# Presentation: 248978

## Modeling Peak Oil with the International Petroleum Production Model: IPPM

- Presentation to ASA Committee
- Washington, DC
- April 9, 2008
**John Holte, Lauren Mayne, John Staub, Glen Sweetnam**
**Energy Information Administration**

**Notes:**
Background on why we are even doing this investigation:
	lots of media attention
	lots of concern about resource shortage due to rising prices and political tensions

Historically, due to the restricted timeframe of EIA’s projection they have not shown a peak in oil production.  In order construct scenarios which extend far enough into the future that post peak production and the full life cycle of oil resource use can be examined, EIA has expanded the timeframe analyzed to the year 2200.  
	Gives a very long forecast horizon to fully examine peak oil production behavior,
	Prevents “end of the world” drop offs in production immediately after the end of the horizon due to resource constraints.

Presentation today is intended to give an overview of this very long term world oil production model, IPPM.

##  “*This is a working document prepared by the Energy Information Administration (EIA) in order to solicit advice and comment on statistical matters from the American Statistical Association Committee on Energy Statistics. This topic will be discussed at EIA's spring 2008 meeting with the Committee to be held April 9, 2008.”

- International Petroleum Production Model Methodology. April 9, 2008

## Overview

- Concepts
- Data assumptions
- Methodology (model schematics)
- Example output
- Questions for the committee

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
During the course of the presentation we will address the underlying concepts of the model and the peak oil study in general, the input data required for the operation of the model, and an example output of the model.  

After these items are covered we will invite members of the committee to share any thoughts on several particular areas of interest.  Although, if during the presentation you have questions on a particular slide or are having trouble seeing something on the screen, please let me know.

Before we get into discussing the operation of the model, I think it is important to be very clear about several concepts that really shaped the approach we took to investigating the outlook for future oil production.

## Concepts

- Peak oil
- Oil streams
- Regions
- Assumptions

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
The first concept that we need to develop is what is meant by Peak Oil, as this term often has different meanings for different people.

Second, we need to identify the specific streams we are referring to when we use the term Oil, as again this term often has different meanings to different people.

Third, we need to recognize that production dynamics vary by region and list what regions will be considered in the model.

Lastly, we need to review the variety of different parameters used in the study which relate to consumption, resources, economics, and the real world interaction of these concerns.

## Peak Oil

- The all time highest annual average production rate (million barrels per day, MMBD)

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
The peak in oil production is not defined by percentages of resource depletion be they 50 percent or total depletion, rather it is simply ...

Even with all input data assumptions being relatively similar, timing and volume of peak can differ greatly depending on definitions of “oil”.

## What is oil?

- Oil = Petroleum Liquids
- Crude Oil & Lease Condensates
- Natural Gas Plant Liquids (NGPL)
- Extra-Heavy Crude Oil
- Bitumen (oil sands)
- Oil Shale (kerogen)
- Crude Oil from Other Source Rock
- Exclude: biofuels, CTL, GTL

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
We do not assume that oil is a homogeneous hydrocarbon mixture throughout the world.  Rather, there are many different individual resource streams that are included in the definition of oil.  These oil streams are differentiated by both hydrocarbon and reservoir quality.

Division of petroleum liquids into these categories is necessary to reflect effect different hydrocarbon and reservoir types can have on the costs of extraction and the recoverable portion of in place resources, or both the economic and technically recoverable limits to resource production.

Units are in volumetric barrels of oil. Bitumen is measured as upgraded synthetic oil.

## Regional Groups

- United States
- Other non-OPEC
- Middle East OPEC
- Other OPEC
- The model is expandable to many other regions or countries

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Division of production of petroleum liquids into different regional groupings is necessary in order to at least roughly represent different production philosophies or predominant production behaviors, such as maintenance of OPEC target levels. 

In order to express differences in production dynamics throughout the world, due to either different political or economic environments in different producing countries, we grouped both input data and model results by regions.  Although just gives a generalization it serves our purposes well for now.

