIGURES Figure 2.1 The bell-shaped curve showing the mathematical relations involved in the production of the reserve Figure 2.2 Crude oil production curve for Illionis Figure 2.3 Crude oil production curve for Ohio Figure 2.4 Ultimate US crude oil production assuming initial productions of 150 and 200 Gb Figure 2.5 Ultimate world crude oil production assuming initial productions of 1250 Gb Figure 3.1 Production curve for a single oil field Figure 3.2 Production curve for multiple oil fields (4) Figure 3.3 Production curve for multiple oil fields (8) Figure 3.4 Comparable Hubbert and Gauss curves along with their derivatives Figure 3.5 The original hubbert curve with an ultimate of 200 Gb compared with the actual data (US) Figure 3.6 Laherrere's hubbert curve with the actual data (US) Figure 3.7 Matching of shifted discovery and production curves (US) Figure 3.8 Former Soviet Union's production data modelled with hubbert curves having different ultimates Figure 3.9 Matching of shifted discovery and production curves (US) Figure 3.10 Oil production and discovery curves for the world 2 2 3 3

4 5 5 5 6

8 8 8

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NOMENCLATURE P Qt Q Pm tm b s Pi ti Production rate of resource Total resource consumed at time t Ultimate reserve of resource Production rate of resource at peak Time of peak Slope factor Standard deviation Production rate of resource at point of inflection Time of inflection

1.

INTRODUCTION

Fossil fuels have proved one of the most important resources for mankind over the last one and a half centuries. Along with the Industrial Revolution, it has led to a dramatic increase in living standards. Fossil fuels originate from the decomposition of buried dead organisms over hundreds of millions of years. Over time, due to effect of heat and pressure, and a series of processes, these are converted into what we presently know as coal and petroleum.[1] However, the slow rate of formation means that in the present age, we have practically, a constant resource of fossil fuels. This in turn, gives rise to the question of how long they can run into the future. Considering the present reliance of our daily lives on fossil fuels, it has become an important question for governments of today. Hubberts peak theory is the earliest attempt to model the rate of fossil fuel production with time. Peak refers to the fact that the production curve is normally bell-shaped with a peak, denoting maximum production rate occurrence. This theory was presented by Marion King Hubbert to the American Petroleum Institute in 1956 in the form of a paper, where he predicted correctly that the US oil production would peak between 1965 and 1970. This, coupled with the oil crises in the 1970s has led to the issue gaining prominence. The peak for world oil production is an important tipping point, because this represents the point after which production can only reduce. This implies to satisfy the existing (and increasing) demand, we would need newer and/or more efficient sources of energy to supplement the energy deficit. Therefore, governments need to have mitigation procedures prepared to deal with this fallout. This was the objective of the Hirsch Report, made at the behest of the US Department of Energy, to look at the energy problem of the US. At the same time, this theory has its fair share of criticism, on a number of points, which will be seen in this report.

2. HUBBERTS PEAK THEORY In his paper[2], Hubbert derives a general curve for production rate vs time without giving an obvious formula. However, the curve is shown to follow a symmetrical bell-shape.

The area under the curve denotes the ultimate reserves of that particular resource. Hubbert gives his arguments for the curve using empirical research, with data from various states in the US and the US itself. The paper analyses three fossil fuels using the same methodology: oil, coal and natural gas. In this report, I will restrict myself to the scenario of oil.

Figure 2.1 The bell-shaped curve showing the mathematical relations [2] involved in the production of the reserve

First let me define oil as used in the paper. The petroleum industry is divided broadly into two parts: upstream, downstream[3]. The upstream industry involves the searching and recovery of crude oil and natural gas, while the downstream industry involves the refining of crude, selling and distribution of natural gas, and products derived from crude refining. The upstream industry also involves processing of natural gas, which leads to Natural Gas Liquids as a byproduct (NGLs). These include higher alkanes like ethane, butane, propane, isobutene and other condensates. These along with [2] Figure 2.2 Crude oil production curve for Illionis crude oil are called liquid hydrocarbons. In the few decades unto the publishing of the paper (1955), crude and liquid hydrocarbons were synonymous because NGLs were not produced in significant amounts. However, that had changed. Hence, the oil Hubbert refers to includes only crude oil, and not liquid hydrocarbons.

