1 Growing numbers of experts are warning of a premature peak in oil production
The world expects several decades of growing supplies of generally affordable oil. Every corporate and ministerial plan is geared to this assumption. Beyond the peak of global oil production the world will face shrinking supplies of increasingly expensive oil. That is a manageable proposition if the peak is several decades away. It is a major problem if the peak is imminent. Growing numbers of people well qualified to offer an opinion fear that it is indeed imminent.
The International Energy Agency (IEA) has been dismissive of peak oil for many years, but in its 2006 World Energy Outlook, it blew a whistle for the first time. Non-OPEC oil production will peak within a few years, the IEA concluded, and then the world’s ability to match growing demand with supply will depend on three countries lifting their production significantly: Saudi Arabia, Iran and Iraq. The IEA does not seem to think they can do it. According to the then IEA Secretary General, Claude Mandl, the world is on an energy path ‘doomed to failure’. In 2007 the IEA’s Outlook warned of a global crunch in five years, estimating that OPEC would have to supply about 36.2m b/d [barrels per day] in 2012, up from today’s 31.3m b/d. As Chief Economist Fathi Birol put it, ‘If Iraqi production does not rise exponentially by 2015, we have a very big problem, even if Saudi Arabia fulfils all its promises . The numbers are very simple – there’s no need to be an expert.’
During 2007, the CEOs of two major oil companies, Total and Conoco-Phillips, joined the whistleblowing. Global production sits at around 85m b/d and the IEA says it needs to reach 116m b/d by 2030 if projected demand is to be met. Total’s CEO Christophe de Margerie said that it will be unlikely to rise above 100m b/d. ‘A hundred million [b/d] is now in my view an optimistic case,’ he said. ‘It is not my view: it is the industry view, or the view of those who like to speak clearly, honestly, and not … just try to please people. We have been, all of us, too optimistic about the geology.’ A man who might know a thing or two of relevance is Sadad al-Husseini, who supervised the largest reserves in the world as Saudi Aramco’s head of exploration and production until 2004. In December 2007 he told a conference in London that the peak of global production is already here. ‘We are already three years into level production,’ he said.
Libya’s National Oil Corporation chairman Shokri Ghanem said at the same event: ‘There is a real problem – that it may not be possible for supply to increase beyond a certain level, say around 100 million barrels. The reason is that in some countries production is going down and we are not discovering any more of those huge oil wells that we used to discover in the sixties or the fifties.’
At the 2007 annual conference of the Association for the Study of Peak Oil and Gas, a succession of industry insiders voiced their concerns that the peak is imminent. Predictions fell in the range from the present to around 2015. Former US Energy Secretary John Schlesinger summed up the situation as he saw it. ‘We can’t continue to make supply meet demand much longer,’ he said. ‘It’s no longer the case that we have a few voices crying in the wilderness. The battle is over. The peakists have won.’
2 Old oilfields are showing that production can collapse unexpectedly fast
If global production flattens off on a plateau, that will be bad enough for our oil-addicted global economy. But if there is a rapid decline after a peak, as has happened in many individual countries like the US, then we have a monster problem on our hands. Nearly a quarter of the world’s oil is pumped from the 20 biggest fields in the world, and most of these were discovered decades ago. The average age of all producing fields today is around 36 years. Production in several of the top 20 is falling fast. Perhaps most dramatic is Cantarell, the world’s second biggest oilfield, which has provided some 60% of Mexico’s oil. Production began to collapse in 2005, falling 8% that year. The national oil company, Pemex, fears that production in the field might plummet from 2m b/d to as little as half a million barrels by the end of 2008.
Such rapid decline rates can be seen not just in individual giant fields but in provinces – nested groups of oilfields set in one
contiguous geological structure. The North Sea was the last oil province to be discovered, back in the 1960s, and production peaked there in 1999. Since then the rate of production decline has surprised the industry. It was fully 7% last year, and continues to fall fast despite rising investment.
