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2 A new energy pessimism
emerges By Michael T Klare
When "peak oil" theory was first widely
publicized in such path-breaking books as Kenneth
Deffeyes' Hubbert's Peak (2001), Richard
Heinberg's The Party's Over (2002), David
Goodstein's Out of Gas (2004), and Paul
Roberts' The End of Oil (2004), [1]
energy-industry officials and their government
associates largely ridiculed the notion.
An imminent peak - and subsequent decline
- in global petroleum output was derided as
crackpot science with little geological
foundation. "Based on [our]
analysis," the US Department of Energy confidently
asserted in 2004, "[we] would expect conventional
oil to peak closer to the middle than to the
beginning of the 21st century."
Recently,
however, a spate of high-level government and
industry reports have begun to suggest that the
original peak-oil theorists were far closer to the
grim reality of global oil availability than
industry analysts were willing to admit. Industry
optimism regarding long-term energy-supply
prospects, these official reports indicate, has
now given way to a deep-seated pessimism, even in
the biggest of Big Oil corporate headquarters.
The change in outlook is perhaps best
suggested by a July 27 article in the Wall Street
Journal headlined "Oil profits show sign of
aging". Although reporting staggering
second-quarter profits for oil giants ExxonMobil
and Royal Dutch Shell - US$10.3 billion for the
former, $8.7 billion for the latter - the Journal
sadly noted that investors are bracing for
disappointing results in future quarters as the
cost of new production rises and output at older
fields declines.
"All the oil companies
are struggling to grow production," explained
Peter Hitchens, an analyst at the Teather and
Greenwood brokerage house. "[Yet] it's becoming
more and more difficult to bring projects in on
time and on budget."
To appreciate the
nature of Big Oil's dilemma, peak-oil theory must
be briefly revisited. As originally formulated by
petroleum geologist M King Hubbert in the 1950s,
the concept holds that worldwide oil production
will rise until about half of the world's original
petroleum inheritance has been exhausted; once
this point is reached, daily output will hit a
peak and begin an irreversible decline.
Hubbert's successors, including Professor
Emeritus Kenneth Deffeyes of Princeton, contend
that we have now consumed just about half the
original supply and so are at, or very near, the
peak-production moment predicted by Hubbert.
Since the concept burst into public
consciousness several years ago, its proponents
and critics have largely argued over whether or
not we have reached maximum worldwide petroleum
output. In a way, this is a moot argument, because
the numbers involved in conventional oil output
have increasingly been obscured by oil derived
from "unconventional" sources - deep offshore
fields, tar sands, and natural-gas liquids, for
example - that are being blended into petroleum
feedstocks used to make gasoline and other fuels.
In recent years, this has made the
calculation of petroleum supplies ever more
complicated. As a result, it may be years more
before we can be certain of the exact timing of
the global peak-oil moment.
On tap: The
tough-oil era There is, however, a second
aspect to peak-oil theory, which is no less
relevant when it comes to the global-supply
picture - one that is far easier to detect and
assess today. Peak-oil theorists have long
contended that the first half of the world's oil
to be extracted and consumed will be the easy
half. They are referring, of course, to the oil
that's found onshore or near to shore; oil close
to the surface and concentrated in large
reservoirs; oil produced in friendly, safe and
welcoming places.
The other half - what
(if they are right) is left of the world's
petroleum supply - is the tough oil. They mean oil
that's buried far offshore or deep underground;
oil scattered in small, hard-to-find reservoirs;
oil that must be obtained from unfriendly,
politically dangerous, or hazardous places. An
oil-investor's-eye-view of our energy planet today
quickly reveals that we already seem to be
entering the tough-oil era. This explains the
growing pessimism among industry analysts as well
as certain changes in behavior in the energy
marketplace.
In but one sign of the new
reality, the price of benchmark US light, sweet
crude oil for next-month delivery soared to new
highs on July 31, topping the previous record for
intraday trading of $77.03 per barrel set in July
2006. Some observers are predicting that a price
of $80 per barrel is just around the corner; while
John Kildruff, a perfectly sober analyst at
futures broker Man Financial, told Bloomberg.com,
"We're only a headline of significance away from
$100 oil." New disruptions in Nigerian or Iraqi
supplies, or a US military strike against Iran, he
explained, could trigger such a price increase in
the energy equivalent of a nanosecond.
A
signal of another sort was provided by the
government of Kazakhstan in oil-rich Central Asia
on August 7. It warned the private operators of
the giant offshore Kashagan oil project - in the
Kazakh sector of the Caspian Sea - to cut costs
and speed the onset of production or face a
possible government takeover. In an interview,
Prime Minister Karim Masimov said threateningly:
"We are very disappointed with the execution of
this project. If the operator can't resolve these
problems, then we don't exclude their possible
replacement."
Kashagan, it must be borne
in mind, is not just any oil project: it is the
largest field to be developed anywhere in the
world since the discovery of Alaska's Prudhoe Bay
some 40 years ago. With estimated oil reserves of
9 billion to 13 billion barrels, it is crucial to
the hopes of its principal developers - Exxon,
ConocoPhillips, Shell, Total (of France), and Eni
(of Italy) - to increase their output in the years
ahead.
Consistent with the "tough oil"
aspect of peak-oil theory, Kashagan is, however,
proving dauntingly difficult to turn into a
successful font of petroleum. The oil reservoir
itself is buried beneath high-pressure strata of
gas, making its extraction exceedingly tricky, and
it contains abnormally high levels of deadly
hydrogen sulfide; moreover, the entire field is in
a shallow area of the Caspian Sea that freezes
over for five months of the year and is the
breeding ground for rare seals and beluga
sturgeon.
As a result of these and other
problems, the Kashagan operating consortium has
seen the price tag for launching the project
nearly double - from $10 billion to $19 billion -
and has postponed the onset of initial production
from 2005 to 2010, infuriating the Kazakh
government, which had hoped to be earning billions
of dollars in taxes and royalties by now.
A demanding world And then
there are those reports from high-level agencies
and organizations on the global energy picture,
all coming to the same basic conclusion: whether
or not the peak in world oil output is at hand,
the future of the oil supply in a world of
endlessly growing demand appears grim.
The
first of these recent warnings, titled the
"Medium-Term Oil Market Report", was released on
July 8 by the International Energy Agency (IEA),
an arm of the Organization for Economic
Cooperation and Development (OECD), the club of
major industrial powers. Although filled with
statistics and technical analyses, the report,
assessing the global oil supply-and-demand
equation through 2012, seemed to leak anxiety and
came to a distinctly
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