Energy Vision 2007

W O R L D E C O N O M I C F O R U M E N E R G Y V I S I O N U P D AT E

The Future of Oil: Meeting the Challenges

Spring 2007

World Economic Forum in partnership with Cambridge Energy Research Associates

About the World Economic Forum The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)

About CERA Cambridge Energy Research Associates, Inc. (CERA), an IHS company, is a leading advisor to energy companies, electric power companies, consumers, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent objective analysis on energy markets, geopolitics, industry trends, and strategy. (www.cera.com) CERA’s expertise covers all major energy sectors—oil and refined products, natural gas, coal, electric power, and renewables—on a global and regional basis. CERA’s team of experts is headed by Daniel Yergin, Chairman, author of The Prize: The Epic Quest for Oil, Money and Power for which he won the Pulitzer Prize, and author of The Commanding Heights: The Battle for the World Economy. IHS is the leading source for the critical information and data on which the upstream oil and gas industry operates worldwide. (www.ihs.com)

About the Energy Industry Partnership The Energy Industry Partnership (IP) programme of the World Economic Forum provides the CEOs and senior executives of the world’s leading companies as well as select energy ministers with the opportunity to engage with their peers to define and address critical industry issues throughout the year. Identifying, developing and acting upon these specific industry issues is fundamental to the Forum’s drive to deliver sustainable social development founded upon economic progress.

The Energy Vision Update is published twice a year and provides in-depth analysis of energy issues identified by the Energy Governors’ Community of the World Economic Forum.

CONTENTS Executive Summary ………………………………………………………………………………………… 2 Energy Community Survey ………………………………………………………………………………… 4 Chapter 1: Introduction ……………………………………………………………………………………… 8 Chapter 2: A Critical Debate Between Two Views …………………………………………………… 11 Chapter 3: Exploring the Differences …………………………………………………………………… 14 PERSPECTIVES The Challenges of Measurement of Conventional Oil Reserves ……………………………………… 24 Peak Oil – How Quickly Must We Start to Mitigate? …………………………………………………… 25 Expanding the Definition of Oil …………………………………………………………………………… 26 How Much Oil Is Left in the Ground? …………………………………………………………………… 27 Beyond Conventional Oil and the Role of Technology ………………………………………………… 28 Chapter 4: Meeting the Deliverability Challenge ……………………………………………………… 29 PERSPECTIVES How to Postpone Peak Oil Production While Reducing the Threat of Climate Change ……………… 37 Beyond Conventional Oil – Realizing the Potential of New Technology ……………………………… 38 Peak Oil and Global Economic Uncertainty ……………………………………………………………… 39 What Is the Role of OPEC and Can It Keep Pace? …………………………………………………… 40 List of Key Contributors …………………………………………………………………………………… 41

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Executive Summary

Are we running out of oil?” This is a commonly heard question and seems to arise especially when oil prices are high. Today, the question is linked to a vigorous debate about the risk of “peak oil”. That is the point at some time in the near or notso-near future when global oil production hits its limit, begins to decline, and countries begin to shift to other energy sources. Emotions run high around the issue of future supplies because oil is so fundamental to the global economy. The world uses 86 million barrels of oil each and every day. If current demand growth rates continue, we will be using more than 100 million barrels of oil per day (mbd) by 2015. Can the oil industry continue to meet growing demand? There are two schools of thought on the answer to that question. Their argument can be summarized as “peak versus plateau”.

Two Competing Points of View Although there is a range, the “peak oil view” centers on the idea that we have exhausted half of our oil resources. Supporters of this outlook believe that we have crossed over the peak – or will do so soon – and will face a rapid decline in oil production, leading to a global shortage of oil that will, in turn, lead to massive economic disruption. This view has a primarily “belowground” focus and emphasizes the finite nature of oil resources. This perspective assumes that price, market responses, and technology will have limited impact on the ability to deliver more oil to global markets. Proponents of this view base their arguments on the methodology of M. King Hubbert (190389), a prominent American geologist. Hubbert believed that production output from an oil field follows a bell-shaped curve. That is, the decline in production – after the peak production level has been reached – will mirror, in its shape, the growth in production prior to the peak. There is a second view that is more market oriented. Although this “market-based view” concurs that oil is a finite resource for which volumes are predetermined by geology, proponents of this view argue that the signposts for a decline in oil production have not been observed. In addition, they believe that when the peak is reached, the decline in production will be gradual, following a path that looks more like an undulating plateau as the oil industry applies new technologies to access more of the ultimate recoverable reserves.

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These two views of the world of oil are fundamentally different, based on the different assumptions described above. They also lead to very different perceptions of what can be done, what needs to be done, and what should be done to ensure that adequate energy supplies are available for economic growth.

What Counts and How to Count? Geoscientists estimate the amount of hydrocarbons – oil and gas – that might be available as well as what they believe can be produced in the future. There is no universal measuring tool; nor is there a standard for what can be labeled “oil reserves”, although there is increasing convergence. Currently eight governmental and international organizations, including the US Securities and Exchange Commission (SEC), have developed reserves or resource classification systems. The “gold standard”, to which they generally all refer, is the system created by the international Society of Petroleum Engineers (SPE). Resource is the term used for hydrocarbons that are, or could be in the future, commercially produced. Reserves are hydrocarbons that can be commercially produced. There are three categories of reserves, often referred to as the “three P’s” – “proven”, “probable” and “possible”. All have a technical and economic dimension to them. Proven reserves have a 90% probability that the total commercially recoverable resources produced will equal or exceed the estimates. These are the “high confidence” resources. They are referred to as P1 or P90 reserves. Probable reserves have a 50% probability and are referred to as P2 or P50 reserves. Possible reserves – P3 – have a 10% probability that the total resources recovered will equal or exceed the estimates. Moreover, yesterday’s “resource” that could not be commercially produced can become today’s reserves, thanks to technology that allows the oil industry to explore, develop and produce oil in places that were not previously possible or to extract more than previously anticipated from a producing field. In 1982 the ultimate recoverable resources in the Permian Basin, a supergiant oil province in the United States, were estimated to be 28.5-30.5 billion barrels. The basin has steadily produced oil over the past 25 years, and yet the ultimate recoverable resource estimates have almost doubled. They are

Executive Summary

now estimated at more than 50 billion barrels. The increase is the result of both better understanding of the fields over time and technological advances. The more conservative peaking perspective mainly takes into account P1 or P2 estimates. Researchers who adhere to this viewpoint tend to limit their production calculations to conventional oil produced in conventional ways. That leads to estimates of global remaining oil reserves of approximately 1.2 trillion barrels. Proponents of the market-based view believe that oil markets will be able to adjust to changing demand requirements and deliver the proven, possible and probable reserves as well as many resources that are not currently commercially viable. Those include hydrocarbons from unconventional sources, such as Canadian and Orinoco oil sands, natural gas liquids and ultradeep water. Within 10 years, almost 40% of total productive capacity – approximately 45 mbd – will be available from these unconventional sources. This broader view leads to estimates of remaining oil resources that could be as high as 3.7 billion barrels. Peak oil advocates mainly make the case in terms of “discoveries”, arguing that discoveries are not replacing production. The market-based view argues that estimates made at time of discovery generally tend to grow much larger over time as fields are produced, knowledge is gathered and applied, and technology advances. The IHS data for “discoveries” for the period 1995 to 2003 show relatively low levels of new “discoveries”, certainly providing fuel for the alarm about the peak. On the other hand, if reserve additions are included, then the total growth of reserves in this period is about 313 billion barrels, 75 billion barrels above the 238 billion of actual production. Altogether, some 86% of the reserve growth in the United States since 1950 is the result of “additions”, not discovery.

The Deliverability Challenge The world appears to have sufficient resources to meet liquid fuels demand for decades. Thus, rather than asking “Are we running out of oil?”, perhaps the more relevant question is, “Are we running out of liquids capacity?” The answer is no, but significant deliverability challenges will need to be addressed, and the anticipated patterns of demand are not assured.The geography of production is shifting, leading to a new set of aboveground risks

for energy investors. In addition to questions of access to reserves, there are rising capital costs, political considerations, the environmental impact of extracting both conventional and unconventional resources, and expectations that oil companies can help convert oil and gas assets into long-term sustainable economic growth for host countries. A separate, but related, challenge is risk of climate change and greenhouse gas (GHG) emissions. The primary manmade source of GHG emissions is the use of fossil fuels to produce energy. Some argue that we are too dependent on a finite resource that will eventually run out, and that we should accelerate the time when we move to a lower-carbon economy. Others are concerned that if an abrupt switch to lower-carbon fuels is made to address climate change risks, the result would be a severe jolt to the global economy. Development of adequate liquid fuels – conventional, unconventional and biofuels – requires substantial investments on the part of the oil industry. Although security of supply looms large, security of demand is no less significant for those investing tens of billions of dollars to supply oil to markets. A key question arises as to whether climate change concerns mixed with security-of-supply worries might influence future oil demand patterns. Governments and societies continue to struggle with the best way to respond to environmental and climate change risks. If this uncertainty persists and governments fail to negotiate the best way forward, the climate change challenge may become more significant than concerns about peak oil. Indeed, technological development and shifts to higher efficiencies – through policies or consumer choice – may well chip away at expected oil demand growth, delaying the onset of peak oil production. The energy industry is poised to ensure that liquid fuels are accessible to markets and consumers when they are needed. However, deliverability challenges should not be dismissed. They are linked to rising capital costs, environmental costs of unconventional fuels and concerns about climate change.

Daniel Yergin, Chairman, Christoph Frei, Director Energy Industry & Strategy, Cambridge Energy World Economic Forum Research Associates

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Energy Community Survey

Figure 1 Energy Community Issue Map 2006–07: Global Issues HIGH

WEAK SIGNALS

Financial Derivatives

NEED FOR MULTISTAKEHOLDER DIALOGUE

Corruption

Cities Mobility

Visual Communication

Trade

Global/Local Tensions

Ageing

SME

Level of Uncertainty

Interest Rates

Migration

Recession

Talent

Shiite-Sunni Rift

Skill Development

Economic Flows

Commodity Prices

Scientific Literacy Innovation Environment

LOW

NEED FOR ACTION

LOW

Impact Issues Important in the Short Term

HIGH

Issues Important in the Long Term

Source: World Economic Forum, Energy Industry Partnership Programme 2006. 61111-6

Key Issues for the Energy Industry The key issues selected and their priority are based on a survey conducted with 35 CEOs of the world’s leading energy companies, 17 of whom (48%) responded. The responders were asked to rank global cross-industry challenges (see Figure 1) and issues specific to the energy industry (see Figure 2), according the degree of their impact on the industry, their uncertainty and their urgency.

The Issue Map Explained Key issues are positioned according to three parameters: • The horizontal axis indicates how large an impact the issue is expected to have on the energy sector.

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• The vertical axis indicates the degree of uncertainty surrounding an issue. • The size of the bubble indicates distance in time to when the issue becomes pressing. Immediate concerns are shown by larger bubbles, while smaller bubbles indicate issues that will become important only in the longer term.

How to Read the Issue Map • High impact/low uncertainty issues require immediate action – by industry associations, political decision-makers, etc. • High impact/high uncertainty issues would benefit from multistakeholder dialogue. • Low impact issues are either considered unimportant or they have not yet registered

Energy Community Survey

Figure 2 Issue Map 2006–07: Energy Industry Issues HIGH

WEAK SIGNALS

NEED FOR MULTISTAKEHOLDER DIALOGUE

Venezuela World Bank/ IMF

M&A: New Wave Central Asia

Fuelling Mobility

System Overstretch

Biofuels Energy Poverty

Level of Uncertainty

Terrorism

Russia EU

IOC-NOC Power Shift Fanaticism

Alternative Energy India/ China Economic Nationalism

LOW

OPEC /IEA

Carbon Economy Carbon Sequestration

Peak Oil Clean Coal

Middle East

Nuclear Power

NEED FOR ACTION LOW

HIGH

Impact

Energy Geopolitical Focus

Energy Market Focus

Issues Important in the Short Term

Energy Vision

Issues Important in the Long Term

Source: World Economic Forum, Energy Industry Partnership Programme 2006. 61111-5

on CEOs’ radar screens. Where the survey reveals sharp differences over the impact of an issue the second interpretation is more likely, in which case the World Economic Forum may seek to raise awareness. • Setting the Agenda. Issues that lay on the upper-right corner of the Issue Map define the Agenda of the Energy Governors. This agenda is balanced with respect to short- and longterm issues.