Much will depend on production in Saudi Arabia, the second highest producer in the world after Russia. Production fell by 8% in 2006 and has not lifted in 2007 despite many pleas to hike output in order to bring the rising oil price down. Pundits debate whether this is due to national peak oil or the result of a strategy to maximise prices. While the pundits argue, Aramco is reportedly pumping seven million barrels of salt water a day into Ghawar, the world’s biggest oilfield, to hold production up. Matt Simmons, a Houston oil banker, argues that such an exacting requirement to maintain production, in Ghawar and other giant Saudi fields, combines with the age of the fields to make a recipe for imminent production collapse in the nation the world most depends on if global supply is to continue meeting global demand. The four biggest Saudi fields are all more than fifty years old. Eight Saudi fields are carrying 90% of the production. Worryingly, Sadad al-Husseini calculates that the giant fields of the Arabian Gulf are on average 41% depleted.
3 The industry is discovering fewer and fewer giant oilfields, and those it does discover are prone to long delays between discovery and production
In the hundred-year-plus history of oil exploration, slightly more than 500 giant fields have been found. We call them giant because they hold 500m barrels or more. That sounds a lot but it is less than a week’s global supply at current demand levels. The peak of discovery of oilfields, giants or otherwise, was in the 1960s. The average size of an oilfield discovery today is 50m barrels, around a tenth of a giant, less than a day’s global oil supply.
The biggest discovery in the last 30 years was Kashagan, an oilfield in Kazakhstan. As much as 13bn barrels may be recoverable, but after its discovery in 1999, development of Kashagan has involved repeated delays, and the first oil cannot now be expected until 2010 at the earliest. Meanwhile, initial cost estimates have doubled, enraging the Kazakh government, who now seek $10 bn in damages from the main developer, ENI. The oil is deep, and it is rich in highly toxic hydrogen sulphide: profitable and sustained recovery in the face of a hostile environment and a hostile government is going to be far from easy. This is why people like the former Chairman of Shell, Ron Oxburgh, said in 2007 that ‘the age of easy oil is over’. Even where the fields are in ‘friendly’ waters, other problems crop up.
BP’s Thunder Horse discovery in 1999, in deep water off New Orleans, was the biggest ever find in the Gulf of Mexico. After delays caused by high pressure at the well head, and a capsized drilling platform after Hurricane Katrina, it is now not expected onstream before the end of 2008. Petroleum Review regularly charts all the major oilfield projects, and its sums show that new oil coming onstream from the ‘megaprojects’ drops significantly in 2011 to well below the depletion rate of existing reserves (around 4 to 5m b/d of capacity). This assumes there are no more time slippages in the major projects. The industry had better find some new oil fast, because 2011 is just three years away.
But here is the problem. The eleven years to develop Kashagan, and the nine for Thunder Horse, are not major outriders from the norm. The average time today from discovery of an oilfield to production is more than six years.
4 Resource nationalism is strangling growth prospects for the international oil companies to find more, or enhance production in existing reserves
The optimists in the oil companies make much of their ability to lift production in existing fields with a variety of enhanced oil-recovery techniques. True enough, but most of these techniques are already deployed in the most of the areas the international oil companies (IOCs) can access today.
The problem for the IOCs is that they can only access around 20% of global oil. The remaining 80% is controlled by national oil companies (NOCs) like Saudi Aramco in Saudi Arabia and Pemex in Mexico. While it may be true that enhanced recovery offers a route to a lot more oil in these countries, given that many NOCs don’t have the technological capabilities of the NOCs, most of their governments are not about to let the IOCs in. Indeed an outbreak of oil nationalism in 2007 – in Russia, Venezuela, and other countries – is shutting down options for the IOCs still further.
The new resource nationalism began in 2006 at Shell’s Sakhalin 2 project in Russia, a 4bn-barrel-equivalent oil and gas field. In the hostile environment of coastal eastern Siberia, Shell experienced the same kind of delays and cost overruns as ENI had in Kazakhstan. They attempted to hand the bill on to the Kremlin as a reimbursable cost. The result was that President Putin’s men first threatened Shell executives with jail for environmental damage, and then effectively nationalised the project by giving a majority stake to Gazprom. In 2007 BP, ExxonMobil and Total have been subject to similar Russian tactics.
