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The Oil Crunch

A wake-up call for the UK economy


Second report of the UK Industry Taskforce on Peak Oil & Energy Security (ITPOES)

February 2010

Industry Taskforce
on Peak Oil & Energy Security
The Oil Crunch
A wake-up call for the UK economy

Second report of the UK Industry Taskforce


on Peak Oil & Energy Security (ITPOES)

February 2010

Industry Taskforce
on Peak Oil & Energy Security
Taskforce member companies
Arup, Foster and Partners, Scottish and Southern Energy, Solarcentury, Stagecoach Group, Virgin Group.
The chairman of the Taskforce is Will Whitehorn of Virgin, and the editor of this report is Simon Roberts of Arup.
Contributors from the companies include John Miles (Arup), Stefan Behling (Foster and Partners), Ian Marchant and
Jeff Chandler (Scottish and Southern Energy), Jeremy Leggett (Solarcentury), Steven Stewart (Stagecoach Group),
and Nick Fox and Alan Knight (Virgin Group).

www.peakoiltaskforce.net

The Oil Crunch


A wake-up call for the UK economy
Second report of the UK Industry Taskforce
on Peak Oil & Energy Security (ITPOES)

Editor Simon Roberts (Arup)

Published 10th February 2010 in the United Kingdom by:


Ove Arup & Partners Ltd,
13 Fitzroy Street,
London W1T 4BQ, UK

Copyright © 2010 ITPOES

ISBN: 978-0-9562121-1-5
February 2010 Industry Taskforce
on Peak Oil & Energy Security

Contents
Foreword 4

Executive summary 6

1 Introduction 8

2 Scene setting 9

3 Opinion A: Chris Skrebowski 15

4 Opinion B: Dr Robert Falkner 27

5 Other points of view 31

6 Taskforce view 35

7 Possible countermeasures 41

8 Recommendations 44

Appendix A: Spare capacity 46

Appendix B: Major disruptive events to oil supplies 48

Appendix C: Biofuels 49

Appendix D: Whole-economy scenarios for the UK to 2025 50

Appendix E: Sources 55
Industry Taskforce February 2010
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Foreword:
The credit crunch of 2008 Virtually every sector of our economy unrest could lead to shortages in
foreshadowed major economic, is still dependent on oil. This is why consumer products and the UK’s
political and social upheaval. It stress- it is vital that whichever party forms energy security will be significantly
tested the responses of governments, the next government, they have a compromised. This has the potential
policy-makers and businesses to coherent set of policies to help the to hit UK business and commerce
the extreme. If only there had been UK adapt. This is especially important as well as the most disadvantaged in
greater time to prepare for its impact for the UK, and other developed society with yet another crisis.
and a greater level of understanding economies, which have been so
While responsibility for addressing
about the issues. reliant on low-cost oil for decades.
these changes must be taken up
The next five years will see us face There are two challenges for by government, we must also build
another crunch - the oil crunch. government and policy-makers. a coalition of interests including
This time, we do have the chance to Firstly, to recognise the situation we businesses and the public if we are
prepare. The challenge is to use that face, and secondly to take action to to implement the changes needed to
time well. mitigate the worst implications of the help us adapt and prosper.
crunch.
As we reach maximum oil extraction The energy sector is facing major
rates, the era of cheap oil is behind Unless we do so, we face a challenges over the next decade with
us. We must plan for a world in situation during the term of the next the need to green the energy mix,
which oil prices are likely to be both government where fuel price
higher and more volatile and where
oil price shocks have the potential to
destabilise economic, political and
social activity.

“Our message to government and


businesses is clear. Act now.”

Richard Branson, Founder, Virgin Group Ian Marchant, CEO, Scottish & Southern Energy

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February 2010 Industry Taskforce
on Peak Oil & Energy Security

From recognition to action


maintain security of supply, while at urban developments. We are also Don’t let the oil crunch catch us out
the same time minimising the cost looking to deploy new technologies in the way that the credit crunch did.
to customers. Scottish and Southern within the fabric of our buildings and
Richard Branson,
Energy, for instance, are investing in cities that will enable us to generate
Founder, Virgin Group
renewable generating capacity and cleaner and more efficient energy in
decarbonising electricity production, future. Arup and Solarcentury are all Ian Marchant,
partly so that the UK is less exposed contributing to the development of CEO, Scottish & Southern Energy
to volatile fuel prices. these activities. Brian Souter,
Our transport system, which is central The impacts of climate change make CEO, Stagecoach Group
to our economy and social fabric, this an urgent task. However the Philip Dilley,
is largely dependent on fossil fuels addition of a peak in oil production Chairman, Arup
and older combustion technologies. and the need to find replacements
Jeremy Leggett,
Businesses such as Stagecoach will speed up that urgency and add
Chairman, Solarcentury
and Virgin are at the forefront of even greater focus.
the drive to shift to newer, cleaner
Our message to government and
technologies and more sustainable
businesses is clear. Act now. If we
public transport.
don’t, we run the risk of a return to
Our urban infrastructure also needs the oil price shocks of the 1970s and
to respond to these changes. We are 2008 with all the inherent uncertainty
placing ever greater emphasis on the and trauma that brought.
need for energy efficient buildings
and the design of energy efficient

Brian Souter, CEO, Stagecoach Group Philip Dilley, Chairman, Arup Jeremy Leggett, Chairman, Solarcentury

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Industry Taskforce February 2010
on Peak Oil & Energy Security

Executive summary
This is the second report issued by Opinion A has been prepared by The intervening economic crash
ITPOES (the UK Industry Taskforce Chris Skrebowski, a recognised has done little to blunt our
on Peak Oil and Energy Security). The independent oil-industry expert. expectations; the time to a peak
interpretation of the current position, He looks in some detail at the in global production is, essentially,
and the viewpoints expressed in the evidence which defines global oil little changed as cancelled new
final recommendations, are those of reserves and extraction rates, and capacity broadly offsets recession-
the ITPOES membership - a group concludes that the global peak deferred demand. When combined
of private British companies whose production rate for oil is likely to with current demand projections, a
interests span a wide range of occur within the next decade (maybe price crunch is still projected to occur
business sectors. The work therefore within 5 years) at a value no higher following the peak.
represents an independent, business- than 92Mb/d (million barrels per
Opinion B has been prepared by
minded, view of the national position. day). This compares with the current
Dr Robert Falkner of the London
Like its predecessor, published record extraction rate of 87Mb/d set
School of Economics (LSE). He
in the autumn of 2008, this in July 2008, and the conclusions
considers the likely effects of tighter
report addresses the question of drawn are essentially the same as
supply conditions and rising oil prices
future oil supply and its potential those reached in the previous ITPOES
on the British economy, particularly
consequences for the UK. It does report. At first sight, this is surprising
focusing on the coming 5 years. He
not address the questions of climate but on closer examination it is clear
concludes that the economy is not
change and carbon reduction directly that the fundamental issues identified
as prey to the price of oil as might
- there are many other texts which do in the 2008 report remain unchanged.
be expected at first sight, but there
that - but there are massive areas of Namely:
are fundamental issues which could
overlap between the distinct issues of • The net flow rate data shows nevertheless spring a nasty surprise
resource depletion and atmospheric that increases in extraction will on the incoming government.
pollution. In some parts of our report be slowing down in 2011-13 and
Following the presentation of these
that overlap is recognised but the dropping thereafter. Given the long
expert opinions, the key findings from
main thrust of the report focuses lead-times involved in developing
several other reports and reviews
on the questions of oil price and the necessary infrastructure, this
of the oil-supply situation, all of
availability over the coming decade. trend is unlikely to be reversed
which were published in 2009, are
In particular, it seeks to highlight within the next 5 years.
presented. In particular, these reports
issues which are likely to confront • The industry is not
include the Wicks Review on Energy
the new government following the discovering more giant
Security for the UK Prime Minister in
General Election in 2010. It follows fields at a sufficient rate.
August, and the latest major research
the style of the first ITPOES report, • There are concerns about the
report by the UK Energy Research
titled “The Oil Crunch, Securing the levels of reserves quoted by the
Centre (UKERC), called “Global Oil
UK’s energy future” in that two expert OPEC countries (which are critical
Depletion”, in October.
opinions have been commissioned to the confidence levels associated
and used as the basis for an analysis with future production capacity). The second half of the report reviews
by the ITPOES membership. • There are indications that the material put forward above and
underinvestment in the oil tries to assess the implications for
industry over the past decade business in the UK. Looking through
has led to infrastructure and the eyes of the Taskforce members,
underskilling problems that will it expresses a view that the price of
make it particularly difficult to oil could rise to a new and sustained,
increase production capacity level which is well above US$100/b
rapidly in the short-term. and that this is very likely to be the
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February 2010 Industry Taskforce
on Peak Oil & Energy Security