Most Urgent Issues On the industry-specific agenda, CEOs consider the aboveground risks (terrorism, uncertainty in the Middle East) as challenges requiring urgent action, similarly to the results of last year’s poll. The urgency of energy security–related issues has again outranked technology and

sustainability-related concerns such as energy poverty, alternative energy, biofuels and new technologies. Among the energy market questions, the issues of carbon economy, institutional capacity (OPEC/IEA) and economic nationalism are likely to have a high impact on the industry, whereas the outcomes of the new wave of mergers and acquisitions and the IOCNOC power shift appear highly uncertain. The carbon economy issue has grown significantly in urgency compared to last year’s results. On the global agenda, corruption has maintained its high-ranking position. The need to reconcile global business interests with local agendas as well as the challenge of attracting, honing and retaining skillful and talented manpower have been ranked as most requiring multistakeholder dialogue and joint efforts.

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Energy Community Survey

Issue Survey Questions GLOBAL ISSUES Recession ……………… Potential global downturn? Interest rates …………… Rising global interest rates Financial derivatives …… Potential international capital market crisis caused by complex financial derivatives Trade …………………… More bilateral trade agreements in the absence of successful Doha Round Scientific literacy ………… The need for greater scientific literacy among decision-makers and the general public Visual communication … Need for improved visual communication for complex problems Mobility …………………… Increasing mobility in people’s lives Ageing …………………… Demographic trends: ageing populations and falling birth rates Skill development ……… New models for education and skill development Talent …………………… Retaining talent Siite-Sunni rift …………… A potential deepening Shiite and Sunni rift Cities …………………… Growing importance of cities as innovation systems Global-local tensions …… Reconciling your global business agenda with local political agendas SME ……………………… Importance of small and medium size firms to global business Economic flows ………… Shifting global flows (capital and production) Migration ………………… Migration and national interests Innovation ……………… Creating a favourable business climate for innovation Commodity prices ……… High commodity prices Corruption ……………… Impact of corruption on innovation and investment decisions Environment …………… Consumer pressure on businesses to solve large-scale environmental issues

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Energy Community Survey

Issue Survey Questions (continued) INDUSTRY-SPECIFIC ISSUES Energy Geopolitical Focus Middle East ……………… Window of opportunity versus risks Central Asia ……………… Societal changes destabilizing the region Russia …………………… Political uncertainty affecting investment opportunities European Union ………… Over-reliance on Russian energy Venezuela ……………… Socialist Venezuela: United States out, China in India/China ……………… Competing for investment opportunities Terrorism ………………… New forms of terrorism: influence on global energy markets Fanaticism ……………… Impact of religious conflicts on geopolitics Energy Market Focus OPEC/IEA ……………… Changing challenges World Bank/IMF ………… Role in financing energy infrastructure Carbon Economy ……… Post-2012 framework Economic Nationalism … Protectionism and re-nationalization in the energy sector IOC-NOC ………………… Power shift Mergers and acquisitions

New wave

System overstretch……… Power: trend towards “system overstretch” Energy Vision Peak oil ………………… Oil peak or merely the end of “easy oil” Carbon sequestration…… Acceptable sustainable solutions Clean coal ……………… Affordable CO2-free technology Nuclear power …………… Old dogmas and new horizons Fuelling mobility ………… Infrastructure challenge Alternative energy ……… Speeding pace Biofuels ………………… Mixed blessings Energy poverty ………… Electrification for the energy impoverished

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The Future of Oil: Meeting the Challenges

Chapter 1: Introduction “Peak” is the word used to describe the top of a mountain or an inflexion point. In the oil industry, “peak” is usually considered to be the point at which production of an oil field begins to decline. But the term has taken on a larger meaning and new significance that puts it at the centre of a critical global debate. For, in this new context, it means that point in history when global oil production begins to decline and economies begin to shift to other energy sources. Indeed, the current debate is about whether that point is close at hand or further into the future. The debate is also about the long-term global production profile. Using the mountain metaphor, does the top of the mountain rise from a broad plain, with a sharp upward slope and then descend steeply after the peak has been reached? Or after reaching the top of the mountain, is there an undulating plateau – before a gradual drop to the plain on the other side is reached? That profile and the timing, whether reaching the sharp peak or undulating plateau, will determine the risk profile for the world community. The peak oil debate is, in fact, really a dialogue about the adequacy of resources – primarily oil – to fuel economic growth over the next several decades. (Although natural gas demand is currently 60% of oil, when measured on an oil-equivalent basis, its long-term future supply gets much less attention.) This peak debate is one of the most controversial issues both in the international oil industry and among the wider public that is concerned about resources and the environment. Although peak-versusplateau has been the subject of discussion for some years, recent developments are creating anxieties that have pushed the topic to the fore. • Surge in demand. In a few short years the world oil market has gone from low oil prices and a large surplus to a tight balance that has tripled prices from those of only seven years ago. This surge in demand has brought a new

focus to the adequacy of resources. Concerns rose to a new level with the “demand shock” of 2004, in which two and one-half years of what is regarded as normal demand growth were crammed into a single year. • Growing impact of India and China. The integration of China and India into the world economy and their high rates of economic growth portend dramatic, sustained long-term growth in oil demand from these countries. China became the world's second largest oil market, replacing Japan, in 2004. China’s oil demand is currently growing at the rate of 7% per year. The potential growth is highlighted by the disparity of the penetration of automobiles across countries. In the United States, for instance, there are 1,148 automobiles for every 1,000 citizens. That compares to 702 for France, 608 for Japan, 11 for India and 9 for China.* As the economies and standards of living in China and India grow, these will drive their demand for energy. • Resource competition. With the new recognition that more than 2 billion people will be demanding substantially more energy, there is a fear that commercial competition will turn into mercantile rivalries among nations for limited resources. • Energy security. Energy security has become a pervasive concern in both consuming and producing nations. This further focuses attention on the availability and adequacy of energy resources.** • “Memory”. The consequences of the oil shocks of the 1970s and the early 1980s were very severe, measured in terms of recession, unemployment, inflation and global tensions. This memory persists and fuels the current anxieties of the economic impact of a battle for resources.

*See the CERA Special Report, Gasoline and the American People. **See The New Energy Security Paradigm, World Economic Forum, Spring 2006.

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The Future of Oil: Meeting the Challenges

The peak oil debate also acts as a vortex that draws in several other critically important issues. • Global climate change and the timing to make the transition to a lower carbon future. Climate change refers to the high concentration levels of GHG emissions in the atmosphere and the impacts this will have around the world. • Adequacy, scale and timing of investments, as well as geological challenges. The need to find and develop new resources and even the ability to access and develop resources will face many hurdles. • Environmental impacts. Many of the new resources are located in fragile ecosystems. Others use technologies that require the use of extensive resources or are energy intensive. • Geopolitical risks. These risks are changing as the centre of gravity for both world oil production and energy demand shifts, leading to questions about the stability and realignment of political and economic relationships among nations. • Role and pace of technology. The debate includes discussion on whether technological development will keep up with growing demand. Although, in contrast to the 1970s, the higher prices have not led to a global economic downturn, at least so far, the continuing anxiety has led to renewed calls for energy independence and diversification in the United States and other countries. Amid greater concern about the impact of increased concentrations of GHG emissions in the atmosphere, some have begun to question whether the age of oil is nearing an end. There is no direct connection between climate change and the timing and scale of future world oil supplies. The connection is in the response to these two sets of concerns. Those most concerned about climate change want to accelerate the transition to a lower carbon future. The “peak” view reinforces that prospect with its argument about the need to accelerate the transition away from oil because of lack of availability.

The debate about “peak versus plateau” raises a number of questions. How much oil do we have left in the ground? Can it be found and developed economically and in an environmentally appropriate way? Can it be delivered to markets where and when it is needed? Is there risk to the global economy of relying on an energy source that may, indeed, be running out? Should we accelerate the search for economic alternatives to fuel our economies? Or will fears of running out prompt conflict among consumers for access to supplies? The “peak” can have a wide variety of impacts. It can accelerate a shift away from oil – even if the direction that shift would take cannot be clearly defined. It can stimulate development of new industries. It could also lead to oversized investments in alternatives and oversized expectations. If the peak eventuates, or is widely believed to be likely, it can aggravate competition and conflict among nations as they scramble to preempt supplies. It can also be used to justify other policies. For instance, Iran’s national security adviser recently explained that Iran needs its nuclear programme because “fossil fuels are coming to an end. We know the expiration date of our reserves.” The question of timing looms large because global economies are heavily invested in the current hydrocarbon infrastructure. Being too late can have very adverse consequences. Doing too much too soon would require governments and corporations to shift investment priorities in uneconomic directions that can lead to disillusionment. Either way, investment and policy decisions will have longterm implications. These decisions need to be made in an atmosphere of understanding about the scale of remaining oil resources, the associated uncertainties, the challenges that the oil industry faces in extracting and delivering those resources when markets demand them and the opportunities to expand the definition of “liquid fuels” for the transportation sector. There are other key questions, of course, which are beyond the province of this particular report, including the potential for efficiency, renewable energy and other alternatives.

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The Future of Oil: Meeting the Challenges

Yet there is also a fundamental conceptual question that haunts the whole peak-versusplateau debate. For underlying all of this is confusion over the definition of reserves, resources and reservoirs – a sense of murkiness about what counts and how to count it. The result is multiple perspectives and definitions that fail to provide the clarity needed to make critical decisions about the way forward. The purpose of this Energy Vision Update is to provide that clarity. The report is divided into three additional chapters. • Chapter 2: A Critical Debate Between Two Views. Oil continues to be one of the cornerstones to global economic growth. Therefore, it is essential to understand the key differences in the views around the question of future oil resources. Although there is a spectrum of views, a basic difference is between the primarily “belowground” resource focus of those woried about an immenent peak and the more “aboveground” risk focus of the “market view”. • Chapter 3: Exploring the Differences. Many of the key differences noted in Chapter 2

come from two questions: What counts? And how do you count it? Three issues emerge. They are understanding “discoveries” versus “reserves growth”; the shape of the decline curve (peak versus undulating plateau); and the significance of oil from conventional and unconventional sources. The chapter also presents the perspectives of five researchers who have analyzed oil resources, presenting significant differences in view on the future of oil exploration and production. • Chapter 4: Meeting the Deliverability Challenge. Although there are differences of opinion on whether we are running out of oil, there is general agreement that critical challenges lie in the ability to develop liquid hydrocarbons in sufficient quantities to meet growing demand. Five aboveground risks test the ability of the oil industry to meet that challenge: commercial opportunities, security situation, political conditions, environmental impact, and social benefits. These risks are discussed along with questions related to whether and how climate change policy choices fit into the equation. Four researchers present their views on these questions.

Ras Tanura Plant in Damman, Saudi Arabia

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The Future of Oil: Meeting the Challenges

Chapter 2: A Critical Debate Between Two Views Emotions run high in discussions about the adequacy of resources to fuel economic growth. Much is at stake. The pessimistic view, referred to as the “peak oil view”, has a primarily “belowground” focus. It believes that physical oil resources are sharply limited and already halfway to exhaustion. According to this view, between 2005 and 2015 the world will run into an oil peak with these characteristics: an inflexion point, followed by the rapid decline in oil output on a worldwide basis that will, as a curve, look very much like its buildup in production. The more optimistic view, referred to as the “market-based view”, has a more “aboveground” focus. It believes that although oil supplies may be constrained, the oil industry will be able to respond with sufficient liquid hydrocarbons to meet global demand for the next several decades. Moreover, it tends to see the major constraints as not being physical, but defined more by investment, access, politics and geopolitics. It recognizes that there can be significant constraints and risks. These two views of the world are based on fundamentally different assumptions; and they lead to different perceptions of what can be done, what needs to be done, and what should be done to ensure that adequate energy supplies are available to drive global economic growth. The two perspectives have very different risk profiles. Each argument is described below.

The Peak Oil View of the World The fundamental concern of the peak oil view is that in the very near future, world oil output will not be able to keep up with demand – and indeed will start falling while demand rises. “It is now clear that the rate at which world oil producers can extract oil is reaching the maximum level possible”, one advocate of the peak view writes. “This is what is meant by Peak Oil. With great effort and expenditure, the current level of oil production can possibly be maintained for a

few more years, but beyond that oil production must begin an irreversible decline and civilization is in trouble… It is not a question of if but when the world economy will be confronted with a major shock that will stunt economic growth, increase inflation, and potentially destabilize the Middle East. It will make the Great Second Depression look like a dress rehearsal”.* The result of the inability to meet global oil demand would be, in the peak oil view, catastrophic. “It looks as if an unprecedented crisis is just over the horizon,” writes Professor Kenneth Deffeyes. “There will be chaos in the oil industry, in governments and in national economies … The year 2000 may be the year of maximum world production, and the mathematical midpoint will be 2004 or 2005. There is nothing plausible that could postpone the peak until 2009. Get used to it”.** “A crash mitigation programme” is needed, says Congressman Roscoe Bartlett, chairman of the US Congressional Peak Oil Caucus. “A crash programme will need the total participation of the American public like we had with World War II Victory Gardens, the technological focus of the Apollo Moon programme and the urgency of the Manhattan Project.” The heart of the peak oil argument has three critical assumptions. • First, it assumes that when global oil production reaches an inflexion point, the decline in production follows the same pattern as the growth in production, forming a symmetrical profile. This assumption draws its inspiration from the late M. King Hubbert [1903-1989], prominent US geologist who in 1956 predicted a peak in US oil production and was off by only two years. Hubbert’s analytical technique is widely used to support the peak oil view. • The second critical assumption is that the world has already produced half of the global resources. There are hard and soft views on this second assumption. The classic peak oil view is that “we have consumed

*Alex Kuhlman, Peak Oil Survival Guide: Preparing for the Coming Global Crisis, www.oildecline.com/index.htm, page 1. **Kenneth S. Deffeyes, Hubbert’s Peak: The Impending World Oil Shortage, Princeton: Princeton University Press, 2001, page 10.

