Thursday, May 22, 2008

Running on Empty? Fears over oil supply move into the mainstream.

This is from the Financial Times. As the article points out worries about oil shortages have moved from being the concern of a few pessimists to the mainstream media. The huge demand increases in newly developing nations such as China is not matched by similar increase in supply. New supplies such as those in the Canadian Oil Sands are quite expensive. Oil is reaching new price highs every few days it seems.

Running on empty? Fears over oil supply move into the mainstreamBy Carola HoyosFinancial TimesMay 19 2008On a rainy day last month, four drummers, three guitarists, a bagpiper, twodidgeridoo players and 186 others assembled in the rural English town ofCirencester to discuss turning their neighbourhoods into low-impactcommunities built around farming, arts and crafts and herbal medicine.After communal meditation and a few speeches, those present gathered insmall groups to discuss everything from transport without oil to engaginglocal politicians in the “Transition Towns” movement’s stated aim: reducingtheir carbon footprint in response to concerns over diminishing hydrocarbonreserves as well as global warming. The mood in the group discussing energywas sombre. One former civil engineer predicted the demise of the lightbulbwithin a decade and derided the idea that market forces and human ingenuitycould save the planet, laughing it off as “the magic wand” theory.For years, such meetings have been dismissed as eccentric. Most of the world’soil executives, government ministers, analysts and consultants reject the“peak oil” theory – the notion based on the 1950s work of Marion KingHubbert, a Shell geologist, that crude production will soon enter terminaldecline. They say it understates remaining reserves, plays down thecontribution of technological advances and ignores the role of market forcesin shaping future supply.But with the oil price at a record $126 a barrel, more than 1,000 per centhigher than a decade ago, fears of the end of the hydrocarbon age haveseeped into the mainstream. Many in the industry itself now accept thatsupply constraints are shaping the price as much as rampant demand. Callsfor greater investment to ease these constraints formed the crux of many ofthe discussions at last month’s meeting in Rome between energy ministers ofthe world’s main oil producers and consumers. A few weeks later, analysts atGoldman Sachs and elsewhere, as well as ministers of the Opec oil cartel,predicted that prices could reach $200 within two years.So are the peak oilists right? A series of recent events certainly appearsto lend credence to those who argue that the world’s ageing oilfields arebeing sucked dry amid China’s and India’s determination to lift themselvesout of poverty and the west’s reluctance to give up the luxuries of modernoil-dependent life.The fact that Russia’s oil production declined almost half a percentagepoint in April, the first drop in a decade, was shocking enough news fromthe world’s second biggest oil producer, whose output was growing at a rateof 12 per cent just five years ago. But Russian oil executives have gone astep further: Leonid Fedun, vice-president of Lukoil, told the FinancialTimes the country’s production may have already reached its peak.Just days later Saudi Arabia, the world’s biggest oil producer and by farthe largest exporter, confirmed it had put on hold plans to increase thekingdom’s production capacity. Ali Naimi, Saudi energy minister, said thedemand forecasts he was reading did not warrant an expansion past the 12.5mb/d capacity Saudi Arabia’s fields will reach next year, following alaborious investment of more than $20bn (£10.3bn, €12.9bn). King Abdullah,the country’s ruler, put it more bluntly: “I keep no secret from you that,when there were some new finds, I told them, ‘No, leave it in the ground,with grace from God, our children need it’.’’Most other forecasts show the world will need Saudi Arabia’s oil. Thus thekingdom’s reluctance to invest further in its fields has led some to askwhether Saudi Arabia can boost production or whether, after 75 years, theworld’s biggest oil deposit has been cashed.Friday’s announcement by Mr Naimi that Saudi Arabia would pump slightly moreoil did little to ease prices because it failed to reduce concerns oversupply: when the kingdom produces more oil, it eats into its cushion ofspare supply. This means such measures sometimes backfire, driving priceshigher – the opposite of what US President George W. Bush, who requested theincreased output, had in mind.One problem is that nobody really knows what is going on inside Saudi Arabia’soil industry. Riyadh is so guarded that analysts from Sanford Bernstein, thefinancial services company, took to spying on its activity via satellite.They spent nine months monitoring the country’s drilling activities andmeasuring whether Ghawar, the world’s biggest oil­field, had subsided. Theirconclusion: Saudi Arabia is having to work harder than the country’sengineers and geologists expected in 2004 to squeeze more out of thenorthern part of the ageing Ghawar field.Matthew Simmons, an energy investment banker, has a bleaker view of Ghawar’shealth. He took the news that Saudi