Oil production constraints to cause “huge recession”

The world will have to suffer a deep economic downturn before serious attempts are made to kick the oil habit, according to the chairman of PFC Energy, the Washington based oil consultancy.

In an interview with lastoilshock.com and Global Public Media, Robin West said it would be very difficult for the oil industry ever to produce more than 95-100 million barrels per day, and that when output growth stops the oil price will go “through the roof”. This will cause “massive demand destruction, a huge recession, and only then will you see very substantial substitution”.

Mr West was in London to deliver a presentation at the IP Week oil conference entitled “Dances with Wolves”, about the dwindling power of the international oil companies (IOCs – those that are fully exchange traded) in the face of the resurgent national oil companies (NOCs – those that are largely state controlled).

Although the IOCs represent the biggest and most profitable industry in history, Mr West argued that the stock market shows little confidence in their future, pointing out that the price-earnings (P/E) ratio of the integrated oil and gas companies is the second lowest in the entire ‘basic materials’ sector – and much less than half the level of the average in the booming minerals business.

Despite their record profits, the IOCs are struggling by other important yardsticks, according to figures provided separately by PFC Energy. The figures, which run to 2006, reveal that in recent years the super-majors have managed to replace the oil they produce with fresh reserves only by including acquisitions and natural gas in the calculation – and sometimes not even then.

On a strictly like-for-like basis, the five biggest international oil companies have consistently failed to replace their oil production with fresh discoveries of oil. On this basis Shell has failed to replace its oil production every year since 2001, BP and Chevron since 2003, and ExxonMobil and Total since 2004.

For 2007 ExxonMobil has recently reported overall reserves replacement of more than 100%, although no breakout for oil on a like-for-like basis was immediately available, and Total has reported overall replacement of 78%. BP and Shell are due to report in the next few weeks.

Many of the largest IOCs are also struggling to maintain oil production levels. Shell’s output has fallen for the last five years.

In his presentation, Mr West attributed the IOCs’ difficulties to the fact that whereas they once controlled almost all the world’s oil reserves, today they have access to just “a tiny sliver of the whole pie”. Today three of the world’s five biggest oil companies are state-controlled PetroChina, Gazprom and Sinopec, he said.

Nevertheless Mr West argued that the IOCs still have a role to play. In the interview he said that IOC involvement would be essential if Iraq was ever to boost its production significantly, but the country did not yet have the legal framework or peace to allow this to happen. He said settlement of the oil issue would be as politically fundamental to Iraq as the settlement of slavery had been in the United States: “it’s a big problem and it has not been worked out”.

Asked if he agreed with IEA chief economist Fatih Birol, who said last year that Iraq must increase its output exponentially if the world is to avoid a supply crunch by 2015, Mr West said “I think we’re going to get into a nasty crunch at some point, one way or another. If Iraq comes on, the crunch can be deferred for a while – but it’s coming”.

As I report in The Last Oil Shock, Mr West – a former US Assistant Secretary of the the Interior in the Reagan administration – briefed Dick Cheney in the summer of 2005 that OPEC oil production – and hence world output – could peak as early as 2015.

Audio interview available at the original article

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