No real alternative to oil: Rise in demand seems unavoidable

By Matthew Saltmarsh

International Herald Tribune, France

During the early 1930s, when oil prospecting in the Gulf was in its infancy, George Lees, chief geologist for the Anglo Persian Oil Company, proclaimed that he would drink all the commercial oil that might be discovered in Bahrain.

In recent years, Bahrain has produced around 185,000 barrels a day - modest by regional standards, but not easy to drink.

The story resonates with those who are optimistic about the prospects for future oil supply.

Energy demand is surging as robust growth in developing economies offsets slower demand in the West. At the same time the scientific warnings are becoming ever starker over the global warming caused by more carbon emissions from fossil fuels.

Interest in alternative, sustainable energy sources has never been stronger.

Yet, despite accelerating investment, the output capacity of these energy forms remains barely more than embryonic. Fossil fuels, reliable and accessible, will continue to provide more than 90 percent of global commercial energy needs to 2030, according to the Organization of Petroleum Exporting Countries.

Leo Drollas, an executive director at the Center for Global Energy Studies in London, shares the assessment. "Oil will be the world's most important energy source for some time," he said. "Many times we hear that it's the end of oil, it's the end of the world. It's never happened."

Oil provides about 40 percent of the world's primary energy, according to both OPEC, the exporter's cartel, and the International Energy Agency, in Paris, which advises consumer governments.

Another 20 percent comes from natural gas, with the remainder coming mainly from coal, with relatively minor inputs from nuclear, biomass, hydro-power and other renewable sources.

By 2030, oil's share in the energy mix will barely have declined, to 36.5 percent, according to OPEC. Similar forecasts have been made by Washington.

"Hydrocarbon Man," wrote Daniel Yergin in "The Prize," a history of oil published in the early 1990s, relies on oil for transport, power, textiles, industrial products and even fertilizers used to grow food.

In July, the International Energy Agency forecast that global oil demand would rise by an average 2.2 percent a year to 2012. Production slowdowns, it said, could lead to a supply crunch as OPEC's spare capacity dwindled.

Looking farther ahead, the U.S. Energy Information Administration, in its international energy outlook published this year, predicted a 58 percent rise in oil consumption from 2004 to 2030, to 118 million barrels per day. To feed consumption, it projected that production would increase by 34 million barrels per day over the period.

Demand is being led by transportation, factories in developing countries and U.S. consumers. Energy consumption in less-advanced economies should grow 2.6 percent a year through 2030, the energy administration forecast. In the developed world, where consumption growth fell last year for the first time since the early 1980s, energy use is projected to grow 0.8 percent a year.

There is a caveat to such projections: China, which has leapfrogged Japan to become the second largest user behind the United Sates, heavily subsidizes oil - as does India. Demand could moderate if those governments should decide that their consumers must pay more.

With that in mind, gauging the remaining viable life span of the world's oil reservoirs is one of the most vexing questions in energy policy.

"You can arrive at any number of estimates," Drollas said. "What counts is not estimates but what's extracted. And here, factors like investment, economics, recovery rates and technology come in."

"Reserves" are usually classed as oil in a reservoir that can be extracted at a specific assumed cost.

Estimates of global proven reserves are constantly revised; for example 157 billion barrels at the end of 1954 became 1.317 trillion barrels as of January, according to Oil & Gas Journal. At current rates of extraction, those would last 42 years, Drollas said.

According to the journal, 56 percent of proven reserves are in the Middle East. Since 2000, the largest net increase has been in Canada, with the addition of 174 billion barrels from oil sands. Iran and Kazakhstan have also had upward revisions.

"It's not that the oil's not there," said Paul Stevens, professor at the University of Dundee in Scotland. "It's whether there's the investment to get it out. The issues are geopolitical and economic."

The largest reservoirs, or "super giants," are the cheapest to develop, in terms of cost per barrel. But the last true super giants were discovered in 1967 and 1968, according to a paper by Robert Hirsch, Roger Bezdek and Robert Wendling that has become seminal to "peak oil" theorists, who argue that reserves will soon peak at a maximum production rate, and decline thereafter.

The 2005 paper, "Peaking of World Oil Production" collated estimated dates for the peak, ranging from last year to beyond 2025. It concluded that government intervention to slow demand was required, "because the economic and social implications of oil peaking would otherwise be chaotic."

Peak oil theory is controversial. A study released last November by Cambridge Energy Research Associates, a U.S. consultancy, estimated the remaining oil base at 3.74 trillion barrels, well above peak theorists' estimates.

There have been significant recent discoveries, in Kashagan and Tengiz in Kazakhstan, Angola, Brazil, Rajasthan and the Gulf of Guinea.

But, as the easiest oil reservoirs have been found, the major oil companies have had to invest in increasingly inaccessible sites, like the Arctic Ocean, or in expensive forms, like shale.

The scarcity of rigs, other equipment and engineers, alongside the nationalism in producer countries like Venezuela and Russia, and the scramble for deals by the state oil importers in China and India, have all combined to create a sense of an industry on the edge.

