BC: LEGGETT ON PEAK OIL
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By Jeremy Leggett
Published: 20 January 2006
A spectre is haunting Europe - the spectre of an acute, civilization changing energy crisis. The latest wobble over disruptions to gas supplies from Russia is merely the latest in a series of reminders of how dependent our economies are on growing supplies of oil and gas. On Wednesday, Gazprom's deputy chairman was in London reassuring Britain that there would be no risk of disruption to British gas supplies in the fall-out from the ongoing spat between Russia and Ukraine over pricing. The very next day, temperatures in Moscow broke a 50-year record, plunging to minus 30C. Gas normally exported was diverted to the home front. Supplies to the West fell.
In December, Sir Digby Jones, director-general of the CBI, warned that any shortfall in gas could cause disaster for British industry. The problem, he said, was the likelihood - as forecast by the Met Office - of a particularly cold British winter. This would mean more gas burning in homes and power plants than our liberalised energy market - or its infrastructure - might be able to supply. There aren't enough pipelines from the continent to carry the imported gas that we need now that our North Sea production is dropping. Tankers that are supposed to be bringing liquefied natural gas (LNG) to the UK are instead following market forces and going to the US, where gas prices have rocketed even higher than they have here. Meanwhile, not enough gas has been stockpiled, because market forces don't favour that kind of thing in relatively warm years.
We shouldn't panic, insisted energy minister Malcolm Wicks, because British Gas is being very grown up about it, and anyway all this will be sorted out by 2007 when a new pipeline and more LNG plants come on stream. Sceptics pointed out that our gas reserves were down to 11 days, compared with an average of 55 on the Continent. That was before the concerns about Russian supplies. If the thermometers fall in the UK it is still quite possible that UK firms may have to stop using gas for one day a week, or even that the suppliers will also have to introduce rolling power cuts by postcode.
Meanwhile, domestic gas bills, which rose by more than a third last year, are expected to rise even higher in the next few months. For many people, such fluctuations have lethal implications. Last winter, there were some 35,000 "excess winter deaths" in the UK, most of them attributable to old people not being able to keep warm enough; and last winter was a relatively mild one.
All this concerns gas, of which there are undoubtedly huge proved reserves left in the ground (even if half of them are in Russia and Iran). Consider oil. The geopolitical risks are the same. Only last week Iran threatened to retaliate by cutting oil supplies if Europe continued to meddle in what it sees as its right to develop a nuclear programme. Where oil differs from gas is that a debate is fast emerging about whether we have enough reserves to meet needs in the short term - even if geopolitics don't kick in and the current infrastructure keeps working as it should. At the annual summit of the Organisation of the Petroleum Exporting Countries (Opec) in December, Kuwait told the world that, without urgent outside help, it could not continue to pump oil at its customary rate. The Kuwaiti oil minister invited Western oil companies back into his country to see if they could do better. The very next day the US government quietly slashed 11 million barrels a day (that's equivalent to the entire daily output of Saudi Arabia) from its forecast of oil production levels for 2025.
To most people who noticed them, such announcements will have seemed remote and academic. In fact, as I shall attempt to explain, they represent the tip of a very big iceberg indeed: one that holds the potential to sink the global economy.
We have allowed oil to become vital to virtually everything we do. Ninety per cent of all our transportation, whether by land, air or sea, is fuelled by oil. Ninety-five per cent of all goods in shops involve the use of oil. Ninety-five per cent of all our food products require oil use. Just to farm a single cow and deliver it to market requires six barrels of oil, enough to drive a car from New York to Los Angeles. The world consumes more than 80 million barrels of oil a day, 29 billion barrels a year, at the time of writing. This figure is rising fast, as it has done for decades. The almost universal expectation is that it will keep doing so for years to come. The US government assumes that global demand will grow to around 120 million barrels a day, 43 billion barrels a year, by 2025. Few question the feasibility of this requirement, or the oil industry's ability to meet it.
They should, because the oil industry won't come close to producing 120 million barrels a day; nor, for reasons that I will discuss later, is there any prospect of the shortfall being taken up by gas. In other words, the most basic of the foundations of our assumptions of future economic wellbeing is rotten. Our society is in a state of collective denial that has no precedent in history, in terms of its scale and implications.
