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Home / Issue Archive / 2008 / November #11 / Don’t Panic! Asia May Yet Stabilize Demand

№ 11 (November 2008)

Don’t Panic! Asia May Yet Stabilize Demand

Recently, the chief economist of the International Energy Agency (IEA) said that larger emerging markets could make up for the losses in oil purchased by developing nations in 2009.

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Countries such as India and China may well fend off recession and continue their growth patterns. If this happens, not only will demand remain at current levels, it may increase according to the IEA’s Chief economist, Fatih Birol.
“If those countries continue to consume oil as much as over the last couple of years they may easily make up losses coming from OECD countries,” Birol told Reuters in an interview on the sidelines of the World Eocomic Forum.
“If those countries don’t fall into a recession and I don’t think they will, we may be able to see some growth in 2009 and therefore we may need to increase production in order to supply the market,” he said.
There is no ready-made answer to the fundamental question, “When do wells dry out?” Many predictions by experts never come true, and so far no one has succeeded in finding out “the average” formula between a pessimistic and optimistic approach. 
According to President and CEO of ARAMCO, the Saudi State-owned oil company, Abdallah Jumah, there are still 4.5 billion barrels of oil in the world, and this amount will suffice for another 140 years, provided the consumption rate does not increase. “The world has consumed only 18 percent of the oil stock,” he claims, denying rumors about world oil reserves running out. According to experts’ estimation, the volume of renewable oil reserves in the world varies between 3 to nearly 4 billion barrels. If the consumption rate goes up by 2 percent annually, starting from the current 85 million barrels per day, by 2070 the oil will run out.
According to the Chairman and CEO of ExxonMobil Corporation Rex Tillerson, the demand for oil will rise by 50 percent in the next decade. Yet, Jumah asserts that new technologies will enable finding enough new oil reserves to add up another billion barrels to the world oil stock within 25 years.
G8 energy ministers  acknowledged the need to increase the efficiency of energy systems and considered the possibility to invest more in new technologies.  At a recent meeting of G8 energy ministers in Aomori, a city in the North of Japan, the main topics of discussion were devoted to the problems of oil and gas markets, investments in the energy sector, power security and climate change. It is worth mentioning here that 11 countries-participating at the meeting share approximately 65 percent of the total world energy consumption.   
That’s the practical side of the matter. As for theory, opinions differ radically. For example, BP Chief Economist, Christof Rühl, believes that available proved oil reserves will enable meeting the world’s demand for at least another 40 years. “The forecasts persist in saying that oil will run out soon. Yet, new fields are discovered all the time,” he said. Taking into account resources still “sitting” in the ground, one can feel pretty sure that oil would last for a long time. The term “reserves” implies the amount of oil or natural gas that could be recovered using all available methods and technologies, while the term “resources” means a cumulative potential. Thus, the world’s “oil future” depends on the possibility to transform resources into new reserves. According to study made by Energy Watch Group, an independent surveying agency, oil shortages may be experienced in the forthcoming years. Experts predict that daily oil production worldwide, which amounted to 81 million barrels per day in 2006, will shrink to 58 million barrels per day by 2020.
In the last 30 years, the oil market has changed dramatically. State-owned petroleum companies of oil producing countries manage over 90 percent of the world’s reserves. This gives them a great deal of influence on the price of oil.   Large Western energy concerns, on the contrary, are heading towards a high tech specialization. Even though they benefited from a high price on crude in the past, they have to focus on hard-to-reach pools.
The International Energy Agency (IEA), for instance, is of opinion that the world oil production peak is not something that has been reached and left behind. “We don’t share the view about reaching oil production peak,” announced the IEA Deputy Executive Director William Ramsay at the Oil and Gas Summit of Commonwealth of Independent States held in Paris last spring.
Although China’s demand for oil seems to be the focus of attention, the domestic demand of the Middle East countries is not a lesser issue. Last year, Saudi Arabia, the United Arab Emirates, Iran, Kuwait, Iraq and Qatar decreased oil production by 544,000 barrels per day. At the same time, their domestic demand grew by 318,000 barrels per day.  According to industry analyst Adam Robinson, today the domestic demand in the exporting countries is the main factor to affect the growth of the world’s demand for oil. He expects the region to account for nearly 40 percent of the world’s growing demand for oil next year.
According to Bill Farren-Price, the Director of Energy Department in Medley Global Advisors, lack of natural gas is one of the reasons that cause domestic demand for oil in the Middle East to grow. It is remarkable in summer when electric power consumption grows. Certain producers, e.g. the UAE, hold back some of the natural gas to enable oil production, thus decreasing gas production even more.
Nevertheless, analysts say there is a good reason to be optimistic: according to Adam Robinson’s estimates, in the next three years, 65 sets of equipment for exploitation of deep oil pools will be manufactured, as compared to 10 made over the last five years. That equipment will enable development of the most promising fields in Brazil, Australia, West Africa and in the Gulf of Mexico.