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The Future of Oil: Meeting the Challenges

approximately half of the world’s total reserve of about 2.5 trillion barrels of conventional oil in the ground”, with only another 1.2 trillion barrels remaining.* A modified view is that there may be more resources that “might be called theoretical oil – it may exist, but in highly uncertain and even problematic environments”.** • A third assumption is that these processes are relatively inflexible and that the working of economics – price and market responses – will be only of limited impact. Researchers who share the peak oil view argue that discoveries are getting smaller and the volumes of new oil discovered each year are not keeping up with consumption. They assert that discovery rates are falling and not keeping up with production. Both timing and impact are also significant components of the peak view, with expectations that geologically determined peak will occur between now and 2015. Colin Campbell, founder of APSO, commented in an interview that the consequences could include “war, starvation, economic recession, possibly even the extinction of homo sapiens”.*** This pessimistic view is in part due to skepticism about the potential of technological innovation to make a major difference in terms of expanding reserves or even just stemming decline. Proponents also point out that more than half of the remaining “proved” conventional oil reserves are in the Middle East, and reports of estimated reserves there do not necessarily follow the rigorous standards of the Society of Petroleum Engineers (SPE). They further argue that the resource levels reported by many exporting countries are inflated and too optimistic.

• Oil is a finite resource for which volumes are predetermined by geology. The world will eventually need to shift away from its use. • Strong demand growth can be expected for oil, particularly in Asia. • The oil industry is increasingly moving to frontier areas that are more difficult to access, technically challenging and costly. The definition of frontier continues to change, and the market-based view incorporates these changes more readily. For instance, the deepwater frontier in the l ate 1970s was about 180 metres (600 feet) of depth; today it is 3,660 metres (12,000 feet) or more. • More than half of the world’s oil resources are in countries that are part of OPEC. • Fossil fuels, including coal, oil, and natural gas, are a major source of greenhouse gas emissions. How to move towards lower carbon economies is now firmly on the international agenda. As noted above, the peak oil view believes that discovery rates are falling rapidly, and that we are now producing two to three barrels of oil for every one we find. Supporters of the market-based view would challenge that statement in two ways. First, the discovery rates are actually rising, not falling. It is the volumes that are falling. Second, although the industry is, indeed, producing two to three barrels of oil for every one it finds through exploration, those supporting the market-based view would observe that the industry is “finding” more oil in current fields through improved production methods, better understanding of the fields and continuing application of new technologies. When additions are added to discoveries, the world growth in reserves has exceeded production in recent years.

The Market-based View of the World The market-based and peak oil view of the world agree on many significant points. They both acknowledge that

The market-based view does not assume a world of endless abundance. Rather, the supporters of this view argue that the signposts

*Kenneth S. Deffeyes, Hubbert’s Peak: The Impending World Oil Shortage, Princeton: Princeton University Press, 2001, page 1. **Paul Roberts, The End of Oil: On the Edge of a Perilous New World, Boston: Houghton Mifflin Company, 2004, page 46. ***Michael C. Ruppert, “Colin Campbell on Oil: Perhaps the World’s Foremost Expert on Oil and the Oil Business Confirms the Ever More Apparent Reality of the Post–9-11 World”, http://www.fromthewilderness.com/free/ww3/102302_campbell.html, October 2002.

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The Future of Oil: Meeting the Challenges

for a decline in oil production have not been observed. In addition, when the decline comes, it will be gradual – an undulating plateau – with no sharp drop-off of supplies. This viewpoint is based, in part, on a belief that commercially available resources will continue to grow in volume in the next few decades, for two reasons. First, technology will continue to facilitate expanded output of “conventional oil”. Second, technology will enable the growth of unconventional sources, including deeper water and frontier areas that have not been previously exploited. By including these unconventional sources – Canadian and Orinoco oil sands, ultradeep water, natural gas liquids and Arctic oil, along with an estimate of likely field upgrade volumes and exploration potential – proponents of the market-based view believe that the remaining endowment of resources is more on the order of 3.7 trillion barrels, nearly three times the volumes that proponents of the peak oil view believe are available. Supporters of the market-based view also do not focus on defining a specific peak of oil production or oil reserves. They believe that identifying a peak – in terms of volumes and time period – requires an accurate knowledge of the global resource base, which in their view, is not known at the present time. Even with the best data and analytical techniques available, it may remain unknowable. They also believe that technology will almost certainly open up

new horizons, expand recoverable reserves of existing fields and improve overall recovery rates. Finally, the market-based view takes a more measured approach to the government policy actions. Because this view does not anticipate an immediate crisis, proponents tend to focus on ways that aboveground risks can be addressed and mitigated in order to meet the global demand for liquid fuels. One of the most contentious issues is the question of “what actually counts?” when geologists add up oil reserves and assess future oil production. A corollary question is “how do you count it?” In Chapter 3: Exploring the Differences, we take a closer look at the issues that cause the most confusion. Both views use history. Those with the peak oil view cite production histories of various regions and invoke the turmoil of the 1970s as the model for the instability that would follow the imminent peak. The “market-based view” observes that there have been four previous periods of “running out” peak-like views. The last was indeed the 1970s. But world production has increased 60% since then. Both peak oil and market-based proponents talk about millions of barrels per day of production and billions and trillions of barrels of reserves. But what they count – and how they count – are very different. And that is what we explore in the next chapter.

Semi-submersible Driling Rig in Baku, Azerbaijan

13

The Future of Oil: Meeting the Challenges

Chapter 3: Exploring the Differences The world currently uses nearly 85 million barrels of oil each and every day, and global demand has grown at an annual rate of 1.5% over the past decade and a half. A clearer understanding of whether production can meet this demand pace is critical for investment decisions by the corporate sector, policy decisions by governments and the overall pattern of international relations. In Chapter 2: A Critical Debate between Two Views, we identified the major assumptions that underpin two views of the future of oil – the peak oil view and the market-based view. The differences in these two views stem, in large part, from what information is used and how it is interpreted. In this chapter of the Energy Vision Update, we strive to clarify the basis for the difference in views. Many differences arise not only from what people choose to focus on, but also from confusion over what constitutes oil resources, reserves and production and how these are measured or counted.

The Challenge of Estimating Oil Resources Simply put, no one really knows exactly how much oil is left in the ground. This is a point that Peter McCabe of the United States Geological Survey (USGS) stresses in his Perspective: How Much Oil Is Left in the Ground? Geoscientists

from around the world strive to estimate the amount of hydrocarbons – oil and gas – that might be available for use by present and future generations, but it is an impossible task. The geology of oil accumulations encompasses a wide range of uncertainty. Current production levels are known and future productive capacity can be estimated. But estimating how much can be ultimately recovered is difficult and challenging and requires a good understanding of the uncertainties. This is illustrated by an analysis of the Permian Basin, one of the two supergiant hydrocarbon areas in the United States (see text box “How Resources Can Keep Growing”). It demonstrates how, in one case, recoverable resources have doubled from what was estimated in 1964. Technology and economics continue to expand the definition of what is recoverable as well. Forty years ago, for example, the technology did not exist to extract oil from offshore fields, comments Hasan Qabazard in his Perspective: Beyond Conventional Oil and the Role of Technology. Today, there are nearly 70 offshore projects generating oil, many of them in water that is more than 500 metres (1,640 feet) deep.

Common Confusing Terms Geologists use a variety of terms to define “what counts”. They also use a wide range of methodologies and models to try to determine future oil production. Three terms, in particular

Perspectives on the Peak Oil Debate The chapter includes the perspectives of five researches who have analysed the future of oil. These perspectives appear at the end of the chapter.

14

•

Roger Bentley, Visiting Research Fellow, University of Reading, United Kingdom

•

Robert Hirsch, Senior Energy Program Advisor, SAIC, United States

•

Peter Jackson, Senior Director, Oil Industry Activity, CERA, United Kingdom

•

Peter McCabe, Research Geologist, US Geological Survey (USGS), United States

•

Hasan Qabazard, Director, OPEC Research Division, Austria

The Future of Oil: Meeting the Challenges

How Resources Can Keep Growing In 1964, cumulative discoveries of crude oil in the Permian Basin were 17.6 billion barrels. Using the Hubbert Method, Richard Nehring projected that the ultimate recoverable volume of crude oil in the basin would be between 19.0 and 27.5 billion barrels. By 1982, cumulative discoveries in the basin had grown to 27.9 billion barrels – more than the previous high estimate for ultimate recovery – and projections of ultimate recoverable volumes had been increased to 28.5 - 30.5 billion barrels. By 2000, cumulative discoveries in the basin had increased to 35.2 billion barrels. Subsequent research that Richard Nehring presented at the American Association of Petroleum Geologists (AAPG) Hedberg Research Conference on Understanding World Oil Resources in November 2006 indicated that cumulative discoveries through 2005 were now 37.9 billion barrels and that ultimate recovery was likely to be between 42.7 and 51.5 billion barrels, roughly double the projections of 40 years earlier. Moreover, more than 95% of this increase had come from additional recovery from fields discovered before 1965, not from new discoveries. Source: Richard Nehring, President, NRG Associates, Colorado Springs, Colorado; Chair of the organizing committee for the American Association of Petroleum Geologist Research Conference on Understanding World Oil Resources.

– reservoirs, resources and reserves – are often used interchangeably. But in order to compare apples to apples, it is important to understand and use common definitions. Unfortunately, the meanings vary, as does their application, and the results can lead to confusion.

total reserves of the basin have been produced, although others disagree. The current peak oil debate revolves around whether the world’s oil resources have reached this inflexion point – or peak – or will reach it in the near future.

• Reservoirs are the geological formations in which oil is found.

Categories of Reserves

Even the term peak can be confusing. All oil fields reach a point in their lives when the rate of oil production begins to decline. Production may well continue for decades after that inflexion point has been reached, but the maximum level of production is rarely duplicated.

One of the major sources of confusion is the classification of oil reserves. There are currently eight governmental and international organizations that have developed reserve or resource classification systems. They are the US Security and Exchange Commission (SEC), UK Statement of Recommended Practices, Canadian Security Administrators, the Russian Ministry of Natural Resources, China Petroleum Reserves office, Norwegian Petroleum Directorate, USGS, and United Nations Framework Classification. In addition, there is the international SPE. Its reserves classification system is the basis generally used for evaluating reserves. The SPE system is the “gold standard” for defining reserves and resources, in the words of Peter Jackson in his Perspective: Expanding the Definition of Oil.

At some point the rate at which additional oil can be extracted by developing new fields in a basin is less that the rate at which already producing fields are declining. Some analysts believe that this point is invariably reached when half the

The SPE is the worldwide professional society of specialists in evaluating, developing and producing hydrocarbon reserves. Its reserves committee brings together experts from academia and research institutions, from independent

• Resources are the hydrocarbons that are today, or could be in the future, commercially produced. • Reserves are a subset of resources. The word reserves is more specific in its meaning and includes the classifications of proven, probable, and possible reserves. These are hydrocarbons that are discovered and can be economically produced.

15

The Future of Oil: Meeting the Challenges

reserves consulting firms, and from industry. They periodically review experience, the state of knowledge and the technological advances that improve understanding of resources beneath the ground. After considerable consultations, the SPE issued definitions in 1965. It has updated and revised them three times since, and is in the process of revising its guidelines yet again to take in account technology advances and changing commercial issues. It is doing this in collaboration with the American Association of Petroleum Geologists (AAPG), the World Petroleum Council and the Society of Petroleum Evaluation Engineers. The new guidelines will be released early in 2007.

