07 November 2007

Tightening of the noose

Things are starting to look very, very dire. Even the IEA is starting to chirp about the repercussions of unrestrained demand growth. And then the supply side has plateaued, the profits aren't there anymore, and all the cheap low-hanging fruit is history. This is going to affect our societies in major ways, many of which can't even be predicted yet. And all of this is going to start becoming very visible in the next few years, even to those that refuse to believe it's happening.

Rise in global energy demands 'alarming,' IAE says

In an unusually grim and direct warning, the International Energy Agency has predicted that the “alarming” rise in energy demand will speed up climate change, threaten global energy security and possibly create a supply crunch that will send already high prices soaring. The agency urged governments to embrace low-carbon economies to avert a genuine energy and climate crisis. “Vigorous, immediate and collective policy action by all governments is essential to move the world onto a more sustainable energy path,” said the IEA's annual World Energy Outlook, a 675-page report, released this morning in London and Paris. “There has been so far more talk than action in most countries.” In an interview before the report's release, Fatih Birol, 49, the IEA's chief economist and principal author of the WEO, called the report “the most pessimistic overview of the world [energy markets] we have ever portrayed.” He said the agency's climate and energy security fears are based on unprecedented demand growth, driven by the burgeoning Chinese and Indian economies, and governments' inability to curb energy use and the output of carbon dioxide, the main greenhouse gas. “There was a lot of talk and a lot of targets, then peanuts happened,” he said.

The report barely mentions the Alberta oil sands, whose vast reserves are second only to Saudi Arabia's. The omission was no accident. In spite of their size, the IEA thinks the oil sands will amount to little more than a global rounding error as demand, now about 85 million barrels a day, rises to a predicted 116 million barrels by 2030. “By 2015, the oil sands should produce about three million barrels a day,” Birol said. “That will be only about 3 per cent of total oil production. The oil sands will not, unfortunately, change the game.” Birol admits the IEA underestimated China's and India's voracious appetite for oil and other forms of energy in previous reports. Driven by the two countries' energy demands, the IEA concludes that the world's overall energy needs will be “well over 50 per cent higher in 2030 than today.” Almost half of the demand growth will be driven by China and India. In the IEA's so-called reference scenario, which assumes governments will have underwhelming success in changing energy use patterns, combined oil imports of the two countries will climb from 5.4 million barrels a day in 2006 to 19.1 million in 2030. That's more than the combined imports of the US and Japan today. At existing trends, China will surpass the US to become the world's largest energy consumer after 2010. Oil demand for Chinese transportation use will quadruple between 2005 and 2030. The fleet of cars and trucks will rise sevenfold to 270 million vehicles. The Indian figures aren't far behind.

The rising demand for fossil fuels, including coal, the fuel that will see the biggest increase in use, will accelerate climate change, the IEA says. In its reference-case scenario, it predicts emissions will jump by an astounding 57% between 2005 and 2030, with China overtaking the US this year as the biggest emitter. Even in the more optimistic scenario, in which carbon reduction measures considered by governments today are put into force, emissions would rise by 27%. At the IEA's press conference in London this morning, executive director Nobuo Tanaka said “if governments don't change their policies, oil and gas imports, coal use and greenhouse gas emission are set to grow exponentially through 2030 … these trends could threaten energy security and accelerate climate change.” The IEA report concluded that: “Urgent action is needed if greenhouse gas concentrations are to be stabilized at a level that would prevent dangerous interference with the climate system.”
(Globe and Mail 071107)

Output points to peak in profits

Sagging crude output at the world's top oil companies is the latest indicator their profits may have peaked even as oil runs toward US$100 a barrel. Oil and gas production fell at all the largest publicly traded oil companies in the third quarter, as aging oilfields, production-sharing agreements and soaring costs and demand for drilling services took a toll on output. Profits at oil majors such as ExxonMobil and BP have also flattened or dropped despite the record oil prices. And their lower output will only push up international prices further as demand from the US and emerging economies outpaces new supply. "A lot of majors for years have been focused on returns and not about putting rigs to work," said Johnson Rice analyst Ken Carroll. "We're seeing the results." The big integrated oil companies reported third-quarter earnings that largely fell short of year-earlier levels due to much lower profits from gasoline production. Moreover, the companies' exploration and production businesses were not able to pick up the slack in the quarter, even with oil averaging about $75 a barrel in the quarter. Exxon, Royal Dutch/Shell, BP, Chevron, ENI and ConocoPhillips posted third-quarter output drops of between 2% and 11%.

Exxon, Chevron and ConocoPhillips all attributed parts of their production declines to countries changing the terms of production agreements or to contracts that gave host countries a larger share of oil produced at the higher prices. Venezuela, Nigeria and Canada have all made moves to harness a greater share of oil revenue. Rising costs were also an issue. According to a Cambridge Energy Research Associates study released in May, oil and gas production costs were up nearly 80% since 2000 on demand for steel, drilling rigs and other production materials. BP chief financial officer Byron Grote estimated third-quarter costs were up 10 per cent from the year-earlier quarter and the head of Chevron's exploration and production operations acknowledged the company had shelved some projects due to the higher costs. High demand for materials has also forced the delays of some projects, like Chevron's Tahiti prospect in the deepwater Gulf of Mexico. The companies also have to contend with the natural decline rates of oil projects. Shell attributed its 9% drop to field decline, a factor BP also said hurt its output.
(Calgary Herald 071107)

Exploration and extraction equipment is in general very old and in very short supply. The majors are hesitant to build new equipment to send out to remote risky ventures because the ROIs are just going to continue heading into the negative territory which is the antithesis of what corporations today are looking for. There may be oil left out there to plunder, but it's getting to the point where it's not worth it anymore unless the price continues to increase to levels that will kill economies.

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