5 Large portions of supposedly proven reserves may not be proven at all … or even exist
A January 2006 report in Petroleum Intelligence Week suggested that Kuwait had been overstating its proved reserves by more than half. In July 2006, the Kuwaiti opposition duly announced that it would oppose major new investments in oil production because it wanted to make sure that what the country did have was conserved for domestic use. In May 2007, after much havering, the Kuwaiti oil minister confirmed the reserves writedown from 100bn barrels to 48bn. The outcome of this drama is still unclear. Meanwhile, this overstatement could be far from a Kuwaiti problem. Sadad al-Husseini is among the growing number of experts who believe the world’s supposedly proven reserves of 1,200 trillion barrels are overstated by fully 300m barrels. Much of the overstatement is in the Gulf countries, where there was a suspicious rise in supposedly proven reserves in the 1980s, after OPEC linked its quotas to the size of national reserves.
6 The tar sands will not be able to plug the gap between supply and demand
Those who don’t pay much attention to processes and timing tend to be easily impressed by the Canadian tar sands. It is true that there are vast amounts of oil locked up there, and certainly hundreds of billions of barrels of it are accessible in principle, hence all the headlines about Alberta being the next Saudi Arabia. The trouble is the oil is solid, not liquid. It has to be melted, mostly underground. That takes vast quantities of gas and water.
Even then, progress is glacial, and will speed up only slowly as tens of billions of dollars pour into the filthy business of turning an oil company into a tar company. The oil industry has invested $25bn to date, and after decades of effort has a production capacity of little more than one million b/d at present. Industry estimates now put production in 2015 at little more than 2.5m b/d. How can that make much difference if there is a peak and then collapse of global conventional oil depletion? And to do much more than 2.5m b/d, as one head of exploration has put it, the tar industry will need ‘all’ Canada’s water. ‘Forget agriculture, industry, everything,’ he says. Well over $100bn of new investment would be needed. In the face of these challenges, at least one oil company, Talisman, has lost faith in the tar sands proposition and pulled out.
7 The industry’s infrastructure is laden with aging problems
In March 2005, an explosion in a BP refinery in Texas City killed 15 workers. In August 2006, 8% of US oil supply was cut out when BP’s Prudhoe Bay pipeline sprang a leak. The stories that emerged in the court proceedings over these two incidents tell a shocking tale. It is one that could be the tip of a ruinous iceberg.
The main problem is that oil is a corrosive substance and the majority of oil industry infrastructure is now more than a quarter of a century old, having been installed during the last period of high oil prices at the beginning of the 1980s. It emerged in court that the BP board had been warned of a link between spending cuts and poor maintenance at oil refineries two-and-a-half years ahead of the Texas City accident.
A refinery chief testified that the lethal site was ‘held together with band aids and super-glue’. An internal BP survey of worker attitudes showed there was ‘an exceptional degree of fear of catastrophic accidents’. Workers would say, ’I could die today’, but didn’t speak out because they didn’t want to lose their jobs. In the risk-assessment process, it emerged that BP had put a monetary cost to the company of a lost human life. It was $20m. As a result of their negligence, this sum is likely to be the smallest fraction of the price BP will eventually pay for their lapses at Texas City, both in court awards and indirect destruction of the company’s value.
Things were little better, if less lethal, in Prudhoe Bay. BP workers told EPA investigators that BP was negligent in maintaining their Alaskan pipelines. A BP official formerly in control of anti-corrosion efforts at Prudhoe Bay pleaded the fifth amendment in a Congressional hearing for fear of incriminating himself. Another worker was found to have destroyed computer files.
Matt Simmons has warned that BP’s pipeline corrosion could be endemic in the wider industry. The problem could be oil’s ‘Pearl Harbor’, as he puts it. The pipeline infrastructure is too old, and too many corners have been cut, he says. The Trans Alaska Pipeline alone would cost $30bn to replace. Saudi Arabia also has an ‘endemic’ corrosion problem.
Others agree. A former BP expert says oil companies are hushing up pipeline corrosion for fear of creating panic. Richard Pike, 25 years with BP, now a pipeline consultant and head of the Royal Society of Chemistry, says that oil companies are setting aside hundreds of millions of dollars to tackle corrosion. ‘People are keeping this quiet,’ Pike says, ‘and just getting on with it because there is an awful risk that the outside world will overreact.’
