If it smells like peak oil, it probably is

Andrew Leonard, Salon
The first sentence of the executive summary of the International Energy Agency’s (IEA) influential “Medium Term Oil Market Report,” released today, states the broad outlines of the problem baldly: “Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2012.”

Demand for oil products — primarily transportation fuels — is growing fast. You can blame all those developing countries whose populations are approaching the critical $3,000 per capita GDP level — that magic moment when, according to the IEA, “a middle class usually emerges, eager to purchase cars, fly in aeroplanes, install air-conditioners and, more generally, use energy-consuming appliances.” Don’t blame a lack of refinery capacity — the IEA says investment in refinery upgrades is proceeding apace, and is not likely to be a problem in the near future. But overall, supply of the raw product — oil and gas — is having a harder and harder time keeping up with demand.

This would seem to be the definition of a world approaching “peak oil” — that moment when supply stops growing and begins to decline, while demand continues to chug along. But it is not until Page 30 of the IEA’s very detailed 82-page report that those all important words are even mentioned. Here are some excerpts from the critical section: [See next item.]

…To drastically summarize the report: The problem is not that the world is running out of oil, but that right now, offshore oil rigs are scarce and expensive, skilled labor is tight, transport infrastructure is limited, and political considerations such as “resource nationalism” in states such as Venezuela and Russia and geopolitical risk in Iran and Nigeria are hampering investment and development. Logistics are the real problem, the report seems to be saying, and not the actual amount of oil in the ground. This leads to the conclusion that even though nearly 3 million barrels of new supply will be needed each year just to offset the decline in established oil fields, “above-ground supply risks are seen exceeding below-ground risks in the medium term.”

But there’s a problem with this formulation that demonstrates a very careful, if not disingenuous, attempt to skirt the troubling implication of “peak oil.” Peak oil does not mean, as has been emphasized a thousand times before, here and elsewhere, that “the world is running out of oil.” It means that “the world is running out of cheap oil.”

And that interpretation seems to be completely justified by the IEA report.
(9 July 2007)

IEA’s Medium-term oil markets report
Interational Energy Agency via Wall Street Journal
… [page 30-1] The concept of peak oil production and its timing are emotive subjects which raise intense debate. Much rests on the definition of which segment of global oil production is deemed to be at or approaching peak. Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak…

While there might be a temptation to extrapolate this trend, citing a peak in conventional oil output, a degree of caution is in order. Firstly, the concept of “conventional” oil changes with time, technology and economics. In the early 1970s, much offshore production was deemed unconventional, but this portion of global supply has since grown to account for 30 percent of the total. Evolving economies of scale and infrastructure development could do the same for [gas-to-liquid], oil sands and ultra-deepwater reserves in the future, shifting today’s unconventional resource into tomorrow’s conventional supply category…

Finally, we note that focusing on non-OPEC crude alone is a rather selective way of considering the sustainability of global oil production. Peak or plateau production is frequently taken as shorthand for impending resource exhaustion. While hydrocarbon resources are finite, nonetheless issues of access to reserves, prevailing investment regime and availability of upstream infrastructure and capital seem greater barriers to medium-term growth than limits to the resource base itself.
(July 2007)
The IEA’s report which is the subject of the above articles. 82-page PDF.
Selections here were noted by Andrew Leonard in his Salon column. -BA

Dear oil is here to stay, so let’s explore what that means

Tom Stevenson, Telegraph (UK)
The latest report from the International Energy Agency makes scary reading. You don’t have to be a “peak oil” doom-monger to believe the world faces an energy crunch. Investors, and everyone else for that matter, need to think through the implications of a significantly higher oil price.

Oil has risen by around 50pc this year to within a whisker of the peak hit last August after Israel’s invasion of Lebanon. At $76 a barrel, the price of crude is seven times its recent low. Crucially, it is close to the inflation-adjusted levels at which the global economy has, in the past, started to squeal.

The International Energy Agency said yesterday it believes demand will rise by 2.2pc a year between 2007 and 2012. It now believes demand for the black stuff will be 95.8 million barrels a day within five years, up from 86.1 million barrels today.

While meeting that demand is manageable, assuming a degree of co-operation from the oil-producing countries that are members of Opec, satisfying the International Energy Agency’s estimate of demand for 2030 of 113 million barrels a day looks more of a stretch. Jeroen Van der Veer, the chief executive of Shell, thinks the world will probably be using twice as much energy by 2050.

You can argue about when the gap between our thirst for oil and our ability to find more of it becomes a major problem, but few now claim that it isn’t an issue.

There are two sides to the energy squeeze, neither of which looks good. On demand, we all know that energy use is rising but it is questionable whether we have really taken on board the scale of the increase.

…The other side of the energy conundrum is supply. Here the harsh truth is that the easy oil has already been tapped. We have already used up the oil and gas that is easy to extract. So while the International Energy Agency thinks there might be as much as 20,000 billion barrels of oil and gas hidden under the earth – as much as 400 years’ supply – most of it will never see the light of day.

There are also serious doubts about how much oil is really left. Saudi Arabia, for example, has reported reserves of 260 billion barrels every year for the past 15 years, despite having produced about 100 billion barrels over that period.

…Looking a generation and more ahead, I think the unspoken truth about the looming oil crisis is that the so-far inexorable march of globalisation should not be taken for granted. In the great sweep of history, the 200-year oil age may be seen as a blip before a return to a more sustainable, more local economic system.

