Broad investment could ease emerging energy crisis

As the gap between supply and demand threatens to push fuel prices higher, energy efficient strategies, exploration programmes and improved developments in synthetic oils could mitigate the impact


It was anyone’s guess. Tensions in Nigeria, Benazir Bhutto’s assassination or a report that claimed the Organization of the Petroleum Exporting Countries (OPEC) might fail to meet its share of global oil demand by 2024. Just three of the many explanations offered up when oil peaked at $100 per barrel in January. In truth, no one knew for sure.

OPEC, the group of nations responsible for about 40 per cent of world oil supply, chose to rebuff claims of an imminent crisis, even though January 2, 2008, represented a low point. Oil costs had tripled since 2004. At the 146th (Extraordinary) Meeting of the OPEC Conference on December 5, 2007, in Abu Dhabi, United Arab Emirates, members did note ‘with concern’ that prices were volatile. The Conference acknowledged geopolitical developments were contributing factors.

But it insisted market tightness was, in major part, the responsibility of market players, ‘exacerbated by non-fundamental factors, including the heavy influx of financial funds into commodities and speculative activity in the markets’.

Having evaluated the market, including the overall demand and supply projections for the year 2008, in particular the first and second quarters, the Conference insisted that market fundamentals had effectively remained unchanged. The market was continuing to be well supplied, the members agreed, and with commercial crude stocks described as at ‘comfortable levels’, the Conference convened. Production has remained constant, yet unchanged, post January 2; as has the OPEC position.

Supply and demand
Heavy price falls followed in January, but traders warn of further runs at $100 in 2008. Some are predicting $200 by 2010. Despite OPEC’s optimism, the long term concern remains the same – the real issue is supply and demand.

Although shorter term fears in the market during the first part of 2008 mostly related to instability in Iran and Nigeria, by the end of January traders were looking to Europe, rather than the Middle East and Africa, where their real focus was on Vienna.

The OPEC Conference had agreed to convene an Extraordinary Meeting in the Austrian capital, on Friday, February 1, 2008, in case ‘necessary measures’ were required to maintain production in balance. Consumer nations called on OPEC for an increase in supply, and The International Energy Agency issued a statement on January 3, 2008, claiming that more oil production was necessary. But it was not a lone solution.

“$100/bbl may be just a symbolic figure but it is a strong reminder that consumers and governments have to implement measures that improve energy efficiency,” warned the agency. Reiterating the need for investment in efficiencies, IEA Oil Analyst David Martin added: “Governments have talked about energy efficiency a lot but not much has happened. “$100 oil is a clear signal that the market is tight. Either we have to get more production or consumers will have to use less.”

Recession and depression?
The IEA’s stark message came just three weeks after energy experts met in London to warn a Parliamentary group that the UK government was failing to recognize how oil and gas depletion could undermine efforts to mitigate climate change. Fears abounded that cheap coal would be used to fuel the country’s furnaces.

Speaking at the All Party Parliamentary Group on Peak Oil, Jeremy Leggett, Executive Chairman of Solar Century, Britain’s largest solar energy company and a government energy adviser, called on the government to enact an urgent contingency study into the prospect of declining world oil reserves. Leggett warned that failure to address oil depletion would lead to ‘a shock to the global economic system that is capable of taking us not just into the next recession, but into a depression in the way that the events of 1929 did’.
Chris Vernon, an oil analyst and commentator for The Oil Drum website, echoed the warning.

Several speakers at the meeting on December 5, 2007, claimed world oil production had reached a plateau, and that terminal decline was likely to set in before 2015. John Hemming MP, Chair of APPGOPO said: “If the government fails to act, the economic, social and environmental consequences are likely to be dire.”

New discoveries
While debates over demand, fuel alternatives/efficiencies and production costs continue, upstream developments within the oil industry have not been insignificant. The world’s second largest discovery in the past 20 years occurred at Brazil’s Tupi field, in November, 2007. Estimated recoverable reserves could reach eight billion barrels.

Galp Energia – owner of a 10 percent stake in Tupi – climbed to a record in Lisbon trading amid reports production may deliver one million barrels of crude a day. Galp’s shares more than doubled to a market value of €15.8bn.

