Peak oil is closing in
Heard of peak oil? It's the name given to a prediction that the world's oil production will reach a peak, and then rapidly decline; and that the actual peak year will only be known after it has passed. And the theory had last week's biennial New Zealand Petroleum Conference all abuzz, as Rob Maetzig reports.
Matt Simmons might be small in stature, but he's a giant in the worldwide oil industry.
Chairman of a specialised energy investment banking firm which has completed more than 700 investment projects for energy clients at a combined dollar value of at least $US70 billion, he's also energy adviser to the Bush Administration.
So when Matt Simmons says the world is rushing headlong into an energy crisis the likes of which has never been experienced before, then people should sit up and take notice.
And that's exactly the warning Mr Simmons issued at the New Zealand Petroleum Conference in Auckland last week.
Worldwide demand for oil and gas is at a record high, he said – to the extent that available supply, and the ability of the oil and gas industry to replace that supply, can't cope.
"So fasten your seat belts – we're in for a rough ride ahead," he warned the more than 500 delegates who crammed into the auditorium at Auckland's Sky City Convention Centre.
Mind you, the warning is nothing new.
The concept of "peak oil" was developed way back in 1956 when American geophysicist Dr M. King Hubbert created a model of future oil availability, called the Hubbert curve, which forecast that world oil production would peak in 2000 and then fall rapidly as a result of the exploration industry being unable to discover replacement reserves quick enough.
It's generally considered that the peak hasn't yet arrived, but that it isn't far away – experts forecast that world oil production will peak in about the year 2010, and that natural gas will peak anywhere from 2010 to 2025.
So how close are things now? Maybe the best answer comes from the International Energy Agency (IEA), which reported that last year's worldwide oil demand was 84.9 million barrels a day, just two million barrels a day short of world production.
Those statistics provided all the ammunition Mr Simmons and a series of other keynote speakers needed to hold the attention of delegates at last week's conference.
Mr Simmons warned that, already, scarcity is popping up everywhere. There is scarcity of promising new frontier exploration areas, scarcity of known large new oil reservoirs, scarcity of drilling rigs, and even scarcity of skilled people.
And unless there are big discoveries soon, there will also be scarcity of oil supply too, he said. The big problem is that whereas demand for oil is still "young" and growing fast, oil supply is "old" and in decline.
Close to 20 percent of the world's oil currently came from 15 very old fields, he said. Another 30 percent came from fields that had an average age of 20 to 30 years.
"So time is now an enemy," he told the conference.
"Over time, the current oil supply will get increasingly older, and over time the current average field decline rates will accelerate. So has the clock now become a ticking time bomb?"
If Mr Simmons' address had the conference attendees shifting uncomfortably in their seats, then another keynote speech from Australian Bill Evans, Westpac Banking Corporation's economic spokesman, added to the discomfort.
He warned that as the world headed towards peak oil, an explosion in energy demand in China and India was aggravating the problem.
In those countries, hundreds of millions of people were heading to the cities to live – and were wanting to own cars. As a result, it was now estimated that the number of vehicles on the world's roads would rise from today's 750 million to a massive 1660 million within 25 years.
All this means that demand for oil will grow from the present 84.9 million barrels a day, to 138 million barrels a day by 2030.
So where might all this oil come from?
There was a good news-bad news answer to that question, care of Bob Banks, the vice-president of international operations with Houston-based Swift Energy.
He pointed out that experts considered the total world "endowment" of oil to be three trillion barrels, slightly more than 50 percent of which has so far been found. In other words, this meant that there remained 1.4 trillion barrels yet to be discovered – a huge amount of oil.
That was the good news. The bad news was that the remaining oil reserves were becoming harder and harder to find. Explorers had to drill deeper, search in more remote and inhospitable places, and employ far more complex exploration techniques."
Maybe for that reason, not a lot of money was being invested worldwide in exploration, Mr Banks said. In fact, energy companies were currently spending 10 times more money on share buybacks than they were on exploration.
His comments were followed by an address by Gaurdie Banister, Shell Exploration and Production's technical vice-president for the Asia-Pacific region. He warned that meeting future energy demand would require massive investment.
The IEA estimated that not less than $US16 trillion would have to be spent in energy infrastructure – finding and developing new oil and gas fields – between now and 2030.
"The sheer scale of this investment means that a very wide range of sources of funding will be needed," he said.
"Some of the investment will come from international companies and their shareholders, some from banks, and some from governments.
"Much of the investment will go into increasingly demanding and complex projects. This means investors will also be looking for greater assurance about returns over the long term and, in a world where there is competition for capital investment, investors will favour those countries with stable and predictable regulatory and commercial frameworks that provide a supportive investment climate."
So where does that leave New Zealand?
It's no secret that there has been only modest investment in exploration in this country over the past two decades, primarily because abundant and cheap Maui gas has been available for the past 25 years.
But now that Maui is running out and demand for energy is increasing, the heat is on to find replacement reserves. That was the whole point of last week's conference – an oil and gas information-fest, organised by the Government, and aimed at encouraging explorers to get out there.
That might be easier said than done, however. Many attending the conference pointed out that exploration was becoming increasingly expensive and difficult, particularly in countries as isolated as New Zealand.
The cost of hiring drilling rigs – if you can get one, because there is a worldwide shortage – has risen at least 200 per cent in recent months, steel has increased 70 per cent in price, and the cost of crew has risen at least 35 per cent and still going up.
It all means that New Zealand, like the rest of the world, is likely to face rising crude oil prices as the explorers strive to stave off the spectre of peak oil, the conference was warned.
Perhaps the last word should belong to Mr Simmons. When he spoke at the big conference, one thing he didn't mention was what crude prices might get to as worldwide oil demand moved past worldwide oil production.
But he did mention it during a television interview the next day. At present, the price of crude is hovering between $US50 and $US60 a barrel – and Mr Simmons suggested that a future price of $US200 a barrel might occur. Now that's a peak.