Hubbert then justifies the peak using the production curves for two regions. While the production curve for the state of Ohio has a clear peak, the problem seems to be with the state of Illionis. However this is due to the fact that Illionis had two distinct spells of oil discovery and therefore there are two peaks signifying the production spells following the discovery spells. Moving on, the paper focusses on the US and the world. In order to predict how the production rates will trend, well need to understand the reserve data. Two terms are generally used for depicting reserve data: Proven Reserves (also referred to as Proved reserves) The amount of reserves which are known to exist, but have not yet been produced Ultimate Reserves The estimate of the total possible reserves of oil. This includes the already consumed resource along with the proven reserves and expected future discoveries
Figure 2.3 Crude oil production curve for Ohio
[2]

Nowadays, a more system involving probabilities is used to indicate resources that have not yet been produced or discovered. These will be explained later. One of the two problems associated with the estimation of ultimate reserves is that it does not take into account improvements in technology. (This is a criticism of Hubberts theory in general). Improvements in technology lead to more ultimate reserve, and possibly a delay in the peak. The other problem is that the reserve amounts are misreported at various levels. This may be due to various political or profit-based reasons. This will also be elaborated on later. For calculation of total reserves of crude oil, Hubbert ignores the unconventional sources of oil, whose production had not reached a significant amount. Unconventional oil is a heavy form of oil. Unlike conventional oil, which is light, easy to extract, unconventional is not easy to recover because production requires a great deal of capital investment and supplementary energy.[4] Thus it is costly and not preferred. Using the Figure 2.4 Ultimate US crude oil production assuming initial productions of [2] estimates of LG Weeks, 150 and 200 Gb Wallace Pratt and modifying them, he arrives at a figure of 1250 Gb for the world and 150 Gb for the US. (1 Gb = 1 billion barrels of oil). At the same time, the proven reserves for the US and the world were 30 Gb and 250 Gb respectively. Using these data and the already known consumed oil data, Hubbert comes with two curves for the US and the world. Another
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assumption Hubbert mentions for calculation for the world peak is that the peak production rate is 2.5 times that of what it was in 1955. Why is this assumption required? Itll be explained in the next chapter. Using these graphs, Hubbert predicts peak oil for world to be around 2000 and the US at 1965. Assuming improvement in production techniques, he also considers for US, the best case of ultimate reserve at 200 Gb (instead of 150 Gb) and calculates the peak to be at 1970. He was proven to be correct in the case of US, while for the world, we are still not sure whether the tipping point has come or not. Why was he wrong?

Figure 2.5 Ultimate world crude oil production assuming initial [2] productions of 1250 Gb

3. APPLICATION OF THE PEAK THEORY While Hubbert explains the peak theory using empirical research, one has to wonder whether is any special significance attached to the structure of the curve. Also, one glaring detail missing is the lack of an equation for the bell-shaped curve. This makes it even more difficult to analyze the logic behind his peak prediction. Jean H Laherrere, in his paper[5] titled Hubberts curve, its strength and weaknesses, published in 2000 addresses these questions. He also tries to apply the peak theory to different regions. Laherrere details three constraints for application of the bell-shaped curve: When there is a large population of fields in the country, such that the sum of symmetrical fields becomes normal under the Central Limit Theorem of Statistics When exploration follows a natural pattern unimpeded by economic or political factors Where a single geographical domain with a natural distribution of fields is considered, political boundaries should be avoided

What Laherrere says is intuitively understandable. I think the reason the hubbert curve takes the bell shape is that the additive production curve of a number oil fields is of a shape similar to the bell-shape. An individual field's production generally appears something like H1 - a gradual increase to maximum output, then a long plateau and a gradual decrease.

Figure 3.1 Production curve for a [6] single oil field

Figure 3.2 Production curve for [6] multiple oil fields (4)

Figure 3.3 Production curve for [6] multiple oil fields (8)

When one combine many fields together, placing a small number of large fields near the beginning and a large number of small fields at the end, as happens in oil exploration, the combined values produce something like a bell curve. The examples below (H2 and H3) show how just four and eight 'wells' begin to approximate the shape of the Hubbert Curve. Obviously the more wells one adds, the smoother the curve. So the production curve for a political domain can be understood as a combination of oil fields following a natural exploration pattern.[6] This explains the first and third points. However, the second point merits explanation. Laherrere looks at some practical cases. But first, he tries to identify an equation for the hubbert curve. We know that Hubbert used a bell-shaped curve. The well-known bell shaped curves are the Gauss, Normal and the derivative of the logistic curve. The logistic curve is a curve used to
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model population curve. According to Laherrere, it is more convenient to use the derivative of it to model the hubbert curve. ( ( ))

Where Pm (in Gb) denotes the production at peak, tm is the time of the peak and b is a factor such that,

Here U (in Gb) denotes the ultimate reserve for the resource. Also used is the Gauss curve, where,
( ) ( )

S is the standard deviation and ( )

Figure 3.4 Comparable Hubbert and Gauss curves along with their derivatives

[5]

If the peak is known, constructing the curve is easy as we just need to calculate the slope factor b (which in a sense denotes the spread of productions rate across time). The problem comes if the peak is not known. Then, the hubbert curve can be constructed fairly well only
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if the inflection point is known. The inflection point is the point where the derivative of the production curve reaches the maximum. (The production curve referred to is the curve formed by joining the points representing the production rates, because we havent plotted the hubbert curve yet!) Using this we get, three equations ( ( Also, ))