There is still another reason to be optimistic. President of Azerbaijan Ilham Aliev announced that the resources of Azerbaijan will last for at least another 100 years. He particularly stressed that Azerbaijan was to produce 50 million tons of oil in 2008 and intended to meet the target figure of 60 million tons per year in the future.
However, representatives of the Total Oil Group were not so optimistic, believing world oil production will reach its maximum by 2020, mostly due to geopolitical reasons. The company assumes the daily limit will be 100 million barrels per day.  Total representatives announced an earlier and more pessimistic date in comparison with other experts’ forecasts. At the same time, IEA predicts oil production at 103 million bpd in 2030 – and even 116 million barrels per day – against  today’s approximate of 87 million barrels per day.
Total suggests demand for oil will increase by 1.2  percent annually between 2005–2030, mainly because of fast-developing countries. However, the demand “will be limited by the offer, so there’ll be no other way but to save energy.” Prospected oil reserves in the world, according to Total, presently add up to 1,000 billion barrels. Allegedly, there are another 200 billion barrels to be prospected in the future. As a result of improved waste management and recycling technologies, the extra 300 billion barrels could be obtained. Like other experts, the French Total Oil Group representatives say that oil is located in places that are hard to get to, and practical use of heavy oils is quite complicated and power-consuming.  Total confirms its decision to develop a nuclear power program and “clean coal” technologies.
Europe is heading towards a shortfall of natural gas by 2015, declared William Ramsay at the summit. In his opinion, Gazprom by that time will be unable to meet the growing demand of the EU. Gas supplies to EU constitute 84.8 percent of all Russian export, and that is 26.3 percent of the total gas volume consumed in EU. The Russian Ministry of Natural Resources has already made a statement that natural gas production will be increased in Russia to 800-900 bcm by the year 2020, making up for the growing demand from Europe.
Gazprom was skeptical of Ramsay’s claims. It announced a plan to be producing 650-670 bcm of gas by 2020. Russia consumes about 450 bcm. Europe (excluding former Soviet countries) – about 520 bcm.
Strangely enough, the German Institute for Economic Research also doubts Russia’s ability to meet the growing global demand for natural gas and oil. “Despite the fact that Russia is the second largest oil producer, it’s only seventh in terms of proved reserves volume. At the current production level, these reserves will have run out in about 22 years,” point out authors of the research. They assert that “a similar but less serious” situation exists in the Russian natural gas sector where reserves are limited by 75-year period. “The fact that the Russian export is growing more slowly than it is required to by the energy strategy does not affect energy supplies to Europe for short- and mid-term contracts. But as for long-term plans, there can be shortfalls in supply, also due to the competition between Europe and other potential consumers, such as China,” says the report.
In the collective opinion of experts making their living by well-paid forecasts, Russia should expect some problems with energy carriers initially, due to insufficient investment in the energy sector under the circumstances when “unsatisfactory political conditions” stand in the way of foreign capital investments. Secondly, Moscow cannot reduce the domestic need for energy, which is stimulated by low prices and supported by massive subsidizing.
The Arctic Ocean’s oil and gas fields are the biggest hope of both Russia and the world. The UN experts believe there can be found some 140-180 billion tons of hydrocarbons in the offshore zone. However, it requires development of latest technologies to exploit reserves in severe northern climate.
According to some scientists’ estimations, announced at an oil conference in Houston, 69 percent of gas deposits are located in the Russian Arctic. Russia has not claimed its right to most of the area yet, but it can start exploiting the North without waiting for the UN commission’s verdict on the borders of the continental shelf. 
Increase of oil production in the countries outside OPEC will be “very disappointing” this year due to a decline in production in Russia and Mexico, reported early in summer Chief of the U.S. Department of Energy Information Administration Guy Caruso. The reason being a serious fall in oil production in Mexico and an unexpected reduction in Russia. The Department predicted a raise in volume of oil production in the countries outside OPEC by 600,000 barrels per day in 2008. And the latest forecast announced early this year suggested a 900,000 bpd growth as a background. Late in May, Pemex, a Mexican petroleum company, informed that oil production countrywide will go down below 3 million barrels per day. As some experts note, Mexico is running out of oil, and if nothing is done to intensify exploration, the country can turn into a fuel importer within a decade. There are two things about the Mexican problem. Firstly, its reserves are mainly located offshore in the Gulf of Mexico and are made available only through the use of highly sophisticated deep drilling equipment. Secondly, certain articles of the Constitution do not allow the country to buy the required technologies. 
As for Russia, following the top-management’s orders, Russian oilmen are learning to process associated gas, which earlier was flared away, causing the loss of nearly $13 billion per annum. If, thanks to the latest technologies, the associated gas will be successfully extracted and processed, then the RF budget is sure to get a considerable inflow.
