Globe's growing thirst poses challenge to big oil
At first blush, major oil companies appear to be booming.
This week, Exxon Mobil and even oil reserve-challenged Royal Dutch/Shell logged windfall profits thanks, in large part, to sustained high oil prices.
But a closer look at production numbers for energy companies reveals a disturbing trend.
In best-case scenarios, like Exxon Mobil, production is relatively flat. Many more energy companies are pumping less oil than they were a year ago.
Despite Shell's quarterly profits of $4 billion — up 54 percent year-over-year — the company pumped 5 percent less oil and gas than it did at this time last year. ConocoPhillips' 75 percent profit jump didn't keep its production from falling 5 percent, as well.
Since global thirst for the fuel shows no signs of being slaked, production declines beg the question: Can the majors keep up with worldwide demand?
Energy experts know one thing — all the easy oil has been found.
Juicy basins in the Gulf of Mexico and North Sea are rapidly tapping out, even as advanced technology is helping to ferret out fossil fuels from declining reserves in the most mature basins.
The majority of the world's reserves are situated under terra firma not firmly committed to open markets, though.
That means more and more often energy companies have to tango with sovereign states, rife with corruption, whose tenants see natural resources as a birthright not to be shared with the West.
Under the surface, the world has plenty of oil. It's the aboveground issues of politics and investment climes that get in the way of harnessing it, or so says Jim Burkhard, the director of global oil markets at Cambridge Energy Research Associates.
He points to OPEC-member nation Venezuela, one of the top three exporters of crude oil to the United States.
After a failed coup in 2002 and a series of national strikes, Venezuela pumps 20 percent less oil today than it did in 1997.
China now is major drain
Most of the world's 99 oil-producing nations are running flat out, trying to meet the surging oil demand. It's coming not only from a rebounding U.S. marketplace but also from China's roaring economy. In 2001, only seven of every 1,000 people in China owned a car, according to the International Energy Agency. By 2030 half the country is expected to be driving.
Fatih Birol, chief economist for the IEA says: "China is becoming a strategic buyer of oil and gas and China's continuing demand could put pressure on prices in the future."
According to Cambridge Energy Research Associates, China accounted for a full 40 percent of the world's growth in oil demand between 2000 and 2003.
Stephen Leeb, who runs a $100 million investment fund and recently published The Oil Factor sees runaway demand forcing the price of oil to $100 a barrel by the end of the decade.
"This isn't the cyclical business it used to be," he says. "The natural cycles for oil are no longer there. It's demand driven now, not supply constrained."
Divining where the supply would come from to fulfill that relentless demand, London-based energy giant BP committed $6 billion to a partnership with Russian oil giant TNK. BP's production jumped 18 percent this quarter thanks to its Russian oil deal, a model others are trying to follow.
Russia is the West's brightest hope for flooding the market with more fuel and wrenching away some control from the Middle East.
If stability in the Middle East seems like a must today with the region supplying 28 percent of global oil demand, just imagine how dicey geopolitical relations will be in 2030 when the IEA predicts the world will depend on the cradle of civilization for a whopping 45 percent of its oil needs.
Douglas-Westwood, a U.K.-based energy consultancy issued The World Oil Supply Report 2004-2050 with even more doomsday scenarios. According to author Michael R. Smith, all the world's known oil reserves may not satisfy even the present level of demand beyond 2020. Start factoring in modest global economic growth of 1 percent or 2 percent and the demand increases could cause production to peak as early as 2016.
Natural gas could step in
Another nasty side effect: sustained increased oil prices for years and years to come.
The supermajors are actively hunting for more oil.
Exxon Mobil spent more on its search in the first half of this year than in the same period last year. Much of the capital expense was used to gin up seismic data in an effort to squeeze more oil out of existing fields and size up promising prospects in Angola and Nigeria. The company also recently inked a deal to build and operate a $7 billion natural gas-to-liquids project in Qatar.
CERA's Burkhard says major oil company commitments in Africa, Brazil and the Caspian Sea should keep any worst-case scenarios from playing out. The increased focus on natural gas alternatives should also help bridge the world's way out of an oil era, whenever that day comes.
"The stone age didn't end because we ran out of rocks. The oil age won't end because we run out of oil," Berkhard says. "At some point another fuel could emerge that's more competitive than oil. That could be natural gas. But that could be decades away."
The world's remaining natural gas reserves are huge — the equivalent of 250 billion barrels of oil. Put another way, that's like finding another Saudi Arabia.
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