And,

The three unknowns are Pm, tm and b. In fact, the result turns out to be

And,

We saw in the previous chapter, Hubbert needed to make the assumption of world production peak to be 2.5 times of the peak in 1955. The production point of the world had not reached inflection. Therefore, an assumption needed to be made. This may also be the reason why he was wrong. Lets move ahead and see the application of the peak theory by Laherrere on different regions in the world. 3.1 US While Hubbert gets the peak timing right, what goes unexplained is the fact that production peak is higher than expected. Even the curve used is the one made by Hubbert for the higher estimate mentioned in the previous section. Laherrere in his paper uses a completely different hubbert curve whose peak is at 3.5 Gb. This curve implies a drop in the decade before and after the peak while starting to witness a rise in the 90s.The reasons given for the drops

Figure 3.5 The original hubbert curve with an ultimate of 200 Gb compared with the actual data (US)

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Figure 3.6 Laherrere's hubbert curve with the actual data (US)

[5]

on both sides is prorationing and economic respectively while attributing the rise to an increase in production of NGLs. The ability of a state to limit oil and gas production, usually based on market demand is called prorationing.[7] It usually involves limiting production proportionally to a fraction of the total capacity of each producer. This happens when the production far exceeds the demand. Therefore, the government maintains an artificially high price and allocates production to suppliers according to their production capacity. This in a sense protects the oil industry. In absence of prorationing, the incentive would be there for the supplier to reduce prices to gain advantage over his competitors. This would lead to a swipe in profits for the companies. Prorationing logically accompanies a drop in production. This seems right in Laherreres analysis.
[5]

Figure 3.7 Matching of shifted discovery and production curves (US)

However, Hubbert in his paper made clear he was not including NGLs. This seems to be a flaw in Laherreres analysis according to me. I think the increase in oil production in the late 90s should be attributable to improved recovery practices, as mentioned by Hirsch in his report.[4] Further, Laherrere suggests that there is a link between production and discoveries. This seems logical as there would be a lag corresponding to the setup of equipment before drilling. The time lag for the US is seen to be at 33 years. 3.2 Former Soviet Union (FSU) In the Soviet Unions case, it was reported in 1980 (before the peak) that they had 200 Gb of ultimate reserves. The inflection point occurs at 1975. The hubbert curve for an ultimate of 200 Gb then shows the peak to be near the end of the 80s. However, the ultimate has been shown to be overstated, because the peak arrives around the mid-80s and the production

Figure 3.8 Former Soviet Union's production data modelled [5] with hubbert curves having different ultimates

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rate is also much lower. In fact the Hubert curve with an ultimate of 170 Gb is shown to be a better fit. Clearly, there is a misreporting of reserves, which the hubbert peak theory has helped identify. The reduction in production after the peak is due the disintegration of the Soviet Union. On the right side, as is clearly seen, the production discovery is also valid, however this time with a lag of only 17 years. 3.3 World In the case of the world, Hubbert never had a chance of getting it right. This was because of the formation of OPEC. OPEC (Organization of Petroleum Exporting Countries) is an intergovernmental organization of 12 oil-producing countries, formed to protect the interests of its members petroleum industry.[8] It operates on the principle of prorationing. Due to political reasons, in 1973, OPEC reduced production of oil and this causes a significant tremor in the production curve. In fact, Hubberts estimation of 1250 Gb for the ultimate is also proven to be wrong. From 1955, things have changed a lot. The convention for indicating reserves has changed. The new system[9] used has three categories for reserves: Proven reserves, also called 1P. These reserves have more than 90% probability of being produced Probable reserves have more than 50%, but less than 90% probability of being produced. Along with proven reserves, referred to as 2P Possible reserves have more that 10%, but less than 50% probability of being produced. Along with 2P, referred to as 3P

Figure 3.9 Matching of shifted discovery and production [5] curves (FSU)

The figure on the right gives the oil data for the world. The discovery curve shifted 30 years satisfies the production curve up to the oil crisis in 1973. To find the ultimate reserves, the cumulative discovery data was sought. This indicates the 2P reserves. It turns out to be 1800 Gb. Its unclear how the data for the ultimate i.e. 2000 Gb is obtained. 200 Gb for the NGLs is included, but the source has not been mentioned.
[5]

Figure 3.10 Oil production and discovery curves for the world

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However, there is a bigger snag. Unlike in the previous cases where the production curve was modelled using a single cycle, the curve here has production rates above the initial peak. In this case, Laherrere suggests modelling the production curve with more than one hubbert cycle. The total production H1 with an ultimate of 150 Gb to correspond with a peak at 1979, H2 with an ultimate of 1850 Gb. Interestingly, a third curve H3 is added to denote unconventional oil, though it did not have a significant contribution then. Its ultimate is 750 Gb. This modified model satisfies the production curve well until 2000. Using this, the peak is predicted to be near 2010. The method of using multiple curves is an interesting work-around and has inspired further paper(s).[10] The production-discovery link is a very good for future production forecasting, unless as Laherrere rightly mentions, a new major discovery cycle has started. However, we can see that the production does not follow the hubbert curve strictly, even in the US case, which is championed as a major success for the peak theory. In any case, it is important to understand its limitations.

