Report For US Government Warns World Oil Production Fast Approaching Peak

US report acknowledges peak-oil threat
Al Jazeera
http://english.aljazeera.net/NR/exeres/5EF86883-8CDB-49B5-9A07-5759205A9DBE.htm

By Adam Porter in Perpignan, France

Wednesday 09 March 2005, 18:23 Makka Time, 15:23 GMT

It has long been denied that the US government bases any policy around the idea that global oil production may be in terminal decline.

But a new US government-sponsored report, obtained by Aljazeera.net, does exactly that.

Authored by Robert L. Hirsch, Roger Bezdek and Robert Wendling and entitled the Peaking of World Oil production: Impacts, Mitigation, & Risk Management, the report is an assessment requested by the US Department of Energy (DoE), National Energy Technology Laboratory.

It was prepared by Hirsch, who is a senior energy programme adviser at the private scientific and military company, Science Applications International Corporation (SAIC).

They work extensively on defence and geopolitical issues for clients, including many for the US government.

Advisory roles

Among current job openings at SAIC are positions at Fort Benning (formerly School of the Americas) and a private military contract to help retrain the Albanian air force in Tirana.

Hirsch has held a wide variety of positions in the US energy hierarchy including senior energy analyst at the Rand Corporation, through to a presidentially appointed assistant administrator for solar, geothermal and advanced energy systems.

He has also previously worked for the US Department of Energy on numerous advisory committees, including the DoE Energy Research Advisory Board.

This new report follows on from two presentations by Hirsch last year. One on 1 March to the same National Energy Technology Laboratory and another on 14 June last year at the Annapolis Centre for Science Based Public Policy. Here Hirsch laid down his ideas on the peak of oil production.

The Annapolis Centre for Science-based Public Policy is a group which has received $658,000 in funding from Exxon Mobil since 1998. It openly disputes the idea that global warming is the result of burning fossil fuels.

But this brand new senior-level report on "peak oil" is unprecedented in US government circles. It is not just the existence of the report itself that is such a landmark in the current oil debate. Its conclusions also pull no punches.

Uncertain timing

"World oil peaking is going to happen," the report says. Only the "timing is uncertain".

The effects of any oil peak are similarly not ignored. Specifically, the impact on the economy of the United States. "The development of the US economy and lifestyle has been fundamentally shaped by the availability of abundant, low-cost oil. Oil scarcity and several-fold oil price increases due to world oil production peaking could have dramatic impacts ... the economic loss to the United States could be measured on a trillion-dollar scale," the report says.

The authors of the report also dismiss the power of the markets to solve any oil peak. They call for the intervention of governments. But also they rather worryingly point to a need to exclude public debate and environmental concerns from the process. They say this is needed to speed up decision-making.

"Intervention by governments will be required, because the economic and social implications of oil peaking would otherwise be chaotic. But the process will not be easy. Expediency may require major changes to ... lengthy environmental reviews and lengthy public involvement."

Hirsch notes, despite arguments from the major oil companies and producer nations, that new finds of oil are not replacing oil consumed each year. Despite the advances in technology reserves are becoming increasingly difficult to replace.

Three scenarios

The report sees "a world moving from a long period in which reserves additions were much greater than consumption, to an era in which annual additions are falling increasingly short of annual consumption. This is but one of a number of trends that suggest the world is fast approaching the inevitable peaking of conventional world oil production".

The report then takes three possible scenarios and outcomes. Firstly that energy replacement solutions, or "mitigation" as the report states, are started 20 years before any "peak". Secondly that solutions are only enacted 10 years before any peak and, thirdly, that solutions are only put into practice as the peak becomes apparent.

In what some may see as an optimistic assessment, the authors believe 20 years is enough time to limit damage from any peak. However, they point out that "if mitigation were to be too little, too late, world supply/demand balance will be achieved through massive demand destruction".

Demand destruction is a modern way of saying catastrophic recessions and shortages. But as well as these predictions, the report lays out "signals" it believes will be apparent in the run-up to any peak. This is perhaps the most worrying aspect of the report, as it seems to describe the very events that are taking place at the moment.

Supply insecurity

"As world oil peaking is approached, excess production capacity ... will disappear, so that even minor supply disruptions will cause increased price volatility as traders, speculators, and other market participants react to supply/demand events," the report says.

"Simultaneously, oil storage inventories are likely to decrease, further eroding security of supply, aggravating price volatility, and further stimulating speculation ... oil could become the price setter in the broader energy market, in which case other energy prices could well become increasingly volatile and unpredictable."

The report highlights a series of ways to minimise any impacts. From increased fuel efficiency to technological help in stopping the practice of "oil-left-behind" or non-extractable oil and various forms of new liquid fuels, liquefied coal and gas-to-liquids.

But in its conclusion the report makes troubling reading, noting that "the world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions were gradual and evolutionary. Oil peaking will be abrupt and revolutionary".

This report is the clearest signal yet that the U.S government is taking the subject of "peak oil" seriously. Yet it remains to be seen what actions can be taken to stop this potentially "revolutionary" change.

