Henry Groppe: I'm Henry Groppe. I'm from Houston, Texas. I have a small specialized consulting firm there which I started 50 years ago in which we do fundamental detailed bottom-up analysis of oil and gas supply, demand, price. We use that to describe and anticipate the future environment.
Julian Darley: You've spent half a century in the oil and gas business, looking at data, thinking about and analysing the supply of oil and gas. With those years of experience and the knowledge you've gathered, can you tell us something about the situation that you find the world in now?
Henry Groppe: I would be happy to. The two fundamentals that drive these conclusions are characteristic of the oil and gas business. Those are first depletion, which is inexorable. From the first well you drill in a specific field, from that on you are depleting that finite resource, and there's nothing to be done to avoid that. And secondly, the rational nature of the exploration and exploitation; very experienced people use the best technology available to try to identify the largest deposits first. They are the easiest to find and they're the most profitable. As you do that the combination of these two fundamental characteristics inevitably gives you the classic production history curve. In the early stages, very large major discoveries are made. They are all brought on; production rises rapidly. In time, due to depletion, that production begins to decline, and by that time the new discoveries are too small to offset those and you have the all-time peak and then the long-term irreversible decline. We reached that in oil in the United States in 1970. That was followed by about 40 years the peak in discovery of new oil fields in the United States. That was followed in time by many years in which we were using a lot more than we were finding, so the production peak followed the discovery peak by roughly 40 years. On a world-wide basis we're approaching that same point. New discovery rate on a world-wide basis occured in the '50s and '60s and for many years now we've been using about two or three times as much as we've been finding, so we're at that same turning point on a world-wide basis to be followed by a long-term decline. I'm talking solely about crude oil at this point. There is a rapidly growing development of natural gas within the international gas business. That's generating increasing volumes of liquid petroleum associated with gas production. Natural gas liquids, natural gasoline condensate, and in time there's some major new projects being built to convert gas directly to liquids. That will maintain, we conclude, roughly flat total petroleum liquid supplies for the next 10 years or so. One of the factors that contribute to the peaking of oil is that if you examine historical record, most of the major on-shore oil fields in the world were discovered with surface geology. You did not need today's technology to make those discoveries. I go to Wyoming a lot on business, and it's always still a surprise to me to recognize that all of the 100+ million barrel oil fields in Wyoming were discoveried in the 1880s. We've not discovered another one that large since. That helps explain why since the first oil crises in the early '70s, during that following the 30-35 year period, the three largest non-OPEC discoveries in the world with about a trillion and a half dollars spent on exploration and development and if we exclude the former Soviet Union, were all under water. The deepwater US Gulf, the deepwater off Brazil, and the discovery of that huge Cantarelle oil field in the bay of Campeche off of Mexico. Each of those have a maximum production that we estimate will be about 1.5 million barrels a day. If they all occur at the same time, which they will not, that's roughly equal to one year's base depletion decline in world oil production. So the three largest non-OPEC discoveries in the last 35 years all under water and only make back contribution. The reason they were all under water is that we weren't able to discover those with surface geology and we needed today's technology to do that. So we think that all of the fundamentals point so clearly to this peaking of crude oil production and flattening including, for a while, significant contributions from the growing international gas business.
Julian Darley: What do you think the picture is for natural gas world-wide?