case within the next 5 years. In our Transport: Passenger and freight may alleviate some of this, but the
view, this could have a significant transport are central to our economy. ground needs to be prepared for
impact on a number of important A mix of technological solutions and the introduction of such technology
UK industry sectors. It could also policies to incentivise behavioural and all the economic and social
have a significant impact on several change and modal shift from the car implications of flexible pricing that
key societal indicators such as fuel to public transport are identified as are enabled in this scenario. The
poverty and mobility. The penultimate key priorities. We believe maintaining government has often talked of a
section of the report looks at some of government investment in public green industrial revolution of late, and
the particular negative effects which transport is crucial and a long-term we believe that such a development
might afflict industry in the UK and view should be taken of its wider is both feasible and imperative, in
suggests some actions designed to economic, social and environmental motive power and generation alike.
combat them. benefits. We also highlight the need However, even if such a revolution
to lay foundations for alternative takes place, it will not produce results
The report concludes with a clear
sources of motive power (e.g. quickly enough to make a material
message to the incoming UK
vehicle electrification) and associated difference to the oil production
government that, although the
infrastructure. problems we describe.
immediate slow-down in the global
economy has removed short-term Retail and agricultural: These Heating: Despite the fact that only a
pressures on oil consumption, the sectors are both hit by a secondary small fraction of UK heating is directly
underlying issues highlighted in last dependence on oil. Retail, because supplied by oil (or oil-based products,
year’s report have not changed. of its dependence on sophisticated such as LPG), there is nevertheless
Therefore, future government policies just-in-time deliveries (transport), a significant minority of households
must explicitly recognise the potential and agriculture because of its that use this form of heating. Once
for: dependence on oil-based crop again, government policies need to
and soil treatment products as be framed in the interest of protecting
• Oil prices on the world markets
well as fuels for cultivation and the disadvantaged members of our
that are significantly higher than
produce transport. In both cases, society.
historic averages as soon as
oil price rises will feed through to
global economic activity revives. The report concludes with a clear
consumer prices on the shelves,
• The possibility of significant price message to the incoming UK
and government policies need to be
volatility, with high peaks and government that future policies must
shaped to protect the disadvantaged.
(possible) supply disruptions. explicitly recognise the potential for
Recommendations are put forward for Power generation world oil prices to rise and for the
policy consideration in the following and distribution: This sector is possibility of oil supply interruptions.
areas: likely to see a significant change Recommendations are put forward
in its demand patterns if there is for policy consideration in the areas
General policies: National and a significant move in the direction of transport; retail and agriculture;
local government policies (particularly of road vehicle electrification. The electricity generation and distribution;
those on the social, economic and introduction of Smart Grid technology and commercial/domestic heating.
financial fronts) should explicitly
acknowledge the potential for high
oil prices and promote appropriate
contingency planning.

7
Industry Taskforce February 2010
on Peak Oil & Energy Security

1. Introduction
The first report of the Industry this report is focussed on the issue Since our first report, there have
Taskforce on Peak Oil and Energy of oil availability. It is not focussed on been a number of important reports
Security (ITPOES) was published climate change or carbon reduction, and reviews on energy and oil from
during the final quarter of 2008. although there are some important a range of organisations. We list
It highlighted the probability that areas of overlap between these two these publications and compare their
future oil production volumes are distinct subjects. conclusions to those from our two
unlikely to rise much above the record experts.
This year’s report starts with a scene
global extraction rate of 87Mb/d
setting description of ‘peak oil’ to The report is completed by an
achieved in July 2008, and that this
clarify terms. As in Report 1, we appraisal of the opinions which
will not match rising global demand.
then present two expert ‘opinions’. have been offered. The Taskforce
The consequences of this shortfall
Opinion A is (again) offered by Chris concludes that action needs to be
were summed up in the phrase ‘an
Skrebowski, an independent, and taken by government to protect
end to the era of cheap oil’ and
highly reputable, oil industry analyst. against the worse scenarios which
the term ‘oil crunch’ was coined to
He concludes that, although the are identified, and that this action
describe it.
details of production volumes and must form a priority for the new UK
One year on, this second report from timings may have altered, the basic government which will arrive during
ITPOES examines the changes which issues remain the same. 2010.
have taken place since Q4, 2008, and
Opinion B is offered by Dr Robert
re-evaluates the conclusions which
Falkner of the London School
were drawn at that time. It concludes
of Economics (Department of
that, although many significant
International Relations). Dr Falkner
economic events have occurred in
looks at the potential economic
the past 12 months, the very simple
consequences of the coming oil
fundamental factors which pointed to
crunch with particular reference to the
the oil crunch have not gone away,
UK. He concludes that times ahead
and an end to the age of cheap oil is
will be tough.
indeed with us. Like its predecessor,

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February 2010 Industry Taskforce
on Peak Oil & Energy Security

2. Scene setting
2.1 Low prices sometime). Rather, it relates to the The need to find new super-giant
maximum rate at which we can fields is illustrated by the fact that,
and abundant resources -
extract oil - which, in turn, relates although there are some 70,000
end of an era? to ease of access and rates of known fields in current production
The idea that cheap oil is available extraction at the wells. These limits world-wide, the vast majority of these
and abundant is one of the great to access, and rates of extraction, produce oil in insignificant volumes.
economic presumptions of our may come about for several, quite A mere 120 fields are the source
times. The price of oil, adjusted for different, reasons of 50 percent of global production,
inflation over the period shown in and one field alone, the super-giant
The first possibility is that we are
Fig 2.1, shows that market prices Ghawar field in Saudi Arabia, yields
already producing at, or near, the
have generally been well below the over 5 percent of the world’s current
maximum capacity of our existing
equivalent of $30/b (US dollars production. Ghawar and the world’s
fields and no more significant oil fields
inflation corrected to today’s prices), other giant fields are, for the most
can be found, despite increasingly
except for the oil shocks of the 70’s part, quite old, and no new finds of
intense exploration activity. This is the
and now. And, over a similar period this size have been reported for a
conventional understanding of the
as shown in Fig 2.2, the global rate very long time. This suggests that
case for ‘peak oil’. Despite the facts
of production has been unremittingly they are not going to be found very
that there is a large amount of known
upwards, suggesting an abundance easily in future and, as a result, ‘peak
oil in the ground (more than we have
of reserves. Figs 2.1 and 2.2 oil’ is at hand. It is our view that this
extracted to date), and that new finds
encapsulate conventional wisdom description of the present state of
are constantly being reported, none
on oil production: low prices and global oil production is quite credible.
of this adds up to enough to replenish
abundant resources. the current levels of draw-down. The second possibility is that we
But the significant rise in prices over The new, easily accessible, super- are producing oil at, or near, the
the past decade presents a cause for giant fields which are necessary to maximum capacity of the existing
concern. Is this a temporary market replenish the mainstay of current fields, but large new (and easily
aberration, or is it an indication that production are nowhere to be seen. accessible) finds will be brought
demand is beginning to run ahead oil price ($/b)
100
of supply? Might it even represent
a turning point in the history of oil 90

production: the point where the 80

highest practicable rate of global $ 2008


70
production has now been achieved
and from which future levels of 60

production will either plateau, or 50


begin to diminish (so-called ‘peak
40
oil’)? And, if it marks the recognition
of peak oil, how big might be the 30

shock to our economic landscape?


