Crude Oil Supply and the Future: Putting Arguments in Proper Perspective

Fatih Birol, chief economist at the International Energy Agency, IEA, in a recent interview warned that major oilfields around the world were being depleted faster than previously believed and that a consequent energy crunch would cripple the fragile global economic rebound. This has again rekindled strident arguments about energy security and the future of crude oil supply. It is not intended here to rehash the (largely impassioned and sometimes sentiment-driven) arguments, but to put them in proper perspective the following points are informative:

First, to the extent that its global rate of consumption far exceeds that of its natural formation, crude oil is a finite resource. That said, there is technological progress in large scale production of oil on a timescale several orders of magnitude smaller than the geological. Companies such as UOP and Solarzyme among others for example, are making progress with their pilot programs for the production of fuels from algae. However, until production economics are fully proven, they remain just pilot programs.

Secondly, there are vastly different estimates for current global crude oil reserves. One reason for this is that the different probabilistic models have different underlying assumptions. But these in essence are all estimates and again, until proven, must not be adduced as "incontrovertible fact". In addition, the claim that only a given percentage of crude oil reserves has been discovered is so incongruous with reason. Similarly, methods for demand projection also bear different underlying assumptions; the recent critique of IEA's demand projection methods by Professor Kjell Aleklett is illustrative.

Thirdly, crude oil production has been progressing into more (technologically, geologically and financially) challenging regimes such as the ultra deep offshore. In assessing such challenges it would be very unreasonable to count on yet-to-be-discovered technologies (particularly those with no indicative research) and even worse to assume that the world will simply adjust to inordinate crude oil prices; these would even make alternatives the more attractive.

More importantly, for the operating International Oil Companies, IOCs, maintaining a minimum recycle ratio of 100% (to wit, proceeds from sale of 1 unit of crude oil equals the cost of discovery and production of a new unit) is absolutely necessary just to stay afloat. A recent Financial Times report which cites, among others, Bernstein Research data, adds that in order to grow reserves, meet dividend expectations and tax provisions, a ratio of 200% would be more appropriate; but the ratios for major IOCs were shown to have dipped below this mark. The report adds that more worrisome for these IOCs is that for the past 10 years, growth rate in cashflow per barrel (15%) has lagged the compound annual growth rate (18%) for discovery and production. Recourse to aggressive cost-cutting measures may be one way of addressing this and such may have informed the recent restructuring measures embarked upon by Royal Dutch Shell (RDS.A) and British Petroleum (BP).

Fourthly, for major IOCs, major crude oil discoveries have been rare lately but the two largest discoveries in recent history were by National Oil Companies, NOCs from developing nations. The discovery in Brazil's Santos Basin by a partnership led by Petrobras is estimated to hold more than 80 billion barrels of oil equivalent, boe. Saudi Arabia also recently introduced a record 1.2 million barrels of crude oil per day from the massive Khurais fields. To many in the developed economies, the relative reserves growth (and therefore leverage or resource nationalism) particularly among nations regarded as unstable or unfriendly is a frightening prospect. Iraq for example is believed to hold even larger reserves than currently reported (and that, in geologically less challenging regimes) but in the last oil block of concessions, only one IOC put up an effective bid. The recent Petroleum Industry Bill introduced to the legislature in Nigeria for consideration has been criticized by major IOCs. They claim that the upward revision of Government's take from oil proceeds would impair profits as well as investment. Iran already boasts one of the world's largest oil reserves but internal turmoil and its perceived bellicose disposition have marred the investment climate in a region which holds a preponderance of proven global crude oil reserves.

Finally, the argument that biofuels and renewable energy programs are the only subsidized energy programs in the United States, is not fact-supported. For example, according to the Energy Information Administration, out of a total US$6.747 billion in subsidy and support for electricity production in the year 2007, about 48% went to fossil fuels (coal, natural gas and petroleum liquids) while about 15% went to renewables. Nuclear took about 19%. On the basis of fuel-specific subsidy and support per unit of production (US$/MWhr), refined coal had the highest (29.81); then solar (24.34), wind (23.37), nuclear (1.59), biomass and biofuels (0.89), coal (0.44) and natural gas and petroleum liquids (0.25).

Disclosure: None

Comments

[JER13071946:]

Worldwide oil and gas reserves estimates by engineers are 'suspect' whereas worldwide climate models for the next 100 years dictating "cap & tax" are 'spot on'. There's an interesting comparison.

Aug 11 11:26 AM

[nerfer:]

Dennis Atuanya, thanks for laying out the facts and pointing out the speculations. Whether or not a person accepts all of the peak oil scenarios, it is clear we have seen the end of cheap oil

Jer13xxx - Why bring that up? Climate models are not part of this discussion. Energy security is, and relying on petroleum supply staying like it has will surely lead to economic/national security problems. It would be interesting to see how cap & tax would affect that.

Aug 11 11:44 AM

[Mad Hedge F...:]

hdfg. I ran some numbers today and came to the staggering conclusion that at $3.60/BTU, natural gas is now cheaper than coal in some markets. One ton of high grade Pennsylvania anthracite costs $65/ton. Some 18 million BTU’s of natural gas, the energy equivalent, costs $66, and doesn’t give you black lung, asthma, lung cancer, polluted air, and mountains of ash. The BTU equivalent of crude comes in at $210, and high test gasoline at an extortionate $420. The crude/NG ratio is at 19:1, an all time high, and an entire generation of ratio traders has been wiped out. It’s just another one of those six standard deviation events which seem to be happening constantly. And like a rubbernecker driving past a gory accident where the human organs are draped over the detailing, I am always interested in wipe outs. Yes, I saw the movie Crash. Don’t ask. Why aren’t the power companies jumping in and burning gas instead of coal? There is the minor issue in that the industry needs $500 billion and ten years to build the plants to take advantage of the enormous new supply. So only frenetic production cuts will support the price until then, which are accelerating as you read this. Or a major hurricane. Better keep UNG on your screen and buy the next wash out.

Aug 11 12:46 PM

[A Barrel Full:]

Peak Oil is largely a political phenomenon, not a a geological one.

Aug 12 04:18 AM

[adamnb:]

How about some evidence for that assertion, or are you just supposed to take it on your word?

On Aug 12 04:18 AM A Barrel Full wrote:

> Peak Oil is largely a political phenomenon, not a a geological one.
>

Aug 13 11:41 AM