The SPE defines nine categories of hydrocarbons which range from proven reserves to undiscovered, high risk prospective resources (see Figure 3). With time, many of the eight organizations are adapting, to one degree or another, to the SPE standards. Of the nine categories, the peak oil debate tends to centre around a subset of those resources that have been discovered and are the least risky to recover. These are the “Three P’s” – proven, probable and possible. All have a technical and economic dimension to them. Proven reserves have a 90% probability that the total commercially recoverable resources recovered will equal or exceed the estimates.

Figure 3 Society of Petoleum Engineers' Resources Classification System

Commercial Sub-Commercial

Discoverd Petroleum Intially-in-Place

RESERVES

Proved

Proved plus Probable

CONTINGENT RESOURCES

Low Estimate

Best Estimate

High Estimate

PROSPECTIVE RESOURCES

Low Estimate

Best Estimate

Unrecoverable

Source: Society of Petroleum Engineers. 61111-10

16

Proved plus Probable plus Possible

Unrecoverable Undiscoverd Petroleum Intially-in-Place

Total Petroleum Intially-in-Place

PRODUCTION

High Estimate

The Future of Oil: Meeting the Challenges

These are the “high confidence” resources. They are referred to as P1 or P90 reserves. Probable reserves fall to a 50% probability and are referred to as P2 or P50 reserves. Possible reserves have a 10% probability that the total resources recovered will equal or exceed the estimates. These categories may appear clear, but there is no worldwide standard either for estimating the reserves or for reporting them. The best known reserves estimates are the “reserve disclosures” that companies report to the SEC. Companies that list their securities publicly in the United States must comply with the specific set of very conservative rules set by the SEC. These SEC rules – promulgated in the late 1970s and not significantly revised since then – are very narrow in their definition of reserves that can be reported. They are based on the 1965 SPE definitions and technological status of the 1970s. They do not take into account the significant technological changes that have accrued in the years since they were implemented and that permit a much better understanding of resources under the ground. Nor do they recognize that the SPE has developed three new sets of guidelines since then, with the fourth imminent. As a result, the SEC disclosures do not provide a reliable guide to future development or global resource levels. (Revising the definitions is on the agenda for the SEC, but that regulatory agency has a host of other issues to deal with as well). These rules are based on the 1965 SPE definitions and technological and market situations of the 1970s.* In addition, national oil companies (NOCs) and companies that are not publicly held are not required to report their hydrocarbon reserves. Some of the NOCs work at world standards in their reserve estimation; others do not. Some countries may categorize proved reserves that would be considered as probable reserves in the United States, Norway and Canada. The result of these various factors is that it is impossible to add up individual estimates of reserves, using company data, to gain a reliable understanding of the world’s total oil endowment (This also holds true for natural gas).

The lack of common reporting standards or a common, publicly available data base has led to widely differing estimates of remaining oil reserves. Robert Hirsch in his Perspective: Peak Oil: How Quickly Must We Start to Mitigate? argues, “A fundamental problem in predicting oil peaking is the poor quality of, and the political biases in, world oil reserves data”. Some who are concerned that oil production may be declining rapidly worry that the NOCs may have overestimated their remaining resources, an argument that cannot be proven or disproven because the data are not publicly available. There is no one way to estimate world oil reserves. Researchers who take the most conservative approach use proven reserves that are currently commercially accessible. That leads to an estimate that the world has remaining reserves of approximately 1.2 trillion barrels. That figure excludes the contribution likely from probable and possible resources, yet-to-find resources and unconventional resources such as extra heavy oil. This approach is based on the view that estimates should be made on the basis of proved reserves only because there is no certainty that the probable and possible reserves are there. They warn about the “what ifs” – that is, what if the global market cannot deliver these probable and possible reserves. Others who share the peak oil view expand the definition of reserves to include both proved and probable reserves – the 2P – estimates, but incorporate only recoverable alreadydiscovered conventional oil, according to Roger Bentley in his Perspective: The Challenges of Measurement of Conventional Oil Reserves. Moreover, this viewpoint does not take into account some contributions from 3P reserves, likely field upgrades and exploration potential. Proponents of the market-based view believe that oil markets will be able to adjust to changing demand requirements (which over time become more elastic) and deliver the probable and possible reserves as well as many of the resources that are currently not commercially viable, at least for the next few decades. This view has more confidence in continuing technological

*See the CERA Special Reports In Search of Reasonable Certainty: Oil and Gas Reserve Disclosure, April 2005, and Modernizing Oil and Gas Reserves Disclosure, February 2006.

17

The Future of Oil: Meeting the Challenges

advance and in the ability of market signals to guide supply (and demand) responses. This perspective also leads to estimates that are much higher. The USGS, for example, estimates that the world may well have 2 trillion barrels of oil of conventional recoverable reserves remaining (see Peter McCabe’s Perspective: How Much Oil Is Left in the Ground?). CERA estimates that the number may be as high as 3.7 trillion barrels, when both conventional and unconventional resources are considered (see Peter Jackson’s Perspective: Expanding the Definition of Oil). CERA estimates that by 2016 nearly 40% of world productive capacity will come from what can be considered unconventional liquids, up from 25% in 2006. These include condensates, natural gas liquids derived from processing natural gas, oil from deepwater reservoirs, ultra heavy oil and gas-to-liquids produced from natural gas (see Figure 4). Those numbers do not include

biofuels. These varying differences – among categories of reserves and between conventional and unconventional oil – can explain part of the debate about the future of oil production.

Conventional and Unconventional Resources As already noted, 40 years ago offshore oil was considered unconventional. A relatively few years ago, Canadian oil sands (otherwise known as tar sands) were considered fringe – that is, marginally economical with a limited future. Today, they constitute 40% of Canadian’s oil production, with expectations that the volumes may grow four-fold by 2020. Yet oil sands are still considered unconventional and, therefore, are not normally represented in traditional global 2P oil reserves estimates.

Figure 4 Unconventional Liquid Components of World Productive Capacity (with shares of total liquids productive capacity)

45

38.2%

Ultraheavy Oil

40 35

31.8% Deepwater

30 Million 25 Barrels per Day 20 15

GTLs*

24.6% NGLs** 17.3%

10 Condensate

5 0

2000

2006

2011

Source: Cambridge Energy Research Associates. *Unconventional liquids as a percentage of total capacity. **Includes LPG (propane and butane), ethane, and natural gasoline derived from processing natural gas. 61111-11

18

2016

The Future of Oil: Meeting the Challenges

Oil located in ultradeep water in the Gulf of Mexico has conventional properties, but the technical challenges in its development are clearly not conventional. And yet in 2006 Chevron succeeded in a production test from the Jack field in the Gulf of Mexico through 7,000 feet of water and another four miles beneath the seabed. Farther out on the spectrum, oil shale is certainly considered unconventional and must overcome substantial research and development challenges to become part of the picture. Each decade of technological advance enables the oil and gas industry to gain a clearer picture of the hydrocarbons underground, to access them and to bring them to the surface. Technology also brings the unconventionals from the fringe into the mainstream. In the United States and Canada, for example, conventional oil production is in decline. But the total productive capacity in North America is reasonably stable because the gap from declining conventional oil is being filled by successful development of Canadian oil

sands, natural gas liquids (NGLs), and wells in the deep water of the Gulf of Mexico. Yet both oil sands and NGLs are excluded from traditional reserves estimates (see Figure 5).

Confusion Between Production Peak and Reserves Peak Much of the debate about peak oil focuses on estimates of global oil reserves and whether we have produced more than half of those reserves. In an ideal world, we would know and report global oil reserves along with annual production. That would provide a clear picture of the remaining oil that would be available to global markets. Reserves estimates continue to change over time. For example, the total ultimately recoverable resources from the Alaskan North Slope were estimated, for some years, at 9.6 billion barrels. Now, the estimates are 13.7 billion barrels – more than 40% greater. Much of the oil in deep water off Africa and Brazil and in the Gulf of Mexico was not accessible until relatively recently.

Figure 5 United States and Canada Productive Capacity to 2016 12

10

Canada Oil Sands

8 Million Barrels per Day

Canada Conventional

6 US Conventional–Rest

4 US NGLs

2

US Deepwater

0 2000

2005

2010

2015

Source: Cambridge Energy Research Associates. 61111-3

19

The Future of Oil: Meeting the Challenges

Analysts who are concerned about an imminent peak argue that once individual basins have reached peak production, their decline is almost as rapid as the climb to that peak. When a strong exponential decline is plotted against rising demand of 1.5-2.0%, the resulting graph can appear alarming. The most famous production curve is the bellshaped curve produced by the geologist M. King Hubbert. Hubbert’s work has become the foundation of the peak oil perspective. His significance is reflected in the title Hubbert’s Peak by Kenneth Deffeyes, one of the foremost advocates of the peak oil point of view, and the extensive discussion of Hubbert’s work in Deffeyes’ book. Similarly, Richard Nehring observes, “Discussion of a peak in world oil production, in both narrow technical circles and the broader public, has been dominated by one method of prediction: the method developed by M. King Hubbert in a series of articles 40-50 years ago.”* Using oil production data from the lower 48 states of the United States, Hubbert predicted the point at which peak production would be reached as well as how the fields would decline. He argued that production peaks when approximately half of the resource base has been depleted. Hubbert predicted the US lower 48 peak would occur in 1968, within two years of the actual US peak in 1970. But his estimate of peak production for 1968 was nearly 600 million barrels per year of oil lower than the actual peak production number of 3.5 billion barrels in 1970. That is, actual production of the peak was 20% higher than Hubbert predicted. The shape of the curve varies field by field and region by region, depending on the geological formation and the technology applied to maintain its production levels. That view is put forward, for example, by Michael Lynch in his analysis of 21 UK fields where peak production was more than 40,000 barrels per day. Only seven showed the sharp bell curve decline of the “peak”; the

remaining 14 showed clear-cut characteristics of the undulating plateau. The production curves of three of the latter fields – Forties, Murchison and North Cormorant – are illustrated in Figures 6, 7 and 8.** The difference between the bell-shaped curve and the asymptotic curve is crucial to the debate. The bell-shaped curve is the one that heralds the sharp decline of the “peak view”, with production falling away as fast as it went up. The other points to the slower decline of an undulating plateau – the significance of which is higher volumes of output over a longer period of time.

The Critical Issue of “New Discoveries” versus “Reserves Growth” When a new oil field is discovered, it is listed as a “new discovery”. Although these new discoveries gain the headlines, bringing production from these new discoveries to market is often a long-term effort. That effort involves extensive field development, laying pipelines, something establishing export facilities, or tying in to current pipelines and working with local communities to ensure that the development can be achieved without environmental damage and with positive social impact. It also involves experience and buildup of knowledge about how the field actually performs. When oil companies prepare their capital budgets, they allocate a portion towards exploring for new discoveries. However, that represents only a relatively small percentage of their capital expenditures. They allocate a much larger portion of their capital budget towards appraising and developing the fields they have already discovered. That is the most capital intensive part of the process. As fields and basins mature, this second type of investment may well lead to reserves growth – an increase in the estimated ultimate volume of oil that can be produced from the field. As noted earlier in this chapter, ultimate recoverable resources of the Permian Basin in 1964 were estimated to be 19-27.5 billion

*Richard Nehring, “Hubbert’s Unreliability,” Oil and Gas Journal, April 3, April 17 and April 24, 2006. **Michael C. Lynch, “The New Pessimism about Petroleum Resources: Debunking the Hubbert Model and Hubbert Modelers.” Minerals and Energy, 18, 1, 2003.

20

The Future of Oil: Meeting the Challenges

Figure 6 Production Curve: Forties Field in the North Sea 30

25

20 Annual Production

(million 15 tons)

10

5

0

0

50

100

150

200

250

300

350

400

Cumulative Production (million tons)

Source: Lynch, Michael C., “The New Pessimism about Petroleum Resources: Debunking the Hubbert Model and Hubbert Modelers.” Minerals and Energy, 18, 1, 2003. 61111-7

barrels. Forty-two years later, the ultimate recoverable resource estimates had grown to nearly 40.0 billion barrels by 2000, and today are estimated at perhaps 52 billion barrels. We are back again to the question of “what counts” – and how is it counted? The USGS has gone back and researched the relative weight of discoveries and “reserve additions.” Its conclusion is that reserve numbers determined during the initial exploration phase of a field are not a good guide to ultimate recoverable production. The USGS observes that reserves growth, including enhanced oil recovery, accounted for 86% of total additions to US reserves since 1950 and 86% of additions to reserves in the North Sea since 1985. In other words, considering discoveries alone may not be a very accurate proxy for estimating future production.