## Data and Assumptions (1)

- World consumption path by t
- World oil price by t
- Initially In Place volumes (IIP) by r,s
- Long term max Recovery Factors (RF) by r,s
- Finding and Development costs (F&D) by r,s,cp
- Lease and Operating costs by r,s
- Taxes and Royalty rates by r,s
- Cost of Capital by r,s
- Where r = region, s = stream, t = time, cp = cumulative production

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Focus of analysis was not to project future macroeconomic or social situations, hence consumption was not derived by internal analysis but rather based on the 2007 Climate Change Science Program (CCSP) reference case scenarios.

Although regional groupings are applied to resource allocation and production projections, consumption trajectories are not expressed on a regional level.  Instead we have constructed candidate consumption trajectories based on both the IEO2007 and the 2007 CCSP report.  These are candidate trajectories as it is not assumed that production will satisfy these paths.

These second parameter in the model is a world oil price path which is assumed to be flat in real terms.

As this is a resource based model the next two assumptions should be of particular interest.  Although production analyses are often based off of assumptions of reserve volumes or recoverable resource quantities, we consider it to be of utmost importance to base long term production models on IIP estimates, as the IIP is really the absolute limit to future production.  Unfortunately the information available regarding IIP estimates around the world can be both sparse and highly variable or uncertain.  IIP estimates used as inputs to this model were derived from a variety of different sources, including I.H.S., the Nehering database, World Energy Council, and EIA resource data.

To this absolute limit we apply a long-term maximum recovery factor in recognition of the fact that not all of the in ground resources will be able to be extracted.  This long-term maximum recovery factor is intended to express the technically recoverable volumes of in-ground resources at the end of the projection horizon, or 2200.  This RF is not intended to be representative of current recoverable volumes, nor is it required that the realized RF of any stream reach these max recovery factors in 2200.

The third major group of parameters applies to the costs of production, with each varying by both stream and region.  The F&D costs assumptions also vary by the level of cumulative production as they are generated from an assumed supply curve, with costs increasing as the recovered fraction of recoverable resources increases. 

## Data and Assumptions (2)

- Max production volumes by r,s,t
- Max growth rates by r,s,t
- Share of new production capacity added based on prior 1 to 10 year average versus economic profitability
- Technology improvement rates by s,t
- Allow negative profits (Y/N)
- Number of annual supply increments up to 100
- Shape of Supply curves
- Production profiles by r,s

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
In order to construct a realistic view of future oil production, we need to establish several parameters:
	restricting production due to regional interests,
	restricting changes in production due to infrastructure constraints (such as the preference to continue using infrastructure previously invested in and the difficulty associated with 		constructing new infrastructure, especially as concerns new resource plays or stream expansions). 
Also, as we expect future technology advancements to have some effect on the costs of resource extraction, we have included a technology improvement factor which shifts the supply curve to the right.  However, as views of technology prospects tend to vary, the model can also be run without this feature.

There are several other model assumptions which can be adjusted due to analyst preference.  One of these adjustable features in the allowance of negative profits, which enables the model to generate production scheduling based on technically recoverable limits rather than economically profitable limits.  Others are the number of supply increments considered per year, which affects the volume of each capacity investment; the shape of the resource based supply curves; and the shape of production profiles, or the fraction of an increment in capacity that is depleted each year.

Now that we have a general overview of the input assumptions needed to operate this production scheduling model, I think it is only appropriate to present the actual numerical inputs.

## Consumption Paths

-   Note:  Biofuels, gas-to-liquids, coal-to-liquids, and refinery gain are excluded

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Candidate consumption paths are derived from both EIA IEO2007 and CCSP (June 2007).  As mentioned before it is not taken as a given that these paths will be satisfied by production.

High
2007 – 2030:  IEO2007 LP (High Volume)
2031 – 2050:  Trends to IGSM Reverence values
2051 – 2100:  Equal to IGSM Reference Scenario
Middle
2007 – 2030:  IEO2007 Reference case
2031 – 2050:  Trends from ratio of Reference Range in 2030 to equidistant in 2050
2051 – 2100:  Remains equidistant between High and Low
Low 
2007 – 2100:  MERGE Reference Scenario adjusted by difference between historical data and MERGE projections in 2006

## Price Paths

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
The three price paths are based on the AEO/IEO 2007, with real prices post 2030 held constant.