20

‘Peak oil’ is an expression that is


10
widely mis-understood. It does not $ money of the day
relate to a prediction that there’s 0
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
no more oil left to extract from the year
earth’s oil fields (although oil is a Fig 2.1 Price of oil over the period 1920 to 2008, both at prices of the day and inflation adjusted to 2008 US dollars.
(Source: BP Statistical Review of World Energy 2009)
finite resource and it must run-out
9
Industry Taskforce February 2010
on Peak Oil & Energy Security

on stream in future despite the fact 90


production (Mb/d)

that these sources are currently


unidentified. The relative absence of 80

obvious candidates for immediate


exploitation merely reflects the 70

comparatively low levels of oil-


60 OPEC
industry investment in exploration
and production over the past decade 50
(due, mainly, to the relatively low
Middle East
market prices for oil). Unfortunately, 40 FSU
South America
even if large new finds are in the
Eastern Europe
offing, only limited new capacity 30
North America
will arrive on stream within the other
OECD
20
next decade or so, because large
fields take many years to develop. 10
In a world with rapidly rising global other

demand, this will inevitably lead to a 0

sharp and sustained rise in oil prices 1920 1930 1940 1950 1960 1970 1980 1990 2000
year
over the coming decade, even though
Fig 2.2 Global oil production 1920-2008. (FSU: former Soviet Union, since December 1991.)
prices may retreat again in the longer (Sources: US Department of Energy for 1920-1964, and BP Statistical Review of World Energy for 1965-2008)
term. In our view, this description
of the present state of global oil
2.2 The rate of production - DEFINITION OF LIQUIDS PRODUCTION
production is credible, but unlikely.
are we really at the peak?
The third possibility is that there will Oil production figures generally used in
be new discoveries of large new oil The historic global rate of oil
this report are actually composed of three
sources, but they will not be easily production is shown in Fig 2.2. elements:
accessed, or they will be difficult For details of “oil” included, see 1. crude and lease condensate production
to extract from. The recent deep “Definition of liquids production” in (everything that comes out of an oil well as
offshore, sub-salt, finds in South/ box. It is tempting to conclude from a liquid)
this that the rate can continue to rise 2. natural gas plant liquids (the propane,
Central America, and the tar sands
indefinitely, even though production butane and other liquids extracted in gas
of Canada, are good examples. processing plants)
Under these circumstances, even seems to have plateaued in the past
3. biofuels and other fuel liquids, such as
though abundant oil reserves may five years.
coal-to-liquids and gas-to-liquids
be uncovered with the passing of If we look behind the scenes, the For example, the IEA’s reported all liquids
time, the ability to extract that oil current global rate of production production of 85.9Mb/d in November
will be limited both physically and is simply the aggregate of a large 2009 would include:
by the sheer cost of exploration and • roughly 73Mb/d (85 percent)
number of known individual fields. We
of crude and lease condensate
production. Consequently, there will know how many fields are producing
• around 8.4Mb/d (10 percent) of natural
be a sharp, and permanent, rise in world-wide, their ages, and (within gas liquids
oil prices from which there will be no some important limits) the production • 2.3Mb/d (3 percent) of other liquids
retreat. In our view, this description characteristics of those fields - so we • 2.2Mb/d (3 percent) of processing gain
of the present state of global oil can predict, with some confidence, (the volume of products after refining
production is probably the best that is the ability of those wells to produce exceeds the volume of crude input by the
available. oil in future. processing gain)

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February 2010 Industry Taskforce
on Peak Oil & Energy Security

The typical production profile for a a


100%
annual production

single field is shown diagrammatically 90%

in Fig 2.3(a). Production rises quite 80%

quickly to a peak, and then subsides 70%

at a ‘depletion rate’ which varies from 60%

50%
field-to-field, depending on geology
40%
and production strategy. Peak
30%
production will be established when,
20%
typically, around 25-30 percent of
10%
the total reserve has been extracted.
0%
(Note, however, that the last 25- 0 5 10 15 20 25 30 35 40 45 50
year
30 percent of the reserve will be
b 100% annual production
extremely difficult to extract, so the
90%
reserve position at peak is not as
80%
rosy as it sounds). If we aggregate
70%
this information for all known, and
60%
planned, fields we can estimate 50%
world-wide future flow rates. An 40%
exercise of this type forms the basis 30%

for the opinion expressed in Section 3 20%

of this report. 10%

0%
An interesting characteristic of oil 0 5 10 15 20 25 30 35 40 45 50

production is that a collection of year


Fig 2.3 (a) The typical production profile for a single field. (b) The production from a single region made up from
fields (in a single region, for example) the aggregation of progressively smaller fields. This shows 15 fields, one field brought into production each year,
will almost always demonstrate a each successive field being 10 percent smaller than the previous. However the overall peak is at 12 years, a date
unchanged by further fields brought into production. (Source: UKERC “Global oil depletion” 2009)
collective ‘peaky’ behaviour. If we
rise significantly above 92Mb/d Middle Eastern producers that the oil
assume that the largest fields are
(million barrels per day) unless is more valuable left in the ground as
tapped first, and that subsequent
some unforeseen giant, and easily a legacy for their future generations,
fields are progressively smaller,
accessible, finds are reported very casts some serious doubt over
and are accessed at successive
soon. In our view, this is extremely the conventional ‘abundant future
time intervals, the aggregated
unlikely. production’ scenario.
characteristic is shown in Fig 2.3(b)
- no matter how many subsequent, The weak point in such analyses, The real question is whether
smaller, finds are added, it is not historically, has been the difficulty significant new supplies of readily
possible to remove the peak - in predicting depletion rates and, accessible, cheap, oil are available.
there will come a point where in particular, some uncertainty over The answer is ‘certainly not’ - from
production moves into decline. the veracity of the stated reserves in the viewpoint of the world’s oil
the OPEC countries. These reserves majors, at least. Whilst all the major
The prediction of future flows is not
are, officially, very high - and this oil companies are reporting new finds,
a precise science. However, the
assertion leads to the conclusion the accessibility of these finds means
analysis presented in last year’s
that if demand rises, pumping rates that the cost of producing oil will be
report from ITPOES, and reinforced
can be easily increased. However, very high in most cases. Or there
in Section 3 of this report, suggests
the inability of oil producers to keep may be other problems, as with the
that global supply rates are currently
up with the rising demands of 2007- great resources of the tar sands. This
at, or near, their peak and cannot
8, and the statements from some is an energy-intensive and, therefore,
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Industry Taskforce February 2010
on Peak Oil & Energy Security

expensive process. It is also likely to 100


extraction cost ($/b)

be very carbon-intensive. But there is


also a physical limit to how fast the oil 90

can be extracted from these sands. 80


Canadian tar sands

So, even if the reserves are abundant,


70
the maximum extraction rates are
likely to be limited, thus constraining 60
deep offshore

the tar sands from becoming the


50
mainstay of future production. conventional non-OPEC

40
Fig 2.4 illustrates the range in costs
of extraction of oil found in different 30 Russia / China
other OPEC
locations at today’s prices; it is other ME
20
clear that we need to find more oil Saudi Arabia
at Middle-Eastern-like prices if our 10

historic position of cheap oil is to be


0
maintained. Fig 2.4 For a range of oil sources, comparison of extraction costs. (ME: Middle East countries)
(Source: Peak Oil Consulting)
New finds at Middle-Eastern-like
from the National Oil Companies who near future and this would change the
prices are very unlikely to be delivered
dominate today’s production scene. outlook dramatically. Iraq is principal
by the world’s oil majors. However
These oil-producing nations (some amongst these, where it is certain
those players no longer dominate the
Middle-Eastern, some not) could find that vast reserves of low-cost oil are
world scene. The ten largest quoted
new low-cost sources of oil in the readily available. But the military and
oil companies currently produce only
production (Mb/d)
about 20 percent of the world’s oil 20

between them. Fig 2.5 shows that


they produced only 17.5Mb/d in 2008 18

(out of a total of around 82Mb/d


BP
in Fig. 2.2). It also shows that this 16

aggregated production volume has


Chevron
been relatively flat for the past six 14
Conoco Phillips
years and is currently in decline
ENI
(although production at two very 12

important companies, Petrobras and ExxonMobil

10
PetroChina, is expanding). Royal Dutch Shell

If the largest, strongest, and best 8


Statoi Hydro
financed companies are having
difficulty in maintaining (let alone 6
Total
expanding) production, then the
idea that the world is coming close 4

to an oil supply crunch is not as Petrobras

unreasonable as it might first appear. 2

PetroChina
It is a fact that the discovery of
0
abundant, easily accessible, new 2002 2003 2004 2005 2006 2007 2008

sources of supply will come (if at all) year

Fig 2.5 Aggregated production for the world’s ten largest quoted oil companies. (Source: Peak Oil Consulting)
12
February 2010 Industry Taskforce
on Peak Oil & Energy Security