Of the current global demand for oil, America consumes a quarter. Because domestic oil production has been falling steadily for 35 years, with demand rising equally steadily, America's relative share is set to grow, and with it her imports of oil. Of America's current daily consumption of 20 million barrels, 5 million are imported from the Middle East, where almost two-thirds of the world's oil reserves lie in a region of especially intense and long-lived conflicts. Every day, 15 million barrels pass in tankers through the narrow Straits of Hormuz, in the troubled waters between Saudi Arabia and Iran. The US government could wipe out the need for all their 5 million barrels, and staunch the flow of much blood in the process, by requiring its domestic automobile industry to increase the fuel efficiency of autos and light trucks by a mere 2.7 miles per gallon. But instead it allows General Motors and the rest to build ever more oil-profligate vehicles. Some sports utility vehicles (SUVs) average just four miles per gallon. The SUV market share in the US was 2 per cent in 1975. By 2003 it was 24 per cent. In consequence, average US vehicle fuel efficiency fell between 1987 and 2001, from 26.2 to 24.4 miles per gallon. This at a time when other countries were producing cars capable of up to 60 miles per gallon.
Most US presidents since the Second World War have ordered military action of some sort in the Middle East. American leaders may prefer to dress their military entanglements east of Suez in the rhetoric of democracy-building, but the long-running strategic theme is obvious. It was stated most clearly, paradoxically, by the most liberal of them. In 1980 Jimmy Carter declared access to the Persian Gulf a national interest to be protected "by any means necessary, including military force". This the US has been doing ever since, clocking up a bill measured in the hundreds of billions of dollars, and counting. With such a strategy comes a disquieting descent into moral ambiguity, at least in the minds of something approaching half the country. The nation that gave the world such landmarks in the annals of democracy as the Marshall Plan is forced by deepening oil dependency into a foreign-policy maze that involves arming some despotic regimes, bombing others, and scrabbling for reasons to make the whole construct hang together.
America is not alone in her addiction and her dilemmas. The motorways of Europe now extend from Clydeside to Calabria, Lisbon to Lithuania. Agricultural produce that could have been grown for local consumption rides along these arteries the length and breadth of the European Union. The Chinese attempt to emulate this model even as they enforce production downtime in factories because of diesel shortages and despair that their vast national acreage seems to play host to so little oil.
There is a similar picture with gas. The scale of the addiction - and of the resource - is smaller. But the patterns are the same: growing demand for a finite resource, most of which has to be imported from the Middle East and the former Soviet Union. Even a temporary blip in supply, such as occurred in Europe this week, is enough to create something close to panic among governments. But it is oil that keeps our civilisation functioning.
This half-century of deepening oil dependency would be difficult to understand even if oil were known to be in endless supply. But what makes the depth of the current global addiction especially bewildering is that, for the entire time we have been sliding into the trap, we have known that oil is in fact in limited supply. At current rates of use, the global tank is going to run too low to fuel the growing demand sooner rather than later this century. This is not a controversial statement. It is just a question of when.
Oil is a finite resource, and there will come a day, inevitably, when we reach the highest amount of oil that can ever be pumped. Beyond that day - which we can think of as the topping point, or "peak oil" as it is often called - will lie a progressive overall decline in production. Putting the same question a different way, then, at the current prodigious global demand levels, where does oil's topping point lie?
This is a question, I contend, that will come to dominate the affairs of nations before this first decade of the new century is out.
Already, a battle is raging, largely behind the scenes, about when we reach the topping point, and what will happen when we do. In one camp, those I shall call the "late toppers", are the people who tell us that 2 trillion barrels of oil or more remain to be exploited in oil reserves and reasonably expectable future discoveries. This camp includes almost all oil companies, governments and their agencies, most financial analysts, and most business journalists. As you might expect, given this line-up, the late toppers hold the ascendancy in the argument as things stand.
In the other camp are a group of dissident experts, whom I shall call the "early toppers". They are mostly people who - like me - have worked in the heart of the oil industry, the majority of them geologists, many of them members of an umbrella organisation called the Association for the Study of Peak Oil (ASPO). They are joined by a small but growing number of analysts and journalists. The early toppers reckon that 1 trillion barrels of oil, or less, are left.