## Initial-in-Place Estimates(trillion barrels)

|  | M.E.
OPEC | Other
OPEC | United
States | Other
Non-OPEC |
| --- | --- | --- | --- | --- |
| Conv. Crude and Condensate | 2.6 | 2.6 | 0.9 | 2.9 |
| Natural Gas Plant Liquids | 0.3 | 0.3 | 0.2 | 0.4 |
| Extra Heavy Crude (<10o API) | 0.0 | 2.3 | 0.0 | 0.0 |
| Bitumen | 0.0 | 0.0 | 0.0 | 2.4 |
| Shale Oil | 0.0 | 0.0 | 2.1 | 0.7 |
| Source Rock | 0.9 | 0.9 | 0.3 | 1.0 |
| Total Liquids | 3.8 | 6.0 | 3.4 | 7.4 |

- Sources:  I.H.S. Energy, World Energy Council, USGS, Nehring Associates, EIA analysis
- Includes discovered and undiscovered volumes.

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Total oil IIP of 20.4 trillion barrels which falls in the wide range of estimates from 14 to 24 trillion barrels.

## 21 trillion barrels of IIP

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
This is just a graphical depiction of the table on the previous slide.  As you can see several resource streams are heavily concentrated in just one or two regions. 

## Recovery Factors

|  | M.E.
OPEC | Other
OPEC | United
States | Other
Non-OPEC |
| --- | --- | --- | --- | --- |
| Conv. Crude and Condensate | 60% | 60% | 60% | 60% |
| Natural Gas Plant Liquids |  |  |  |  |
| Extra Heavy Crude (<10o API) | 50% | 50% | 50% | 50% |
| Bitumen |  |  |  |  |
| Shale Oil | 10% | 10% | 10% | 10% |
| Source Rock |  |  |  |  |
|  |  |  |  |  |

- _Recovery Factors_
-   Typically vary between 10 to 70 percent
-   Increase with technology
-   Higher in “good” reservoirs

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Of all the input assumptions discussed here, recovery factor assumptions have the most significant impact on future recoverable resource volumes.  Unfortunately, not a lot of emphasis has been placed on studying recovery factors either as they vary by reservoir characteristics or as they change over time.  The RF assumptions presented here reflect our current best estimates based on an assortment of field or play specific studies that have been conducted by different entities, including the USGS, Norwegian Petroleum Directorate, and EIA itself.

## Technology Improvement

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Need more information/discussion 

## Model Schematic 

**Model Schematic **

_**Proved developed reserves**_ for different oil streams (conventional crude+condensate, NGPLs, bitumen, extra heavy oil, shale, and other source rock) are generated through investment, constrained by both above ground and below ground factors
- The availability of production from proved developed reserves is used to assess the viability of  “candidate” oil demand paths drawn from the recent U.S. Climate Change Science Program scenarios report.

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
The IPPM was designed to allow us to take this variety of input assumptions and schedule investments in incremental production capacity (or the establishment of proved developed reserves) according to the profitability of each available investment option, with the most profitable option being acted upon first, subject of course to above ground constraints.

In this way the IPPM is really a resource based and investment or economics driven model.  The schematic here shows how input assumptions regarding above ground concerns (or economic and political environments) and assumptions regarding below ground concerns (or IIP and maximum technical recovery factors) are both considered when determining the most profitable investment able to be made to satisfy a needed incremental increase in production capacity.

## Model Loop

- Loops through
- 2008 to 2200
- five regions
- six streams

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
For each year, the model compares the exogenous world petroleum demand level with the currently installed capacity. If unmet demand exists, it is divided into up to 100 equal increments. The model shifts the supply curves for technology changes for each stream in each region.

For great detail please refer to the model documentation.

## Scheduling:  Investment In Incremental Production Capacity

**Resource 1**

**Resource 2**

**Max RF****1**** ********* IIP****1**

**Max RF****2**** ********* IIP****2**

**Proved Developed Reserves (B)**

**Proved Developed Reserves (B)**

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
This supply curve is at time (t). The model updates the curve for every region/stream pair in each time period, because the every year adds more cumulative production and technology advances push the curve down and to the right.