discovery rate 30Mb/d in the future, will be systemically


different from the past. To date,
the vast majority of world demand
for oil has come from the OECD
OPEC output 36.7Mb/d
countries (the so-called ‘Western
world’). But, in future, the principal
extra claimed OPEC proved
reserves 300Gb reserves 656Gb growth in demand will come from the
non-OPEC output 32.3Mb/d non-OECD countries (the so-called
FSU output 12.8Mb/d
‘developing world’). The non-OECD
reserve growth
countries comprise the vast majority
FSU proved reserves 128Gb
25Mb/d
of the world’s population (some 5
non-OPEC, non-FSU proved reserves 174Gb
billion people of the world’s current
Canadian tar sands proved reserves 174Gb
population of 6 billion), so the
Canadian tar sands output 1.2Mb/d
consequences of a steady growth
in per capita oil-demand in these
nations need no further elaboration.
road
50% The forces of globalisation, now
biofuels 1.5 Mb/d
unlocked, will be very powerful and
air
8%
will probably change our outlook on
non-fuel
16% sea future oil demand from a fundamental
heating 8%
& power point of view. Nevertheless, in the
18%
short-term (within the context of
consumption 84.5Mb/d
the next decade, at least), there are
arguments both for, and against, a
continued strong growth in global oil
Fig 2.6 Schematic of the size of oil reserves, supply and demand in today’s market. Non-fuel consumption includes
chemicals, solvents, lubricants and asphalt. (Source: Peak Oil Consulting) demand.
On the side of the ‘weak growth’
political difficulties in Iraq rule out any 2.3 Global demand - argument, the underlying trend of
simple predictions of future supply unfettered growth among the OECD
is it really set to rise?
from this theatre. And real knowledge countries has been modified by the oil
of most other National Oil Company It seems reasonable to assume that shocks of the 70’s, a general maturing
assets is cloudy, at best. world demand for oil will continue of demand in the last two decades,
to rise for the foreseeable future. It and the recent economic collapse.
A simple summary of today’s picture
has, after all, risen fairly continuously If we ignore short-term economic
of reserves, supply, and demand,
for the last 100 years (Fig 2.2). volatilities (economic cycles come
is presented in Fig 2.6 showing the
A simple extrapolation of this line and go), the underlying maturing of
relative scale of the components,
would suggest that world demand the OECD economies suggests that
including biofuels. (For more details
could reach 120Mb/d by 2050, a future growth in oil demand might be
about biofuels, see Appendix C.)
very similar figure to that predicted expected to flatten off. Indeed, there
by an extrapolation of the IEA’s 2009 are even signs that it is beginning to
predictions for demand in 2030. decline, as prices rise and nations
But a simple extrapolation of historic and consumers become more careful
demand could be deceptive, because in their use of natural resources.
world economic development, The current economic downturn has

13
Industry Taskforce February 2010
on Peak Oil & Energy Security

accentuated this pattern and the drop 110


oil demand and production cap (Mb/d)

in demand over the past 18 months non-OECD projected demand


100
has been dramatic. When economic production cap

recovery arrives, will demand rise 90

back to the earlier growth trend very 80


quickly, or will some demand have
70
been permanently destroyed? It is
conceivable that the demand from 60
Non historical
OECD demand
the Western world will never again 50
non-OECD

rise to the levels seen in 2008, and


40
the current excess of capacity will
OECD
turn into a glut. 30 projected
demand
OECD
OECD historical demand
Another argument which puts a limit 20

on global demand is that oil prices, 10


when they rise above a certain
0
threshold ($120/b at today’s prices?), 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
automatically trigger an economic year
Fig 2.7 Oil demand by region for the historical period 1920-2008 and extrapolation to 2030 according to the IEA’s
recession. This deflates demand, projected 1%/y global growth within which we suggest a 0.5%/y OECD decline. Also shown is the production cap to
thus putting an automatic cap on the 2015 according to the megaprojects/depletion analysis of Opinion A (Fig 3.2). (Source: BP Statistical Review of World
Energy)
maximum required rate of production.
Some argue that this happened in economies of the developing world in Section 6 that the IEA prediction
2008. cannot live with oil prices in excess for demand growth is possibly
of $120/b - indeed, their economic too low, but, for scene-setting
The counter to these arguments lies
systems are currently evolving in purposes, it provides a reputable, and
in the rate of development of the
a climate of higher oil prices and conservative, starting position.
non-OECD countries. Historically,
therefore might be relatively immune
demand from these countries has
been very low (or even non-existent)
to it (whereas the OECD economies 2.4 So what is the likely
but, as suggested previously, a rise
did not, and are not). effect on oil prices
in per-capita demand from these It seems reasonable, on balance, to and availability?
populations could have an explosive expect that the growth in oil demand
Based on the foregoing arguments,
effect on the global market for oil. For from the non-OECD countries over
it seems inevitable that global
these reasons, it can be argued that the next few decades will outweigh
demand will move to a point where
the next phase of demand growth any shrinkage in demand from the
it consistently exceeds supply. The
will be structurally different from the OECD countries. This view is in
effect must be a structural increase in
past 50 years. Globalisation has line with the projections of the IEA,
oil prices, coupled with the prospects
opened up markets and expectations whose most recent World Energy
of oil shortages and a consequent
that were previously unthinkable, so Outlook (2009) predicts global oil
increase in market volatility. The only
the flattening demand patterns of demand at levels of 105Mb/d by
questions are “how soon, and by how
the late 20th century in the OECD 2030 in their “Reference” scenario.
much?”
countries cannot be used as a basis The demand line associated with this
for future extrapolation. Likewise, view is shown in Fig 2.7, along with a
the ‘recessionary trigger’ argument production cap which represents the
may not be valid. There is no reason current predictions of the ITPOES
to believe that the strong emerging members (Section 3). We will argue

14
February 2010 Industry Taskforce
on Peak Oil & Energy Security

3. Opinion A: Chris Skrebowski


Peak Oil Consulting

3.1 Introduction The next major supply constraint,


along with spiking oil prices, will not
There are now serious concerns that occur until recession-hit demand
the free flow of relatively low cost grows to the point that it removes
oil, which has underpinned OECD the current excess oil stocks and the
countries economic growth since large spare capacity held by OPEC.
1945, may not be sustainable for very However, once these are removed,
much longer. It will be shown in this possibly as early as 2012/2013 and
section that low-cost (under $25/b) no later than 2014/2015, oil prices are
oil supplies effectively ended in early likely to spike, imperilling economic
2005 and are unlikely to return. The growth and causing economic
actual global supply of oil is now dislocation.
expected to be limited to 91-92Mb/d
Oil supply over the next five to six
(million barrels per day) of capacity
years is predictable owing to the
that will be in place by end 2010/early
slow-moving nature of oil supply
2011. Global capacity will then remain
and the long lead times for major
in the 91-92Mb/d range until 2015
projects. The primary risk is from
from which time depletion will more
supply shortfalls caused by project
than offset capacity growth from then
delays over and above those already
onwards.
announced. The demand side is
Between July 2008 and January rather less predictable as the path
2009 virtually all the world’s of economic recovery from the
economies went from vigorous recession is uncertain and because
growth to economic recession. This 80-90 percent of future demand is
has radically changed the short-term expected to come from non-OECD
outlook for energy demand in general countries such as China and India
and oil demand in particular. The where consumption data is rather less
recession has changed the market reliable. In contrast OECD demand,
dynamics and potentially moved the which makes up 55 percent of global
‘oil crunch’ point (when demand demand, is expected to see little
exceeds production capacity) out demand growth going forward and
by around two years. This in turn may even decline.
provides one of the few positive
The last 15 months have seen
aspects to the recession - it gives
unparalleled levels of price volatility in
companies and individuals more
the three main hydrocarbon fuels. Oil
time to prepare and adapt to the
prices have swung from $147 in July
coming oil supply crunch. The
2008 to $32 in late December 2008
great risk is that as prices may
and then back up to $70-80 from late
remain fairly low for the next year
August 2009.
or so, and complacency may set
in thereby postponing decisions on As both UK Prime Minister Gordon
making adaptive investments being Brown and French President Nicholas
postponed until oil prices start spiking Sarkozy have publicly observed in
again. their calls for greater price stability,
this sort of volatility is very damaging
15
Industry Taskforce February 2010
on Peak Oil & Energy Security