Bentley refers to the 1995 analysis conducted by Colin Campbell as a consultant using Petroconsultants’ data. This analysis of future supplies is one of the bedrocks of the peak oil view. Petroconsultants is now part of IHS, which, combining similar organizations in the United States, is now the leading source for upstream data. At the time of the 1995 study, Petroconsultants had data on 17,000 fields. Today, IHS’s databases include production histories on some 70,000 oil fields and 4.7 million wells. For future assessments, IHS focuses on nearly 23,000 of those fields. The IHS data for “discoveries” during 1995 to 2003 show relatively low levels of new “discoveries”, certainly providing fuel for the alarm about the peak. This period was characterized by

21

The Future of Oil: Meeting the Challenges

Figure 7 Production Curve: Murchison Field in the North Sea 5.5 4.5 4.0 3.5 3.0 Annual Production 2.5 (million tons)

2.0 1.5 1.0 0.5 0.0

0

5

10

15

20

25

30

35

40

Cumulative Production (million tons)

Source: Lynch, Michael C., “The New Pessimism about Petroleum Resources: Debunking the Hubbert Model and Hubbert Modelers.” Minerals and Energy, 18, 1, 2003. 61111-9

relatively low oil prices – as low as US$ 10 per barrel – and high levels of mergers and acquisitions, which focused attention on restructuring and integration. Exploration activities were not emphasized. If reserve additions are included from a combination of resource growth and new data from previously discovered fields, the total growth of reserves in this period is an estimated 313 billion barrels – which is 75 billion more than actual production. The impact of resource growth on production can be significant and is often underappreciated or even ignored. In the case of Hubbert’s analysis of production in the US lower-48 states, for example, he could not have predicted the impact of technology that had not yet been invented – nor the impact of the development of new areas such as the deepwater Gulf of Mexico. By

2005, US lower-48 oil production was some 66% higher, and cumulative production since 1970 was some 15 billion barrels greater than Hubbert predicted, representing more than 10 years of US production at present rates. Technological innovation and an expansion of exploration and production activity outside traditional areas had allowed new reserves to be “discovered” and production to be enhanced from existing fields. Yet Hubbert’s influence continues to be strong over the half century since his first article. Colin Campbell and Jean Laherrere have commented, “Predicting when oil production will stop rising is relatively straightforward once one has a good estimate of how much oil there is left to produce. We simply apply a refinement of a technique first published in 1956 by M. King Hubbert.”*

*Colin Campbell, “The End of Cheap Oil”, Scientific American; March 1998, Vol. 278 Issue 3, page 78.

22

The Future of Oil: Meeting the Challenges

Figure 8 Production Curve: North Cormorant Field in the North Sea 6

5

4 Annual Production (million tons)

3

2

1

0

0

10

20

30

40

50

Cumulative Production (million tons)

Source: Lynch, Michael C., “The New Pessimism about Petroleum Resources: Debunking the Hubbert Model and Hubbert Modelers.” Minerals and Energy, 18, 1, 2003. 61111-8

Others, however, point out that Hubbert’s analysis was limited by the fact that he was doing his work during a time of low oil prices, production restrictions by the Railroad Commission of Texas (the regulatory agency overseeing oil and gas production in the state of Texas) and relatively little technological innovation. His perspective reflected his time. “Growth in the ultimate recovery of older fields creates a back-breaking challenge to proponents of the Hubbert Method,” observes Richard Nehring. “The experience of the industry since 1970, in a different economic and technological environment, provides overwhelming evidence

that massive growth does occur … The problem we face is that of accurately predicting the resources and production of all types of liquid hydrocarbons, not simply predicting a steadily diminishing component of world oil such as the so-called conventional resources.”* This chapter explored the differences between the peak oil view and the market-based view. In the next chapter, we will examine the critical questions of the aboveground risks to delivery of oil to markets in a timely manner and the relationship between the climate change debate and the future of oil.

*Richard Nehring, “Hubbert’s Unreliability,” Oil and Gas Journal, 3 April, 17 April and 24 April 2006.

23

Perspective 1

The Challenges of Measurement of Conventional Oil Reserves by Roger W. Bentley, Visiting Research Fellow, University of Reading, United Kingdom

The amount of recoverable conventional oil in a region is given by the proven plus probable reserves, referred to as 2P reserves. Some field 2P data are in the public domain, but aggregate 2P data are held in the databases of companies such as IHS Energy, PFC Energy, Energy files and Wood-Mackenzie. Many analysts assume the amount of oil within a country is given by the proven, or 1P, reserves. This is erroneous. For countries where reserves are reported under US Securities and Exchange Commission rules, proven reserves are conservative “inventory” figures, recording only the oil that is close to market. Over time, 1P data naturally grow towards the more realistic 2P figures. But analysts who think 1P proven reserves are a meaningful indication of oil quantity mistakenly see such growth (for example, the sixfold growth in proven reserves of US onshore fields) as proof of technology accessing new oil. The proven reserves data for the big Middle East producers are, by contrast, overstated and are larger than the corresponding 2P reserves data held in the industry datasets. For the majority of countries in the world, proven reserves data are not updated regularly, and for some countries the figures stay constant for many years at a stretch. For all these reasons, proven reserves data cannot be used to forecast oil production.

Global Quantities of Oil and Gas When measured in 2P terms, the world’s original endowment of recoverable conventional oil lies probably in the 2-2.3 trillion barrel range. Of this, about half has been used. The original endowment of conventional gas is roughly the same as for oil, in energy terms. Of this, about one-third has been used. The world contains very large quantities of unconventional oil as well. Currently recoverable Canadian tar sands and Orinoco heavy oil total about 600 billion barrels. A much larger amount of these oils exists, but this will be very difficult to recover, and some is probably negative in energy terms. Likewise, the world contains several thousand billion barrels of shale oil; but again the real costs and energy balance of recovering this oil are problematic. Unconventional gas includes coalbed methane, tight gas, gas in deep brine aquifers and methane hydrates. The size and extractability of the latter are questionable.

Calculating Future Rates of Oil and Gas Supply Many analysts assess the future supply of a region’s hydrocarbon supply in terms of its reserves-to-production (R/P) ratio, calculated as proven reserves divided by annual production. This calculation is completely misleading. First, as explained above, proven reserves data are very unreliable. More importantly, production in a region goes over a resource-limited production peak well before the “end-date” indicated by the R/P ratio. Peak occurs when about 60% of what has been discovered has been produced; or when about 40-50% of the region’s ultimately recoverable reserves (“ultimate”) have been produced. This peaking occurs when production from the large early fields is sufficiently into decline that this is not compensated by production coming onstream from the later, smaller fields. Past 2P discovery data are key to predicting future production. Some 60 countries are now past their resourcelimited peak in production of conventional oil. Many are small producers, but large producers past peak include the United States, Indonesia, Norway and the United Kingdom. Russia is past mid-point, if not technically past peak. China and Mexico will soon go past peak. Some published data on apparent “reserves growth” in industry datasets are misleading. The global discovery of oil in new fields has been declining since about 1965. Detailed analysis in a number of studies, such as those of PFC Energy, Energy files, R. Miller at BP, Germany’s BGR, France’s IFP and the 1995 study by Petroconsultants (now part of IHS), shows that the global peak of conventional oil production is to be expected between about 2010 and 2015. Most of the same studies find that the expected increase in global production of unconventional oil will not be adequate to offset the global decline in conventional oil. For conventional gas, the global production peak is expected between about 2020 and 2030. This date depends on the amount of gas-carrying pipelines and ships that the world builds.

24

Perspective 2

Peak Oil – How Quickly Must We Start to Mitigate? by Robert L. Hirsch, Senior Energy Program Advisor, SAIC, United States

The peaking of world conventional oil production will be unlike any energy problem yet faced by modern industrial society. Without timely mitigation, the economic, social and political costs will be dire and unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated well in advance of peaking, because the scale of liquid fuels mitigation is extremely large. When world oil peaking will occur is not known with certainty. A fundamental problem in predicting oil peaking is the poor quality of and political biases in world oil reserves data. Some experts believe peaking may occur soon, while some think later, but rarely beyond the time required for effective mitigation. The problems associated with world oil production peaking will not be temporary, and past experience will provide relatively little guidance. Oil peaking will create a severe liquid fuels problem primarily for the transportation sector, not an “energy crisis” in the usual sense that term has been used. While greater end-use efficiency is essential, increased efficiency alone will be neither sufficient nor timely enough to solve the problem. Production of large amounts of substitute liquid fuels will be required. A number of commercial or near-commercial substitute fuel production technologies are currently available for deployment, so the production of vast amounts is feasible with existing technology. An analysis for the US Department of Energy considered a worldwide crash programme in physical mitigation – the most optimistic, limiting case. Because peak oil will present a liquid fuels problem, only liquid fuel conservation and production options were considered – vehicle fuel efficiency, enhanced oil recovery (EOR), heavy/oil sands, and CTL and GTL. Using a simplified, transparent model, the sum total of the contributions shows a pattern of delay followed by rapid build-up of impact. Mating these results with a model for world conventional oil peaking showed that worldwide crash programme mitigation must be started on the order of 20 years before the peak, which is very difficult, since the date of conventional oil peaking is not known with certainty and there may not be 20 years available for action. To determine the possible shape of world oil peaking, we examined the peaking profiles of four very large oilproducing regions, for which the period around peak oil production was not affected by war or cartel action (Texas, United States as a whole, Norway and the United Kingdom). What the related experience shows is that peaking can occur with little advance notice and that post-peak declines can be relatively steep. Although it is by no means clear that world conventional oil peaking will occur in a similar manner, the profiles do indicate what actually happened in a number of relatively free-market situations. To manage the peaking of world oil production, intervention by governments will be required, because the market alone will almost certainly not act rapidly enough on its own. The experiences of the 1970s and 1980s offer useful guides as to government actions that are desirable and those that are undesirable, but the process will not be easy.

25

Perspective 3

Expanding the Definition of Oil by Peter Jackson, Director, Oil Industry Activity, Cambridge Energy Research Associates, United Kingdom

The greatest risks to oil production growth are above ground rather than subsurface. The four subheadings below focus on reserves issues. That is only a part of the problem.

Expanding the Definition The geological habitat and composition of crude oil is complex and highly variable. Although oil is a finite resource, we still don’t know accurately how much is ultimately recoverable. With time we continue to find new resources in more complex environments. But recently, as oil has become more difficult and expensive to find and extract, companies have shifted emphasis away from conventional oils. The unconventional liquids are more expensive to find and develop and include the extra heavy oils in Canada and Venezuela, natural gas liquids that are stripped out of the rapidly expanding stream of global gas production and crude produced in ultradeep water (more than 2,500 feet [762 metres]) and more recently GTL and even biofuels have been included. Technology and economic factors have contributed to the drive towards exploitation of unconventional oils. Importantly these unconventional oils represent a huge proportion of the global oil resource base, currently estimated to be 4.8 trillion barrels. Canadian oil sands alone represent some 175 billion barrels.

Proven Reserves versus Proven + Probable (+ Possible) The classification system of the Society of Petroleum Engineers describes nine separate categories from proven reserves to undiscovered, high risk prospective resources. The peak oil debate should revolve around at least the three least risky categories of reserves which are proven, probable and possible discovered reserves. Proven reserves have a 90% probability that the quantities actually recovered will equal or exceed the estimate, probable show a 50% chance of equaling or exceeding the estimate and possible a 10% chance. The proponents of the peak theory focus on proven reserves only, which is a pessimistic view of reality. CERA considers all three as well as exploration potential. Resource calculations are imprecise, and there is no systematic global compilation of reliable estimates that is freely available. In addition, these published numbers generally refer only to conventional oils and ignore the huge potential volumes of unconventional liquids. While those with the peak oil view consider that there are 1.1 trillion barrels of proven conventional resources remaining, CERA believes that some 3.74 trillion barrels remain to be recovered, but we incorporate conventional oil (1.2 trillion barrels), field upgrades (592 billion barrels), tar sands (444 billion barrels), shale oil extracts (704 billion barrels) and exploration potential (758 billion barrels). With these global reserves and resource estimates it is important to think in terms of order of magnitude rather than absolute numbers. Different reserves estimates for an individual field can easily vary by 50%. We know the global oil resource tank is large and finite, but we don’t know yet exactly how big.

Production Peak versus Reserves Peak On a global scale we have seen a reserves peak that predates the onset of the much heralded, but so far never seen “peak” in production. Although we have likely discovered a large proportion of global resources, we should not assume that production curves will reach their peaks and fall off a cliff to zero soon thereafter. CERA believes that the global production curve will follow an undulating plateau for a number of decades before declining. Unconventional resources will begin to play an even greater role, field upgrades will continue on a massive scale with adoption of new technologies and exploration will contribute new resources for many decades to come. Our detailed field-by-field analysis shows no imminent danger of a “peak” before 2020, but we might anticipate reaching the undulating plateau during the current century. The large resource inventory discovered in the 1960s and 1970s, and the reserves/production ratio of more than 40 years at present production rates are key.

