WebHubbleTelescope, a long time TOD poster, has been one of the most active in the blogosphere in the area of oil production modeling. He has advocated a more physically based approach instead of a heuristic curve fitting approach such as the Hubbert Linearization. He proposed an original method, the so called Shock Model, that has a clear physical interpretation and that is making use of both the production profile and the discovery data. I think that a review of the Shock Model is long overdue.
I also propose three modifications or extensions:
- Originally, the instantaneous extraction rate function E(t) has to be provided by the user. I propose a method to estimate E(t) directly from the observed production profile.
- Reserve growth is modeled as a fourth convolution function based on an empirical parabolic cumulative growth functions (this will be detailed in part II).
- A new way to project future extraction rate (in part II).
The code in R language is provided at the end of this post.
From Discovery to Reserves
The Shock Model is described in details on Mobjectivist. It is based on the following three equations:
D Discovery (backdated) T Instantaneous gross reserve addition R Oil reserves E Extraction rate or shock function P Annual oil production hBuild,hFallow,hMature Exponential functions
Fig 1. Timeframe for the development of an oil field1.
On Figure 2, we can see an original discovery impulse is being spread out on a large time period.
Fig 2. The filtering operation by three successive Exponential
distributions is equivalent to a Gamma distribution
The convolution by a Gamma function will smooth and shift the original discovery curve by 2λ. Using the ASPO backdated discovery curve (Figure 3), we get a shifted and smooth reserve curve.
Fig 3. Effect of the succesive convolutions on the original backdated
discovery curves (ASPO) .
Fig 4. Simulated oil reserves R for different values of λ.
Estimating the shock function
Fig 5. World production for crude oil + condensate2.
The figure below is the estimated shock function E(t) with the proposed technique. The shock function is assumed constant in the future and equals to the last estimated value.
Fig 6. Shock function E(t) estimated by the bootstrap filter (with λ= 3 years).
Click to enlarge.
In my opinion, the model has limited predictive abilities because it cannot predict correctly future extraction rate values (i.e. the shock function E is unknown in the future). WHT has made the following prediction for crude oil + NGL.
Fig 7. World production forecast (crude oil + NGL) .
This forecast includes NGL production which I don't think is appropriate because the model is based on conventional oil discoveries. On Figure 8, we can see the application of the shock model for different time intervals assuming that the extraction rate remains constant in the future and equals to the last estimated value. Predicted production levels are falling immediately because E(t) should increase in order to maintain or increase production. In part II, I will propose a simple solution to deal with this problem.
Fig 8. Different world production forecasts for crude oil + condensate .
It's interesting to compare the inverse of the estimated extraction rate (1/E(t)), which is equal to the reserve to production ratio (R/P), and fluctuations in nominal crude oil prices:
- When R/P values are below 30 years, prices are increasing. This was the case in 1970 at the time when demand for oil was very strong and energy efficiency not part of the vocabulary. A lowering of consumption after 1985 (mainly a combination of economic slowdown, energy conservation, drilling frenzy,...) has contributed in an increase in the R/P values.
- The recent increase in price since 2003 corresponds also to current R/P values below the 30 years threshold minimum (27.6 years) observed in the 70s.
- The ASPO discovery data is probably underestimating some significant amount of reserve growth that has occured in the late 90s hence the premature fall of the simulated R/P curve around 2000.
- The R/P values given by the model are surprisingly closed to the R/P computed from proven reserves (BP) once corrected from large reserve additions in middle-east countries (red circles).
- In order for the R/P value to come back above 30 years, either reserves need to increase significantly or crude oil consumption needs to decrease significantly.
Fig 9. Crude oil prices are inflation adjusted (nominal prices). The red dotted vertical line is the year
In Part II, I will look at the modelisation of reserve growth and a new way to improve the predictive ability of the shock model.
Footnotes:1Giant oil fields and their importance for future oil production, Fredrik Robelius, PhD Thesis.
2The data for the world production of crude oil + condensate is composed of:
- 1900-1959: API Facts and Figures Centennial edition 1959.
- 1960-2006: EIA data.
The code is available in R language, the windows version of R software is available here. You will need to install the Matlab package (go in "Packages/Install Package(s)" then choose a CRAN site and select Matlab from the package list). To execute the program, open the file given below and click on "Edit/Run all".Code