to economic activity and one that is Saudi Arabia, to hold spare capacity provided when the UK was self-
becoming increasingly expensive for to enforce discipline. As demand sufficient in oil and gas supply is now
companies to hedge against. It is also rises and spare capacity disappears, eroding quite quickly. This is likely to
true that great price volatility makes OPEC has to cede pricing power to put pressure on the UK balance of
investment by both end users and the market as happened in mid-2008. payments and in a world of floating
energy suppliers more difficult. exchange rates is also likely to put
The UK, because it is now a net and
downward pressure on the valuation
As this section will make clear, energy rising importer of oil, gas and coal,
of the pound sterling. In other words
price volatility is set to continue is becoming increasingly exposed to
the positive benefits to the valuation
for some time simply because competition for supplies from other
of the pound as a petrocurrency are
small mismatches in energy supply energy importers. The insulation
now disappearing.
and demand produce wide price from international supply pressures
swings as there is no economic
price ($/b)
actor strong enough to absorb and 140
global price
damp the mismatches. When the 120
‘Seven Sisters’1 dominated global oil trending price
100
supplies in the 1960s, they were in a
position to ensure price stability. Now 80

there is no group in this position in 60


terms of oil or energy supply. OPEC
40
has limited pricing power but only
when it holds capacity off the market 20

and this requires key players, usually 0


1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
year
A B C D E F

production (Mb/d)
88

86

84

82

80
historical production
78

76

74
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
year

Fig 3.1 Global price and historical production for crude oil in the last decade showing the basic forces acting on the
industry since 2000. (Source: EIA production and prices)

1 The ‘Seven Sisters’ refers to the seven oil companies


A Oil prices recovering steadily from a $10/b low D Promises of additional Saudi supply produce price
that dominated oil production, refining, and distribution in caused by the Asian financial crisis. setback, but absence of additional supply produces
the mid 20th century, these being: BP, Chevron, Exxon, B Supply and demand are well balanced. Prices rapid price escalation to peak in mid-July 2008.
Gulf Oil, Mobil, Royal Dutch Shell, Texaco. Later mergers moving in a narrow range around $25/b. Production E Prices and production fall as recession and banking
reduced the original seven down to four following and price dip in 2001 associated with the shallow crisis develop. Prices fall to marginal cost of highest
formation of ChevronTexaco (including Gulf Oil) and dotcom recession. cost producer -Canadian tar sands - as the OPEC
ExxonMobil. C Prices start to rise steadily initially producing cutback is seen as inadequate.
additional supply but then acting as a rationing F Prices rise steadily on announcement of large OPEC
mechanism for an essentially flat supply. Rationing production cutback and abating recession, reaching
trend extrapolated. Saudi target price of $75/b in the third quarter 2009.
16
February 2010 Industry Taskforce
on Peak Oil & Energy Security

3.2 Impact of the price of $75/b in August 2009. Since Recession also impacts on the
that date prices have moved in a supply side making the sanctioning
recent recession
narrow range awaiting clear evidence of new oil field investment more
In terms of the energy market, the of a strong revival in oil demand and difficult particularly if the immediate
immediate impact of an economic reacting to changes in the value of outlook is for prices to remain
recession is to depress demand, the US dollar but have not to date relatively low. A low price expectation
either in a temporary or more exceeded $81/b. also renders a number of potential
sustained way, and for this to be projects uneconomic and subject
Although OPEC announced its first
reflected in lower prices. This is to cancellation, delay or complete
production cutback in September
exactly what was seen between the re-budgeting. Again this is exactly
2008 this was generally seen as
third quarter of 2008 and the first what has occurred. It should be
inadequate and was followed by a
quarter of 2009 (Fig 3.1, period E). noted, however, that with large
prolonged standoff between OPEC
Prices peaked in July 2008 at $147 capital projects such as major oil field
and non-OPEC producers as to who
before falling steadily to a low by developments, it is usually cheaper to
would cut production to balance the
the end of December. There was complete those already well underway
market. As a result and in conformity
a slow recovery thereafter, largely - even if this may have negative
with economic theory, the oil price
driven by OPEC’s agreement to consequences for oil prices. Relatively
fell all the way to the marginal cost
restrict production and its success few oil developments due on stream
of the highest cost producer - the
after January 2009 in doing so (Fig in 2009 and 2010 have been delayed
Canadian tar sands. More or less
3.1, period F). Once oil prices were or cancelled but without a strong
at the point when producers would
seen to be on an upward trend, and demand recovery these will add to
have had to close in tar sands
significant financial funds started to the current overcapacity and may
production (because out of pocket
invest in oil, both in terms of buying depress prices or restrain upward
expenditures would have exceeded
physical cargoes and selling them price pressures.
revenues), OPEC made it clear that
later at higher prices and in terms
it was prepared to shut in enough The credit crunch, the collapse of
of paper transactions on the futures
capacity to strengthen oil prices. The oil prices and uncertainty about the
markets (Fig 3.1, period F). This self-
formal output cuts announced by length and depth of recession mean
fulfilling momentum took prices all the
OPEC in January 2009 were seen that analysis now has to look at the
way up to the OPEC target
as enough to put oil prices back on costs of existing and incremental
a rising trend which then gathered oil production, the availability of
momentum reaching $75/b in August resources to be developed and the
2009. likely impact of recession and price
on the trajectory of oil demand
growth.

17
Industry Taskforce February 2010
on Peak Oil & Energy Security

a.
8
capacity (Mb/d) project slippage. From these data
gross new capacity we see there is a clear bulge in new
6 projects and incremental capacity in
2009 and 2010 and a rather lower
4
level from 2011 to 2013.
net new capacity

2 A widely accepted assessment of


current depletion rates is that it
0
accounts for 4.7 percent of current
2000 2002 2004 2006 2008 2009 2010 2011 2012 2013 2014 2015
year
liquids production. Breaking this
-2
down, Peak Oil Consulting puts
-4 current depletion rates at 1.5Mb/d
4.7% depletion and 2.5Mb/d for OPEC and non-
-6
depletion (Mb/d)
OPEC respectively giving a total
annual loss of capacity of 4.0Mb/d
production (Mb/d) or 4.7 percent of current total liquids
b. 92
production of 84.5Mb/d.
90
The final column in Table 3.1 is net
of depletion. In terms of net new
88
net new capacity
capacity, this is overwhelmingly
86 spare capacity concentrated in 2009 and 2010 with
minimal additions thereafter.
84
Each annual gross new capacity and
82 depletion combine in Fig. 3.2(a) to
form net new capacity each year
80
historical production production cap
which go on to derive the production
cap, the limit of production capacity,
78
to 2015 in Fig 3.2(b). This shows
76 production as no higher than
92Mb/d. (For a discussion of possible
74 disruptive events to oil production
2000 2002 2004 2006 2008 2009 2010 2011 2012 2013 2014 2015
capacity that might reduce this
year
production cap, see Appendix B.)
Fig 3.2 Derivation of the maximum future production capacity or “production cap”.
(a) Annual values of gross new capacity, as summarised in the megaprojects listing in Table 3.1, together


with annual depletion of total current production.
(b) Historical production projected into the future using first the current spare capacity, then each annual
3.4 Limited discovery and
value of net new capacity (net of depletion) as shown in (a). high-cost reserves
3.3 Supply to 2015 - Table 3.1 shows all projects with a
One of the many challenges faced by
peak flow of 40,000 b/d or greater in
megaprojects analysis the industry is that discovery rates
each year - that is, the megaprojects
have over the last decade averaged
Increases in oil supply up to six years - separating them into OPEC and
a little over 30Mb/d while demand
hence are largely dictated by the long non-OPEC and listing the gross
has grown steadily reaching nearly
lead times for major projects, so an new capacity. Allowances have
85Mb/d in 2008. This in turn means
analysis of these projects gives a been made for the contribution of
the world’s store of ‘discovered and
calculation of the maximum supply- smaller projects of below 40,000 b/d,
in production’ oil is now being run
side capacity high confidence. operational uptime as well an average
18
February 2010 Industry Taskforce
on Peak Oil & Energy Security

