CERA — a Peak Oiler in the making?

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By Aage Figenschou

CERA has over the years been extremely optimistic regarding future expansion of liquids capacity. They also have belittled and ridiculed those who disagreed, particularly with the notion that we will soon see a Peak Oil scenario.  It is therefore with some surprise you read the various CERA reports in chronology and you realize that CERA is presently gliding away from previous strongly held beliefs and setting the stage for joining the Peak Oil community.

Astonishing downward revisions.

If you look at a report they presented in October last year (Filling the Hopper), their capacity tables show a brisk growth from 92.4 million b/d in 2008 to 114.4 million b/d in 2015. Then they project almost a plateau until 2020 (113.7 million b/d). If you look at crude alone, it actually declines between 2015 and 2020.  It certainly looks like a Peak Oil scenario.

Even more astonishing is a report presented at a conference in London last December (Recession Shock) where they slashed their own October numbers. In the December report global capacity in 2008 was reduced from the October estimate of 92.4 million b/d to 90.2 million b/d.

Global capacity forecast for 2010 was reduced from 99.3 to 94,2 million b/d, for 2015 was revised down from 111.4 million b/d to 98,6 million b/d, and for 2020 from 113.7 million b/d to 103.3 million b/d.  In their 2005 report, “Worldwide liquids”, their forecast for 2010 was 101.5 million b/d. Now they are almost at that level 10 years later and the year for peak crude production must have moved forward from earlier forecasts.

The CERA code.

For many it has been difficult to compare CERA figures with other forecasts since they only stick to “production capacity” and it is a bit like apples and oranges. In their October report, page 3, they lead us through deciphering the numbers.

You start with their figure for global capacity, 92.4 million b/d in 2008. Then you deduct shut in capacity which they say was 3.7 million b/d. This must also include all the capacity which was locked in due to civil war, bad policy and because the oil is so heavy nobody wants to buy it. In July, when the price was almost $150 we had global spare capacity of 2.3 million b/d according to the IEA. One might call that “non-existant spare capacity.”

The net figure after deducting spare capacity, 88.7 million b/d, is then adjusted for lack of project/operational efficiency, which CERA says is 4 percent, giving us real production in 2008 of 85.2 million b/d. You must then add 2 million b/d in refinery gains, which is not included in CERA’s “global capacity,” and you reach global production of 87.2 million b/d in 2008 as per CERA’s estimate in October.

Is CERA’s Peak 100 million b/d ?

Based on the above what can we expect as production in 2010, 2015 and 2020?

For 2010 their new forecast is 94.2 million b/d.  Based on their own methodology, we must first deduct spare capacity. If we assume the supply situation is “$150 tight” (to illustrate real full capacity utilization) we deduct 2.3 million b/d and multiply with 96% and add refinery gains. This gives us 90.2 million b/d. Not likely but not impossible and way more modest than in the super optimistic headlines CERA usually provides.

In 2015 the similar calculation indicates a real production capacity of 94.5 million b/d and in 2020, 99 million b/d.  By that time there may be geopolitical peace and harmony and the heavy unsellable crude may have found a buyer; still, maximum capacity is around 100 million b/d which brings CERA in line with TOTAL and many others.

In the meantime TOTAL has moved their position. According to their CEO, de Margerie, speaking last week, the world will never be able to produce more than 89 million b/d of oil, so CERA may revise their position further.

Hedging their bets.

CERA must have realized that they have been heading in the wrong direction for some time and are therefore trying gradually to adjust their course without letting it be too obvious. They still use a prose which reminds of the old CERA but the language has lately become more and more guarded.

In their December report their forecast is that global spare capacity will reach 8 million b/d by 2012. Yet in the executive summary they say that “as the economy starts to pick up, the oil market could tighten in the first half of the next decade.” That is not more than 12 months from now. Furthermore they  say that “If prices fall too far” the lack of investment could accelerate the tightness” and strong economic growth “could also accelerate tightness.”  With these words CERA could claim to be right even with $100 oil price by this summer.

Impressive track record?

It is surprising the kind of standing CERA has among politicians and the media, given their track record.  If you look at the report they published in May of 2005 their forecast for 2005 was a capacity of 87.85 million b/d. Yet by the release of CERA’s October report in 2008 the 2005 figure had been revised down by 1.4 million b/d to 86,45.  Not very impressive real time data.

CERA makes a big issue out of their fantastic database, that it is why their forecasts are so superior to everyone else’s. If they are far away from other forecasts the reason is simply that they claim they have much better data to back up their views.

It is therefore an interesting experiment to size them up in a country where the data is simple, transparent and public, and where “a better database” therefore is not really a competitive edge. Let us take Norway. In their 2005 report they were expecting Norway to produce 3 million b/d of liquids in 2010. In their 2006 update this figure had been revised up to 3.15 million b/d.

According to the latest IEA figures and the Norwegian Petroleum Directorate it is expected that Norway to produce about 2.1 million b/d in 2010.  This actually means that in 2006 CERA was more than 50% too high in their estimate for capacity 4 years down the road for a country with relatively few fields and the most transparent and public statistics in the world.

The UK is also a fairly transparent country. In CERA’s 2005 report the UK should have a capacity of 2.1 million b/d by 2010. According to the latest forecast from the IEA the production in 2010 will be 1.2 million b/d. This time they are 75 percent too high.

When they are that much off in such a near future in transparent countries like Norway and the UK, how likely is it that their forecast for countries like Azerbaijan or Iran 10 years into the future are meaningful at all ?

Unfortunately for CERA, time is passing and their wildly optimistic predictions can now slowly be recognized for what they have been: wildly optimistic.  It is possible that it is the grueling realization of how wrong they have been which caused the dramatic downward revision in their December report. It will be interesting to see if their rhetoric will be adjusted to fit the reality.

Perhaps they have known for quite a while and that was the real reason CERA did not dare to accept ASPO’s challenge to a $100,000 bet during early 2008 on their own forecasts being right.

Aage Figenschou is a lawyer working in Norway’s oil industry.