New Discoveries versus Reserves Growth In the past five years between 8 and 18 billion barrels of new resource were found annually through exploration, which is not enough to replace recent production of 30 billion barrels per year. However, this low level of success is not because of limited prospectivity, but rather because E&P companies spend a small proportion of their capital on exploration, rather focusing on appraisal and development projects during these times of high oil price. This is reflected in the high levels of reserves growth in existing fields seen in the last few years. Globally resources have been replaced in recent years. Backdating reserves growth is cosmetic and should not detract from the fact that new, previously unknown reserves have been identified in the global reserves tank.

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Perspective 4

How Much Oil Is Left in the Ground? by Peter J. McCabe, Research Geologist, US Geological Survey, United States

As a petroleum geologist I am often asked, “How much oil is left in the ground?” It is a question that is impossible to answer precisely. In addition to geologic uncertainty, the remaining amount of extractable oil depends on future prices and on future technologic advances. Reported reserves (discovered) and estimated resources (discovered and undiscovered) identify only a fraction of the global abundance of oil, based on selected criteria and subjective classification. For example, the USGS estimated the original recoverable resource base to be approximately 3 trillion barrels of oil (http://pubs.usgs.gov/dds/dds-060). By the end of 2005, 1 trillion barrels had been produced, and it would be easy to conclude that one third of the world’s oil has been produced. However, it is only correct to say that one third of the USGS assessed oil has been produced. There is a large volume over and above this amount including small oil fields, oil in unexplored or underexplored frontier basins (in regions such as the Arctic, the Indian Ocean, and offshore Australasia), oil that may be recovered from reservoirs with the application of new technologies (reserves growth) after 2025, and oil that may be extracted from oil sands and oil shales. Most of this additional volume of oil was not assessed by the USGS because it cannot be produced economically using current technologies. History, however, shows that resources regarded as inaccessible or uneconomic can eventually be produced as technological advances reduce costs. The ultimate amount of oil produced could, therefore, far exceed 3 trillion barrels. Advocates of “peak oil” reject the possibility of significant reserves growth through technological innovation and arbitrarily define a subset of the World’s oil as “conventional”, usually excluding deepwater oil, Arctic oil, heavy oils and oil sands, although it is precisely in the development of these resources that the major technological advances are occurring today. Extrapolation of production of that finite amount leads to prediction of a peak within the foreseeable future. The amount of available oil may be reduced still further because of a belief that certain countries and companies overestimate reserves and because of a reluctance to accept uncertainty in geologic assessments. Although it is probably unrealistic to hope for worldwide uniformity in calculating reserves, over the long term it is the total resource, not reported reserves, that is important. Moreover, reserves growth is clearly an important worldwide phenomenon. For example, in the past 20 years, 86% of the addition to reserves within the United States and the North Sea came from reserves growth rather than from discovery of new fields. To backdate these additions to reserves to the original time of field discovery, as peak-oil advocates recommend, serves only to deprecate the importance of new technologies in enlarging the oil resource base over time. An understanding of the global geographic distribution of oil is more critical to consideration of future energy scenarios than is the production curve of a subset of the world’s oil. Like other geologic-based commodities, oil is widespread but enriched in a small number of locations where the geologic history has been particularly favorable for accumulation and preservation. Although oil is produced in more than 110 countries, over 50% of the remaining economic oil lies within just five countries: Saudi Arabia, Russia, the United States, Iran and Iraq. This geographic concentration has profound geopolitical implications, especially if there is instability within a major producing country or disruption in the supply routes. In this regard, it is worth noting that much of the oil that was not assessed by the USGS may have a distinctly different geographic distribution. The majority of the world’s oil sands and oil shales, for example, lie within North America. Technological advances could make much of this resource economically viable. Already oil from Alberta’s oil sands accounts for 39% of Canada’s oil production and is forecast to quadruple by 2020.

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Perspective 5

Beyond Conventional Oil and the Role of Technology by Hasan M. Qabazard, Director, OPEC Research Division, Austria

The world is not running out of oil. In fact, OPEC shares the view of most analysts that for the foreseeable future energy supply will continue to rely primarily on fossil fuels, and that oil will remain the leading commercial energy source, accounting for close to 40% of energy demand over the next two decades. The reality of plentiful oil resources is evidenced by figures highlighting that estimates of ultimately recoverable resources of conventional oil continue to grow with each successive assessment, for example, from just 0.6 trillion barrels through the 1940s, rising to 2 trillion barrels in the 1960s and 1970s, up to the most recent mean assessment by the USGS and IHS Energy of 3.3 and 3.95 trillion barrels, respectively. Furthermore, since the mid-1980s the cumulative production, as a percentage of the estimated resource base, has been relatively stable at just under 30%. These increased estimates are due to new discoveries, reserves growth in existing fields and basins, the availability of improved data, knowledge expansion and new management techniques and technological advancements. It is the latter that proffers an interesting insight into the oil industry’s future as technological advances and their implementation will play an important role in meeting oil demand growth. To appreciate the future role of technology, it is important that we look to the past, as previous advances have enabled the world to increase its oil resource base to levels that would have previously been considered unimaginable. Take, for instance, where the industry stood only 40 years ago. At that time, none of the world’s offshore oil was classified as conventional, simply because it was not economically recoverable. However, in the past two decades in particular, advances in areas such as subsurface three-dimensional (3D) and four-dimensional (4D) imaging, drilling and offshore production have had a dramatic effect on upstream activity, leading to large discoveries, particularly in deep water. The application of these breakthrough upstream technologies has contributed to significant hydrocarbon resource additions through increased exploration success, improved economics and a long-term reduction in costs and expanded access to new frontier areas. This all leads directly to “looking beyond conventional”. Today, technological progress in areas such as the cost of extraction, transportation and environmental protection should allow future development of large amounts of unconventional oil. These include GTL, CTL, tar sands and heavy oil. This will, in turn, further extend the availability of oil supply. In a similar vein, technological advancements such as carbon capture and storage (CCS) with enhanced oil recovery (EOR) in conventional oil fields are also expected to increase the resource base substantially. Given the importance of seeking ways to produce oil that is cleaner and more efficient than ever before, this offers a “winwin” scenario by not only increasing oil reserves that can be accessed in mature fields – it is believed EOR can potentially recover an additional 6-15% of the original oil in place and thereby increase total production from an oil reservoir by 10-30% – but also storing carbon dioxide (CO2) and reducing emissions to the atmosphere. A key point is that technology continues to blur the distinction between conventional and unconventional oil. It is in such a sense – the process of expanding the definition of oil – that the very concept of a resource limit is regarded as highly misleading. There is no physical shortage of the necessary conventional and unconventional resources – some of which will likely be viewed as conventional in the future – to meet demand. The issue is not about availability, it is about deliverability, which also underlines the critical importance of timely investments given the long lead times and capital-intensive nature of the industry. From OPEC’s viewpoint, we are conscious of the growing complexity of energy markets in an increasingly interdependent world and are cognizant of the important role our member countries, with nearly 80% of proven global crude reserves, play. The organization is committed to ensuring that the market has a stable and secure supply of oil, at reasonable prices that are compatible with robust growth in the world economy, for developed and developing countries alike.

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The Future of Oil: Meeting the Challenges

Chapter 4: Meeting the Deliverability Challenge • What are the aboveground risks that the oil industry faces?

In previous chapters of this Energy Vision Update, we explored the critical differences of view surrounding the question of whether we are “running out of oil”. We also analyzed the issues around what constitutes oil resources, reserves and production, and how these are measured and counted.

• What role, if any, will climate change mitigation play in ensuring that global energy needs are met and that hydrocarbon resources are used wisely? • What will be the timing of investment, and what will be the political, financial and material constraints?

As noted in Chapter 2, the “peak oil” view has a “belowground” focus, projecting a relatively limited supply. The “market-based” view recognizes the geological challenges, but believes that the oil industry will be able to respond from a resource point of view with sufficient liquid hydrocarbons to meet global oil demand for the next few decades. This second view focuses on the major constraints that could affect the deliverability of those oil resources.

The starting point for the oil industry is the belowground risks. Is the oil there? Is it in significant enough accumulation to extract in commercial quantities? How difficult will that extraction be? What are the technological challenges? It’s a big and challenging part of the story. But it’s only part of the story.

The question of deliverability is critical to the debate. In addition, concerns about the potential implications of climate change, although not directly related to deliverability, have entered the discussion. Finally, there are clearly international economic implications if oil supply/ demand fundamentals become unbalanced.

In this chapter of the Energy Vision Update, we focus on aboveground risks to set the framework for the questions noted above. IOCs face five categories of aboveground risks when they are exploring, developing and producing hydrocarbons. Some, but not all, of these risks are also faced by NOCs. Any analysis that examines the future of oil needs Figure 9

Pyramid of Issues: Layers of Complexity

Social Benefits Environmental Impact Political Conditions Security Situation Commercial Opportunity

Source: Cambridge Energy Research Associates. Data source: Based on conversations with oil industry executives. The pyramid is in line with the "Energy Policy Needs" pyramid in Christoph W. Frei's “The Kyoto Protocol—A Victim of Supply Security? Or: If Maslow Were in Energy Politics.” Energy Policy, 32, 11, July 2004, 1253–56. 60804-14

29

The Future of Oil: Meeting the Challenges

to take into consideration these risks and how they can be mitigated. The five categories are described below (see Figure 9). • Commercial opportunity. The bottom layer of the pyramid – or the foundation of any project – is the commercial opportunity. Are there opportunities to find and access the oil? Is there a market for the oil at a price that is sufficient to make an economic return? Are transportation systems and refineries capable of processing the oil in place, or can they developed economically? • Security situation. The next layer of aboveground risk relates to the basic state of the host countries. Domestic security requirements are preconditions for energy companies to ensure that companies can safely develop the resources and transport the oil to market. Are the countries in a civil war or involved in regional conflicts? Are there physical threats? How secure are the supply chains from producers to consumers? • Political conditions. Geopolitics, regional politics and the degree to which institutional capacity exists or can be built provide the next layer of complexity. Is there a basis for the international cooperation and dialogue that are necessary to facilitate foreign direct investment and to strengthen the investment regime?

• Environmental impact. Although environmental and social issues are an integral part of investment decisions, questions of environmental impact are normally not raised until the commercial, security and political situations are clear. Are there viable solutions to environment impacts that are of concern to local communities, lenders and nongovernmental organizations? • Social benefits. Increasingly, companies are asked by host governments to assist with economic development. At the same time, companies face criticism that they are disrupting the lives of local citizens. Are there opportunities to improve the lives of local citizens and avoid human rights conflicts and accusations of unfair treatment of indigenous people? The remainder of this chapter looks at each of the three major questions in the context of the five aboveground risks, with a particular emphasis on commercial opportunity, political conditions and environmental impact.

How Will Shifts in Global Demand and Liquids Capacity Affect Deliverability? Global oil demand is expected to increase at an annual rate of between 1.5 to 2.0%. However, the distribution of that demand

Perspectives on the Deliverability Challenge The discussion in this chapter is based, in part, on the perspectives of four individuals who consider the role of oil in the global economy, the implications of climate change and the role of technological innovation in aboveground risk assessments. These perspectives are located at the end of the chapter.

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•

Fatih Birol, Chief Economist and Head, Economic Analysis Division, International Energy Agency, France

•

Neil Hirst, Director, Energy Technology and R&D, International Energy Agency, France

•

Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy, Harvard University, Cambridge, Massachusetts, and former Chief Economist, International Monetary Fund

•

Adnan Shihab-Eldin, OPEC’s Former Acting Secretary General and visor to Kuwait Petroleum Corporation, Kuwait.

The Future of Oil: Meeting the Challenges

Figure 10 Change in World Refined Product Demand by Region, 2005 to 2020 7 China and Other NonOECD Asia Pacific account for 45% of the increase in demand from 2005 to 2020.

