Oil Officials See Limit Looming on Production

A growing number of oil-industry chieftains are
endorsing an idea long deemed fringe: The world is approaching a
practical limit to the number of barrels of crude oil that can be
pumped every day.

Some predict that, despite the world's fast-growing
thirst for oil, producers could hit that ceiling as soon as 2012. This
rough limit -- which two senior industry officials recently pegged at
about 100 million barrels a day -- is well short of global demand
projections over the next few decades. Current production is about 85
million barrels a day.

The world certainly won't run out of oil any time
soon. And plenty of energy experts expect sky-high prices to hasten the
development of alternative fuels and improve energy efficiency. But
evidence is mounting that crude-oil production may plateau before those
innovations arrive on a large scale. That could set the stage for a
period marked by energy shortages, high prices and bare-knuckled
competition for fuel.

The current debate represents a significant twist on
an older, often-derided notion known as the peak-oil theory.
Traditional peak-oil theorists, many of whom are industry outsiders or
retired geologists, have argued that global oil production will soon
peak and enter an irreversible decline because nearly half the
available oil in the world has been pumped. They've been proved wrong
so often that their theory has become debased.

The new adherents -- who range from senior Western
oil-company executives to current and former officials of the major
world exporting countries -- don't believe the global oil tank is at
the half-empty point. But they share the belief that a global
production ceiling is coming for other reasons: restricted access to
oil fields, spiraling costs and increasingly complex oil-field geology.
This will create a global production plateau, not a peak, they contend,
with oil output remaining relatively constant rather than rising or
falling.

The emergence of a production ceiling would mark a
monumental shift in the energy world. Oil production has averaged a
2.3% annual growth rate since 1965, according to statistics compiled by
British oil giant BP PLC. This expanding pool of oil, most of it priced
cheaply by today's standards, fueled the post-World War II global
economic expansion.

On Oct. 31, Christophe de Margerie, the chief
executive of French oil company Total SA, jolted attendees at a London
conference by openly labeling production forecasts of the International
Energy Agency, the sober-minded energy watchdog for industrialized
nations, as unrealistic. The IEA projects production will grow to
between 102.3 million and 120 million barrels a day by 2030. Mr. de
Margerie said production by 2030 of even 100 million barrels a day will
be "difficult."

Speaking Clearly

This is "the view of those who like to speak clearly,
honestly, and [are] not just trying to please people," he bluntly
declared. The French executive said many existing oil fields are being
depleted at rates that will damage their geologic structures, which
will limit future output more than most people allow. What's more, some
nations endowed with large untapped pools of oil are generating so much
revenue from their current production that they feel they don't need to
further develop their fields, thus putting another cap on output.

Earlier this month, James Mulva, the chief executive
of ConocoPhillips, echoed those conclusions in a speech at a Wall
Street conference: "I don't think we are going to see the supply going
over 100 million barrels a day.... Where is all that going to come
from?" He questioned whether the industry has enough support services
and people to execute projects to add that much oil production.

Even some officials from member states of the
Organization of Petroleum Exporting Countries, which has long insisted
on its ability to supply the world with fuel for decades hence, are
breaking ranks and forecasting limits. The chairman of Libya National
Oil Corp. said at the same London conference the world will have
difficulty producing more than 100 million barrels a day.

A former head of exploration and production at Saudi
Arabia's national oil company, Sadad Ibrahim Al Husseini, has also gone
public with doubts. He said in London last month that he didn't believe
there were enough engineers or equipment to ramp up production fast
enough to keep up with the thirsty global economy. What's more, he
said, new discoveries are tending to be smaller and more complex to
develop.

Many leaders of the industry still dismiss the idea
that there is reason to worry. "I am no subscriber to the theory that
oil supplies have already peaked," said BP's chief executive, Tony
Hayward, earlier this month in a speech in Houston.

Exxon Mobil Corp. Chief Executive Rex Tillerson has
said that if companies had better access to the world's oil reserves,
production would increase and prices would go down. "Sufficient
hydrocarbon resources exist to play their role in meeting this growing
global demand, if industry is allowed to access them," he said in a
speech this month. If access were granted, Exxon Mobil believes the
industry would be able to raise fuel production to meet demand in 2030
of 116 million barrels a day.

The oil industry has long been beset by doom-and-gloom
scenarios, which so far haven't panned out. "The entire oil industry in
the late 1970s was convinced the price [of oil] would be $100 by 1990
and we would need huge oil shale mines" to exploit oil locked away
tightly in rock, says Michael C. Lynch, president of Strategic Energy
& Economic Research Inc. Of course, that didn't happen, as
discoveries ushered in new eras of low-priced oil in the mid-1980s
through the late 1990s.

U.S. government experts are optimistic -- to a point.
The Energy Information Administration, the data arm of the Energy
Department, forecasts world oil production will hit 118 million barrels
a day by 2030. But the agency warns that its prediction might not pan
out if resource-rich nations such as Venezuela and Iraq don't invest
enough in their operations.

"We know that the world is not running out of energy
resources, but nonetheless, above-ground risks like resource
nationalism, limited access and infrastructure constraints may make it
feel like peak oil just the same, by limiting production to something
far less than what is required," said Clay Sell, deputy secretary of
energy, in a speech in October. Resource nationalism refers to
tightening state control of oil fields to achieve political aims, often
by restricting outsiders' ability to develop the oil for world markets.

'Undulating Plateau'

Two or three years ago, it was far more common for oil
analysts and officials to trumpet the potential of new technology to
harvest more oil. In a report last year, Cambridge Energy Research
Associates, a prominent adviser to energy companies, made the
comforting prediction that oil production could reach 110 million
barrels a day by 2015, and "more than meet any reasonable high growth
rate demand scenario we can envisage" up to that date. Because of
progress being made in extracting oil through new methods, CERA said it
found "no evidence" there would be a peak in oil flows "any time soon."
In a later report, CERA said world oil production won't peak before
2030 and that even when it does, production will resemble an
"undulating plateau" for one or more decades before declining gradually.

