Peak Oil Replaced by Oil Abundance
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Copyright © 2014 Energy Intelligence Group . All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited. FRI, JUN 6, 2014 Perspective: Peak Oil Replaced by Oil Abundance? Wait a Minute... Nordine AitLaoussine and John Gault, both energy consultants based in Geneva, provide the following perspective on the outlook for the oil market. Mr. AitLaoussine is a former Algerian oil minister, while Dr. Gault is codirector of the Oil & Gas Leadership Program at The Graduate Institute in Geneva. They jointly publish a quarterly oil and gas market outlook. "Peak oil" has vanished from public discourse, replaced by news about the North American surge of unconventional petroleum liquids produced from oil sands, shales and tight formations. Unconventional oils, we read repeatedly, are a "game changer" that will render North America "energy independent," will offset declining production elsewhere in the world, and will prevent oil prices from rising. Indeed, accepted wisdom in the industry today is that markets are oversupplied and, sooner or later, prices must weaken. Public discourse is driven by oversimplification. During the peak of peak oil popularity, writers rarely emphasized the principal caveats. Peak oil was most applicable to conventional oil in regions, like the contiguous states of the US, where past exploration drilling was dense and a long history of reservoir performance was well established and transparent. Peak oil also played down possible technical advances in petroleum exploration or production as well as price considerations. Now, seemingly, peak oil has lost its relevance in the face of "oil abundance." Yet this widely held perception is just as much an oversimplification as was the popular version of peak oil, and just as misleading. The caveats are too easily omitted. Industry analysts differ over how long the dramatic increases in US shale oil production can be extended, with some suggesting the boom could last less than a decade. An even more important caveat is that some other nations, where an everincreasing supply of conventional oil has been taken for granted, now seem unable to expand output significantly. Various oilproducing countries, including members of Opec, fall into this category. The reasons are different in each case, and are not limited to the geological arguments that underlie peak oil. Investment in incremental production capacity is inhibited by increasing costs, inadequate fiscal terms, and geopolitical and security issues including civil strife and regional separatism (Iraq); popular antigovernment demonstrations (Algeria, Venezuela); piracy and oil theft (Nigeria); collapse of central government authority (Libya); and sanctions (Iran). The unspoken assumption that Opec, with its abundant reserves, will serve collectively as the ultimate swing supplier, able to provide additional oil whenever called upon, deserves careful reexamination. Ten years ago, the International Energy Agency projected Opec production would soar to nearly 50 million barrels per day by 2020. Instead, over the past 10 years, Opec output has stagnated at an almost steady 30 million b/d while global oil demand has grown by 8 million b/d. The anticipated Opec supply growth failed to materialize, even when members were not subject to individual supply quotas. Some might argue that Opec effectively restrained production with or without quotas to maintain prices. However, most members, with the exception of Saudi Arabia, the United Arab Emirates and Kuwait, appear to be producing at capacity. Optimistic announcements of future capacity increases sometimes do not take into
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Transcript of Peak Oil Replaced by Oil Abundance
Copyright © 2014 Energy Intelligence Group. All rights reserved. Unauthorized access or electronic forwarding, even
for internal use, is prohibited.FRI, JUN 6, 2014
Perspective: Peak Oil Replaced by Oil Abundance? Wait a Minute...
Nordine AitLaoussine and John Gault, both energy consultants based in Geneva, provide the followingperspective on the outlook for the oil market. Mr. AitLaoussine is a former Algerian oil minister, while Dr.Gault is codirector of the Oil & Gas Leadership Program at The Graduate Institute in Geneva. They jointlypublish a quarterly oil and gas market outlook.
"Peak oil" has vanished from public discourse, replaced by news about the North American surge of unconventionalpetroleum liquids produced from oil sands, shales and tight formations. Unconventional oils, we read repeatedly, are a"game changer" that will render North America "energy independent," will offset declining production elsewhere in theworld, and will prevent oil prices from rising. Indeed, accepted wisdom in the industry today is that markets areoversupplied and, sooner or later, prices must weaken.
Public discourse is driven by oversimplification. During the peak of peak oil popularity, writers rarely emphasized theprincipal caveats. Peak oil was most applicable to conventional oil in regions, like the contiguous states of the US,where past exploration drilling was dense and a long history of reservoir performance was well established andtransparent. Peak oil also played down possible technical advances in petroleum exploration or production as well asprice considerations.
