Energy Security

[Dayuhan]

As far as supply is concerned, yes, I'm more optimistic than you are. I strongly suspect that the Santos basin and the recent Gulf discovery are the minimal tip of a very large iceberg. It is only in the last few years that there has been any incentive to look for "deep oil", the process is very complex and very time consuming, and only a very small number of areas with potential have seen systematic exploration. I think there's a whole lot more out there. We've only just begun to look.

I also think there will be a whole raft of new technologies emerging for getting more oil out of existing deposits. Right now the rule of thumb is that only 20-30% of a given deposit is recoverable, and I think that's going to change. Again, there was little incentive to develop those technologies in the face of a glut and perceived glut that persisted up until a very few years ago, but if the price of oil stays high, that changes the incentives radically. You put a few hundred billion dollars underground, there's going to be some real effort put into getting it out.

The development costs will be very high, but as long as oil stays in the $70-120 band the numbers still work out.

Again, the problems - and there are very large ones - lie more on the political and financial factors. The technology for finding and extracting new reserves is in the hands of the oil companies. The new exploration is very expensive and the oil companies will not invest without assurances of return on investment. Many countries with potential reserves are reluctant to make deals with oil companies.

In some areas we are seeing these problems addressed: the GCC countries in particular have led the way in developing win-win relationships between national oil companies and oil majors. Of course some level of political stability is essential. Some countries that have been driven by nationalist impulses in the past (think Mexico, Indonesia, and eventually Venezuela) will be forced by financial necessity to take a more pragmatic approach. It is in the interests of Western governments to promote such deals, but unfortunately "big oil" stands only slightly behind "wall street" in the demonology of anti-corporate sentiment, and in many places official support for oil companies is seen as politically unacceptable, even when the national interest coincides with the private interest.

Again, the danger of the excessive focus on absolute supply is that it distracts from desperately needed efforts to resolve the political and investment constraints on further exploration and production.

[Bill Moore]

I also think there will be a whole raft of new technologies emerging for getting more oil out of existing deposits. Right now the rule of thumb is that only 20-30% of a given deposit is recoverable, and I think that's going to change. Again, there was little incentive to develop those technologies in the face of a glut and perceived glut that persisted up until a very few years ago, but if the price of oil stays high, that changes the incentives radically. You put a few hundred billion dollars underground, there's going to be some real effort put into getting it out.

No disagreement on the political and financial being the primary long poles in this tent, but I'm not as confident as you are that the technology currently exists, and this is not a financing friendly economy at the moment. However, let's assume energy demands overweigh political and financial issues and that the technology is developed. We still live a world where we have "the rise of the rest", and that means India, China and a lot of other nations will have an increased demand to sustain their growth. Not sure punching a few more soda straws seven or more miles deep into the ocean will meet that demand.

Other issues, if oil prospects for the U.S. look better in our backyard, why would western oil companies invest in places like Nigeria? What impact will that have on their economy and subsequently their security and our security interests?

[Dayuhan]

No disagreement on the political and financial being the primary long poles in this tent, but I'm not as confident as you are that the technology currently exists, and this is not a financing friendly economy at the moment. However, let's assume energy demands overweigh political and financial issues and that the technology is developed. We still live a world where we have "the rise of the rest", and that means India, China and a lot of other nations will have an increased demand to sustain their growth. Not sure punching a few more soda straws seven or more miles deep into the ocean will meet that demand.

There would have to be a whole lot of new holes being drilled.

One of the keys to managing the medium-term energy future is keeping oil prices high. That will have impact on both the supply and demand sides. High oil prices will call up new supply and will lead the development of new technologies, if they are sustained. It won't happen overnight, and if high prices are seen as just another risk-driven spike, they accomplish nothing.

On the demand side, if you look at energy use per unit of GDP, you see very quickly that India and China in particular are exceedingly inefficient users of energy. That's because the infrastructure that underlies their current growth was laid down during the 90s oil glut. Sustained high oil prices will force a redirection of development... would the US have developed its personal transport economy and its energy-intensive ways if oil had been at $100 a barrel from 1950-1975? Not likely. If oil stays expensive, you will see concerted efforts by these countries to move in non-oil directions, out of self interest. I suspect we're going to see a surge of nuclear and coal construction in China in the next decade. Greenpeace will have fits but the Chinese don't care, nor do they have to deal with the NIMBY situation.

One of the most critical energy policy objectives I can think of for the next decade, counterintuitive though it may seem, is to keep oil prices up.

Other issues, if oil prospects for the U.S. look better in our backyard, why would western oil companies invest in places like Nigeria? What impact will that have on their economy and subsequently their security and our security interests?

If the US won't the Chinese will.

As we've both mentioned, the impact of political risk on potential for investment recovery - particularly as the size of the needed investments grows - is going to be a major problem, probably as great or greater than the issues of absolute supply. If risk is high enough not even the Chinese will invest, and once they are burned a few times (it will happen, given the way they are managing their business now) their risk tolerance may shrink a bit.