Henry Groppe: Natural gas is a different picture because it's generally found in deeper geological formations that do not correlate as well with surface features as the shallower deposits of oil do. So unlike the records for new discoveries of oil around the world, there've been huge discoveries of natural gas. Those reserves will support a growing international gas business for many years to come. For example, in the waters off of Qatar the one field alone there has proved recoverable gas reserves of about 1,000 trillion cubic feet. By comparison, the combined recoverable natural gas reserves in North America (US + Canada) are something of the order 225, about a fourth of the reserves in that one field. The other part of that field that extends across the international boundaries in the Gulf that lies off of Iran, and it has another 1,000 trillion cubic feet. And Iran, which is highly gasprone on the east side of the Gulf as compared to the oil-prone formations on the west side, has another 1,000 trillion cubic feet elsewhere in Iran. And there've been big discoveries elsewhere. The problem has been that those are stranded, they are in isolation from big markets. So we've had to make large investments, and that's increasing, to liquify that gas, to move it to markets, or increasingly to build energy intensive businesses, petrochemical businesses' direct conversion of that gas to liquid fuels. That will be a growing activity. We'll see a growing migration from the United States of very energy intensive businesses to those parts of the world, we're already seeing that. The major problem this presents is that to a much greater degree than most of us realize the entire economy and culture and society of the United States was predominantly influenced in the last 100 years by the availability of what appeared to be almost limitless supplies of oil and gas available at very very low prices. For the bulk of that time being the world's most highly developed economy with the lowest energy costs in the world. In a relatively rapid transition in the several years we're moving permanently to a position in the world of having the highest energy cost. There isn't much recognition yet, or appreciation of the implications of this fundamental paradigm shift for the United States.
Julian Darley: What are the implications as you see them?
Henry Groppe: They are first a movement away from all energy intensive manufacturing activities. Those, as I said earlier, will be migrating. That's already well underway. We have the largest hydrocarbon processing complex in the world stretching along the Lousiana and Texas Gulf coast. Petrochemical plants, refinaries and so on. The last several years we've begun to see petrochemical plant shutdowns. That capacity being replace with capacity overseas. It means also that for the first time in our history there will be major influences at work that will tend to reverse the long-term policy of movement out to suburbs. Tax incentives have promoted that. There'll be economic incentives to move closer in to the cities and developing much more diverse populations within the inner cities. We've already begun to see this; certainly in Houston, we should see it in Denver, we'll see that elsewhere. So a change in lifestyle. Probably also a real impetus to increasing dispersion of the location of work, taking full advantage of all the telecommunications technology and other technology that will make it possible to work from homes and perhaps go in to central locations only once a week or once every two weeks. And many of those kinds of changes.
Julian Darley: You are a man, I think, of some 80 years of age or something like that?
Henry Groppe: Almost, 79.
Julian Darley: Oh, there we are, 79 that's pretty close. Do you have any sense that America in some sense is moving back to a world that you were more familiar with in your boyhood?
Henry Groppe: Very good question, but I never think in those terms. I'm a chemical engineer and I love to think in terms of whole problems, and whole systems, and I've been doing that as long as I can remember. I always try to observe the current conditions, try to understand this system, and then try to think about what kinds of thinks might be done with the knowledge we have available to address those. In many ways there can be unintended consequences to these changes. Along these lines for example: my major outside interest is preventive medicine research. In a couple of research institutes we very carefully validated the use of lifestyle changes along these lines of plant-based diet, plant-based protein, stress-management exercises, those kinds of things. With those, individuals have many fewer health problems, much greater longevity, much greater productivity. In many ways some of these changes may move us back in that direction. As the Congressman spoke at lunch here today, Congressman Bartlett, there's about 90% efficienctly lost when we can grow feed and convert that to animal protein. So just think of what these kinds of pressures and motivations for some change, think of what might be done in that direction. Also physical exercise of course. Not jumping in a car at every moment. Moving closer in, doing a lot more walking. Those could help address other major problems we're facing in terms of health-care. We have an epidemic of obesity in the US and some of these kinds of lifestyle changes brought on by the consequences of much much higher cost and scarce energy can have unexpected beneficial results.
Julian Darley: It sounds like you're saying Americans should eat a lot less meat and fish and use their cars a lot less. That seems and extraordinary thing to say.
Henry Groppe: I think they should and I think they will with motivation. I think high prices will do that. It's always hard to anticipate the extent of the response changes as I indicated in my presentation yesterday. Very few people realize that all of the OECD countries: the US, western Europe, and the OECD countries in Asia are using approximately the same amount of oil today that they used in 1979, 26 years ago. To think how much populations have grown during that time, how much economic growth has occured. Enormous increase in vehicle population, and it's all been accomplished with no increase in oil consumption because higher prices motivated much more efficient approaches to all that.
Julian Darley: Thank you very much.
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