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Despite Gulf disaster, deepwater oil is all we have left

The race is on: can we extract the last remnants of Western oil from such unlikely places as the ocean floor before the global economy picks up enough to test out the hypothesis that supplies have already peaked?

Never mind the ongoing environmental and economic carnage in the Gulf of Mexico, rapidly reaching Biblical proportions – a poisoned sea allegedly spewing toxic rain across the US which, if whipped up by a hurricane, just might lead to a mass exodus from an entire seaboard – the industry is frantically promoting its right to continue with deepwater exploration.

And never mind that a single accident on a single well can be enough to bring the world’s third largest oil company to the verge of insolvency – BP’s problems are such that the British Prime Minister reportedly had to lobby Barak Obama for clemency – the majors are so desperate for oil that it’s a risk worth taking.

An insight into this level of need was given at the Fortune Global Forum in Cape Town, which ran June 26 – 28 to essentially hitch a ride on World Cup soccer media coverage and “demonstrate issues and opportunities in the developing world.” According to an item in the Guardian newspaper, Shell: deepwater drilling will go on:

Royal Dutch Shell’s boss, Peter Voser, insisted that today it was not possible to satisfy the world's growing energy demands without drilling for oil in deep-water reserves, despite the ongoing environmental disaster in the Gulf of Mexico.

At a conference in South Africa, Voser defended the oil industry's push into deeper oil reserves and said Shell would continue to play its part, even as a tropical storm threatened to disrupt BP's efforts to clean up oil off the coast of Louisiana.

"Given the rise in the population and the rise in the developing world of energy needs, we will have to develop those resources in deep waters, so my expectation is that we will go forward with it, but it will need some changes," Voser told the Fortune Global Forum in Cape Town.

BP is currently spending $100 million per day on its Gulf of Mexico oil spill response which has so far cost $2.65 billion. It has had to set aside set aside $20 billion in an escrow fund, as the company market value tumbled by around 50 per cent. And yet it remains hopeful of picking up more deepwater operations off the coast of North Africa, according to the Guardian:

It appears BP will be given the go-ahead to drill in deep-water sites off the coast of north Africa. The head of Libya's National Oil Company said today that the "accident" in the Gulf of Mexico would not mean that BP lost its contract to drill for oil in the Mediterranean Sea.

"Accidents happen all the time. If an air crash takes place, we don't stop air traffic," said Shokri Ghanem. "So we have to continue but we take this step to learn more lessons."

In its March 20 Strategy Presentation document, published a month before the Deepwater Horizon disaster, BP outlined its commitment to deepwater oil. “Expanding deepwater” was cited among its “key sources of growth” beyond 2015.

And that’s pretty much the way rival oil producers see it. The future is offshore, for all its attendant risks. Right now there is a scramble to drill in Arctic waters off the Canadian Coast, not to mention Alaska – without regard for the fact that, bad as the Gulf of Mexico oil leak is, an Arctic leak is inaccessible for most of the year.

In addition, much industry excitement followed this week’s announcement of new reserves on the UK continental shelf, 110 miles east of Aberdeen. From the BBC:

EnCore Oil said the Catcher prospect is thought to hold up to 300 million barrels of oil, and further investigations could add to this.

It would make Catcher among the largest discoveries since the billion barrel Buzzard reservoir off Aberdeen in 2001.

EnCore - whose shares rose sharply - said the find was "exceptional".

Clearly, the world’s oil companies are only searching for oil in the depths of the ocean because that’s the last place available to search. The easy-to-obtain oil is gone. Anyone looking for official confirmation of just why deepwater is so important to us all of a sudden could take a look at the International Energy Agency’s June report, Medium-Term Oil and Gas Markets 2010. Although an exercise in studied blandness that was greeted with mild derision by many with an interest in peak oil, it contains an interesting aside about dwindling Opec spare capacity and subsequent market volatility. From the IEA’s press release:

Under higher growth, even with ongoing energy efficiency improvements, oil demand increases by an average of +1.2 mb/d annually (1.4%), reaching close to 92 mb/d by 2015. Oil demand recovers to pre-crisis 2007 levels again by 2010.
Effective OPEC spare capacity in this scenario begins to decline again as soon as next year, reaching 3.6 mb/d by 2015. While new OPEC capacity should come on stream in 2014, we anticipate a tightening global balance, with surplus capacity falling below 5% of global demand. This could lead to more jittery markets ahead, after what has been a prolonged period of relative price stability over the past year.

This has been expanded on in a June 28 Bloomberg item, Oil Price Swings to Worsen as Spare OPEC Capacity Shrinks: Energy Markets. This states: “Swings in oil prices may widen over the next five years as OPEC's shrinking spare production capacity increases traders' concern about supply shortages."

It cites Opec stating idled capacity is vital to “avoid a repeat of the price swings of the past two years, when oil slumped from a record $147 a barrel in July 2008 to $32 in December of that year.” But the declining spare capacity is due to the ongoing decline in non-Opec production:


OPEC, supplier of 40 percent of the world’s oil, pumped 29.4 million barrels a day in May, with capacity of another 5.5 million barrels idled, according to data compiled by Bloomberg. The group’s spare capacity was as low as about 2 million barrels a day in July 2008, when oil prices peaked, before tumbling as the global recession crimped energy consumption.

Spare production capacity will drop as supplies from outside the group fail to keep up with demand, according to the IEA. The agency estimates world oil usage will rise 6.4 percent by 2015 to 91.93 million barrels a day, while output, excluding OPEC crude, will increase 3.7 percent. That means the world will need more of the group’s oil to meet demand.

“There is good OPEC spare capacity today that should get whittled down as demand increases over the next few years,” Ian Taylor, chief executive officer of Vitol Group, the world’s biggest independent oil trader, said at a conference in London June 24. “The big issue is what the demand increase is going to be. Most people would feel that the market is unlikely to fall but could rise.”

This has geopolitical implications. When Opec spare capacity drops to 3 million barrels a day, any disruption in supplies from “a producer such as Iran or Nigeria” will have an immediate global impact.

But then, that’s the essence of peak oil – market volatility, a dependence on the world’s most unstable regions, and increasing pollution as really rather untenable reserves are exploited.

And putting it all together, it's difficult not to conclude that oil has already peaked, or is very close to doing so. The major oil producers are acting as if that's the case.

What do you think? Leave a comment below.

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