The oil crunch: Securing the UK’s energy future

October 30, 2008

Executive Summary

Plentiful and growing supplies of oil have become essential to almost every sector of today’s economies. It is easy to see why, when we consider that the energy locked into one barrel of oil is equivalent to that expended by five labourers working 12 hour days non stop for a year. The agricultural sector perhaps makes the case most starkly: modern food production is oil dependent across the entire value chain from the field to the delivered package. Within modern cities, for example, life in the suburbs will become extremely challenging without plentiful supplies of affordable oil.

Yet in recent years, a growing number of people in and around the energy industry have been warning that global oil supply will soon fail to meet demand, even if the global demand drops, because the world is on or close to its peak of oil production. Peak oil production is the point at which the depletion of existing reserves can no longer be replaced by additions of new flow capacity. Conventional wisdom holds that the peak is many years in the future, allowing a timely transition to alternatives that can replace falling oil supply. However, the International Energy Agency has warned of an oil crunch by 2013. Other authoritative voices warn of severe problems earlier than this.

Being concerned about the implications of an early peak in global oil production for the UK economy, the companies contributing to this report have elected to conduct a risk assessment, from a collective UK industry perspective. Equally, aware of the commercial opportunities that are arising around the world in clean energy, we wanted to examine the opportunities. We asked ourselves three related questions: How big is the risk from peak oil? How big is the alternative-energy opportunity? How do the two conflate?

Risk analysis and the taskforce approach

We sought two opinions on oil-supply risk, one from an oil-industry expert known as a leading advocate of the early-peak scenario, and the second from Royal Dutch Shell, who we expected might advocate a more sanguine prognosis. In our first risk opinion, Peak Oil Consulting2 presents an analysis pointing to a peak in global oil production in the period 2011-2013. His core argument is that the problem is not so much about reserves, as the timely bringing on stream of new flow capacity to replace the depletion of existing capacity. The “easy oil” that makes up most of existing capacity is declining fast, and the new capacity coming on stream – often from “not-so-easy” oil – will not be replacing it fast enough from 2011 onwards.

In our second risk opinion, Shell argues that we indeed face an “easy oil” supply gap, but should think not of “peak” production, rather “plateau” production, with accompanying tensions as the demand for energy continues to surge. The global supply of oil will flatten by 2015, in Shell’s view, and if the oil industry globally is to maintain hydrocarbons supply on this plateau, very heavy investment will be required in ultradeep water, pre-salt layers, tight gas, coal-bed methane,3 in the Canadian tar sands and other areas of unconventional oil production. We find it of great concern that both our risk opinion-providers agree that the age of “easy oil” is over. If so, fast-growing alternative energy supplies become imperative, even if production flattens in 2015 as Shell suggests.

We publish the taskforce’s views, based on the two risk opinions and our own researches, as an interim report and an invitation-to-debate.

Recommendations

… International:

1. We call on oil companies and governments generally to be more transparent about oil reserves. OPEC governments could address concerns about the state of their reserves, as summarised in this report, with a minimal programme of verification by a small United Nations team of suitably qualified experts. Such a confidencebuilding measure has been proposed by the G-8 governments.

It could ultimately be beneficial for the global economy whatever the findings. If its results show the fears expressed in this report to be groundless, oil prices would surely fall. If the programme confirmed reasons for concern, governments could work together with urgency to accelerate sustainable energy alternatives. In the meantime any resultant rise in the oil price would itself stimulate greater efficiency and renewables investment.

2. We urge all governments to combine efforts to deal with oil depletion and climate change in the multi-lateral post-Kyoto climate negotiations, and significantly to improve their level of co-operation in that forum. There is ample scope for the UK government to lead by example domestically in this respect. Such leadership could include ensuring rapid trialing of CCS, and rapid national nuclear decision-making so as to give investors clarity on their energy options. Unconventional oil should not be exploited if its net carbon footprint is higher than that of conventional oil.

3. All governments should draw up their own national responses to peak oil. National energy mobilisation plans should aim to accelerate the green industrial revolution already underway.


Tags: Fossil Fuels, Industry, Oil