6 5

Million Barrels per Day

20.1% 17.3%

4 3

11.6%

2 1 0

27.3%

7.2% 4.6%

4.5%

5.0%

2.4%

Africa

Latin Middle North Eurasia Europe America East America

OECD Asia

China Non-OECD Asia exChina

Source: Cambridge Energy Research Associates, Dawn of a New Age: “Asian Phoenix Scenario”. 61111-12

is shifting away from the OECD countries towards “emerging economy” countries, particularly China and India (see Figure 10). Over the next two years, CERA estimates that non-OPEC countries will contribute 3.3 million barrels per day (mbd) of additional capacity compared with 3.0 mbd for OPEC countries. Over the next 10 years, however, the pendulum will swing in favour of OPEC countries, which are expected to add 13.3 mbd of additional productive capacity compared with 9.2 mbd for non-OPEC countries. Adnan Shihab-Eldin, in his Perspective: What Is the Role of OPEC and Can It Keep Pace?, comments that the changing demand patterns combined with the extensive oil resources in OPEC countries lead to the conclusion that

“an inevitable structural change in oil supply is looming”. That is occurring, however, at the same time that questions arise about climate change concerns. The risk for OPEC countries is that they will invest in oil infrastructure that will not be needed. The risk for IOCs is that they will not have access to new resources. They are increasingly competing with NOCs (some with international operations) from importing countries. These NOCs often have government mandates to lock up oil resources to ensure that domestic energy demands can be met. In addition, the shifts in the geography of world liquids capacity illustrate how hydrocarbon productive capacity will be increasingly concentrated in Russia, the Caspian and Central Asia, Africa and the Middle East (see

31

The Future of Oil: Meeting the Challenges

Figure 11 Shifts in World Liquids Capacity (million barrels per day)

12.05

2.85

3.50

4.19

5.13

9.75 6.57

10.50

7.01

5.68 5.78 4.06

Canada 7.85

7.23

Northwest Europe 6.54

6.18

4.01 1.53

4.88

2.53

Russia and Others

Caspian Area 15.71 15.99

9.31 9.19

37.88

United States 12.51 12.62

7.78 8.14

11.25

34.64

8.48

Asia/Pacific

10.33 10.66

28.87 27.27

Africa

Latin America

2001 2006 2011 2016

Middle East

Source: Cambridge Energy Research Associates. Updated October 2006. 60305-8

Figure 11). With resource nationalism increasing, IOCs are also concerned that they will not gain access to resources on a competitive basis.

What Are the Aboveground Risks that Oil Companies Face? Belowground potential is the starting point for any oil exploration and production activity. Then, companies move to address the aboveground risks. Commercial opportunity is the cornerstone for all aboveground risks. Oil companies require

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access to resources, but also the technology, equipment and skilled personnel to extract and deliver the oil to market. Fatih Birol comments in his Perspective: How to Postpone Peak Oil Production While Reducing the Threat of Climate Change that “capacity additions could be slowed by shortages of skilled personnel and equipment, regulatory delays, cost inflation, higher decline rates at existing fields, geopolitics or a deliberate strategy on the part of producing countries to curb output to support prices”. Today such constraints are evident.

The Future of Oil: Meeting the Challenges

As Neil Hirst notes in his Perspective Beyond Conventional Oil – Realizing the Potential of New Technology, “The overriding questions today revolve around the technologies, prices and policies that will make the world’s vast resources economically recoverable”.

Based on a global basket of projects, CERA estimates that global offshore oilfield development costs have increased 68% over the past six years. That means, on average, any oil and gas development project started today will be 68% more expensive to complete than if the same project had begun in 2000 (see Figure 12).

Unfortunately, currently energy project developments are experiencing a “doublebubble” of rapidly escalating input costs. • The first bubble comes from higher oil and gas prices that inherently raise upstream costs because more companies compete to develop resources. The costs of industry-specific equipment such as drilling rigs and expert personnel are bid up as available capacity decreases. • The second bubble has been the significant cost increases seen in raw materials such as steel and in full utilization rates at shipyards and equipment manufacturers. This second set of increases is driven by robust global economic activity, particularly in China and other countries.

The question of commerciality – the ability to explore, develop and deliver with a reasonable return – is critical to the question of whether oil resources can be delivered on time to meet market demands. Neil Hirst argues that “even at US$ 30 a barrel, the opportunities are substantial.” He notes that the deep water and Arctic reserves, enhanced oil recovery, heavy oil and bitumen, and oil shales are all possible contributors, although – if carbon capture and storage costs are also included – some of the resources will require higher price points. Observing that “the innovation of the international oil and gas industry has been one of the greatest success stories of energy technology over the past 50 years,” Hirst says that the industry and the financial community can mobilize the

Figure 12 IHS-CERA Capital Cost Index: Rising Exploration and Production Costs for Offshore Portfolio 180 Q3 2006 167.4

170 160

Q1 2006 148.0

150 140 Cost Index 130

(year 2000 =100)

120 110 100 90 80 2000

2001

2002

2003

2004

2005

2006

2007

2008

Sources: Cambridge Energy Research Associates, Capital Cost Forum, IHS. 60609-5_1215

33

The Future of Oil: Meeting the Challenges

resources required, but public policy-makers are responsible for setting the investment framework. One of the most significant sources of new productive capacity is the ultradeep water, defined as more than 2,500 feet (762 metres). The technology already exists to pursue these projects, which were considered technically too challenging and uneconomic only a few years ago. More than 6 mbd of new liquids capacity are expected to come online over the next 10 years from these deepwater fields. Most of these additions will be in non-OPEC countries, with Brazil, the United States and Angola accounting for the largest additions, but Nigeria will also make an important contribution (see Figure 13). Other risks that companies face include the security situation, the political conditions and the environmental and social impacts of their operations. Any of these can affect the ability of the oil industry to deliver oil to markets in a timely manner at an acceptable cost. Many of the new

fields require laying new long-distance oil pipelines to link frontier areas to current markets. Building pipelines can be delayed by security issues, changes in host government tax regimes and pressures from local communities whose land and lives may be affected by the new infrastructure or who may live in the general area of the new route. Most recently, the focus has been on security and political conditions. During 2005-2006 the global oil market experienced a cumulative supply disruption of more than 2 mbd due to the aggregate impact of problems in Iraq, Nigeria and Venezuela and residual hurricanerelated problems in the United States. As noted by Birol, “Government policies, geopolitical factors, unexpected changes in unit costs and new technology could all affect the opportunities and incentives for private and publicly owned companies to investment in developing oil resources.”

Figure 13 World Offshore Liquid Capacity Expansion: Water Depths Exceeding 2,500 Feet 12

10

*Others

8 Million Barrels per Day

Nigeria Angola

6

4

Brazil

2

0

United States

'00 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Cambridge Energy Research Associates. *Mexico, Equatorial Guinea, Congo, Ivory Coast, Sao Tome, Mauritania, United Kingdom, Norway, Indonesia, Malaysia, Australia, new areas all deepwater at 2,500 feet. 60709-5_1121

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The Future of Oil: Meeting the Challenges

What Will Be the Role of Climate Change Mitigation? The final issue to be addressed in viewing the future of oil is the impact of climate change mitigation. In Kenneth Rogoff’s Perspective: Peak Oil and Global Economic Uncertainty, he comments that “in 20 years the problem of ‘peak oil’ may well be overshadowed by the problem of how to continue using fossil fuels at anything like today’s level without unacceptable environmental consequences.”

The challenge in the eyes of some is to find a way to meet the world’s demand for energy – for heat, light and mobility – while moving to a lower carbon economy. Although plans for the development of liquid fuels – conventional, unconventional and biofuels – are sufficiently advanced to meet expected demand patterns, those plans require substantial investments on the part of IOCs and NOCs within both nonOPEC and OPEC countries. Shihab-Eldin notes that “the larger uncertainty of future requirements for OPEC production complicates planning and

European Heatwave, 19 August 2003 Satellite image illustrating the change in temperatures in Europe from 2001 to 2003. The deep red across southern and eastern France (left of image centre) shows where temperatures were 10 degrees Celsius hotter in August 2003. White areas show where temperatures were similar, and blue shows where temperatures were cooler in 2003 than 2001.

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The Future of Oil: Meeting the Challenges

committing to appropriate timely investments and signifies a heavy burden of risk associated with under- as well as over-investment”. Concerns about the future of oil and climate change are intertwined. Birol argues that “governments ... can take action to temper the growth in oil demand and related emissions through policies to encourage more efficient oil use and switching to other fuels … This would have the effect of reducing the need to develop oil resources, postponing the peak in production”. For IOCs and NOCs that are investing in the exploration and development of oil resources – often unconventional and in frontier areas – clarity on climate change policies that would dampen oil demand is a critical need.With so much uncertainty about the ability of political systems to define a clear path forward for reducing GHG emissions in an equitable, economic way, this issue may well be as significant as the question of when oil production will peak. Or more so. As Rogoff notes in his concluding remarks, “Environmental risk remains perhaps the biggest source of uncertainty, including uncertainty about how governments and societies are going to respond … Unless these problems are negotiated in the very near future, peak oil may soon seem like the least of our problems”.

The Future of Oil: Meeting the Challenges raised the question of whether we are reaching a peak in oil production. In fact, the question would be better framed as “Are we reaching a peak in liquids capacity?” The answer in this case is clearly “no.” The world has both conventional and unconventional oil resources in sufficient volumes to meet oil demand for many decades. But there is a second series of questions that are equally important: • Will the oil industry be able to overcome the five sets of aboveground risks that test all new projects and that, in fact, can confront projects already under way? • Can oil companies meet the deliverability challenge through technological development of new frontier areas? • What will be the environmental impacts – both direct and indirect – of the expanded use of unconventional liquids? • How will climate change concerns – mixed with energy security-of-supply worries – influence future oil demand patterns? • Could technological development and shifts lead to higher efficiencies and sharply alter the currently anticipated patterns of demand? The World Economic Forum and Cambridge Energy Research Associates will be exploring this critical set of questions in the months ahead.

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Perspective 6

How to Postpone Peak Oil Production While Reducing the Threat of Climate Change by Fatih Birol, Chief Economist and Head, Economic Analysis Division, International Energy Agency, France

The earth’s oil resources are finite, so their production must peak one day. When that happens depends on how much oil can be recovered, technically and economically, and how quickly we actually exploit the oil that remains in the ground. The IEA’s World Energy Outlook (WEO) projects global oil production will continue to rise through to 2030 – depending on the pace of demand growth. Non-OPEC conventional oil output is expected to peak by the middle of the next decade, but OPEC conventional output and non-OPEC unconventional oil continue to grow if necessary investments are mobilized in a timely manner. There can be no guarantee that all of the investment needed to enable growth in production will, in practice, be forthcoming. Government policies, geopolitical factors, unexpected changes in unit costs and prices, and new technology could all affect the opportunities and incentives for private and publicly owned companies to invest in developing oil resources. Capacity additions could be slowed by shortages of skilled personnel and equipment, regulatory delays, cost inflation, higher decline rates at existing fields, geopolitics or a deliberate strategy on the part of producing countries to curb output to support prices. International oil and gas companies may not be able to invest as much as they would like because of restrictions on their access to oil and gas reserves in many resource-rich countries. These factors could drive up oil prices, but could also delay peak production of conventional oil. In addition, there is considerable scope for boosting output of unconventional oil, including oil sands, oil shales and GTL and CTL. Increased supply of biofuels – liquid transport fuels derived from biomass – would also reduce the need for petroleum. The WEO projects rapid growth in output from these sources, notably oil sands, GTL and biofuels. Major technological advances and faster reductions in unit costs than assumed could stimulate even more rapid development of unconventional oil and biofuels. For example, new biofuels technologies being developed today, notably ligno-cellulosic ethanol, could allow biofuels to play a much bigger role, though significant technological challenges still need to be overcome for these second-generation technologies to become commercially viable. Increased reliance on unconventional oil would lower the need for conventional oil and, again, can delay its production peak. Oil supply needs to rise to meet a projected steady increase in oil demand in the next 25 years, driven largely by developing countries. In a Reference Scenario, in which now new government polices are adopted, global oil demand rises by 1.3% per year over the period to 2030. Increased oil use is both a contributor to and a consequence of economic growth and development. Yet emissions of CO2 from the production, transportation, processing, transformation and final use of oil are projected to grow inexorably through to 2030, increasing the threat of catastrophic climate change. Emissions from fossil fuels in total are expected to grow even more and even faster, because the use of coal – the most carbon-intensive fuel – is set to grow more rapidly, while the share of nuclear power in the primary energy mix drops. Governments are not powerless to alter these trends. They can take action to temper the growth in oil demand and related emissions through policies to encourage more efficient oil use and switching to other fuels, including renewables and nuclear power. This would have the effect of reducing the need to develop oil (and other fossil fuel) resources, postponing the peak in production. It would also lower import needs in net oil-consuming countries, diversify energy supply sources and enhance energy security. WEO analysis shows that the policies that countries around the world are currently considering could lower oil use in 2030 by about 12 mbd compared with what it otherwise would be, though it would still be higher than today. This saving is higher than Saudi Arabia’s current output. In this Alternative Policy Scenario, OECD oil imports peak by around 2015 and then begin to fall; in the Reference Scenario, they carry on rising through to 2030. The good news is that, Although consumers would need to invest more in energy-efficient equipment, this would be more than offset by the reduction in fuel costs that results from more efficient oil use. The cumulative savings in the OECD import bill in 2005-2015 amount to US$ 130 billion compared with additional investment by consumers of only US$ 50 billion. There are formidable hurdles to the adoption and implementation of new policies to address energy security and climate change concerns. In practice, it will take considerable political will to push strong new policies and measures through, many of which are bound to encounter resistance from some industry and consumer interests. Politicians need to spell out clearly the benefits to the economy and to society as a whole of proposed measures. Private sector support and international cooperation will also be needed. Although most energyrelated investment will have to come from the private sector, governments have a key role to play in creating the appropriate investment environment. The industrialized countries will need to help developing countries leapfrog to the most advanced technologies and adopt efficient equipment and practices. This will require programmes to promote technology transfer, capacity building and collaborative research and development.