Oslo-based Rocksource announced on January 8, 2008, that production targets for the year had been met from its US subsidiaries, exceeding 2,000 barrels of oil equivalent per day. Two days later, Swiss-based Manas Petroleum stated that a resource evaluation in north-western Albania had assigned 2.987 billion barrels of oil with 3.014 trillion cubic feet of associated gas.

Upstream investment
Despite the successes, oil suppliers in general are struggling to increase production. Investment is increasingly being seen as the panacea for the supply/demand conundrum. While some experts (Ernst & Young 2008 Global Oil & Gas Industry Forecast) predict an even more cautious approach to upstream spending in 2008, others suggest more substantial, untapped oil and gas reserves could be realised.

India – with its unprecedented growth (alongside China’s) fuelling the global oil and gas demand – is among those nations pushing to develop new energy resources. Mr M.S. Srinivasan, India’s Union Secretary for Petroleum and Natural Gas, issued a stark warning while addressing delegates at New Exploration Licensing Policy-VII road show, in Mumbai, India, on January 8.
Crude oil prices could reach $150 a barrel within two or three years, he said, and therefore the Government intended to put more efforts into oil exploration and production.

As Asia’s third largest oil consumer, the country remains fearful that soaring crude prices will curb its record economic growth. Attempts are ongoing to attract major companies such as Exxon Mobil and Chevron to invest their specialist knowledge and expertise to explore the remotest regions.
But the government is not alone in seeking to develop resources. India is competing with countries such as Nigeria to attract global explorers to search in deep waters and formerly inaccessible districts.

Several hundred experts and delegates attended the 7th International Conference & Exposition on Petroleum Geophysics, in Hyderabad, over three days from January 14-16 to discuss new upstream strategies. Supported by Society of Exploration Geophysicists USA and European Association of Geoscientists and Engineers Netherlands, the theme was: Energy Security: Exploration, Exploitation & Economics.

“This was a unique opportunity to present and share the benefits from technical experiences, achievements and advances made by fellow professionals,” said Apurba Saha, President of the Society of Petroleum Geophysicists, India. The Union Secretary for Petroleum and Natural Gas, Mr M.S. Srinivasan, stated at the conference that the Government would decide within a fortnight on a moratorium for oil exploration.

Poor infrastucture
The statement followed a request made by major oil companies to extend deadlines regarding delays in exploration. The problem was a shortage of rigs for exploration. The IEA believes poor infrastructure is an issue affecting energy resources worldwide. The agency is confident large amounts of untapped oil and gas remain available, but it fears access is limited when utilising aging infrastructure in areas of high demand.

Chronic new project delays and cost inflation mean significant delays in consumer delivery. Others are in agreement with the IEA assessment that more investment is required. Latest analysis by the IMF suggests that supply is lagging demand growth because of the increasing technological and economic challenges for oil production.

The IMF predicts a prolonged price surge will have an effect of curtailing demand—especially in the United States, by inducing greater substitution into other energy sources and by increasing incentives to conserve energy.

But tight market conditions are expected to persist and possibly intensify, assuming strong GDP growth continues in the emerging markets of India, China and others.

China’s growing economy is believed to be the most important factor in the oil price rise over the past four years, with India not far behind. Although global figures have been revised for 2008, GDP remains strong, and is likely to intensify pressure on demand whatever happens in America.

Gas to liquids in 2008
The demand issues will increase focus on synthetic fuels this year. Research and Markets, the world’s largest market research resource, has announced the addition of a report: Analyzing Gas to Liquids Market – 2008 1st Edition, to its portfolio. Major international oil companies (IOCs) such as BP, ExxonMobil, Royal Dutch Shell continue to investigate options in the gas to liquid market. South African national oil companies PetroSA remains among the most active in its production. Global LNG demand is now expected to reach more than 500 bcm/year by 2015 and 635 bcm/year in 2020.

The International Energy Agency estimates that European imports of gas from Africa and the Middle East (mainly in the form of LNG) will at least quadruple by 2030. As for long term predictions regarding crude oil? A finite source that will one day run out. Beyond that we are all guessing, even the Middle East.