8 The industry isn’t investing enough to fix its problems
Goldman Sachs calculates that the oil industry must invest $2.4 trillion in 10 years if it is to meet expected demand. That amounts to $240bn a year (around $200bn of it upstream and $40bn downstream). The top 50 oil companies invested around $550bn in exploration, development and production between 2000 and 2004, which is an average of $110bn a year, less than half the amount required. According to the IEA, more than $4 trillion is needed in new investment if the oil industry is to meet projected oil demand by 2030. It is far from certain that this investment will actually occur, the IEA warned in 2006, professing that recent absolute increases in investment by oil companies are ‘illusory’, in relative terms, because of inflation in drilling costs.
Amazingly, in real terms the big five international oil companies actually cut exploration spending between 1998 and 2006, in spite of the rise in oil prices. ExxonMobil, BP, Chevron and Conoco-Phillips used more than half of their increased operating cash flow not on exploration but share buybacks and the payment of dividends to shareholders. For the NOCs there are different pressures on investment. OPEC ministers pointed out that President Bush’s 2007 assertion that the US is ‘addicted to oil’ could impact their plans to invest in new production. They fear a return to the 1970s and 1980s when they invested billions only to see the oil price fall.
9 The industry has a huge human resources problem
The average age of people working in the oil industry is a staggering 49 years. The average age at retirement is 55 years. The workforce is dominated by people close to retirement and inexperienced graduates. The problem is worldwide, but particularly acute in the Middle East. The ‘legacy’ problems are going to be immense. Already headhunters can’t find enough senior project managers able to run multi-billion-dollar operations. One estimate is that the industry is up to 100,000 people short at the present time.
The oil industry has always prided itself on hiring the very best talent. But think now of the recruitment challenge in finding brilliant and committed people, given recent history. Even without the environmental stigma, scandals are not good recruitment ads. In 2006, in addition to the Texas City and Prudhoe Bay scandals, BP found itself in court for allegedly price-fixing in the US propane market, for manipulating oil prices in 2003/4 by shutting a storage plant and for manipulating prices of petrol. It promised ‘root and branch’ revision of practices, and replaced its CEO in May 2007. In September, however, after ‘dreadful’ quarterly results which saw profits slump 20%, it came up with the standard solution: cutting thousands of jobs.
The oil industry faces soaring costs, falling profits and mounting health-and-safety pressures. Its increasingly inexperienced workforce seems set for a titanic struggle in the years ahead. There could well be another serious problem, related to high salaries and boredom running facilities in far-flung places. In job screening or post-accident tests in the tar sands projects, a staggering 40% of workers have tested positive for cocaine or marijuana use.
10 When the peak oil crunch comes, all the indications are that key exporters may slow, or even shut off, the taps
If the early peak-oil analysis proves correct, recent history in Kuwait, Iran and Russia suggests that as the new realities dawn on exporters, the news might not be good for importers. Recent events in Kuwait we have already considered. In Iran, fears emerged in 2007 that domestic consumption has become so high that the nation’s status as an exporter is under threat even in the absence of a foreseeable peak in its oil production.
The aged and neglected infrastructure combines with the problem of demand growing at up to 10% per year to suggest, in one estimate by analysts, that as soon as 2015 Iran will no longer be an exporter. In July 2007 the Iranian government brought in fuel rationing as a reaction to shortages caused by long-running domestic underinvestment in refining. Riots resulted, and in a foretaste of what awaits governments who fail to meet domestic expectations of oil supply, Iranians set fire to petrol filling stations. It will be difficult indeed for a government to export in the face of this kind of pressure at home, if domestic demand cannot be met.
In Russia, President Putin has openly pondered putting a cap on Russian oil production. From February 2006 to February 2007, Russian oil production increased by over 400,000 b/d, whereas exports remained flat. The excess was needed at home, where Russian car production and sales grew prodigiously in 2006. The Russian use of gas as an instrument of economic blackmail during 2007 shows clearly the kind of treatment states dependent on its fossil fuel exports can expect, should a global energy crisis materialise.