Arabia was not planning to expand to 15mb/d as further evidence that the kingdom was struggling to ward off acollapse of its oilfields.With his book Twilight in the Desert: The Coming Saudi Oil Shock and theWorld Economy, published in 2005, Mr Simmons, more than any otherindividual, laid the seeds of doubt over Saudi Arabia’s future reliability.Poring over 200 technical papers written by engineers over 20 years, somestored electronically and others gathering dust in the filing cabinets ofthe Society of Petroleum Engineers’ offices on the outskirts of Dallas,Texas, he uncovered evidence the kingdom’s fields were far more complicatedto tap and declining more quickly than the secretive nation was willing toreveal.Less well known, but equally damning, is his study of the rest of the world’soilfields. Mr Simmons launched his project in 2001 after none of theanalysts brought in to help the US Central Intelligence Agency map the world’sremaining big sources of oil came up with answers that satisfied him.He found that the world depends on just a few giant, old, decliningoilfields and that almost nothing to match them has been discovered sincethe 1970s. One in every five barrels of oil consumed each day is pumped froma field that is more than 40 years old. Not a single field discovered in thepast 30 years has ever been able to produce more than 1m b/d and the numberand size of fields discovered since then have been shrinking dramatically.Output declines as an oilfield ages – sometimes dramatically. One example isMexico’s Cantarell field. Discovered by a fisherman in 1976, Cantarell atits peak produced more than 2m b/d. Today, the field pumps half that volumeand is in relentless decline, losing 24 per cent of its production eachyear.The same trend – though at a slower pace – is plaguing most fields aroundthe world, possibly including the four biggest: Ghawar, Cantarell, Kuwait’sBurgan and China’s Daqing. This means running to stand still: each year asmuch as two-thirds of new oil supply capacity goes towards covering for theslowdown at ageing fields.Mr Simmons’ work is potent fodder for peak oilists, who espouse their gloomyviews of the future on websites ranging from those with an academic air tomore alarmist ones that come complete with advertisements for freeze-driedfood and survival guides.Hubbert in 1956 correctly predicted that US production would peak between1965 and 1970. His later forecasts proved less reliable, as did propheciesby his followers. The Hubbert model maintains that the production rate of afinite resource follows a largely symmetrical bell-shaped curve, meaningthat post-peak life could turn quickly to economic turmoil followed by ahorse-and-cart existence.Mr Simmons knows his peak oil views have moved him towards the fringes of abusiness in which he used to occupy a far more central position. But he isnot alone. T. Boone Pickens and Richard Rainwater, the billionaire USinvestors whose net worth is estimated at more than $3bn each, have profitedfrom their view of peak oil, through their hedge funds of mainly oil and gasholdings. Last Thursday Mr Pickens placed a $2bn order for the first 667 of2,500 wind turbines that he plans to erect on the Texas Panhandle as he goesabout building the world’s biggest wind farm.Fears over supply increasingly extend to the corner offices of internationaloil companies. James Mulva, chief executive of ConocoPhillips of the US, andChristophe de Margerie, his counterpart at Total of France, both recentlysaid they did not think world oil production would ever surpass 100m b/d.That is the amount of oil the International Energy Agency, the consumingnations’ watchdog, estimates the world will need in seven years’ time. By2030, it will need 16m b/d more.Mr Mulva and Mr de Margerie would take deep offence at being called peakoilists. But they, together with a rapidly growing number of industryexecutives and ministers, believe the world is running out of “easy oil” andthat political barriers – such as Nigeria’s crippling unrest, thenationalisation that has stunted Russia’s energy industry and theinternational tensions that have for two decades stymied Iraq’s energypotential – are keeping companies from being able to exploit the2,400bn-4,400bn barrels that remain.Instead of preparing for Armageddon, they are using technologies such ashorizontal drilling to squeeze more oil out of their old fields and lookingfor reserves in harsher terrains. But even they advocate that consumers, whorely on oil for everything from light to lipstick, should be less wasteful.Industry executives admit that fields in the developed world, such as thosein the North Sea and Alaska, are about to peak. (Sanford Bernstein believesproduction outside Opec will peak this year.) But they argue thatunconventional fields, such as those in Alberta and in Venezuela’s Orinocobelt, hold more barrels of oil than Saudi Arabia, while the Arctic’s richescould be immense as well.Natural gas, coal, corn, sugar cane, algae and turkey innards are promisingalternative sources that could fuel China’s new love affair with the car,they say. Meanwhile the biggest oilfield, as Joseph Stanislaw, adviser toDeloitte Consulting, likes to point out, lies beneath Detroit. In otherwords, millions of barrels