Major Industry Trends
Extracting Meaning from the Oil Price Roller Coaster
The oil price has had a wild ride over the last three years. At one point, in June 2008, it was heading past US$140 per barrel, and in December 2008 it looked like the world would see the return of sub-US$30 pricing for a barrel of oil. By June 2011, the oil price had rebounded to US$125 a barrel as the global economy recovered, but by the start of August, as developed markets experienced yet another bout of nerves over the European sovereign debt crisis, allied to concerns over the downgrading of US debt by the ratings agency Standard & Poor’s, the price of oil fell below US$90 a barrel again. This extreme volatility has created headaches for both emerging and developed economies and there does not seem much chance of more stable pricing in the foreseeable future.
Global oil reserves currently stand at around 1,150–1,350 billion barrels. However, in March 2010, scientists and researchers from Oxford University said that official figures are inflated because member countries of oil cartel OPEC over-reported reserves in the 1980s when competing for global market share. They argued that, as a result, demand may outstrip supply as early as 2014. The researchers said it is an open secret that OPEC is likely to have inflated its reserves, but that the International Energy Agency (IEA), BP, the US Energy Information Administration (EIA), and World Oil do not take this into account in their statistics.
It is certainly not in doubt that consumption is rising rapidly. In 1980, according to the EIA, worldwide consumption of oil amounted to just 63 million barrels of oil per day (mb/d). By 2009, that had risen to 83 mb/d. The IEA, which publishes the World Energy Outlook (WEO) each year, estimates that by 2030, if we continue on the same path, that total will have increased by 45% to 106 mb/d.
However, new reserves are coming on stream. In January 2010, for example, it was reported that a new US assessment of Venezuela’s oil reserves said that the country might double the supplies of Saudi Arabia. Scientists working for the US Geological Survey say Venezuela’s Orinoco belt region holds twice as much petroleum as previously thought. The geologists estimate the area could yield more than 500 billion barrels of crude oil. Venezuela holds the largest oil reserves of any OPEC country outside the Middle East. Saudi Arabia has proven reserves of 260 billion barrels. Brazil also discovered a huge offshore oil field in 2009 that could triple that country’s reserves and propel into the ranks of the world’s top oil exporters. The discoveries were by Brazil’s state oil company, Petrobras, off Brazil’s south-east coast, thousands of meters below water, rock, and salt. One field known as Tupi is said to hold between 5 and 8 billion barrels of oil and gas, while there have been suggestions from officials that another may contain as much as 33 billion barrels. By way of comparison, recent new finds in the North Sea tend to be substantially below 100 million barrels.
Meanwhile, oil is due to start flowing from Caspian offshore field Kashagan in 2013. Kashagan marked the world’s largest oil discovery in 40 years. Kazakhstan’s sector of the Caspian Sea is believed to contain even greater undiscovered oil reserves than the estimated 9–13 billion barrels at its offshore Kashagan field.
In addition, the world has yet to fully exploit the potential of unconventional sources of oil, such as the Alberta oil sands, the second largest source of oil in the world after Saudi Arabia. Production is expected to increase from 1.31 mb/d in 2008 to 3 mb/d in 2018.
Other factors that have to be taken into account include the world’s refining capacity, and the leeway—or lack of it—between productive capacity and demand. In fact, demand is already pushing at the absolute limits of existing refinery capacity. As Nobuo Tanaka, the executive director of the IEA says, “Current trends in energy supply and consumption are patently unsustainable—environmentally, economically, and socially. They can and must be altered.”
To make oil last another 100 years, according to Nationmaster’s Ian Graham, worldwide oil consumption would have to be cut to 6.87 billion barrels of oil per year, or just over 8% of our current rate of consumption (6.48% of the projected figure for 2030). By any standards, that looks to be an extremely difficult feat to pull off, but it may well be that pricing alone will drive the world to find alternatives, or to cut back drastically on its usage.
Peak Oil—and Its Alternatives
The peak oil theory, formulated in the mid-1950s by one-time Shell geophysicist M. King Hubbert, is based on the Hubbert curve, which sees oil production peaking at a definite point in time, then tailing off. The curve itself works for any limited natural resource, and is frequently cited in “peak oil” debates in the sector. What makes the Hubbert curve significant for discussions about the future of oil and gas as energy reserves is that it predicts a steep fall-off, or a high rate of decline of production as existing assets wind down. Peak oil debates tend to have an “Armageddon” quality to them, because they use the steep fall-off predicted by the Hubbert curve to argue that global oil production will decline too fast for the world to develop sufficient alternative sources of energy to replace that gained presently from oil.
Shell itself does not subscribe to peak oil theory, but does agree that since 2000 demand for oil has accelerated: “Looking forward and assuming adoption of alternative policies, even the lowest projection shows that energy demand will continue to grow at 1.4%, while the highest projection is that demand will grow 2.5%. At that rate, demand in 2030 will be more than double what it was in 2000. While we do not subscribe to the peak oil theory, the truth is that, particularly outside the Middle East, the readily accessible sources of conventional oil are being depleted,” Shell says.
