by Jerome a Paris
Fri Jun 24th, 2005 at 05:55:02 AM EST
With oil prices having finally breached the 60$/bl limit, another "countdown" diary is certainly warranted! But I'll take this from another angle, which is: how this is vievew by out "global elites" in the West.
hfiend pointed me out earlier this week to a new study by CERA, a well respected energy consultancy, about peak oil. I have no way to access that study, which is for customers only, but CERA has kindly promised a short summary here.
Interestingly, both the Financial Times and Le Monde, the two highest brow papers in the UK and France, have also published some highly visible articles on peak oil in recent days (in the FT's case, a text by Martin Wolf, their senior economic editor, and in the case of Le Monde, 3 articles with a front page headline).
So let's hear their views.
Let's start with the articles by the FT and Le Monde. Both read in a similar fashion, i.e. as introductions to the concept of peak oil to their readers and, it seems, to the writers of the articles themselves, and they follow similar premises:
- oil is getting pretty expensive, at close to 60$/bl;
- they describe in more or less detail the current market factors that generate this: strong demand growth, limited spare capacity today;
- they flag the long term fact that reserves are finite and that there will be a peak at some point.
Here they diverge somewhat:
While Le Monde is more alarmist in its description of peak oil, providing worrying quotes from the boss of Shell and providing suggested dates for peak oil (Total, 2030, Jean Lahererre, 2015, Colin Campbell, 2006, these last two being the founders of ASPO), they end up on a more reassuring note, with the usual arguments that oil companies have significantly improved their recovery rates, and that they will start developing unconventional reserves (ultra deep offshore, artic, heavy oils and oil sands). Le Monde publishes a separate article discussing French major Total's plans in all these sectors, as well as an interview with Gerard Mestrallet, CEO of Suez, one of the largest European utilities, who concludes that nuclear is the only reasonable option in this context.
FT's Martin Wolf goes the other way round: he starts with the International Energy Agency's (still rosy) scenarios for 2030 and looks how realistic these are. His conclusions, for someone who writes explicitly that he knows little about the specific topic of oil reserves, are quite interesting:
Predictions are always dangerous. High oil prices could, once again, generate low prices a few years down the road, as adjustments work through supply and demand. Exactly this happened in the 1980s. Yet three conclusions seem plausible: first, the pressures of demand are bound to be strong as what Lady Thatcher once called "the great car economy" comes to Asia; second, the world will become increasingly dependent on Opec and, above all, on Gulf producers, which are sitting on 62 per cent of the world's proven reserves; and, finally, high oil prices could well be a feature of much of the next few decades.
Sustained high prices should themselves encourage investment in innovation. But governments can help by supporting research in alternatives. They could also do something to encourage responsible use of this valuable resource. The US is particularly wasteful in its use of energy and could usefully do much more to encourage both conservation and investment in new technologies.
Prometheus was not only the giver of fire. His name also means "forethought". If our descendants are to enjoy the gift of abundant energy, that is a virtue we also need to show. At the moment, however, it seems more remarkable for its absence.
He focuses on the right things:
- a big chunk of the developing world is entering or about to enter the "age of the car", and everything indicates that people are willing to pay significant amounts to have the freedom associated with a car, and that their consumption is not very elastic to oil price increases. Thus, limiting demand will be really hard;
- everything points to a non-OPEC peak very soon. Martin Wolf notes that OPEC production has to double in the next 25 years to catch up with expected demand; he also quotes a study which shows that OPEC will have little rational interest to do so;
- his conclusion is therefore that, irrespective of how this actually unfolds, significantly higher prices are very likely ("high enough to choke off additional demand").
From these articles, we can note the following:
- the concept of peak oil is steadily gaining mainstream acceptance, and you read more and more about it from very creditable sources. This is a good thing as awareness of the issue grows, which increases the chances of a more rational discussion on energy policy;
- an acknowledgement that oil prices will remain high. At least high enough to allow for unconventional fuels and new technologies to be developed and used, and possibly much higher;
I find Martin Wolf's piece particlarly striking in that he only uses very official sources (the International Energy Agency, the US Dept. of Energy, BP statitstics), and reaches pretty pessimistic conclusions. Remember that the guy is a highly renowned economic writer, he is generally a "market optimist", and his recent book "Why globalisation works" is the best defense of the phenomenon to have been written. Le Monde still sounds like they are in denial, despite providing much more specific information on peak oil.
Let's now turn to the CERA study. Again, the comments below come only from their press release, and not their detailed study.