The volume of prospected oil reserves in Russia is classified information. Yet, nearly every day brings some good news about new “wet” exploration wells that promise a considerable hydrocarbon production rate. Imperial Energy, for instance, made a positive announcement regarding their reservoir discovery in Kiev-Egan License Block on the eastern bank of the Ob River. In the course of drilling of a vertical well #361, reservoir sandstone was found at 2,278.3 meter depth. The well is now being tested and yields 1,575 barrels per day without any stimulation or pumping. LUKOIL and Gazprom also found something containing oil and gas condensate. Russian and British shareholders of TNK-BP are having a hard time trying to divide a big gas field that TNK-BP discovered near a place called Kovykta. Besides, the Russian technologies keep pace with those of other countries worldwide. In early summer, there was “The Global Energy 2008” Awarding ceremony at the 12th Economy Forum in St. Petersburg. Russian Academician Edward Volkov and Canadian Professor Clement Bowman received 30 million rubles for their joint work on synthetic oil generation. Equally, an Academician Oleg Favorskiy was awarded the grant for development of gas-turbine installations. So, the Russian “hydrocarbon kingdom” fares not too bad, and there’s nothing to dramatize, despite gloomy predictions from abroad.
Who is right, after all? To get some insight, one has to recall old forecasts. Pessimists predicted a pending exhaustion of oil reserves back in the 1970s, from the times of oil crises – so far, their fears have not come true. Dr. King Hubbert, Shell geologist and a world authority on the issues regarding oil reserves reduction, predicted in 1956 that oil production would have grown in the States to its maximum by the early 1970s, and since then it should be gradually declining. At that time, his forecasts seemed contradictory and dubious, but the history proved fairness of his arguments.
Michael Lynch from DRI-WEFA company is one of the few analysts whose predictions, on the whole, prove true. In the work he has published, on the former calculations analysis, Lynch points out the mistakes of his earlier fellow analysts: use of inadequate information and methods of analysis. According to him, one of the main miscalculations of Hubbert’s followers was taking the existing world oil volume as a constant figure. In fact, Michael Lynch believes, as infrastructure and technologies of oil production develop, the volume of obtainable oil reserves also grows, and quite significantly, too.
Technological optimism is the key point in the argument between pessimists and optimists: whether new technologies will enlarge the volume of oil that can be reached. “No,” say the pessimists. In the opinion of Dr. Defeyes, oil industry has already spent billions of dollars on innovations and it’s hard to imagine today any “new” technology that would radically affect oil production volume. However, in the optimists’ view, the peak of the innovative revolution, a real breakthrough in oil production, is still far ahead. The current technologies still allow extracting of only 30-35 percent of total value from a reservoir. Optimist analysts expect technologies allowing for extraction of 50-60 percent of total reserves volume to appear within the next ten years. In the opinion of IEA experts, in case development of new technologies gets a proper financial backing, the peak of world oil production can be avoided for the next 20 years. Certainly, it will require substantial funding: in accordance with IEA’s calculation, in the oil producing countries outside OPEC alone, $1 trillion investment has to be made within the next decade.
Oil consumption also depends on a technical progress that enables a more successful operation of the existing fields, a better processing and more efficient use of oil. A horizontal drilling technology, for instance (when drilling is not only done downwards but sideways as well – the so called “sidetracking”, or, “extended reach drilling”), that allows for extraction of up to 50-60 percent of oil from the reservoir instead of 35 percent available with conventional techniques. If such innovations are developed and put to practice, then oil consumption can remain on the same level, or even go down a little. Besides, there are a number of promising technologies that allow making artificial oil, for instance, out of fowl feathers.
Speaking of energy source alternatives, the continental part of the USA alone, with its 12 states where the wind is quite strong, has a potential for hydrogen production by means of a wind power that is compatible, in terms of scale, with the volume of oil production of all OPEC countries including the region of Persian Gulf. 
The world hydrocarbon map is very complicated and ambiguous. Oil prophets are not always objective when explaining it. Total offer in the oil market can hardly cover for all the need. Still, the fact remains: oil reserves worldwide are not unlimited, and if most of the developed countries can satisfy their needs provided there isn’t a serious rise in demand – others cannot. China and India, for instance, as their economies develop and they change their means of transport, will have to import still more and more of the “black gold”. And here is a paradox: the Chinese change the bicycle for the Rolls-Royce while Albion swaps from a personal car to public transport, or “reinvents the wheel”, turning to bicycling.
Oil can be substituted in some areas. Thus, coal, gas and atomic power can be used for generating electricity. Wind mills can also be built, though this is largely symbolic. Every five weeks they introduce power generating plants in China that are equal to the whole British wind power development program, and 80 percent of those new plants operate on coal. Apart from that, as a fuel for vehicles and airplanes, oil cannot be substituted.
There are as many forecasts as there are experts. However, it is a well-known fact that the global society should get rid of the habit of wearing “black gold”-rimmed glasses, and invest petrodollars, petrorubles and petroeuros in development of the latest technologies in order to renew what has previously been a non-renewable energy source.
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