In a society that has allowed its economies to become geared almost inextricably to growing supplies of cheap oil, the difference between 1 and 2 trillion barrels is seismic. It is roughly the difference between a full Lake Geneva and a half-full one, were that lake full of oil and not water. If 2 trillion barrels of oil or more indeed remain, the topping point lies far away in the 2030s. The "growing" and "cheap" parts of the oil-supply equation are feasible until then, at least in principle, and we have enough time to bring in the alternatives to oil. If only 1 trillion barrels remain, however, the topping point will arrive some time soon, and certainly before this decade is out. The "growing" and "cheap" parts of the oil-supply equation become impossible, and there probably isn't even enough time to make a sustainable transition to alternatives.
Should the early toppers be right, recent history provides clear signposts to what would happen. There have been five price peaks since 1965, all of them followed by economic recessions of varying severity: after the 1973 Yom Kippur War; in 1979-80 after the Iranian revolution and the outbreak of the Iran-Iraq war; in 1990, with the first Gulf War; in 1997, with the Asian financial crisis; and in 2000, with the dot.com collapse. The most intense peaks were the first two. In 1973, the oil price more than doubled, reaching around $35 per barrel in modern value. The cause was an embargo by Opec, led by Saudi Arabia, and triggered through overt American support for Israel at the time of the Yom Kippur War. World oil supplies fell only 9 per cent, and the crisis lasted only for a few months, but the effect was simple and memorable for those who lived through it: widespread panic.
The embargo was short-lived, largely because the Saudis feared that if they kept it up they would create a global depression that would cripple Western economies, and hence their own. As it was, the short embargo created an economic recession. I spent much of it doing my homework by candlelight. I didn't see much of my father. He was queuing for petrol.
The second, and worst, oil shock was triggered by the toppling of the Shah of Iran in 1979, and prolonged by the outbreak of the Iran-Iraq War in 1980. The first shock did not push prices as high as those at the time of writing, but the second shock pushed them to more than $80 a barrel in today's terms. Again panic reigned, even though the interruption to global supplies was only four per cent.
The crisis ended in 1981 when the price fell for three main reasons. First, the Saudis opened their taps. With their huge reserves, mostly discovered in the 1940s and 1950s, they were able to act as a "swing producer", increasing the flow to bring prices down just as they had decreased it in 1973 to push prices up. Second, new oil came onstream from giant oilfields in more stable regions of the globe, including the North Sea. Third, large amounts of oil were released from government and corporate stockpiles.
These three reasons are high on the list of why we should worry today, because in the face of another shock things could not be resolved in a similar way. First, there are grounds to worry that the Saudis are pumping at or near their peak, no longer able to act as a swing producer. Second, the early toppers fear that there are no more giant oilfields left to find, much less wholly new oil provinces like the North Sea. Third, there is not much oil in storage, relative to current demand. The modern world works on the principle of just-in-time delivery (another factor in the short-term crisis facing Britain this winter). Our economies, overall, are more efficient in their use of oil than in the 1970s - a point much emphasised by late toppers - but the sheer weight of demand is much higher today, and it is still growing without an end in sight, or even strong governmental or corporate leadership demands that there should be one.
The cost of extracting a barrel of oil from the ground doesn't change much. A good rule of thumb might be $5 a barrel today, though obviously there are variations between oilfields in different geographic and political settings. What influences the price of oil most is confidence in supply and demand among oil traders. Oil prices are already at their second highest levels ever, in real terms, at the time of writing. Some pundits now profess that they will soon reach their highest ever levels, in modern value. This situation has arisen for many reasons - but these do not include the fear that the oil-production topping point is near. Early-topper arguments are not on the radar screens of the oil traders and analysts, as things stand. Should that happen, and should the mood of the packs on the trading floors flip to the view that we live no longer in a world of growing supplies of oil, but rather shrinking ones, the price will soar north of $100 a barrel very quickly.
An investor friend of mine has already concluded that this scenario is inevitable. He has switched his investment portfolio to anticipate the moment of "market realisation". This peak panic point, as he calls it, will not be limited to oil traders. The worlds of economics and business routinely assume a future in which oil is in growing and cheap supply.