Still, "this is the fifth time that the world is said to be running out of oil," said Yergin, the chairman of Cambridge Energy. Each time, "technology and the opening of new frontier areas has banished the specter of decline. There's no reason to think that technology is finished this time."

Although the drawdown on reserves should make for a more expensive barrel, and oil's climb toward $100 per barrel has appeared to add weight to the argument, prices tend not to follow consensus for long. Fundamentals of supply lead prices for a while, then economics or geopolitics takes over.

Many current oil bulls may forget that prices were below $10 a barrel as recently as 1999, when the Asian financial crisis crimped demand. The world was awash in oil, reports said at the time, and several hundred million barrels of oil were said to be "hiding," waiting for prices to rise.

"The truth is, no one really knows where prices are going," said John Hall, of John Hall Associates, a British energy consultancy. "People who predict $100 are talking the market up."

Stevens, of the University of Dundee, said the most likely scenario in the next five to 15 years was for oil to stay above a floor of $60 a barrel. Ultimately, that will trigger a demand response, as the price trims consumption in China and India and as biofuels win market share. At that point, the floor might be tested.

In April, a UBS economist, Jan Stuart, estimated a long-term price of $50, below which oil would fail to yield returns that would encourage investment in production capacity growth.

HSBC has a similar long-term forecast. Its analysts, Paul Spedding and David Phillips, have just raised their 2010 forecast to $55 from $47, which "should preserve oil's competitive position in the energy stakes, slowing competition from natural gas and coal." "It should also be sufficient to meet the financial needs of most OPEC countries," they said.

Within the exporter group, there are differences on pricing strategy. Those with large reserves, especially Saudi Arabia, want crude to remain competitive. But the majority are keen for prices to stay above $50 as their own consumption - mostly heavily subsidized - expands and they become increasingly reliant on oil and gas revenue to feed budgets swollen by development and demographic pressures.

UBS estimates the "breakeven" price for major producers in a range from $23 for Kuwait to between $50 and $55 in Venezuela, where production costs are high, and Iran, which has a big population relative to production and reserves.

Whatever the price, the role of OPEC is in flux, altered by unconventional resources and the emergence of Russia and Mexico as major global suppliers. According to the Energy Information Administration in Washington, the OPEC producers' share of world oil supply fell to 41 percent by 2004, from 52 percent in 1973.

According to the Oil & Gas Journal, Canadian oil sands now represent 50 percent to 70 percent of reserves that are not off-limits to international oil companies because of government restrictions on operators. Canada is a welcoming and stable host - but production is expensive and twice as energy-intensive as normal oil extraction because of the energy needed to separate the bitumen from the surrounding sand.

Will other fuels to step in to meet demand?

According to estimates by Goldman Sachs, nonconventional fuels like oil sands and shale, ethanol and biomass liquids, coal and natural gas will meet 3.5 percent of demand by 2015, up from 2.8 percent in 2006, and the share could rise to 10.6 percent by 2030. That is a considerable change, but not enough to plug the oil wells.

In recent decades, more processes have emerged to synthesize liquid hydrocarbons from natural gas and coal. There is no shortage of supply - 65 years of proven gas reserves and 150 years for coal, compared with 40 years for oil, according to BP - but it means using one high-emission fossil fuel to create another.

After oil, coal is the No. 2 source of energy. Growth is driven mainly by developing countries; every week to 10 days, a coal-fired power plant opens in China. But coal combustion needs rail, water and power lines, and it also produces more carbon dioxide per unit of energy than oil from conventional sources.

Projects that convert natural gas to petroleum products, like Shell's Pearl project in Qatar, have proved more complex and expensive than planned. The same is true of so-called coal-to-liquids, although analysts suggest that this may be a feasible option for China, given that country's vast coal reserves, modest capital cost assumptions and soaring demand for oil.

In terms of renewable sources, there have been bold steps by governments, including an EU plan to generate 20 percent of all EU energy from renewable sources by 2020.

The largest nonfossil energy source is biomass. Liquid fuels from biomass - mainly ethanol - have grown but still contribute only about 1 percent of the energy provided by oil. Wind and solar energy produce about 1 percent of the world's energy, a share that U.S. government forecasters predict will rise modestly.

Hydro power, which supplies about 2 percent of world energy, is not likely to grow significantly, outside of China and other developing Asia-Pacific areas. Nuclear power contributes about 6 percent of energy, and could expand its share if concerns over safety, security and waste disposal can be overcome.

In all of these areas, there will be advances. But squaring the needs of global economic growth with the imperative of curbing global warming will also depend on major long-term changes in consumption behavior.

Meanwhile, oil's pride of place looks assured. Prices will rise and fall, reserves will run dry and be discovered. But the thirst will continue, and will continue to be quenched.

Energy: a Special Report
A two-part series looks at the prospects for oil, and its alternatives . For more, read Energy, Part Two, Wednesday, October 31 at www.iht.com