Year of OPEC Non-OPEC Total Annual gross Annual net amounts to about 30Mb/d, again with
project projects projects projects new capacity new capacity some limited expansion potential.
completion completed completed completed to be to be
brought on brought on This means that essentially the world
stream stream has around 80Mb/d of production
2009 26 24 50 6.2Mb/d 2.2Mb/d capacity and 5Mb/d of spare capacity
2010 14 25 39 5.7Mb/d 2.1Mb/d which is profitable providing prices
2011 6 17 23 3.2Mb/d 0.2Mb/d are above $60/b and even at this
2012 24 18 42 3.4Mb/d -0.2Mb/d price level new investment can be
2013 14 25 39 4.4Mb/d 0.3Mb/d justified.
2014 15 6 21 4.2Mb/d 0.2Mb/d
The real challenge is that the final
2015 4 6 10 2.4Mb/d -1.2Mb/d
5-10Mb/d of global capacity comes
Table 3.1 Megaprojects listing of the incremental supply coming on stream in each year for 2009-2015. The gross from the third tranche high-cost
new capacity figures have been corrected with a delay to account for an unannounced three-month project slippage
and 10 percent reduction to account for the typical operational uptime for a project of 90 percent. The net new
sources - predominantly deepwater
capacity figures take account of loss to depletion. (Source: Peak Oil Consulting) developments off the West African
down at an annual rate of up to production onshore in the Middle coast, in the Gulf of Mexico and
55Mb/d. (The additions to reserves East, Russia and China. This has full offshore Brazil as well as Canadian
made when companies revise cycle (investment and production) tar sands. Fully built-up costs at
estimates for discovered fields should costs of under $30/b. This is highly the levels required to justify new
be treated with some caution as profitable and has some, relatively investments range from $70/b to
they extend field life but only rarely limited, expansion potential over and $100/b. Some commentators have
expand production capacity.) The above the 4Mb/d of spare capacity claimed that in the light of recent
world’s reserves of both developed OPEC currently has. (For an in- price volatility, companies would
and undeveloped oil are large but the depth analysis of spare capacity, need to see prices as high as $120/b
challenge of expanding output further see Appendix A.) Low-cost onshore before sanctioning new investment
is becoming ever harder to meet. If OPEC plus onshore Russia and for these high-cost, multi-billion dollar
oil prices remain relatively low over China currently accounts for around projects. This is the group that has
the next few years, it will be virtually 55Mb/d of global production including the largest expansion potential and
impossible to sanction investments the OPEC spare capacity. The the group from which most of the
in high-cost resources, such as large supra-normal profits earned incremental production is expected
deepwater offshore oil, offshore Arctic by this group support massive to come from. Existing production is
oil and Canadian tar sands. government expenditures. In the profitable at current prices of around
case of the Middle East this allows $75/b but incremental investments
Fig 3.1 shows that despite an ever are hard to justify unless oil prices are
minimal taxation and large education,
increasing financial incentive in the in the $100-120/b range.
health and welfare benefits for the
form of higher oil prices from around
population. The challenge is that if oil prices
May 2005 to mid 2008, there was
little or no increase in supply which The next tranche essentially reach the levels necessary to
moved in a narrow range at just over comprises all other onshore justify these high-cost investments,
84Mb/d. production in the world and the economic growth may be imperilled.
relatively shallow water production This results from the higher cost of
Fig 3.3 shows the oil cost split by oil and the fact the first production
from Mexico, the North Sea and other
the volumes of production capacity. group (OPEC plus onshore Russia
continental shelves. Here fully built-
It is possible to divide current global and China) is making massive supra-
up costs are in the $50-60/b range.
oil production of around 85Mb/d into normal profits. Because these extra
Production from this group currently
three tranches. The first comprises profits are not readily absorbed, they
19
Industry Taskforce February 2010
on Peak Oil & Energy Security

a. production cost ($/b) are usually partly remitted to the


110
banking centres of London and New
100 York. This is the classic petrodollar
recycling which led to the South
90
high price
American debt crisis in the 1980s and
80
arguably was a key contributor to the
financial crisis of 2008.
70
It therefore appears that there may
60 be real constraints to the widely
low price
held idea that shortfalls in oil supply
50
profit current production cost can be met by mobilising high-cost
40 reserves.

30
3.5 Recent history
20 reconciling static supply
and rising demand
marginal production cost

10

0
Between 2004 and 2008 Chinese
0 10 20 30 40 50 60 70 80 90 100 demand grew by 1.2Mb/d and
current production rate (Mb/d) Indian demand by 0.3Mb/d. As there
b. production cost ($/b)
110 was only a very limited expansion
high price of supply in this period, supply
100
and demand had to be reconciled
90
tar sands
by using high prices to depress
Orinoco
demand in the OECD area. Rapid
80 Asian demand growth was met
current price
by depressing US, European and
70
Japanese demand by over 1.5Mb/d
60 from 2004 to 2008. The effect was
accentuated because much of the
50 deep offshore
rapidly growing Middle East and
low price
40 Asian demand enjoyed subsidised,
low oil products prices while OECD
30 profit
countries generally experienced the
20 Iraq
full rise in oil prices
Another way of understanding what
10 production costs
happened between 2004 and 2008
0 might be to consider the marginal
10 20 30 40 50 60 70 80 90 100 utility or the marginal productivity
current and future possible production rate (Mb/d)
of an extra barrel of oil. This may
Fig 3.3 Progressively higher production costs ($/b) related to global capacity (Mb/d). (Source: Peak Oil Consulting)
(a) Analysis of current production with a price range, $60-80/b, that allows most production types to be be much higher in fast growing but
profitable. If the price were to go much lower than $60/b, the marginal production costs show how much relatively poor non-OECD countries
production would be viable, though covering only direct costs and operating at a loss.
(b) Addition of possible new production from 2015 with extra investment in: Iraq, deep offshore (Brazil), than it is in much richer OECD
Orinoco (Venezuela) and tar sands (Canada). Horizontal lines representing low $40, current $70 and high countries. This would lead to the
$100 oil prices show both the viability for production from high-cost types as well as the degree of
profit from low cost types.
20
February 2010 Industry Taskforce
on Peak Oil & Energy Security

apparently non-intuitive conclusion maintains a plateau capacity in this of US GNP have been associated
that because additional oil supply range until mid-2015. This is when with every US recession since 1960
brought greater benefits, the capacity starts to be overwhelmed by apart from the one after the dotcom
developing countries could afford depletion and lack of new capacity bubble burst. Association does
high oil prices more readily than additions, and consequently declines. not prove causality but this close
richer developed economies. The oil crunch or peak occurs when association is highly suggestive. At
demand reaches 91-92Mb/d or the moment 4 percent of US GNP
The global supply demand behaviour
somewhat less if after mid-2015 when would equate to $80/b oil. It also
in the 2005-2008 period immediately
capacity is declining. suggests there is an oil price level too
begs a number of important
high to be afforded without negative
questions. The first is whether the
demand decline in the OECD area will
3.6 Future supply-demand economic consequences.
reverse in the face of sustained lower dynamic Fig. 3.4 overlays the global
prices and easier supply conditions? production cap derived from the
The long lead times for major oil
Or whether a fundamental change megaprojects analysis above with
developments and the attempt to
to a declining demand trajectory has projections of global demand.
bring on new supplies quickly led
occurred? A further key question is Projected demand exceeding the
to huge inflation in all oil field costs
whether fuel subsidies are a valid or production cap gives an indication of
which doubled between 2005 and
an invalid policy tool? And if invalid, when the price crunch will begin.
2008. This required ever higher oil
how could and should countries be
prices to justify the ever higher cost The demand projections in Fig. 3.4
dissuaded from their use? Finally
of investment. In 2009 costs have are all from the IEA’s Oil Market
and at a more profound level should
eased back a little declining by Reports (OMR) but from different
the richest countries encourage
around 20 percent from the 2008 times to illustrate the difficulties
efficiency in use in order to depress
highs. The general expectation is that inherent in such predictions. The
their own oil demand in order to free
prices will soften while few contracts oldest projection shown is from the
up oil supplies for the rapidly growing
are being awarded but will inflate Medium-Term OMR of July 2008.
developing economies of the non-
again once more contracts start to be A year later, the Medium-Term OMR
OECD countries?
awarded. of July 2009 shows the effect of the
While all of these questions really recession, indicating much reduced
The general assumption had been
start to apply as we approach the demand and cross over with the
that there would be smooth transition
oil crunch or peak, addressing production cap out to 2015. However
to higher cost oil supplies and that
them earlier could make adaptation since late summer 2009 the IEA
these higher prices for oil would
to peaking oil supplies rather less has been steadily revising demand
be acceptable in the end markets.
disruptive to economic activity, projections upwards for 2009 and
What the events of 2008 brutally
growth and employment. 2010. It would now appear that, in
demonstrated was that if oil prices
terms of the impact on oil demand,
Although there has been some move too high too quickly the only
the recession has been much less
suggestion that the July 2008 economic adaptation is recession.
severe than earlier anticipated.
production of 87.0Mb/d represents
There is no accepted idea of what
the peak oil output, this report In the December 2009 Oil Market
oil price is absorbable and what level
shows that this is unlikely. At a Report, the IEA offered two demand
causes recessions. Recent work
time of depressed demand it is scenarios. The first is for annual oil
done in the US shows that high oil
more useful to think of the size of demand growth of 1.4 percent for
prices and recessions are linked.
production capacity. It has been 2009-2014 which gives an oil crunch
The work showed that rapid price
shown that this reaches 91-92Mb/d in 2014, little changed from the
rises with oil costs reaching 4 percent
by end 2010/early 2011 and then projected date in the ITPOES report
21
Industry Taskforce February 2010
on Peak Oil & Energy Security