Now, seemingly, peak oil has lost its relevance in the face of "oil abundance." Yet this widely held perception is justas much an oversimplification as was the popular version of peak oil, and just as misleading. The caveats are tooeasily omitted. Industry analysts differ over how long the dramatic increases in US shale oil production can beextended, with some suggesting the boom could last less than a decade. An even more important caveat is that someother nations, where an everincreasing supply of conventional oil has been taken for granted, now seem unable toexpand output significantly.
Various oilproducing countries, including members of Opec, fall into this category. The reasons are different in eachcase, and are not limited to the geological arguments that underlie peak oil. Investment in incremental productioncapacity is inhibited by increasing costs, inadequate fiscal terms, and geopolitical and security issues including civilstrife and regional separatism (Iraq); popular antigovernment demonstrations (Algeria, Venezuela); piracy and oiltheft (Nigeria); collapse of central government authority (Libya); and sanctions (Iran).
The unspoken assumption that Opec, with its abundant reserves, will serve collectively as the ultimate swing supplier,able to provide additional oil whenever called upon, deserves careful reexamination. Ten years ago, the InternationalEnergy Agency projected Opec production would soar to nearly 50 million barrels per day by 2020. Instead, overthe past 10 years, Opec output has stagnated at an almost steady 30 million b/d while global oil demand has grownby 8 million b/d. The anticipated Opec supply growth failed to materialize, even when members were not subject toindividual supply quotas.
Some might argue that Opec effectively restrained production with or without quotas to maintain prices.However, most members, with the exception of Saudi Arabia, the United Arab Emirates and Kuwait, appear to beproducing at capacity. Optimistic announcements of future capacity increases sometimes do not take into
consideration realistic declines in the output of older producing fields. And many Opec members have failed to meetexpectations:
• In June 2009, the Nigerian oil minister stated that Nigeria's potential production was 3 million b/d, but the countrysupplied less than 2 million b/d in 2013.
• In mid2013, the Venezuelan oil minister announced that his country would reach 3.25 million b/d production by theend of the year, but Venezuela's December production was only 2.4 million b/d.
• Angola had planned to reach 2 million b/d during 2013, but in mid2013 the country's oil minister postponed thisgoal until "2014 or 2015." Current Angolan production is only about 1.7 million b/d.
• In 2009, when international oil companies were awarded the first postwar projects in Iraq, the country targeted 4.5million b/d of production by 2014. Current production is about 3.5 million b/d, although the country may reach 4million b/d by yearend.
Iran's oil production has long been in decline. Recent sanctions have further restricted Iran's output to about 2.8million b/d, down from an average 3.6 million b/d in 2011. The shutin of some producing wells may have causedpermanent reservoir damage, preventing an eventual return to previous production levels. While Iran has announcedplans to offer greater incentives to foreign investors in its oil and gas industry once sanctions are lifted, most oilcompanies have so far shown little interest.
Algeria's oil output has also been declining in recent years. In January, Algeria launched a new oil exploration licensinground based on liberalized terms, but investors question the security situation following the deadly attack on the InAmenas gas facility one year earlier and the highly controversial recent presidential election.
Without directly admitting so, Opec may itself have come to recognize that its upside production potential, overall, islimited. In response to questions about the impact of increasing US oil shale production on already oversuppliedmarkets, the Saudi Oil Minister was quoted as saying: "The supply of shale oil is welcome to the market. Verywelcome to the market. Actually any addition to supply in this big market is welcome."
NonOpec producers generally operate their facilities at or near capacity. Oil companies producing North Americanunconventional liquids are compelled by shareholders to earn a financial return on their investments, and cannot affordto maintain idle capacity. Consumers worldwide therefore depend on Opec to provide a rapid output surge in theevent of a supply interruption. If Opec's current idle capacity is less than assumed, and if Opec is not capable ofexpanding that idle capacity as global consumption grows, the danger of sudden price jumps will increase.
While the perception that oil markets are currently oversupplied is correct, and the nearterm prospect is for oil prices(in the absence of a supply interruption) to decline, this perception should not reinforce an uncritical belief in oilabundance. While Opec may soon focus on how to prevent a price slide, over the longer term Opec may be less ableto prevent oil prices from soaring. We must not be mesmerized by reports of oil abundance any more than we shouldhave been by popular interpretations of peak oil.
