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Tuesday, October 11, 2005

UK North Sea simulation

At the request of a previous commenter, I took a stab at fitting the UK North Sea oil production data to the oil shock model. I transcribed the Laherrere data for discovery and production from the figure below:

The first cut I took assumed an immediate 4 year minimum time to construct an offshore oil platform with an exponential distribution of 1 year mean beyond that. The averages for the fallow phase and the maturation phase came out similarly low at 1 year. (Note that this differs for the worldwide fit where I assumed exponentials of 8 years for each of the fallow, construction, and maturation phases). I chose an extraction rate much closer to the world-wide average I used twice before of 0.07, adjusting it upward slightly to 0.1, i.e. 10% per year volume extracted. The unshocked results came out as the red curve below:

Note that a perceptible shoulder creeps up, largely due to the second set of discoveries. Importantly, the model can predict these secondary bumps given that the spacing between significant discoveries has a time gap beyond the reciprocal of the extraction rate.

Assuming naively that the model could account for the rest of the deviations through perturbations to the extraction rate, I eyeballed a shock profile duplicated to the right. I placed one regular shock causing a dip of 10% to the extraction rate in 1988; this corresponded to the devastating offshore fire on the Piper Alpha platform. After settling back to 10% extraction rate, I placed a fairly significant linearly increasing reverse shock starting in 1994. Whether this has any basis in reality, I can't really say for sure, but I needed this for the model to match the trending of the production curve.

So is this reverse shock indicative of a need to keep up with production demands? Or should we agree with Michael Lynch who keeps crowing up the second North Sea bump as the repudiation and comeuppance of every peak oil analyst out there?


Professor Anonymous Anonymous said...

Very interesting! That prediction of the second bump in form of a prolonged shoulder is indeed a quite promising sign. While it is interesting to speculate about the possible nature of external shocks that could help to explain the observed deviations it is maybe better to first look at the margin of errors in your input data. These seem to be generally larger for newer discoveries due to a systematic underreporting of newly explored fields and could be a partial explanation for the observed discrepancies. As for possible external 'shocks': One candidate is of course the observance of the peak itself. Sharply declining output should lead to a increased drilling activity to maintain production. This in combination with the short overall response time of the entire system could help to amplify the minima and maxima.

6:29 AM  
Professor Blogger Mr. Sprang said...

Once again, I'm struck by the importance of price information.

Why the sharp decline BEFORE the Piper Alpha fire? Because prices had crashed. Offshore oil was expensive in the early 80's - those North Sea rigs were cutting edge technology, affordable at at 1978-1982 prices, but too expensive after 1985. So as prices declined, there was an understandable decline in investment and new capital. That translated into a decline in production even before the fire. It also meant that the effects of the fire were more long-lasting than had the fire occured in a high-price environment, simply because replacing the rig was not as profitable. Although your shocks are ostensibly driven by the extraction rate, I get the feeling that you end up using extraction rates as a blunt proxy for prices.

Another consideration: perhaps you need to add a multiplier effect of some sort to account for a field's location/capital requirements. On-shore production tends to be easier to gradually ramp up or shut in, based on prices. Off-shore production is more dependent on large projects with high up-front capital costs. The result is that individual off-shore production projects (especially deep-water) should lag slightly more than on-shore, but be more likely to persist in production when prices decline.

Finally, when I look at your extraction rates, what do they represent a percentage of? The discovery data. Doesn't BP also have actual Reserve-to-Production ratios for those years? Do they fluctuate as much as your extraction rate curves? Oil companies aim to have very flat extraction curves, and that's largely through changes in proven reserves - which are price-dependent! Again - perhaps price would be the missing factor in the curve?

8:34 AM  
Professor Blogger @whut said...

Yes indeed, either of the scenarios you mention could explain it.
(1) Underestimate of discoveries in the second bump, i.e. margin of errors.
(2) Increased extraction rates, i.e. external shocks.

And there could be other combinations of parameters involved. For example, I can make the shoulder more pronounced at the expense of not matching the production levels at the first peak. In other words, I have in no way scanned completely through the input parameter space.

8:38 AM  
Professor Anonymous Anonymous said...

What happened in the North Sea was this:

The first and biggest field (Brent) peaked in 3 - 5 years (1978-1980)! All of fields (over 20) of the first phase were peaking quickly, most of them in 10 years after becoming online.

There were virtually no new fields added during the period 1985 -1989) or immediately after the first peak. That is why the production started to decline. The Piper Alpha effect lasted 1988 - 1992 but it affected only one (big) field. The production was restored in 1992 and the share of the drop after the peak was about one third.

After 1989 numerous small fields came online but their effect was small, they only helped to offset the depletion but didn't add more production. After 1993 new and more significant fields came online. The whole second peak came from those new fields and the share of the new (after 1990) fields in the maximum production is over half. The present production is almost all frome these new fields and most of it is from very new fields, found after 1995.

The share of the first two big fields was about one third during the first peak and the following minimum, but only 1/10 during the second peak.

So the first peaking can be attributed to a gap in exploration and development and second to an intensive development of new fields. The minimum between them was caused by depletion of the big old fields and lack of development. So we can here see the price effect.

But the development was intensified only after 3 years - quite soon after the peak became visible. So not much price effect here. We should ask the oil companies what happened but the production history suggests that the first peak was unexpected. The depletion was probably bigger than anticipated - this has been true all the time in North Sea.

The overall picture is that the everything was done all the time to push up production.

11:16 AM  
Professor Blogger @whut said...

I think TI has a good summary of what actually happened. I also think that with such a limited number of fields to work with, the stochastic nature of the model becomes weaker and is more prone to the deterministic effects.

3:14 PM  
Professor Blogger @whut said...


missing figure

8:14 PM  
Professor Blogger Unknown said...

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1:37 AM  

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