The answer is not to trot out the Hubbert curve and wring one’s hands, Shell says, but rather to look to some hard choices, including converting oil sands to useable oil fluids, as Shell is doing in Canada. Other options which should also be explored, according to Shell, include stepping up the progress on renewables and introducing a “cap and trade” carbon tax.
The environmental lobby, however, is massively opposed to oil sands exploitation, arguing that they are easily one of the worst (most polluting) forms of energy. WWF, for example, argues that the extraction of oil from oil sands creates “three times the carbon emissions of conventional oil production and destroys the local environment, devastating forests, and using massive amounts of river water. Oil sands production contributes to climate change, and creates dangerous waste, including poisonous water that leaks into the wider environment” (see More Info).
Oil shale is even worse, WWF argues, producing up to eight times the carbon emissions of conventional production. It quotes NASA’s comment by Jim Hansen: “Squeezing oil from shale mountains is not an option that would allow our planet and its inhabitants to survive.”
The Institute for Security and Development Policy (ISDP), a Stockholm-based independent research and policy institute, has done a study titled “The global race for oil and gas—Power politics and principles in Asia.” It argues that whether or not global oil and gas is actually now in decline rather than on the increase, with the consequent gap between demand and production widening, it remains true that some countries and politicians are acting as if this was the case. This is creating a global “dash for oil.” In particular, the Institute argues, “Competition between consumer states over energy raw materials has already resulted in a race for oil and gas in Central Asia and Siberia.”
What could this mean for the global economy? According to the ISDP, in the absence of some serious geostrategic thinking, we face some unattractive alternatives: “It is likely that China and India, ultimately even the US, the EU, and Japan, will begin to ‘play hardball’ in the race for raw energy materials.”
The ISDP hopes that the European Union’s example of adhering to the Energy Charter Treaty, an international agreement that was signed in the Hague in December 1991, offers a way forward for the world, as it works its way through the traumas associated with moving from dependence on oil to other energy sources. The treaty’s essence is the peaceful implementation of non-discriminatory conditions for trade in energy materials, based on World Trade Organization rules, and provisions to ensure reliable cross-border energy transit flows. The world has already had several examples of how difficult such cross-border agreements can be, the most recent being Russia’s spats with Ukraine and Belarus, both of which had the potential to have a serious impact on the supply of oil and gas to Europe.
Cambridge Energy Research Associates (CERA), a leading adviser to international energy companies, governments, financial institutions, and technology providers, does not subscribe to the peak oil theory. It sees no evidence of a peak in oil production before 2030, with global production eventually following an undulating plateau for one or more decades before declining slowly. The organization believes that “hydrocarbon liquids—crude oil, condensate, extra heavy oil, and natural gas liquids—are a finite resource; but, based on recent trends in exploration and appraisal activity, there should be more than an adequate inventory of physical resources available to increase supply to meet anticipated levels of demand in this time frame.” Moreover, it adds, if the “peak demand” now evident in the OECD countries is a precursor of later developments in the emerging markets, world demand itself could eventually move on to a different course.
The Global Gas Position
According to the EIA’s “International energy outlook 2009,” natural gas consumption is growing twice as fast in non-OECD countries as in the OECD. Moreover, the EIA expects production increases in the non-OECD region to account for more than 86% of the growth in world production between 2006 and 2030. Worldwide, natural gas consumption will increase from 104 trillion ft³ in 2006 to 153 trillion ft³ in 2030.
As of January 1, 2009, proved world natural gas reserves, as reported by the Oil & Gas Journal, were estimated at 6,254 trillion ft³—69 trillion ft³ higher than the estimate of 6,186 trillion ft³ for 2008. The largest increases in reported natural gas reserves in 2009 were for Iran and the United States. Iran added an estimated 43 trillion ft³ (a 5% increase over 2008 proved reserves) and the United States added 27 trillion ft³ (a 13% increase). There were smaller, but still substantial, reported increases in reserves in Indonesia, Kuwait, Venezuela, and Libya. Reserves in Indonesia and Kuwait both rose by 13%—with Indonesia’s reserves increasing by 12 trillion ft³ and Kuwait’s by 7 trillion ft³. Venezuela added nearly 5 trillion ft³ of reserves (a 3% increase), and Libya added 4 trillion ft³ (a 9% increase. Almost three-quarters of the world’s natural gas reserves are located in the Middle East and Eurasia. Russia, Iran, and Qatar together accounted for about 57% of the world’s natural gas reserves as of January 1, 2009. Despite high rates of increase in natural gas consumption, particularly over the past decade, reserves-to-production ratios for most regions are substantial. Worldwide, the reserves-to-production ratio is estimated at 63 years. By region, the highest ratios are about 48 years for Central and South America, 78 years for Russia, 79 years for Africa, and more than 100 years for the Middle East.