Economists tend to assume that their "price mechanism" will apply. Higher prices will lead to more attractive conditions for exploration. This will lead to more oil being found, and the inevitable discoveries will bring the price down until the next cycle. Massive corporations write five-year plans based on assumed access to cheap oil and gas. Think, for example, how important such access must be to a chemical company dealing in plastics derived from oil. Or a food-processing company reliant on oil for every stage of food transportation, including of perishable final products, plus almost all the bottling and packaging and many of the preservatives and additives.
But suppose the economists and corporate planners are wrong? Imagine the collapse of confidence when a critical mass of financial analysts, across the full breadth of sectors in a stock exchange, conclude that they are wrong?
If the topping point is indeed imminent, economic depression looms as a real prospect. The Saudis were right to be scared of this possibility in the 1970s. In the Great Depression of the 1930s, triggered in 1929 by the worst-ever stock-market crash, economic hardship was horrific. World trade fell by a breathtaking 62 per cent between 1929 and 1932. The widespread unemployment and social unrest bred Fascism in many countries, in some nations on a scale that would change the course of history. As for the stock markets, it took them 50 years to regain their pre-collapse value in real terms.
There are so many things to worry about in the fall-out from a premature peak in oil production. Here is one that gives me particular nightmares. When I and some of the oil-supply whistleblowers addressed a conference on oil depletion in the formerly oil-rich nation known as Scotland last year, five leaders of the British National Party sat in the audience. They said nothing. They just listened, and learnt, and no doubt reflected that the far right does well in tough times.
The stakes are high with energy policy. Higher than most people dream of when they flip a light switch.
The question of how much oil is left actually breaks down into three sub-questions. First, the existing-reserves question: how much oil is there in discovered oilfields, mapped out, proved and ready to be exploited? Second, the reserves-addition question: how much oil remains to be added via new discoveries, enhanced recovery techniques and so called unconventional oil? Finally, the speed-to-market question: how fast can the oil, once found, be delivered to fuel tanks?
One also needs to consider these questions both in relation not only to conventional oil - that is, liquid that sits underground in a reservoir under pressure - but also unconventional oil (which consists of sands and shales containing solidified oil or solid tar or bitumen deposits; is mostly found in Canada, the United States and Venezuela; and carries considerable environmental extraction costs). The same applies, strictly speaking, to deep water oil (much-hyped by Exxon a few years ago but already widely thought to have peaked) and gas, whose patterns of availability tend to mirror those of oil, and which already faces its own problems of increasing consumption (gas demand is expected to double by 2030, reaching 4.3 billion tonnes of oil equivalent a year, of which over 40 per cent will be used for power generation).
I find it hard to feel optimistic about any of the answers.
I say this as someone who, for most of the 1980s, was a creature of Big Oil. I taught petroleum engineers and geologists at the grandiose-sounding but in fact quite tatty Royal School of Mines, part of Imperial College of Science and Technology in London. My researches on the history of the planet included such issues as the source of oil, and was funded by BP and Shell, among others. I also consulted for oil companies. In those days, I was psychologically insulated in a quest for the respect of my peer group, and highly selective as a consequence with the information I allowed on to my radar screen. The build-up of greenhouse gases (a separate but scarcely less urgent reason for worrying about our dependence on oil) registered nowhere on my list of concerns. I had concerns about oil depletion, but only in the sense that this cloaked my quest to find more with a certain nobility, at least in my own eyes.
But one thing that was clear to me even then was that most of the planet has not a drop of drillable oil. Almost everywhere geologists have looked - which means everywhere by now, at least at some level of exploration - there is no oil because one or more of the key geological requirements is missing. Even when all the boxes can be ticked, you can end up finding no oil. Only one well drilled in every 10 finds oil. Only one in a hundred finds an important oilfield. And the more wells that are drilled in a province or country, the smaller the oilfields generally tend to become.
In my book, Half Gone, I examine in detail the prospects of future viability for each of the major sources described above. But one of the most important arguments against over-confidence in future reserves can be summarised simply.