World oil price changes affect recovery factors (RF) but do not directly intersect this curve.

This curve intersects the world demand curve for additional capacity additions. See following slide for example of how different supply streams compete with each other.

## Capacity Addition Supply Curve

**65% of IIP**

**Technology improvements shift the curve to the right.**

- International Petroleum Production Model Methodology. April 9, 2008

## Petroleum Streams (and Regions) compete to provide Capacity Additions

**Volume**

**Oil sands become competitive with crude oil here.**

**Oil sands**

**Crude oil**

- International Petroleum Production Model Methodology. April 9, 2008

## Production Profile

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Production profiles from each petroleum stream, region and year are stacked to satisfy consumption each year

## Stacked Production Profiles

- etc.

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Production profiles from each petroleum stream, region and year are stacked to satisfy consumption each year.

In this example each successive year adds 10 units of capacity.

## Example Output

- The following charts are based on a middle consumption case
- They illustrate how the model works

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
This figure shows the long run historical and modeled aggregate production. Beginning in about 2080 supply is not able to meet the target consumption path, based on the input assumptions.

## Example Output

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
This figure shows the long run historical and modeled aggregate production. Beginning in about 2080 supply is not able to meet the target consumption path, based on the input assumptions.

## World Production

- International Petroleum Production Model Methodology. April 9, 2008

## World Production

- International Petroleum Production Model Methodology. April 9, 2008

## Recovery over time

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
This figure shows the percent of Initially In Place (IIP) resource produced over time.

## Recovery over time

- International Petroleum Production Model Methodology. April 9, 2008

## F&D Costs

- Market share constraints and different regional F&D costs prevent equilibration.

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
Also note that the “curves” end when no additional production capacity is added. This is either due to exhaustion of recoverable resources or production quota limits.

## F&D Costs

- Here we see production constraints, combined with technology improvements push F&D costs down.

- International Petroleum Production Model Methodology. April 9, 2008

## Market Share

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
We can adjust max production limit by region/stream/year to target an particular market share.

## PD Reserves

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
The data points prior to 2008 are “proved reserves” as published by the Oil and Gas Journal. In the U.S. this data generally refers to proved developed reserves, P1. In other countries the data in the Oil and Gas Journal is closer to a proved + probably, P50, measure. The model then calibrated the data into a consistent Proved Developed reserves metric based on annual production trends and assumed production profiles. 

You’ll notice that the U.S. data is quite consistent across the methodology transition in 2008, while OPEC regions are much different.

## Questions for the committee

- Is this approach appropriate for modeling long term industry behavior?
- How might we better estimate
- Recovery Factor improvements
- Finding and Development cost evolution
- Supply curve shape
- Sensitivity analysis?

- International Petroleum Production Model Methodology. April 9, 2008

## Next Steps

- Refine IIP data sources
- Better estimates of RF improvement
- Supply curve refinement
- Add environmental costs i.e. taxes

- International Petroleum Production Model Methodology. April 9, 2008

## Thank you

- John Staub
- John.Staub@eia.doe.gov
- Tel: (773) 360-1942
- Lauren Mayne
- Lauren.Mayne@eia.doe.gov
- Tel: (202) 586-3005
- John Holte
- John.Holte@eia.doe.gov
- Tel: (202) 586-7818
- www.eia.doe.gov

- International Petroleum Production Model Methodology. April 9, 2008

## Appendix

- International Petroleum Production Model Methodology. April 9, 2008

## IIP

- International Petroleum Production Model Methodology. April 9, 2008

## IIP

- International Petroleum Production Model Methodology. April 9, 2008

## Initially-In-Place: Scenario Control

- International Petroleum Production Model Methodology. April 9, 2008

## Supply Curve Assumptions 

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
The table shown here is really just to provide you with the information needed to construct these curves on your own should you so choose.

## Supply Curve Assumptions 

- International Petroleum Production Model Methodology. April 9, 2008

**Notes:**
The table shown here is really just to provide you with the information needed to construct these curves on your own should you so choose.