I’m just not betting my pension on that brave new world arriving any time soon.
(9 July 2007)

Top IEA official: without Iraqi oil, we hit the wall in 2015

Jérôme à Paris, Energy Bulletin
In a stunning interview for the French daily Le Monde, Fatih Birol, the chief economist of the International Energy Agency (i.e. the intergovernmental body created after the oil shocks of the 70s to coordinate the West’s reaction to energy crises) effectively says that peak oil is just around the corner, and that without Iraqi oil, we’ll be in deep trouble by 2015:
(28 June 2007)
The recent IEA report was prefigured by this interview last month. Jérôme translated some of the article from the French. -BA

World facing oil ‘supply crunch’ as demand soars, agency warns

Carl Mortished, UK Times
The world faces an energy squeeze as soaring demand for fuel exceeds the rate of growth in the supply of crude oil, the West’s leading energy forecaster has predicted.

In a gloomy appraisal of the global oil balance, the International Energy Agency yesterday predicted a world of increasing market tightness beyond 2010. The world faces a “supply crunch” by 2012, according to the agency’s Medium-Term Oil Market Report, with weak increases in oil output from nonOpec countries colliding with strong demand and diminished spare capacity within the cartel of oil producers.
(10 July 2007)

Energy watchdog warns of supply crunch within five years

James Moore, Independent
…The IEA’s report said: “Despite four years of high oil prices, this report sees increasing market tightness beyond 2010. It is possible that the supply crunch could be deferred – but not by much.”

It continues: “The potential effects of a combination of low Opec spare capacity and slow non-Opec production growth are of significant concern – all the more so when considered alongside tightness in other hydrocarbons, particularly the natural gas market.”

IEA’s head of oil industry and markets division Lawrence Eagles warned: “The results of our analysis are quite strong. Something needs to happen. Either we need to have more supplies coming on stream, or we need to have lower demand growth.”

The IEA has also warned that additional global refining capacity over the next five years will not match earlier expectations as a result of rising costs and a shortage of engineers. This will delay construction.
(10 July 2007)

IEA Sees Oil Output Plateau for Russia

Reuters via Moscow Times
LONDON — Russian oil production may level out from 2010 to 2012 and stall until the middle of the decade, the International Energy Agency said Monday.

The IEA, adviser to 26 industrialized consumer nations, said it had based its forecast on a study of the top 20 development projects through to 2012 and an assumed 3 percent annual net decline rate for baseload production.

…The IEA said that without publicly available, field-specific data, it was not possible to perform an in-depth, field-by-field analysis for the country. The IEA avoided making any forecasts beyond the middle of the next decade, adding, “Extrapolating a decline in Russian production in the longer term would be premature before examining post-2012 prospects in detail.”
(10 July 2007)
Related from the Moscow Times: Alfa Report Sees Trouble Looming in Oil Sector:

Alfa Bank warned on Monday that “production stagnation is unavoidable” at the country’s oil fields and further downgraded its target prices for shares in most Russian oil companies.

The dramatic worsening in its outlook was the result of the government’s reluctance to consider lowering taxes on oil firms and a higher proportion of water in the declining output, the bank said in a research report.

…Alfa Bank first downgraded its projections in the sector in March, saying that oil majors were depleting existing fields while heavy taxes on the industry were preventing the development of new fields. In Monday’s report, the company described the situation as “substantially more dangerous” than it had suggested four months ago.

The increasing proportion of water in total output was a major source of concern, the bank’s analysts wrote. This causes a quickening in the rate of natural production decline at most fields.

“The growing decline rate simply means that more and more new wells need to be drilled just for output levels to stay flat,” the report said. “This fully explains why rapidly accelerating drilling activity in Russia resulted in smaller and smaller production increases.”

Since 2003, companies have lost 76 million tons of oil due to the rising water component, and have had to drill 5,000 new wells just to offset the lost production, the report said.

IEA warns against ‘resource nationalism’

Terry Macalister, Guardian
A growing trend towards nationalism over resources in Russia and even Britain could backfire by cutting expenditure on oil and gas worldwide at a time when demand is likely to rise faster than expected over the next five years, the International Energy Agency warned today.

At the same time, Shell signed a strategic agreement with Kremlin-controlled oil company Rosneft, just weeks after BP agreed a similar deal with the Russian government-owned gas group, Gazprom. Both companies appear to be signalling that they need the influence of local operators in order to be involved in big developments in Russia.

The IEA criticised governments of energy-producing countries for using a period of high oil prices – currently $76 per barrel – to tighten their control over production. This comes as the IEA has adjusted its oil demand growth forecast from 2% per year over the next five years to 2.2% on the back of booming consumption in the US and China.

“It is little wonder that consumers focus on supply diversity, both geographically and by fuel form. This can create a vicious circle for investment,” said the IEA, the Paris-based adviser to 26 industrialised nations including the UK, in its medium-term oil market report.

Resource nationalism, where governments impose tougher terms on independent oil companies, has seen Shell and BP forced to hand over control of the Sakhalin-2 and Kovykta gas schemes in Russia while ConocoPhilips has effectively been made to leave Venezuela. But the IEA also said there were recent examples of rather more “benign” examples of the trend with the recent North Sea tax hikes and other developments in both Britain and Norway.

All governments tend to use higher oil prices as an opportunity to shift revenue flows in their favour, the IEA explained.
(9 July 2007)

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