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4.

CONCLUSION

Weve seen in all cases, the application of the hubbert curve can explain more or less the production curves. However flaws are also pointed out. E.g. it fails to take into political reasons. The OPEC not only delays the peak, but renders the one-peak hubbert obsolete. Prorationing, as was the case in the US caused the production curve to fall beneath levels suggested by Hubbert. Also, improvements in technology cannot be taken into account by the curve, as the 90s production rise in the US suggests. In terms of applicability on the world, unconventional oil has not been taken into account. While Laherrere does this, there are doubts over whether the hubbert curve will be followed in its case, especially as its industry is in its infancy. Data clarity is also a serious issue as Laherrere fails to acknowledge the exclusion of NGLs by Hubbert. G. Maggio et al(2009)[10] outline the difficulty in understanding the exact definition of oil considered. Different data sources (BP, ENI EIA) have different definitions of oil and this furthers the problem in creating an accurate hubbert curve. On the other hand, the peak theory has helped uncovering the true ultimate reserve of oil in the USSR and despite its failing to take into account the political issues, identified the US peak accurately. While the misreporting in the case of USSR was found out, it was only because the production was past the inflection point. Misreporting happens at various levels and it will be difficult to take this into account. In fact, there is heavy debate over the issue of peak oil. CERA, a consulting company in the United States has suggested that peak is very much a hyped issue and that we are actually heading towards a plateau (as opposed to peak) of oil production, as unconventional oil along with improved recovery methods and reserve growth (unaccounted in the hubbert curve) will balance out the expected decline.[11] On the other hand, there are suggestions that peak has already been reached.[12] The Hirsch report was created by request for the US Department of Energy and published in February 2005. It examined the time frame for the occurrence of peak oil, the necessary mitigating actions, and their likely impacts. It suggests that while the time of peak may wary, the peak is very much real and that mitigation measures must start 20 years before peak to minimize the impact of reduction in production along with the increase in demand. In conclusion, for all its apparent failings, the peak theory must be given credit for what it has done. It has also put into perspective the fact that oil will peak, which wasnt the case when the paper was published.[13] While it may ultimately fail, it has created a lasting interest into this issue

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5.

REFERENCES 1. http://web.archive.org/web/20070312054557/http%3A//oaspub.epa.gov/trs/trs_proc_q ry.navigate_term%3Fp_term_id%3D7068%26p_term_cd%3DTERM . EPA. Archived from the original on March 12, 2007. Retrieved 2007-01-18. 2. M.K. Hubbert, Nuclear Energy and the Fossil Fuels. Presented before the Spring Meeting of the Southern District, American Petroleum Institute, Plaza Hotel, San Antonio, Texas, March 78-9, 1956 3. http://www.oilandgasiq.com/glossary/ Retrieved on April 12, 2012 4. Hirsch, R.L., 2005. The inevitable peaking of world oil production. The Atlantic Council of the United States. 5. Laherrere, J.H.,2000. Hubberts curve : its strengths and weaknesses. Version proposed to Oil and Gas Journal on Feb 18, 2000 6. http://watd.wuthering-heights.co.uk/mainpages/hubbert.html. Graph showing how number of oil well approximate the hubbert curve. Retrieved on April 12, 2012 7. https://www.tsl.state.tx.us/exhibits/railroad/glossary.html Texas State Library and Archives Commission. Definition for prorationing. Retrieved on April 12, 2012 8. http://www.opec.org/opec_web/static_files_project/media/downloads/publications/OS .pdf OPEC statute. Retrieved on April 12, 2012 9. http://www.spe.org/industry/docs/GlossaryPetroleumReservesResourcesDefinitions_2005.pdf Society of Petroleum Engineers. Definition of reserve categories. Retrieved on April 12, 2012 10. G. Maggio, G. Cacciola, 2009. A variant of Hubbert curve for oil production forecasts 11. Peter Jackson, 2006. Why the Peak Oil Theory falls down. myths, legends and future of Oil Resources. Retrievable from http://www.liv.ac.uk/~jan/teaching/References/Jackson%202006.pdf 12. J Murray, David King 26 January, 2012. Oils tipping point has passed. Published in Vol 481, Nature.

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