Think of all that expertise that had been built up since the first oil was drilled in 1859. Think of all the trillions of dollars in oil revenues stacked up in the 20th century, and all the hundreds of billions spent on exploration and the hi-tech toys of exploration in the half-century since the biggest Saudi and Kuwait fields were discovered. Think of the sophistication of the seismic reflection profiling offshore. Consider the all-important oil source rocks, and how relatively limited they are in distribution. As BP's former reserves co-ordinator, Francis Harper, told the Energy Institute in November 2004: "We know how many world class source-rocks there are, and where they are." Wouldn't it be reasonable to think that with modern technology at least one more field of more than 80 billion barrels might have been found somewhere, in all the places the companies have looked these last 50 years?
The third-biggest oilfield in the world is Samotlor, discovered in 1961, with 20 billion barrels. The fourth-biggest is Safaniya, discovered in 1951, at which time it also supposedly contained 20 billion barrels. The fifth-biggest is Lagunillas, discovered in 1926, containing 14 billion barrels. Only around 50 super-giant oilfields have ever been found, and the most recent, in 2000, was the first in 25 years: the problematically acidic 9-12 billion barrel Kashagan field in Kazakhstan.
Let us reduce our scale of scrutiny from the super-giant to the merely giant. Half the world's oil lies in its 100 largest fields, and all of these hold 2 billion barrels or more, and almost all of them were discovered more than a quarter of a century ago. Consider the recent record of discoveries of giant oil- and gas-fields of over 500 million barrels of oil or oil equivalent. Half a billion barrels - the definition of a "giant" field - sounds a lot. But since the world is eating up more than 80 million barrels of oil a day at the moment, it is in fact less than a week's global supply. In 2000 there were 16 discoveries of 500 million barrels of oil equivalent or bigger. In 2001 there were nine. In 2002 there were just two. In 2003 there were none.
On the basis of this kind of evidence, is the industry going to meet the steady increase in demand with new discoveries? Francis Harper, for one, doesn't seem to think so. "Worldwide, the frequency of finding giant oil provinces and super-giant oilfields has been declining for decades and will not be reversed," he told an agog audience at a November 2004 London conference on oil depletion held in the Energy Institute. "We've looked around the world many times. I'd say there is no North Sea out there. There certainly isn't a Saudi Arabia."
In January 2004, the early toppers' case suddenly looked a good deal more worryingly feasible to those who have tended to take the late toppers at face value. Shell's then chairman, Sir Philip Watts, told investors that the company had overestimated its reserves by more than 20 per cent. By March, internal e-mails had been requisitioned by lawyers and these made it clear that the chairman and his head of exploration had known about this problem for some time, and had deliberately lied about it. Both men departed the scene.
Shell's corporate scandal is dramatic enough. But there is a clear risk that it is only the tip of an iceberg. Today, many people in the oil industry appear to be under pressure when it comes to supplies of oil. "There is something strange going on in this industry," Shell's replacement boss, CEO Jeroen van der Veer, told the press in November 2004. He suspects that other companies have the same problems he inherited. The Economist drew the following conclusion: "Industry analysts and investors are quietly saying that Mr van der Veer may be right, and another big reserves scandal may be brewing somewhere."
Against this unpromising start, how much oil do we think the oil companies have found to date? Call BP for a bit of help with the answer and you'll be sent their annual BP Statistical Review of World Energy. In it, you'll see lists of data for national proven oil reserves. Add these up to a global total of oil reserves year by year, and you'll see the total creep reassuringly upwards over time. The chart on page seven shows those figures, from successive annual reviews split into the Middle East and the rest of the world. Global reserves rise from just over 600 billion barrels in 1970 to almost double that today: 1,147 billion barrels at the last count, up to and including 2003.
So what's the problem? The first hint that something might be amiss comes, as is so often the case in life, in the small print. Squinting through a lens if you have anything but perfect eyesight, you will find that the data in BP's own report are not BP's at all. The estimates have been compiled using "a variety of primary official sources, third-party data from the Opec Secretariat", and a few other places completely removed from BP's headquarters in St James's Square with all its accumulated research and knowledge. Think how many libraries of understanding BP must have gathered in over a century of aggressive oil exploration and production all over the world. And yet all they offer us as a guide to our own understanding of how much "proved" oil reserves there are left on the planet is a compilation of other people's data. And much of that itself is secondhand.