of 2008, or a semi-recessionary 94
production on demand (Mb/y)

growth of just 0.5 percent which


OMR December 2009
postpones the oil crunch to some @ higher GDP

time after 2015 (see Fig 3.4). 92

3.7 Review of future over 90

four time periods MTOMR July 2008


88
The foregoing discussion has historical demand
derived a production cap to 2015
and discussed interaction with 86
OMR December 2009
demand. This can now be reviewed @ lower GDP
by considering how both supply and
84
prices might develop over four time MTOMR July 2009

periods with reference to


Fig. 3.5 considering also the forces 72

that could alter their impact and historical production production cap

duration. Prices are ultimately going 80

to reflect underlying supply/demand 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
year
balances although speculative
Fig 3.4 Comparing predictions of demand to production capacity, as derived in Fig 3.2, to 2015. The ‘oil crunch’
pressures or OPEC actions have occurs at the point when demand matches or exceeds the production cap. The most recent projected demand trend
the ability to move price levels away (IEA Oil Market Report December 2009) is given for higher and lower GDP growth outlooks. Older projected demand
trends (IEA Medium-Term Oil Market Reports) are shown for July 2009 and July 2008. Also shown are historical
from fundamentals, sometimes for production and historical demand.
extended periods.
3.7.2 Supply satisfies to engender an upward price
momentum as supply tightens or
3.7.1 Low prices during economic growth,
appears to tighten. Prices are likely to
recovery to 2011 2011-2013 be higher than in the earlier period in
The first period is to 2011 when The second period is 2011-2013 the $70-90/b range but could also be
supply is likely to be adequate and when economic recovery from the quite volatile.
prices relatively low. How low will recession should be complete and
largely depend on how successful economic growth re-established 3.7.3 Tightening oil supplies,
OPEC is in both defending prices around the world. As a result, oil 2014-2015
around the preferred $75/b level and demand would be expected to be
The third time period would be 2014-
in ensuring they don’t rise too far growing strongly with prices starting
2015 when the oil market would be
above this level in order to minimise to rise and supply to begin tightening.
starting to experience rapidly rising
the risk to recovering economic
For the 2011-2013 period prices prices and tightening oil supplies. As
growth.
are likely to increase as rising these trends establish themselves
demand absorbs the spare capacity increasing amounts of money will
overhang. The danger is anticipation seek a return invested in oil - in
by producers leading to excess oil companies, and in oil futures and
coming onto the market ahead of as physical oil contracts. In effect
demand growth and leading to lower this could easily become a repetition
prices. The counter pressure will be of what happened in 2008 and is
financial market activity attempting the period in which the oil crunch
22
February 2010 Industry Taskforce
on Peak Oil & Energy Security

160
price ($/b)
3.7.4 Recessionary forces with
140
high price projection
volatile prices from 2015 on
120 The fourth time period is 2015-2020
historical price when we would expect a repetition
100
of the post-2008 experience - a rapid
80 price fall caused by recessionary
low price projection forces followed by a price recovery.
60
Unlike 2009-2010 where there is
40 spare OPEC capacity and large
volumes of incremental capacity
20
coming on stream, after 2015
0 depletion will be eroding capacity
2006 2008 2010 2012 2014 2016 2018 2020
year steadily with only limited new capacity
production (Mb/d)
1 2 3 4
coming on stream. The expectation
92
will be that companies will make
90 heroic efforts to bring on new
capacity although it is unlikely that
88
this will be sufficient to fully offset
86 depletion. A possible outcome is
an undulating production plateau at
84
around 90Mb/d, as indicated in
82 Fig. 3.5.
historical production production cap long term production

80 There is, however, a plausible


2006 2008 2010 2012 2014 2016 2018 2020
alternative scenario for this period.
year
Here, adaptation and new technology
Fig 3.5 Prices and global production projections for the period 2009-2020. Historical data is shown for 2006-2009. will have reached the point where
The production cap to 2015 is based on megaprojects currently in build, as derived in Fig 3.2. The production
projection beyond 2015 is shown as a plateau. declining usage of oil in the OECD
area and not-too-rapid non-OECD
growth are just enough to reconcile
supply and demand at around
90Mb/d even though production
is most likely to occur. It is notable will wish to avoid a repetition of 2008. capacity is likely to be declining. Oil
that the CEO of Total, Christophe de Their ability to do so largely depends prices are likely to be fairly high to
Margerie, is already warning of such on how far the fuel mix has changed maintain the pressure to minimise
an outcome in the 2014/15 period. and how responsive demand is to usage. This relatively benign outlook
rising prices. This means there is becomes less likely if non-OECD
For the UK, this is exactly the period
potentially a relatively benign outcome growth proceeds at over 3 percent
when the next UK government will be
in which prices rise above $100 but and OECD growth reappears as
seeking re-election.
economies are broadly able to absorb this would give overall growth
In the 2014-2015 period it is expected this. There is also the oil crunch approaching 2 percent per year.
that demand will start to outrun outcome in which oil prices are bid (OECD and non-OECD are likely
immediately available supply with up to levels that produce a recession each to take half of global supply by
prices advancing strongly. All parties and we get a repetition of 2008-2011. around 2013.)

23
Industry Taskforce February 2010
on Peak Oil & Energy Security

3.8 Gas - the wild card Companies are now scouring the now enjoy LNG costs of around $6-8
globe to identify and exploit shale mn BTU, roughly a third of the levels
There has been much recent gas reserves. In Canada where both paid in early 2008.
discussion of the undoubted gas reserves and gas production
It is widely accepted that gas prices
development success of US shale have been in sustained decline, since
in the $6-9 range would allow
gas reserves and the possibility that 1996 and 2002 respectively, the
profitable development of both LNG
this success can be repeated around discovery of the Horn River shale gas
resources and the unconventional
the world allowing a partial transition accumulation provides the first hard
gas reserves such as shale gas and
to gas to offset potential shortfalls evidence that Canada may be able
coal bed methane. On a calorific
in oil supply. This is a development to the repeat the US gas turnaround.
equivalence basis gas at $6-9mn
that would also lower the cost of Potential shale gas reserves have also
BTU is equivalent to oil prices of $36-
energy as the calorific cost of gas is been identified in Spain and Poland,
54/b. Historically oil has commanded
around half that of oil. The associated France and Germany and at least
a 20 percent premium to the strict
possibility is that relatively cheap gas among some companies there are
calorific equivalence which would
will pressure and reduce oil prices. high hopes that significant European
translate to $43.2-64.8/b.
Over the last five years aggressive shale gas resources will be identified.
The rest of the world appears to be In terms of primary energy supply
development of unconventional gas
on the cusp of a scramble for the proportion of gas in the energy
reserves has reversed the US gas
shale gas. mix varies widely. In the UK gas
supply decline and boosted US gas
constitutes 39.9 percent of primary
reserves. Most notable has been the Already the global gas market is in
energy a little ahead of oil’s 37.2
Barnett shale in Texas as well as the upheaval thanks to the US shale gas
percent share. Probably the most
more conventional ‘unconventional success. In addition the last year has
gas-dependent economy is Russia
gas’ reserves such as coal bed seen a massive increase in liquified
with a 55.2 percent share for gas.
methane. Between end 1998 and natural gas (LNG) supplies with the
In sharp contrast the two Asian
end 2008, US gas reserves grew start up of massive trains in Qatar,
giants - China and India - have
by 2.08tn cm or 44.7 percent with Sakhalin, Irian Jaya (Indonesia) and
minimal gas utilisation with primary
most of the increase coming from most recently Yemen. 2010 will see
energy shares of 3.6 percent and
unconventional gas resources. This even more LNG export capacity
8.6 percent respectively. Australia
in turn has allowed a 7.5 percent coming on stream from Qatar, Peru
despite its abundant gas resources
increase in production in 2007-2008 and Yemen.
only achieves a 17.9 percent share for
alone taking US gas production
In one sense the timing could not be gas. Asia’s two largest LNG importers
to a record high. The short-term
worse as economic recession has - Japan and South Korea - also
consequence has been to drive
hit gas demand globally while US have a remarkably low gas utilisation
US gas prices down to levels not
shale gas has already backed out in their energy mix at 16.6 percent
seen since the start of the decade
LNG supplies into the US. In 2007 and 14.9 percent respectively. What
as winter gas storage filled early
US LNG imports were 21.82bn cm this clearly indicates is there is
and recession hit demand failed
but these fell to 9.94bn cm in 2008 enormous potential for gas to capture
to take up the slack. This is likely
- a 54.4 percent decline which took market share driven by its economic
to rebalance as demand rises and
utilisation of recently expanded US attraction versus oil and its lower CO2
excess stocks clear.
LNG import capacity down to just 8 emissions versus both oil and coal.
percent. This diverted LNG supply
has increased LNG availability in
Asian and European markets which

