New oil proves elusive, and alarm bells ring
STAVANGER, Norway It's a tale that Statoil's explorers enjoy retelling. In 1992, the company decided to give up on an offshore tract after two exploratory wells came up dry. Management was getting nervous about the cost - $15 million a well - and was ready to cut its losses.
The explorers still had hopes, though, and managed to get permission for one last try. The third well struck oil, opening a new field with about 550 million barrels of oil, enough to satisfy all of Britain's consumption for a year.
But Statoil's find, the Norne field, was the last significant crude oil discovery in Norway. In more than 11 years of hunting since then, quite a bit of natural gas has been found, but hardly any more oil.
The same is true across much of the developed world. Western oil companies are running out of likely places to look, and significant finds are growing rarer. With the most accessible areas either already picked clean or kept off limits for political reasons, exploration teams are having to push into harsher, more remote and less promising territory, where the costs and risks are high.
Oil trading at $45 a barrel may make such projects seem attractive anyway, but there is widespread concern in the industry that prices cannot be counted on to stay that high. So companies direct much of their effort toward wringing more production from known fields rather than hunting for new ones.
"Finding sufficient quantities of oil will get more difficult," said Tore Torvund, the executive vice president for oil and energy at Norsk Hydro.
Strategists have been surprised this year by the strength of global demand for oil, driven in large part by growth in the appetite for cars, manufactured goods and electricity in Asia, and especially China.
"There's a need to invest in more production capacity," said Claude Mandil, the executive director of the International Energy Agency in Paris. "We're ringing the alarm bell."
According to Wood Mackenzie, an energy research firm, six of the 10 largest oil companies have cut their investments in exploration since 1998. Together, the world's leading companies spent $8 billion drilling for oil last year; in 1998, they spent more than $11 billion. The number of wells drilled in the 11 full members of the Organization of Petroleum Exporting Countries fell 6.5 percent in 2003 from the year before.
As worldwide oil consumption has grown by about 17 percent over the past decade, to about 80 million barrels a day, explorers need to find ever growing quantities of oil to replace depleted reserves. Exxon Mobil, BP and Royal Dutch/Shell alone need to find 4.4 billion new barrels of oil each year just to replace their current production.
Along with most U.S. production, Alaska's North Slope, which provides a quarter of America's output, is in decline. With the United States importing increasing quantities of oil to meet demand - to a projected 70 percent in 2025 from 54 percent in 2002 and 37 percent in 1980, according to a forecast by the U.S. Energy Information Administration - the oil industry wants to be allowed to look at the Alaska National Wildlife Refuge.
To be sure, the world still has a lot of underground oil left to develop. Five countries in the Middle East - Saudi Arabia, Iran, Iraq, the United Arab Emirates and Kuwait - sit on top of 700 billion barrels of oil, or 61 percent of the worlds proven oil reserves. At today's rate of production, enough oil has already been found to last 41 years, according to statistics compiled by BP.
One country has seen a stunning increase in oil production in recent years - Russia. Oil production in Russia jumped 40 percent between 1998 and 2003, in part because of the industry's privatization and the adoption of Western skills. Russian production is still short of the Soviet-era peaks and there are mounting concerns about governmental intervention in the sector.
Even so, analysts say the industry has disappointingly little to show for its exploration efforts in recent years. There have been only a few big strikes, notably the Kashagan field in Kazakhstan in 2000, the industry's largest in 30 years with 10 billion to 30 billion barrels. It is expected to start producing in 2008.
But while exploration activity is in decline, oil companies are stepping up production and spending more on existing projects. According to Wood Mackenzie, the top 10 oil companies spent $50 billion on field development in 2003, up 42 percent from 1998.
Memories of that year haunt the industry. Financial crises in Asia undercut demand for oil so rapidly that prices plunged below $10 a barrel, prompting production cuts and the cancellation of dozens of exploration projects. Once bitten, analysts say, the oil companies are now twice shy.
"Executives have taken a more conservative outlook for oil prices since then," said Frederick Leuffer of Bear Stearns in New York. In planning their development budgets, Leuffer said, "most companies are still thinking in terms of $20 to $25 a barrel - no one is thinking in terms of $30 oil."
The industry has also consolidated since then, in a wave of mergers driven by cost-cutting. And new technology has made it cheaper to recover oil from existing fields. From about $7.30 a barrel in the early 1990s, average production costs fell to $5.95 a barrel last year, according to Bear Stearns.
"As a result, exploration has become much more disciplined, with a real focus on returns," said Daniel Yergin, chairman of Cambridge Energy Research Associates. Yergin said that the world's production capacity is expected to jump by some 21 percent to reach about 103 million barrels a day in 2010.
The biggest oil companies are at least still treading water with their exploration efforts. Leuffer said that they have found enough new oil around the world to replace their production in eight of the past 10 years, and last year they found about 9 percent more than they pumped. "We see no fallout or reduction in the industry's performance," he said.
But they are having to look in ever more forbidding places to find it, as Norway's recent experience illustrates. Though the country still has potential, "the easy part is done," said Tor Fjaeran, head of exploration at Statoil.
Unlike the British sector of the North Sea, which is considered completely explored, the Norwegian continental shelf is believed to still hold substantial quantities of undiscovered oil - perhaps one-third of the amount already found, or 9.4 billion barrels of oil and 67 trillion cubic feet, or 1.9 trillion cubic meters, of gas, according to estimates by the Norwegian Petroleum Directorate, the government agency that oversees the oil industry.
But only 19 exploratory wells were drilled last year in Norwegian waters, the fewest since 1977. Only about one in three found oil or gas, down from half in 2002.
Increasingly, the search is moving northward into the Barents Sea, above the Arctic Circle and near Norway's far northeastern border with Russia, where the weather is bitter and there is no daylight for months in the winter.
The oil industry is also eyeing the Lofoten Islands off Norway's northern coast, which are closed to exploration because of seabird colonies and cod spawning grounds that environmentalists and the Norwegian fishing industry want protected. Environmental concerns led to a two-year halt in drilling throughout the Barents Sea, but the Norwegian government allowed exploration programs to resume in December, and three more wells are due to be drilled this winter.
"We're forced into new frontier areas, into deeper and harsher conditions, and into potentially more politically and environmentally sensitive areas," says Tore Holm, the director of exploration for Shell in Norway. "It's by nature riskier, and by nature most costly. But the rewards could be higher."
New York Times
What do you think? Leave a comment below.
Sign up for regular Resilience bulletins direct to your email.
This is a community site and the discussion is moderated. The rules in brief: no personal abuse and no climate denial. Complete Guidelines.