Energy Security

**Rick M** · 09-03-2009

This 10-page analysis is entitled “Fueling the Balance: A Defense Energy Strategy Primer” and is authored by two members of the Obama ’08 defense policy task force.

This report builds on concerns which are increasingly being expressed about the vulnerabilities which are inherent in current energy consumption patterns (both in terms of physical supply and affordability).

Although this study focuses almost exclusively on DoD consumption, many of its concerns apply to the civilian sector as well, and of course it is the productivity of the domestic economy which funds DoD and other government services.
Clearly, our reliance on petroleum is suddenly emerging as an urgent issue.

Its bibliography reflects the incorporation into this study of the recent concerns of Col. Gregory Lengyel, the Defense Science Board, Cdr. Jeffrey Eggers, and the recent CNA study.

This study points to the upcoming Quadrennial Defense Review and states that “a closing window of opportunity must not be missed…. the energy nexus…. cannot be deferred again” (p. 1).

This is a concise and highly relevant study, well worth reading.
Thanks to Lisa Wright at Congressman Roscoe Bartlett’s office for passing along the link:
http://www.brookings.edu/~/media/Fil...egy_singer.pdf

**Dayuhan** · 09-04-2009

Interesting piece of news today: new oil discovery in the Gulf of Mexico, estimated at a billion recoverable barrels. Deep, will be expensive to recover: $200 million per well, not all the wells will produce, and there's the transport infrastructure to consider. But still, with a billion recoverable barrels at, say, $70-100 each, you can afford to put $10-20 billion into production.

A billion barrels is significant, but the real significance of the find is the location, which is an impressive demonstration of what modern exploration and recovery techniques can do. The Gulf of Mexico is probably the single most explored oil-producing region on the planet. 20 years ago they were calling it "The Dead Sea"; it was considered all dried up. Clearly not so.

What we're seeing now (the 28 billion barrels off Brazil, discovered in 2007, is another example) is the beginning of the next wave of discoveries. They will be complex and expensive, but they are there.

I mentioned this in an earlier post, but it's worth repeating: most of the world's oil-producing regions have not seen systematic exploration in 20 years, often more. From the late 80s through 2002-2003 there was anb oil glut, offering little incentive to explore. From 2003-2006 the price spike was seen as just another transient spike due to instability in the Middle East. It's only in the last few years that we've seen real exploration beginning. It takes a good deal of time to produce results, both because of technical and political constraints.

Many traditional oil producing regions still aren't getting attention: Mexico, Venezuela, Indonesia, Libya and many others are still pumping from deposits discovered 30 years ago and more. In these cases National oil companies don't have the technology and government policies make investment by oil majors unattractive. Iran and Iraq have not seen significant exploration in 30 years. Even the GCC states have let exploration languish for years: given their known reserves they simply had no reason to go looking.

How much more is out there? We don't know. Probably a fair amount, and as long as oil remains expensive the next 20 years are likely to see an interesting range of technologies developing for getting more out of existing fields. Today we assume that only 20-30% of a given reserve is recoverable; that is likely to change. Today's technology is likely to look as primitive in 20 years as the technology of 20 years ago (which seemed really impressive back then) looks today.

Again, we do face major problems, but the geological problem (is there oil there) is less immediate and less vexing in many ways than the political and investment-related problem (can the oil that's there be brought to market). From the reactive perspective, the conclusion is the same either way: we need to prepare for potential shortage. From the proactive perspective, the actions needed to maintain supply are very different. This is the danger of the obsessive focus on absolute reserves: it distracts from the essential focus on confronting the political and investment-related concerns.

**Rick M** · 09-05-2009

Hi, Steve

Regarding the GOM discovery, this article mentions at least 3 billion, which is of course significant:
http://newsok.com/oil-discovery-exte...rticle/3397994

However, the exuberance of its headline surely is not warranted in light of other info.
A BBC article indicated that they should reasonably expect to retrieve only 30% or so, which fits with the 1 billion that you mentioned.

Even at 3 billion, that would supply the world for a few weeks, the USA for about 5 months.
If Tupi and the Iranian discovery are both around 8 billion, then that’s global consumption for about 12 weeks from each field.
Not exacting what I would call “extending the petroleum age.”
Most Ages are measured in centuries, not weeks.

Both the Santos Basin discoveries and the new GoM field are ultra-deep water (the latter at record depth), and thus cannot be cheap.

Our perspectives on this are different… you are clearly more optimistic than I am.

But there is much that we agree on: that we face major problems, and that the investment and geopolitical aspects may catch us long before the geological constraints.
I especially agree with your point that “the conclusion is the same either way: we need to prepare for potential shortages.”

I have spent the past few months going through numerous GAO documents from the 1970s and 80s. They are very detailed, blunt in their assessment, and I commend the GAO for its persistence.
But it appears that little has changed… the issue seems to have faded away and North America remains highly vulnerable to an oil shock.
Such a shock would not require physical shortages: all it requires is widespread & prolonged unaffordability: our continent would then surely have a problem of unprecedented magnitude and complexity.

I also agree with your final comment about the obsessive focus on absolute reserves: such a focus would indeed distract from the many interacting above-ground factors.
But I also think that the credible peak oil analysts moved beyond that many years ago.

But in some respects, the inclusion of above-ground factors makes the situation more tentative, not more secure: the geological limits then provide a best-case scenario which can only be achieved in sensible, orderly geopolitical & investment climate, which may not in fact be maintained.

In fact, there are many factors which point to the difficulty of maintaining the relative peace & stability that we have enjoyed since 1946.

Other views are welcome.

**Dayuhan** · 09-05-2009

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** · 09-05-2009

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** · 09-05-2009

Originally Posted by Bill Moore

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.

Originally Posted by Bill Moore

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.