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Perspective 7

Beyond Conventional Oil – Realizing the Potential of New Technology by Neil Hirst, Director, Energy Technology and R&D, International Energy Agency, France

The innovation of the international oil and gas industry has been one of the greatest success stories of energy technology over the past 50 years. Can this happen again, and can new technology alleviate the pressures on the oil market over the next 50 years? The answer is, yes! – provided that the industry is given the right opportunities (see Figure 14). Figure 10 gives estimates of the cost and potential of global oil resources, including unconventional oil, from the IEA’s 2005 publication Resources to Reserves. It shows that at costs in the range of US$ 30 to US$ 60 per barrel, the potential of unconventional sources is at least equivalent to remaining conventional reserves. The industry’s investment threshold is set well below the level of current prices. But even at US$ 30 per barrel, the opportunities are substantial. The key sources are deep water and Arctic reserves, EOR, heavy oil and bitumen and oil shales. Some of these technologies have high CO2 carbon emissions, and the costs take account of the need for mitigation – for instance through carbon capture and storage – to achieve carbon neutrality with conventional oil. Realizing this potential is a huge challenge for the industry, requiring technological progress in a number of key areas. These include continued progress with reservoir definition and fluid imaging, cost reductions, advanced field management, standardization of operations, and in the ability to operate in ever deeper waters and more hostile conditions. They include technologies for safety and to protect the environment. And of course they also include the specific technologies for unconventional oil recovery, including heavy oils, bitumen and oil shales. The industry and the financial community can mobilize the huge resources that will be required provided that public policy-makers set a framework that is favourable to investment in new resources. This includes licensing, taxation, royalties and support for demonstration projects. A policy climate is also needed that ensures continued active cooperation between technology developers globally and the holders of hydrocarbon resources, including OPEC countries. There are other areas in which public policy can contribute. For instance, CO2 emission reduction incentives could foster higher recovery rates through more widespread CO2-based EOR. And governments should support key areas of basic science, such as bacterial biology, that could eventually lead to major breakthroughs. The key problem, therefore, is not the limit of geological resources. The overriding questions today revolve around the technologies, prices and policies that will make the world’s vast resources economically recoverable and turn them into proven reserves.

Figure 14 World Energy Outlook: Cumulative Accessible Oil to 2030

80 70 60 50

Oil Shales** Arctic

Economic Price 2004 (US dollars)

Deepwater

40

EOR*

30 20 Already Produced

10 0

0

OPEC Middle East

1,000

Other Conventional Oil

2,000

Super Deep

3,000 Billion Barrels

Source: IEA. * EOR = enhanced oil recovery. ** Includes CO2 mitigation costs to make CO2 neutral compared to conventional. 61111-1

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Heavy Oil Bitumen**

4,000

5,000

6,000

Perspective 8

Peak Oil and Global Economic Uncertainty by Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy, Harvard University, USA

Whether or not one believes that “peak oil” has arrived (personally, I don’t), the real challenge facing the global economy today is how to deal with the huge uncertainty surrounding future energy supplies. It is not hyperbole to say that energy risk is one of the two biggest risks to global growth and stability in the 21st century. That includes not only physical uncertainties about how much oil remains in the ground, but also technological uncertainties regarding both new and existing energy supplies, as well as political uncertainties over what kinds of risk citizens are willing to tolerate (e.g. the debate over bringing back nuclear power plants). In addition, given that policy-makers in the major energy exporting countries all have a broad range of economic, social and political problems to navigate, the risk of supply instability will always hang over the market, at least to some degree. And perhaps the most important risk of all is the huge u ncertainty surrounding global climate change and the impact of carbon fuels. Indeed, in 20 years the problem of “peak oil” may well be overshadowed by the problem of how to continue using fossil fuels at anything like today’s level without unacceptable environmental consequences. In the present, however, the good news is that global markets and the global economy have proven extremely resilient to energy uncertainty over the past 15 years. Monetary authorities have largely been able to avoid repeating the mistakes of the 1970s which greatly exacerbated the costs of the early oil price shocks. Financial markets have deepened, allowing greater diversification of risk, and many countries have become more energy efficient. A sharp supply-driven rise in global oil prices still puts a dent in global growth, say, with a 50% rise in global oil prices probably reducing global growth by between 0.5 and 1.0%. But this new consensus estimate is far below what many economists believed 10 to 15 years ago. As long as changes in oil supplies are reasonably gradual, economies today can easily learn to adapt to rises in price. Indeed, the more markets become convinced of peak oil, the faster one can expect to see advances in fuel economy and the development of alternative sources of energy. In due time, societies will also learn to adapt, with more efficient public transportation as well as more coherent strategies for developing cities and for the sharing of automobiles. What markets cannot easily handle are abrupt disruptions in the supply of energy; it is sobering to note that the oil crisis of 1973 involved only a 10% reduction in global oil supplies. A major terrorist incident or war that affected global shipping could have a far larger impact on supplies today. How well can markets handle the uncertainty of future energy supplies? Quite well, up to a point. The problem is that whereas markets can handle price uncertainty quite well, they cannot easily handle the massive geopolitical and regulatory uncertainty that surrounds future development of energy resources. Indeed, I think too much attention has been focused on the implications of oil price volatility for the industrialized countries, and not enough attention has been focused on how financial markets might be used to help mitigate the huge risks and volatility that exporting countries have to live with. It does not help that many major oil producers have been extremely reluctant to spread risk into global markets, preferring to retain the risk of energy price fluctuations rather than find ways to diversify it into world markets. Developing country, government-owned oil companies, which control roughly two thirds of proven global reserves, have been reluctant to diversify. This makes it very difficult for markets to spread risk efficiently. Developed countries also make risk-sharing more difficult by the unpredictability of their regulatory and political processes. Markets have proven that they can easily survive high degrees of oil price volatility if given the chance to function properly. It is the larger geopolitical and environmental uncertainties that we really need to worry about. As I stated at the outset, environmental risk remains perhaps the biggest source of uncertainty, including uncertainty about how governments and societies are going to respond. Will the United States belatedly recognize that global warming is a significant risk and put in place a suitable tax on carbon emissions? Better yet, will the world move towards adopting a harmonized global carbon tax, which would be far preferable to the inefficient and incomplete, not to mention inequitable, mixed quantity/price system, put in place by the Kyoto Protocol? Unless these problems are negotiated in the very near future, peak oil may soon seem like the least of our problems.

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Perspective 9

What Is the Role of OPEC and Can It Keep Pace? by Adnan Shihab-Eldin, OPEC’s Former Acting Secretary-General, and Senior Adviser, Kuwait Petroleum Corporation, Kuwait

While global demand for oil is set to continue to grow at around 1.5% per year, the structure of the demand growth has been changing – gradually, but surely. In contrast to the situation of few decades ago, it is the developing and not the OECD countries that account increasingly for most of the growth (about 80%) in the foreseeable future. The transportation sector will continue to dominate oil demand growth evidenced by the exponential growth of vehicle registration in most developing countries. Still, for decades to come, per capita consumption of oil in large developing countries such as China will remain far less than in OECD countries, pointing to a potential for continued growth beyond 2050. In all baseline scenarios, the cumulative demand increment is large and challenging, around 25 mbd by 2025. This is, nonetheless, manageable and poses no basic obstacle to the supply side for the foreseeable future. Albeit finite, and notwithstanding the “Peak Oil” noise, the conventional oil resource base is very large and sufficient to satisfy the growing world demand for many decades, aside from the vast potential of unconventional resources. The consistently rising trend over time of estimates of proven reserves and ultimately recoverable resources is likely to continue for some time. Rather than a peak, a considerable plateau many decades away is most likely, giving ample time for an orderly transition while meeting the rising needs and aspirations of developing countries. The heightened concern about climate change is a more genuine challenge to the extended use of all fossil fuels. Fortunately, EOR with CO2 sequestration is a proven commercial technology ready for large-scale demonstration applications. It is a win-win option for collaboration among producers and consumers and a win for the environment as well. With OPEC’s share of global reserves close to 80% and non-OPEC conventional oil supply growth reaching a plateau by 2012, an inevitable structural change in oil supply is looming. Over the long term, OPEC will increasingly be called upon to provide most of the incremental barrel and will assume a rising share of the expanding global oil trade. Rising Asian oil imports will increasingly be met by rising exports from the Gulf. This is the foundation of a new strategic relationship currently being forged between Asia and the Gulf across the energy supply chain, which would extend to trade and investments beyond energy, with profound global implications. OPEC has recently demonstrated anew its commitment and ability to respond both to demand surges as well as supply disruptions. Starting in 2003, OPEC quickly brought most of its sizable spare capacity (5 mbd) into the market, helping to curb price escalation beyond overdue adjustments called for by inflation and the rising cost of production. It also mobilized resources, activated plans and committed investments of more than US$ 100 billion in upstream projects that would add some 7 mbd of new capacity by 2010. Given a similar growth in non-OPEC supply, the oil market should quickly return to a more stable mode with ample spare capacity, as early as 2007. This would enable OPEC to better exercise its desirable guiding influence on prices towards a more sustainable range, likely between US$ 50 and US$ 60 per barrel for now, while reducing the risk from undesirable price increases due to non-fundamental (e.g. geopolitical) factors that could test the limit of the observed resilience of the global economy. A more demanding challenge facing OPEC is the very large uncertainty of the cumulative demand increment (40% by 2025) arising from uncertainties in the rate of world economic growth, in energy and environmental policies among major consuming countries and in the pace of technology. The larger uncertainty of future requirements for OPEC production complicates planning and committing to appropriate timely investments and signifies a heavy burden of risk associated with under-, as well as over-investment. Thus the call for a demand “road map” as part of the response to energy security is legitimate. Obviously, this isn’t about guaranteeing future demand. Rather, it is a call for more transparency, consistency and predictability in the evolving energy policies of major consumers. The way forward is for producers and consumers as well as the NOCs and IOCs and other intermediaries to engage in a constructive dialogue, make determined efforts and collaborate to reduce uncertainties and share risks. The development and future role of the NOCs and IOCs as well as the nature of their evolving relations are crucial for the success of this process and the health of the industry at large. The NOCs must continue to evolve to improve their operations, enhance management skills and seek to acquire advanced technology; some may be capable of becoming a national IOC by expanding their business activities horizontally, to other countries, and vertically to the downstream – possibly through merger with and/or acquisition of an IOC. In seeking to add value to their shareholders, the IOCs must look for new and innovative modalities for cooperation, partnerships and alliances with NOCs. Such new modalities must be customized to each country and NOC, as no “one size fits all”. Collectively, these developments would enable OPEC to fulfil its role of providing its increasing share of the more-reasonably-assured required additional capacity.

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List of Key Contributors The World Economic Forum wishes to thank those who actively contributed to this report.

Roger W. Bentley Visiting Research Fellow University of Reading

Arsene Panov Fellow, Oil, Gas and Coal Industries World Economic Forum

Fatih Birol Chief Economist and Head Economic Analysis Division International Energy Agency

Hasan M. Qabazard Director, Research Division Organization of the Petroleum Exporting Countries

Christoph W. Frei Director, Head of Energy Industries Word Economic Forum

Kenneth Rogoff Thomas D. Cabot Professor of Public Policy and Professor of Economics Harvard University

Robert Hirsch Senior Energy Program Advisor Science Applications International Corporation (SAIC)

Susan Ruth Senior Director, Head of Global Oil Research Cambridge Energy Research Associates

Neil Hirst Director, IEA Office for Energy Technology and R&D International Energy Agency

Adnan Shihab-Eldin Senior Advisor Kuwait Petroleum Corporation

Peter Jackson Senior Director, Oil Industry Activity Cambridge Energy Research Associates

Daniel Yergin Chairman Cambridge Energy Research Associates

Peter J. McCabe Research Geologist, US Geological Survey US Department of the Interior

Contact Details Energy Industry Community of the World Economic Forum For further information, please contact: Christoph Frei Director, Energy Industry & Strategy Tel.: +41 (0)22 869 1313 Fax: +41 (0)22 786 2744 [email protected]

The Energy Governors Community of the World Economic Forum consists of 30 top executives of the world's leading energy firms. The community identifies the key issues that are relevant to its industry, discusses them with thought-leaders and translates them into pragmatic actions that are in line with the World Economic Forum's mission statement: Commited to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.

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