Their vision is deliberately optimistic:
Despite current fears that oil will soon "run out," global oil production capacity is actually set to increase dramatically over the rest of this decade, according to a new report by Cambridge Energy Research Associates (CERA). As a result, supply could exceed demand by as much as 6 to 7.5 million barrels per day (mbd) later in the decade, a marked contrast to the razor-sharp balance between strong demand growth and tight supply that is currently reflected in high oil prices hovering around $60 a barrel.
In a rigorous new field-by-field, bottom-up analysis of the world's capability to produce hydrocarbon liquids, Worldwide Liquids Capacity Outlook To 2010-- Tight Supply Or Excess Of Riches, CERA indicates that worldwide capacity could rise by as much as 16 mbd between 2004 and 2010 -- a 20 percent increase over the period.
This significant expansion in liquids productive capacity will meet volatile and expanding demand later in this decade and beyond, according to the CERA report.
Actually, they do acknowledge that peak oil will happen, but they see it as an "undulating plateau":
The CERA analysis rejects the current fear that a near-term "peak" in world oil production and a coming exhaustion of supply are near. The report indicates that the "inflexion" point will come in the third or fourth decade of this century. Moreover, rather than a "peak," it will be an "undulating plateau" that will continue for several decades.
They focus on non-conventional oils to provide much of the supply growth:
Jackson and Esser argue that "unconventional" oil will play a much larger role in the growth of supply than is currently recognized. These unconventional oils include condensates, natural gas liquids (NGLs), extra heavy oils (such as Canadian oil sands), and the ultra-deepwater (greater than 2,500 feet deep). By 2020, they could be almost 35 percent of supply.
The interesting thing in the report is that they provide country by country analysis, but the press release only provides sketchy details (for instance that non-OPEC production will grow by 7.5 mb/d by 2010, most of that coming from Brazil, Angola, Canada, Russia and the Caspian, and that Saudi production will increase by 1.5 mb/d. The US would decline by only 5%.) It is hard to critique the se numbers without seeing the details, but these numbers seem very optimistic to me:
- All news from Russia point to a stagnation of production in the coming years;
- the decline in the US in 2004 alone was 5%;
- both the Caspian and Angola are set to increase production by at most 1 mb/d each by 2010;
- most of OPEC production increases would come from outside Saudi Arabia. Do they have Iraq in mind? Iran? Lybia? I don't have enough information but that sounds strange to me.
The focus on NGLs is a valid point, as most of the oil majors are now developing more gas reserves than oil reserves, and NGLs are a (valuable) by product of gas production. For instance, more than 90% of ExxonMobil's reserve additions in 2004 came from their shares in Qatari gas developments. The gas is commercialised in the form of LNG, but LNG production is accompanied by significant volumes of high quality oils that are extracted from the gas (See here
about Qatar, for instance, which produces 700,000 b/d of NGLs, or two thirds of its liquids production, in parallel to its LNG. With LNG production set to more than triple by 2010 in that country, LPG production from Qatar could presumably grow by 2 mb/d - but they have the biggest LNG inverstment plans in the world by far and have access to the biggest and richest gas field on the planet, so there would not be so much coming from elsewhere).
Still, CERA expects unconventional oils to go from less than 20 mb/d now to more than 30 mb/d. I suppose that depends on the definition of unconventional, and especially where you draw the line offshore between conventional (not so deep) and unconventional (very deep). For instance, most of Angola's coming production will come from very deep offshore, as will most of Brazil's, and a lot of US production in the Gulf of Mexico. But an additional 10 mb/d? That sounds like a lot of oil to be coming on stream, that presumably the oil markets would know of...
The press releases makes no mention of the decline of existing fields, so it is hard to know what hypotheses they make about this (beyond their mention of a very small overall decline of US production)
On the pricing side, CERA is also resolutely optimistic:
The balance of supply over demand has the potential to expand significantly over the next five years, and this could drive oil prices to the downside. If demand growth averages a relatively strong 2.2% through 2010, prices could weaken from recent record highs and slip well below $40/bbl as 2007-08 nears. If demand growth were notably weaker, a steeper price fall would be conceivable; however such a fall would likely slow capacity expansion and bring a market rebalance within two to three years.
While they implicitly acknowledge that high prices may remain for a couple of years, they thus see the trend being downwards, as all of that mooted supply comes on line.
This is not what the futures markets have in mind, with 2010 futures significantly above 40 and more now.
As I have said, and do believe, that they have a good reputation, it is hard to imagine them doing such an announcement without some hard data to back it up. They are certainly in a better position than me to comment on individual countries and fields, but I still remain doubtful of the numbers they have chosen to put forward In their press release. So, color me skeptical but not in a position to say much more.
So I will hide behind Martin Wolf to conclude that high prices are not only very likely, they are also very necessary...