11 Gas has problems of its own, and cannot come to the rescue
Gas can be used for many of the needs oil meets, including transport, but in 2007 an American oil company CEO warned that ‘the world has a natural gas problem’. Conoco-Philips CEO Jim Ulva thinks we face ‘serious future gas shortages’. It is easy to see why. More than half the world’s gas reserves lie in just three countries: Russia, Qatar and Iran. Russia cut gas supplies to the West in January 2006 during a big freeze, despite earlier promises never to do so, because it was struggling to meet domestic demand. In April 2006 Gazprom deputy head Alexander Ryazanov told the Russian media that he had serious doubts the industry had been investing enough to meet demand within a few years. At the time, Gazprom’s output was flat. It’s three biggest fields, Urengoy, Yamburg and Komsomolskoye, were in decline while its export obligations were growing each year. In November 2006, the Russian Industry and Energy Ministry forecast shortages in 2007. Sure enough, in May 2007 a power plant near St Petersburg was left without fuel because Gazprom said it needed the gas elsewhere.
In the Gulf, the picture is the same, with proliferating reports from industry insiders that major supply problems are emerging. One executive fears that Qatar, the world’s biggest exporter, may be unable to lift exports after 2011. The Qatar government put a moratorium on new liquefied natural gas (LNG) projects in 2005 after fears emerged that the vast North Field, the world’s biggest gas field, was less productive than was originally thought. The moratorium stays in place until a geological review is completed. The results are not due until 2010. Meanwhile, LNG projects have been put on hold or cancelled around the world and the major development projects of the Gulf states, notably Dubai, have come under threat. In the view of Frank Harris, an LNG expert at energy consultants Wood Mackenzie, ‘even assuming that the current tightness in the LNG market is worked out in the next few years, the industry needs a new Qatar in order to maintain growth’.
12 Many in the oil industry are in denial about the peak oil problem … and they are not alone
In March 2007, the US Government Accountability Office, an investigative arm of Congress, suggested that the US needs a plan for peak oil. The GAO noted that forecasts of peak oil range between the comforting prospect of 2040 and the worrying prospect of the present day. ‘The consequences of a peak and permanent decline in oil production could be even more prolonged and severe than those of past oil supply shocks,’ the GAO report said. ‘There is no formal strategy for coordinating and prioritising federal efforts dealing with peak oil issues.’ Not in the US, nor in most other countries. In the UK, the ministry responsible, the Department of Business and Regulatory Reform, flatly denies that there might be a peak oil problem when petitioned by worried experts. They will not even concede that there is a risk issue involved worthy at least of a contingency study.
Within the energy industry, my experience is that a dysfunctional form of machismo prevails. Within companies like BP and ExxonMobil, it is quietly considered almost an act of treason to suggest that there might be a problem. The cultural view seems to be that this, after all, is an industry that has solved considerable problems on frontiers for over a century, and an industry with technological prowess undreamed of a few decades ago. ‘We have solved so many problems, risen to so many challenges,’ the prevailing assumption goes. ‘Why should things change?’
13 Climate change will increasingly squeeze the industry’s options
Nothing I have written so far considers climate change. Yet this problem is considered by many people to be the single biggest of all the threats to a viable future for global human civilisation. Opinion polls in 2007 showed this to be understood right across the world.
Growing numbers of companies are responding with leadership measures of different kinds. Many executives believe that within a few years profound carbon consciousness will be written into the DNA of boardrooms across every sector of the global economy. Governments too are responding, though arguably not with anything approaching the meaningfulness of corporate action. Sweden, a noble exception, has announced a target of becoming the world’s first oil-free economy just 15 years from now. The minister of sustainable development announced the government’s plan in 2006 after work by a committee of industrialists, car makers Saab and Volvo, plus academics, farmers, and civil servants. National oil use is already 32% down in Sweden from 77% in 1970.
Against this backdrop, it is a safe bet that oil companies intent on ignoring carbon implications of plundering the tar sands, or seeking to produce liquids from coal, are going to be made to suffer for it at the hands of shareholders and customers. Shareholder action in 2007 has forced ExxonMobil to drop its long-running bankrolling of climate contrarian groups. This kind of pressure on oil companies is just beginning.
Renewable energy could be a major part of the answer to the problems the oil industry faces. In May 2007, a survey showed that many oil executives know this. KPMG surveyed 553 financial executives from oil and gas companies in April 2007. Sixty-nine per cent of them said that at least 50% of energy government funding should be directed at the renewable sources sector, and a quarter said at least 75% should be. Eighty-two per cent cited declining oil reserves as a major reason why this investment is needed. And yet in 2007, BP reined in its renewables operations to focus on the core business of oil and gas. As for ExxonMobil, they have remained uninterested in renewables all along.