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Commentary: Oil & Money Conference—What the CEOs and VPs are Saying

On October 20-21, the 30th Oil & Money Conference, convened in London by Energy Intelligence and the International Herald Tribune, attracted roughly 500 attendees, many from the industry press (most of them working for the conveners). Held under tight security at the opulent Intercontinental Hotel, a half-dozen oil ministers past and present plus two dozen CEOs and VPs of oil producing, service companies and other industry players shared their views.

No statements were as ground-breaking as the O&M conference two years ago, when the Wall Street Journal and others covered stark warnings by Total’s CEO Christophe de Margerie, Libya’s oil minister Shokri Ghanem and former Saudi Aramco VP Sadad al Husseini that world oil production was going to undershoot demand in the foreseeable future. But all three were present again, and all three echoed their previously-stated concerns, especially in light of the late-2008/2009 downturn in investment by a growing number of players outside of the super-major investor-owned oil companies. In fact, the majority opinion was a warning about the looming impacts of climate change decisions and project investments on prices and supplies over the next few years. A few comments from key presenters:

Optimists
Abdalla El-Badri, Secretary General of OPEC, said that among the reasons for extreme price volatility during 2008 is “…the peak oil theory, which in OPEC we don’t believe in. We know that we have a lot of resources, we can supply the world with oil for the foreseeable future.” He focused on the new level of trading volumes of paper barrels, pointing out that from 2003 to late 2008, the daily paper barrels trade increased from 900 million barrels to 3 billion barrels a day—roughly 35 times the amount of oil actually consumed per day.

Tony Hayward, CEO of BP Plc, stated that “I do think the market is driven by the fundamentals of supply and demand…Between 2004 and 2008, the growth in demand meant almost all of the world’s spare capacity had been consumed. As we came into 2008, spare capacity was probably somewhere just a bit above a million barrels a day…Declining production from existing fields, coupled with new demand, mean we’ll have to find ways of bringing on-stream nearly 50 million barrels a day of new capacity between now and 2030…The problem in meeting that goal isn’t geological. It’s political. We have the natural, human and financial resources…We need secure and reliable access to those resources. If the conditions are right, industry will invest.”

Harsh Realists
Christophe de Margerie, CEO of Paris-based Total SA, in his lunchtime talk said that, “…demand [will be] constrained by supply, and not the opposite. Demand will take time to recover, but production capacities are taking more and more time to come on-stream. It is our responsibility to be critical and vocal. It has nothing to do with being provocative. When I still hear people say we will develop more than 100 million barrels of day of production, I want them to come here, now, and tell me where is it going to come from? Because it is not possible. Now the good news: we’ve made good discoveries and the reserves will last longer. Brazil is a brilliant result. But no production from those discoveries before 2016, 2020. Well, I’m not in charge of the road shows for Petrobras. It’s great, but it’s not for tomorrow. So tomorrow we will be short of capacity.”

Jim Mulva, Chairman and CEO of ConocoPhillips, stated that “the world economic downturn has caused the largest decline in oil demand that we’ve seen in 25 years. It took approximately 8 years to get oil up to $147…but they lost more than two-thirds of that increase in about 8 months; and today, with the oil price around $75 a barrel we really don’t know whether that $75 a barrel is going to hold or not…And reserve replacement costs in our industry have more than doubled…Reserve replacement costs are not falling as quickly as the oil price [did].”

Mulva commented on gas-to-liquids during Q&A: GTL “is quite a challenge…It’s a pretty capital intensive process and you have to ask whether that’s really the right way to go. I don’t think so and I think the markets pretty well said that…I don’t remember the numbers but I do remember certainly that GTL did not compete with LNG and it’s more complex, more costly.

Paolo Scaroni, CEO of Italian oil company ENI, said that comparing a cap-and-trade system to carbon taxes, “I prefer a carbon tax because it seems to me easier to apply, more clear, something that can be implemented right now…But it is the only way in which we can push forward what I think is the real answer, short term, to the CO2 fight…which is energy efficiency. Energy efficiency should be the name of the game starting tomorrow.”

Sadad al Husseini, former VP of oil exploration and production for Saudi Aramco and now an industry consultant, started by saying “I am not a peak oil or flat oil or plateau oil [person]; I think we just need to be good engineers and try to see what’s going on…It’s the short term and the long term—you’ve got to look at both the recent volatility and the longer term direction…

“In the long term, and that’s kind of where we probably miss the boat, we are depleting reserves. The clock is ticking. The replacement rate has not been very good…If you want to push production beyond say 70 or so million barrels a day, you have to move into higher cost alternatives.

“Other sources of energy we’ve talked about this morning…is coal going to displace oil? The cost of clean coal is going to almost double the cost of electricity….Is [natural] gas going to displace oil? The top 10 gas reserves holders have about 77% of the reported gas reserves…How realistic is it to count on them as a future alternative to oil?...We get a little bit too facile with our talk about alternatives and switching and so on—there’s a problem with every source of energy.

“…as you go up to say $90 a barrel, you’re consuming 4.5% of the global economy [for oil]. That in itself is a ceiling—you cannot go indefinitely into more expensive alternatives without destroying [the] economy and therefore destroying demand. So we do have a ceiling on prices and how much expensive alternative fuel we can put into the market.

“…in spite of the fact that oil prices were going up, North American production was going down…We’ve had a very exciting development in Brazil with the subsalts, but on the other hand there’s Venezuela coming down and the rest of South America hardly moving. Another example: West African production is climbing very steadily, but Nigeria is declining; in North Africa, Libya has increased but flattened out and the others are generally flat. So the relationship between real high prices and increased production does not hold when you don’t have the resources.

“One of the projects I do with my friends in Morgan Stanley is to track global projects…Here are 273 non-OPEC projects, country by country, [and assuming] a 6.5% decline rate; at an 8% decline rate you need even more [projects]. Here are the OPEC projects including Iraq, Iran, Saudi Arabia, at a 3.5% decline rate; at a 5% decline rate means more intense production [is needed]. Combining OPEC and non-OPEC and looking at the global replacement rate, which should be around 4.5 million barrels/day per year, assuming conservative decline numbers, you just don’t have enough projects…Even if you have a very moderate increase in demand of about ½% per year, that shortfall becomes very substantial. I’m not saying this is the forecast—of course a lot has to be done to avoid this—but this is the reality as it stands today.

Nobuo Tanaka, Executive Director of the International Energy Agency, said that at their recent 35th anniversary meeting of the IEA, “certainly the issues there were the oil market, the gas security…but the most important and focused issue was climate change.” To achieve the “450 [CO2 parts-per-million] Stabilization Scenario…we have to peak out the demand of fossil fuels by 2020. This is the new finding of our 2009 World Energy Outlook.” “To achieve the 450 Scenario, we need first energy efficiency; but at the same time we have to invest in renewables, nuclear and carbon capturing and storage; and the cost as a whole is about 10 trillion US dollars between now and 2030.” In response to a question, he admitted that IEA was previously criticized for being too optimistic; “now we are criticized for being too pessimistic.”

Steve Andrews, a co-founder of ASPO-USA, was granted a press pass to cover the pricey O&M conference for the Peak Oil Review—an intriguing decision by the Energy Intelligence group.

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