a day of oil could be saved if Americans tradedin their gas-guzzlers for more efficient vehicles.All of this means global production will follow an “undulating plateau forone or more decades before declining slowly”, says Peter Jackson ofCambridge Energy Research Associates, an industry consulting firm. Afterstudying its oil production and resources database, the group concluded thatit saw no decline in the world’s ability to produce oil before 2030, makingCera’s one of the most sanguine forecasts.But the ride could yet prove a bumpy one, even Cera admits. Saudi Arabia’sspare capacity is at its lowest level in a generation, having been eateninto by China and other fuel-hungry customers. It now stands at 2m-3m b/d,too little to cover a big interruption in supplies from elsewhere. This hasalready added a sizeable premium to international oil prices, though no onehas a grasp of exactly how much.Meanwhile, the long-term alternatives have serious downsides. The Albertaproject is a big, dirty mining operation, both energy- and water-intensive.Hugo Chávez, Venezuela’s populist president, has made it risky forinternational oil companies to pour billions of dollars into the Orinocobelt. The technology to tap the Arctic’s big reserves and bring them backashore has not been invented. Regarding power of the solar, wind andturkey-gut varieties, even the most optimistic forecasts say these willremain a small fraction of the overall energy mix.In fact, even if all the policies to increase renewable fuels and to use oilmore efficiently were to be enacted immediately, the world would still needOpec’s daily production to increase by 11.5m barrels by 2030, the bulk ofwhich would have to come from Saudi Arabia, the IEA says.That is a tall order. It is 50-plus per cent more than the amount by whichOpec managed to increase output between 1980 and 2006. This time, the oilbusiness is faced with a shortage of skilled labour (the industry’s averageage is just shy of 50) and a squeeze in the supply of steel and othercritical components.So what if politics, an ageing workforce and a dearth of equipment get inthe way and Saudi Arabia cannot – or will not – come to the rescue? Will thepeak oilists turn out to be right, for the wrong reasons?The answer depends on the market’s ability to adjust. For optimists, theworst that could happen is high oil prices eventually damp demand whilegiving the entrepreneurially inclined time to think of ingenious ways toproduce and conserve energy.Growth in demand is in fact already slowing, especially in the US and otherdeveloped countries. Neil McMahon, an analyst at Sanford Bernstein, suggeststhe downturn in developed countries may prove large enough to allow hungriernations, such as those within Opec and China, to continue to demandincreasing volumes of oil. “The question is: Have these [developed] nationsbeen squeezed enough yet, or will prices have to go higher?” he asks in arecent report. Though he leaves open the possibility that prices willcontinue to rise for a while, he argues: “Based on 3.5 per cent [growth in]global GDP, overall oil demand growth will be close to zero.”Guy Caruso (right), head of the Energy Information Administration, thestatistical and forecasting arm of the US Department of Energy, also pointsto the power of the market to drive changes in government policy and thebehaviour of consumers and oil companies. “As you know, we are not believersin peak oil. We believe the above-ground risk is the issue,” he says.The EIA predicts that US imports of oil and petroleum products will decreaseslightly in the next 22 years. This means the import dependence of the world’sbiggest oil consumer is forecast to drop from 60 per cent to 50 per cent by2015 before climbing again slightly to 54 per cent by 2030. The reasons forthe drop include improved car efficiency, slower demand, higher use ofbiofuels and a 1m b/d increase in oil production from the US’s Gulf ofMexico by 2012. “One of the things M. King Hubbert couldn’t have known isabout the technology to drill in 12,000 feet of water and to drillhorizontally,” Mr Caruso says.A pessimist’s version of events would include a more serious and widespreaddownturn, as developing countries buckle under the burden of subsidisingtheir citizens’ swelling fuel and food bills. At the extreme end are theviews of Jeremy Leggett, a geologist turned entrepreneur and author of HalfGone: Oil, Gas, Hot Air and the Global Energy Crisis. In his worst-casescenario parable, he writes: “The price of houses collapsed. Stock marketscrashed ... Companies went bankrupt ... Workers fell into unemployment bythe hundreds of thousands and then millions. Once affluent cities withstreet cafés now had queues at soup kitchens and armies of beggars on thestreets.”Industry executives dismiss this as doom-mongering so corrosive that it hasthe power to distort policy and investment decisions. But such visions alsohave the power to prompt people to use energy more efficiently. Thebagpipers and didgeridoo players of Transition Towns are indeed already apart, if only a small one, of the solution to the uncertainties ahead – evenif the world never has to experience quite the disaster that they predict.

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