Aljazeera

"The global market will need increasing volumes of oil from members of the Organisation of Petroleum Exporting Countries after non-OPEC production reaches a maximum of about 50 million b/d between 2007 and 2011... A question crucial to future oil supply, therefore is: Can OPEC's old fields deliver.... Most of the supergiant oil fields have had water or gas injection installed to maintain pressure for 20-30 years. Handling produced injection fluids is a growing problem in Iran, Saudi Arabia, the UAE, and in older fields in Iraq (Kirkuk, Zubair, and Rumailah).... The oil fields of Iraq are the least depleted and least developed of any of the Persian Gulf oil producing countries, and Iraq has the potential to rapidly increase oil output.... Combined with earlier results, these predictions for OPEC yield an estimate of the world's ultimate recoverable oil reserves of 2.5-2.9 trillion bbl, with 1.29-1.66 trillion bbl remaining (1.224 trillion bbl produced to end 2003)..... It seems unlikely that OPEC can increase production at the rate that was possible in the 1960s and 1970s, when the fields were fresh and initial well production rates were higher... Only Iraq has undeveloped supergiant oil fields (West Qurna, Majnoon, and East Baghdad) and the potential to rapidly increase production to 8-10 million b/d...... The five Persian Gulf countries (Saudi Arabia, Iraq, Iran, Kuwait and the UAE) are crucial to raising OPEC production. The political situation in Iraq is unlikely to be conducive to major investment in new oil production capacity for some years. Saudi Arabia has serious internal problems, which threaten to destabilize the ruling royal family. Iran remains under unilateral US sanctions. US military intervention in the Gulf and its failure to effectively and fairly engage in resolving the Palestinian-Israeli conflict conspire to provide a hostile backdrop to western interests in the Middle East. The combination of burgeoning future oil revenues and growing hostility to the US in the region is not conducive to major capacity expansion and will not provide a stable investment environment or offer easy opportunities to the major international oil companies to assist in any capacity expansion projects. Based on these considerations and the maturity of OPEC’s major fields, it seems more likely that OPEC’s considerable reserves will be expressed as a long plateau rather than a sharp peak. It is quite possible that the Persian Gulf countries will not raise production capacity high enough or quickly enough, either for political reasons, the slowness of internal decision-making, or the hostile security environment. The consequences of this for world oil supply are immense, with the likelihood of further military interventions and conflicts within the Middle East ….. It is unlikely, except in the high reserves case, that OPEC production will be able to meet the high demand forecast of 121 million b/d for 2025 by the US Energy Information Administration. OPEC is able to meet mid-demand growth (1.5%) until 2013-15 if OPEC’s oil reserves are low or until 2017-20 if OPEC’s reserves are high. OPEC is able to meet low-demand growth (about 1%/year) until 2020 under either reserves scenario. These forecasts suggest world oil demand is likely to be dampened by a rising oil price due to supply constraints, particularly after non-OPEC production peaks (2007-11), but also when OPEC production increases start to tail off. This could occur in 2010-15 if OPEC’s reserves turn out to be low or around 2015-20 if OPEC’s reserves are high. Oil supply will become increasingly concentrated in the Middle East and the former Soviet Union. The proportion of oil production from the main producers of the Persian Gulf (Iran, Iraq, Saudi Arabia, Kuwait, and the UAE) is forecast to rise to 45% in 2025 from 25% in 2003. Just seven countries – Russia, Iran, Iraq, Saudi Arabia, Kuwait, and the UAE and Venezuela – are expected to make up more than 60% of world oil production in 2025. For the range of oil reserves demand scenarios considered here, world oil supply is predicted to peak at 90-105 million b/d between 2016 and 2028…Based on these results, the EIA forecast of world demand of more than 120 million b/d in 2025 seems unlikely to be met by production ….. Total world oil reserves are estimated at 2.5 – 2.9 trillion bbl. The world has consumed 1.224 trillion bbl to the end of 2004, so remaining reserves are estimated at 1.3-1.7 trillion bbl (Table 1).As the different components of supply reach their maximum production rate, a series of crises in oil supply is likely over the coming decades. The first, related to the peak and decline of non-OPEC production, is practically upon us and underpins the currently high oil prices. Other factors are burgeoning world oil demand, driven primarily by China and the USA, and restricted output from Iraq. The imminent inability of non-OPEC production to meet incremental demand and its decline after 2010 precipitates the second crisis as OPEC’s diminishing spare capacity (even with Iraq’s production back to preinvasion levels) becomes less and less able to accommodate short-term fluctuations. The timing and depth of the crisis depend on world oil demand and OPEC investment in new capacity. While OPEC countries will have every incentive to make the necessary investments, the pace of past decision-making is not encouraging, and enough spare capacity may not be available in time. The third crisis, due to OPEC’s incremental supply being unable to meet incremental demand, follows in the first half of the next decade. This assumes that OPEC’s reserves are as published. If OPEC’s reserves are higher than published, this crisis may not occur until the latter half of the next decade and may be muted, particularly if demand moderates. These crises will have global economic and geopolitical significance: The oil price will be high and volatile, and demand growth will have to be curtailed..."
Oil Supply Challenges - 2: What Can OPEC Deliver?
Oil and Gas Journal, 7 March 2005
(The Author: Peter. R.A. Wells is managing director of Neftex Petroleum Advisors Ltd. He spent 12 years with Shell International in positions that included exploration manager for eastern Nigeria, followed by 4 years with BP PLC, where he was chief negotiator for Azerbaijan in 1992-3.)