Another of the great energy policy challenges of the next decade will be to work out arrangements that will allow the governments of the nations that have the oil to make deals with the companies that have the technology to find and extract the oil on terms that will allow reasonable ROI and risk mitigation for the companies without overstepping the demands of nationalism on the part of the countries. Again, this may be a more vexing problem than any absolute supply constraint.

[Rick M]

Here is some more info on Tiber & GoM oil, both from GLG.

Lynch is (as always) optimistic:
http://www.glgroup.com/News/BPs-Tibe...ig--43001.html

The other (unnamed) analyst is less so:
http://www.glgroup.com/News/Tiber-Di...Oil-43004.html

[Rick M]

This appeared today in the The National (out of the UAE).
It provides the latest warning of an imminent supply crunch if serious investment does not kick in.
The author warns that "$147 a barrel oil [will] seem like a blessing" compared to what's coming if we can't get our collective act together.

This is a sensible article which links the concerns of peak oil, depletion rates and the urgent need for investment:
http://www.thenational.ae/apps/pbcs....ate=columnists

Surely it would be prudent for North Americans authorities to dust off & review our fuel emergency plans (at every level: federal, state/provincial and local).
It's possible to have a serious fuel emergency without physical shortages: all it would require is widespread unaffordability (which would almost certainly lead to public unrest).
Consistent warnings are being issued on this impending supply crunch, but there is little public awareness, no political or media interest, and therefore no observable action.

[Rick M]

As for other evidence on the imminency of the expected "supply crunch" and price spike, I would point to several documents:

1. last summer's Chatham House report: "The Coming Oil Supply Crunch."
This report by Paul Stevens was written in Aug.08 and updated in May 09.
His 40 page analysis warns that "a supply crunch appears likely around 2013" (p.8).

In his May 09 update, Stevens stands by this prediction: "the developments since publication of the report in August 2008 have done little to change its original
conclusions" (p. 37).

This link provides an intro and link to the complete study:
http://www.chathamhouse.org.uk/publi...view/-/id/652/

2. last summer's Chatham House report on oil exporters
In July 08 a 40-page study was released by Chatham House in the UK.
Entitled "Ending Dependence: Hard Choices for Oil Exporting States", their assessment is stark:
"Of the twelve countries in this study, oil production is in decline or at a plateau in three: Indonesia, Malaysia and Norway.
In a further seven countries, the plateau will be reached around 2010.
Saudi Arabia and Kazakhstan will reach a plateau before 2020" (p. 35).

Clearly, if export capacity is headed for such near-term limitations, a supply crunch should be on everyone's radar.
The study is available here:
http://www.chathamhouse.org.uk/news/view/-/id/457/

3. the IEA's most recent World Energy Outlook
The Nov. 08 WEO is striking in its tone, warning that "global trends in energy supply and consumption are patently unsustainable" (p. 37) and that "time is running out" (p. 49).
It states, "Some 30 mb/d of new capacity is needed by 2015. There remains a real risk that under-investment will cause an oil supply crunch in that timeframe" (p. 41).

Paul Stevens (#1 above) has a concise analysis of the WEO in his May 09 update (p. 35).

4. public statements by Fatih Birol
Mr. Birol is the Chief Economist of the International Energy Agency.
He has provided several presentations and interviews since the release of last year's WEO and has repeatedly warned of the dangers of under-investment and of a potential supply gap "after 2010."

His recent interview with Steve Connor of The Independent (UK) is cited here:
http://www.independent.co.uk/news/sc...t-1766585.html

Mr. Birol is further quoted as saying, "the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted."

My concern is that despite this credible information, the potential for a near-term oil supply crunch & price spike does not seem to be on the radar of our policy-makers or the public.
Whether a crunch occurs in 2015, "after 2010" or somewhere in between, the time-frame is very tight when we are looking at something as colossal as the global supply of affordable liquid fuel.
This urgency is greatly compounded by our reluctance to acknowledge that a problem even exists.

Surely we need to prepare for such a situation.
I have several questions which I hope this group can assist with:
Can anyone shed light on the status of US plans for liquid fuel emergencies (LFE)?
Has anyone seen a written LFE plan at any level?
Does anyone know anyone who has?

Has anyone examined the recent LFE work in Australia and the UK?
Should we not be conducting similar reviews of our fuel emergency plans here in North America?

Since the military and National Guard are often called upon when domestic emergencies are beyond the capabilities of local authorities, this information and the the subsequent questions should be of some relevance to this audience.

Thanks very much for considering this, all of you.
Other views are welcome.

[Bill Moore]

Posted by Rick M,

Surely it would be prudent for North Americans authorities to dust off & review our fuel emergency plans (at every level: federal, state/provincial and local).
It's possible to have a serious fuel emergency without physical shortages: all it would require is widespread unaffordability (which would almost certainly lead to public unrest).
Consistent warnings are being issued on this impending supply crunch, but there is little public awareness, no political or media interest, and therefore no observable action.

Rick, you know how we are, we like to admire and discuss problems and potential crisises, but we don't solve them until they are a crisis.