After this revelation comes another. The small print continues: "The reserves figures shown do not necessarily meet the United States Securities and Exchange Commission definitions and guidelines for determining proved reserves, nor necessarily represent BP's view of proved reserves by country."
They don't even believe the figures they are publishing! Referee! This is a publication used as an energy bible by researchers the world over. Students quote it as whole truth in undergraduate essays. Journalists quote it as gospel in legions of articles. They don't insert caveats like this. Neither have they seen such caveats in earlier reports.
You might end up with a few questions for the authors of the BP Review at this point. But then, at the end of the document, we read the following: "BP regrets it is unable to deal with enquiries about the data in the Statistical Review of World Energy."
So what is BP's real view of "proved" reserves? Could it go something like this?
Looking closer at the chart and zooming in, you'll see that the figures show that global reserves of oil went up particularly quickly between 1985 and 1990 (a big black oily arrow indicates the point). There must have been some big new oilfields discovered then, right? Wrong. The actual new discoveries in that period were less than 10 billion barrels. But the Middle East nations hiked their "proved" reserves from already discovered oilfields by fully 300 billion barrels collectively in that period, professing one after another that their national calculations had all somehow hitherto been too conservative. Three hundred billion barrels is a lot of oil. It is more than a decade of demand at current levels.
Here's how it happened. In the 1950s, the nations with oil organised themselves into the cartel known as Opec. Opec's main aim was and is to try and control the price of oil. They don't want it too low. That would cut their income. Neither do they want it too high. That might get the addicts thinking of maybe going elsewhere. They want it just right, perhaps around $30 per barrel in today's money. To do this they can't produce too much, because that would flood the market, causing the price to drop. They have to produce exactly the right amount collectively, and that means quotas. After much bickering in the early days, the Opec oil ministers decided in 1982 to allocate a quota to each country in the cartel according to the size of its reserves.
But in 1985, they began to - how shall I put it? - massage the data. Kuwait was the first to give in to temptation. They found that their reserves had gone up overnight from 64 to 90 billion barrels. In 1988, Abu Dhabi, Dubai, Iran and Iraq all played the same card. Abu Dhabi had been so needlessly conservative that their reserves went up from 31 to 92 billion barrels. They surely must have employed some incompetent geologists. How could they have overlooked 60 billion barrels? Finally, in 1990, Saudi Arabia decided it too had been conservative, hiking its total from 170 to 258 billion barrels.
You can also see in BP's data that the Middle East's reserves have been almost constant in size since then. What you don't see in the figure - but do see in the data - is that this is apparently the case not just for the sum of the reserves of the Middle Eastern oil producers but also for the figures of reserves for the individual nations.
Consider the enormity of this coincidence. It means that the billions of barrels found in new discoveries each year would have to match exactly the billions of barrels produced each year in each of the Middle Eastern OPEC nations, and do so consistently every year for more than a decade.
BP's Statistical Review of Everyone's World Energy Statistics Except Their Own invites us to believe all this without comment from them or recourse to questions by us. We are left to look at the total figure they cite for "proved" reserves, 1.1 trillion barrels, and think to ourselves ... "Er, really?"
The early toppers have a different view. Being in most cases old hands from the oil industry, they know a thing or two about the games that go on in their industry. They estimate the total of proved reserves to be 780 billion barrels, some 300 billion barrels short of "BP's" figures. This is less than the world has produced since the first oil was struck over a century ago: 920 billion barrels by the end of 2003 (a figure about which there is somewhat less controversy).
Let us take some opinions that ought to be difficult to discount, one from the top of the oil tree in the US and two from the Middle East. The Houston-based energy investment banker Matthew Simmons has been one of George W Bush's energy advisers. He has studied reports by Saudi engineers showing that pressure is dropping in Saudi oilfields. The four biggest fields (Ghawar, Safaniyah, Hanifa, and Khafji) are all more than 50 years old, having produced almost all Saudi oil in the past half-century. These days, Simmons says, they have to be kept flowing largely by injection of water. This is of explosive significance, he argues. "We could be on the verge of seeing a collapse of 30 or 40 per cent of their production in the imminent future. And imminent means some time in the next three to five years - but it could even be tomorrow." |