Oil companies have seen several years of bull-market
prices, and thus of trying to produce more. This has given their
executives a better sense of what is and isn't possible.

One limit: Many people think most of the world's giant
fields already have been discovered. By 1970, oil-industry explorers
had discovered 10 giants that could each produce more than 600,000
barrels a day, according to Matt Simmons, chairman of energy investment
banking firm Simmons & Co. International. Exploration in the next
20 years, to 1990, yielded only two. Since 1990, despite billions in
new spending, the industry has found only one field with the potential
to top 500,000 barrels a day, Kazakhstan's Kashagan field in the
Caspian Sea. And Mr. Simmons notes it is proving expensive and
difficult to extract.

Big strikes are still possible. This month, Petróleo
Brasileiro SA announced a deep-water find off Brazil's Atlantic coast
that appears to be the largest discovery since Kashagan.

But some of the most promising geological formations
are in locations that are inhospitable, for reasons of geography or,
especially, politics and strife. Output from Iraq's rich fields is
unlikely to grow much until security improves and outside investment
returns. The future of Iranian and Nigerian production is likewise
clouded by geopolitical and local instability.

Labor and construction bottlenecks also are making it
difficult to develop proven fields. One of the largest obstacles is the
booming commodity markets themselves: The prices of raw materials used
in oil-field platforms and equipment has escalated. And during the
years of low or moderate oil prices in the 1980s and 1990s, companies
didn't develop enough geologists and other skilled workers to supply
today's needs. "Years of underinvestment in new talent have led to a
limited and aging pool of skilled workers," noted Andrew Gould, the CEO
of oil-service giant Schlumberger Ltd., last month.

High oil prices have also led to steep cost inflation
for drilling rigs and other equipment. Costs have soared so much that
the industry is falling behind in the investment needed to sate
expected future demand. To meet demand forecasts of 90 million barrels
of oil a day in 2010, the industry needed to have spent $350 billion on
drilling and producing in 2005, argues Larry G. Chorn, chief economist
of Platts, the energy and commodities-information division of
McGraw-Hill Cos. But the International Energy Agency estimates that
spending on oil-field production in 2005 came to only about $225
billion, he says.

A failure to spend enough in the past few years "may
have already put the industry behind the spending curve," Mr. Chorn
says. As a result, he predicts "temporary shortages over several years,
causing debilitating price spikes."

Compounding the problem: Most of the world's biggest
fields are aging, and production at them is declining rapidly. So, just
to keep global production at current levels, the industry needs to add
new production of at least four million daily barrels, every year. That
need is roughly five times the daily production of Alaska, with its big
Prudhoe Bay field -- and it doesn't assume any demand growth at all.

Rate of Decline

Mr. Simmons scoffs at estimates that production from
proven fields will decline only 4.5% a year. He thinks a more realistic
rate of decline is 8% to 10% a year, especially because modern
technology actually succeeds in depleting fields faster.

If he's right, the industry needs to add new daily
production of at least eight million barrels -- 10 times current
Alaskan production -- just to stay even.

Mr. Simmons thinks the world needs to shift its energy
focus from climate change to more immediate concerns. "Peak oil is
likely already a crisis that we don't know about. At the furthest out,
it will be a crisis in 2008 to 2012. Global warming, if real, will not
be a problem for 50 to 100 years," he says.

Oil executives who believe a production ceiling is
coming are making plans to stay relevant in a world where oil
production is constrained.

Mr. de Margerie said at Total's annual meeting this
spring that the company was "looking into" nuclear-industry investments
and had hired nuclear experts to help make strategic decisions.
ConocoPhillips recently said it was considering building a
commercial-scale plant to turn plentiful U.S. coal into natural gas.

Soaring energy prices have breathed new life into
projects targeting "nonconventional" oil, such as that trapped in sand
or shale. But these sources can't be tapped nearly as quickly or
inexpensively as the big oil finds of the past.

Vivid Example

Canada's massive oil-sands deposits, which hold the
largest oil reserves after Saudi Arabia's, offer a vivid example. They
contain an estimated 180 billion barrels of oil. But after years of
intensive development and tens of billions of dollars of investments,
the sands are producing only a little more than 1.1 million barrels of
crude a day. That's projected to reach three million a day by 2015. The
oil deposits are so heavy that companies must either mine them or
slowly steam them underground to get the oil to flow out of the sand.

Randy Udall, co-founder of the U.S. chapter of the
Association for the Study of Peak Oil and Gas, has written that these
unconventional oil supplies are like having $100 million in the bank,
but "being forbidden to withdraw more than $100,000 per year. You are
rich, sort of."

As these uncertainties mount, there is growing hope
that Saudi Arabia, which has about 20% of the world's oil reserves,
would ride to the rescue if needed. Saudi Aramco, the national oil
company, has embarked on an ambitious plan to increase its daily
production by 30%, or three million barrels, early next decade, and
thus reclaim the title of top producer from Russia. But Mr. Al
Husseini, the former Saudi oil executive, now an independent
consultant, said others aren't doing as much, leaving the world
entirely dependent on Saudi Arabia to provide extra capacity.

"Everyone thinks that Saudi Arabia will pull us out of
this mess. Saudi Arabia is doing all it can," he says in an interview.
"But what it is doing, in the long run, won't be enough."

Write to Russell Gold at russell.gold@wsj.com and Ann Davis at ann.davis@wsj.com

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