24
February 2010 Industry Taskforce
on Peak Oil & Energy Security

Because gas has the potential to be The detractors point out that the The recent takeover of the largest US
so disruptive of energy markets it has economics of shale gas are suspect independent shale gas producer XTO
attracted rather strident advocates because production falls off between Energy by ExxonMobil for $31 billion
and detractors. The advocates claim 50 percent and 65 percent in the first and the buy-ins of shale gas acreage
it as the fuel of the future, pointing year with an economic production and production from Chesapeake
out that the world hasn’t really been limit for each well of 10 years and Energy by BP and Total strongly
explored for shale gas and other maybe as little as five years. The suggest the oil supermajors now see
unconventional gas supplies, and that counter to this is that even if the unconventional gas as a growth area
huge volumes are potentially available decline curves are very sharp and for them. Whether the development
at prices rather below current oil development drilling has to be almost of unconventional gas supplies is fast
prices. In addition ever greater continuous that doesn’t mean it is enough to have an impact on the oil
quantities of remote or stranded gas uneconomic, just that it requires crunch remains to be seen. It is clear,
can be mobilised as LNG particularly a very different approach from however, that unconventional gas will
as the new floating LNG technology conventional gas fields. There have be a key incremental energy supply
has the potential to mobilise smaller also been water supply and water in ameliorating the impact of the oil
gas accumulations which to date contamination problems associated crunch.
have been uneconomic but are with the hydrofraccing that is the
actually very numerous around key to shale gas development
the world. They also suggest that with the detractors seeing this
greater gas utilisation could reduce as a fundamental constraint and
dependence on oil imports from the advocates as a learning curve
OPEC countries and restrict OPEC’s problem. Detractors also believe it
and Russia’s power. The advocates would be dangerous to depend on
also suggest that a determined move a new and not fully proven resource
to utilise gas in transport would both particularly as the quality and
drive the utilisation of gas and reduce producibility varies widely between
the dependence on oil for transport gas shale formations.
across the world.
For the large quoted oil companies
gas presents a great challenge.
Almost all have shale gas and LNG
investments but if plentiful gas
supply keeps oil prices down they
will be unable to develop their high-
cost deepwater, Arctic and tar sand
reserves. The challenge is whether
they can make gas as profitable
as oil.

25
Industry Taskforce February 2010
on Peak Oil & Energy Security

3.9 Conclusion There has been much recent The severity and impact of the
discussion that the undoubted oil crunch in terms of economic
The recession caused by the credit development success of US shale disruption will be largely determined
crunch and the 2008 price spike has gas reserves and the possibility this by the degree to which the period to
delayed the oil crunch by at least two success can be repeated around 2014 is used to plan and adapt to the
years. the world allowing a partial transition real threat of restricted oil supplies.
to gas to offset potential shortfalls
Potentially greater gas utilisation
in oil supply. This is a development
offers an amelioration of the oil supply
that would also lower the cost of
challenge. It should be remembered
energy as the calorific cost of gas is
however, that fuel supply changeovers
around half that of oil. The associated
take time and investment even when
possibility is that relatively cheap gas
there is a clear economic incentive.
will pressure and reduce oil prices.
Companies will want to see more gas
The danger is that a period reserves proved up and the attractive
of relatively low oil prices by price differential maintained before
recent standards may induce they are prepared to invest in a large-
complacency and inhibit investment scale move to gas.
in both adaptive technologies and
incremental oil production capacity.

26
February 2010 Industry Taskforce
on Peak Oil & Energy Security

4. Opinion B: Dr Robert Falkner


London School of Economics (Department of International Relations)

4.1 Introduction be made to fill the growing gap in the


country’s oil trade balance.
For the UK, ‘peak oil’ is no longer
Is Britain facing a knock-out blow
a matter of theoretical debate. Ever
from peak oil? A future tightening
since oil production in the North Sea
of oil supply conditions is unlikely to
started to decline just over a decade
produce a sudden and catastrophic
ago, the prospect of continuously
effect in the short-term (5 years) to
dwindling petroleum reserves has
medium term (10 years) term, and
become part of the country’s new
the global economic recession has
economic reality. As the UK is
delayed the ‘oil crunch’ point by at
becoming more dependent on energy
least two years. Still, the short-term
imports, the parameters of energy
consequences, i.e. over the likely
policy are shifting. Peak oil has
lifetime of the next government, are
emerged from the fringes of political
serious enough and will be felt in
and economic debate, and security
important sectors of the economy, as
of energy supply has risen to the
well as among some of the poorest
top of the political agenda. Will the
parts of society. As the world begins
next government face up to this new
to feel the consequences of tightening
reality?
supply conditions, the UK may have
to deal with a toxic mix of greater oil
4.2 Beyond the peak:
import dependence, rising yet volatile
the UK experience oil prices, inflationary pressures and
Few analysts doubt that the UK the risk of sudden disruptions to the
passed its regional oil peak in 1999. transport system.
Annual oil production in the North
Sea has since fallen from 137 million 4.3 Economic consequences
tonnes to 72 million tonnes in less for the UK
than a decade. Responding to this
Of all the different sectors of the
challenge is as much an international
British economy, transport is most
as a national issue. As the UK is
exposed to the effects of global
facing growing dependence on oil
supply constraints and price shocks.
imports (it became a net importer
Despite efforts to promote energy
of crude oil in 2005), it will have to
efficiency and the use of alternative
tackle the growing global supply
fuels, ground and air transport remain
constraints head on, with an ever
stubbornly dependent on petrol,
smaller cushion of a safe source of
diesel and kerosene. These oil-
domestic oil. Not only will this put
based liquid fuels simply cannot be
pressure on the country’s balance
substituted in the short to medium
of payments, but it will also turn
term. Biofuels, for example, currently
energy policy firmly into a foreign
only account for 2.6 percent of the
policy concern. As more and more
fuel supplied for road transport in the
global oil reserves are concentrated
UK (for more details about biofuels,
in countries that are either unstable or
see Appendix C). If anything, current
unpalatable, hard choices will have to
trends in the growth of air travel and
27
Industry Taskforce February 2010
on Peak Oil & Energy Security

road haulage suggest that future The lesson from this experience is Continued dependence on oil,
demand growth will more than clear. Sudden supply-side shocks coupled with a more uncertain global
compensate for any energy-saving generated by oil supply restrictions energy environment and fluctuating
or oil-substitution measures. Global or hikes in oil prices would not be oil prices, will cost the UK economy
supply restrictions and price volatility isolated economic events. They would dearly. The recent rollercoaster ride
will therefore pose a growing threat quickly reverberate throughout the of oil prices marks a significant
to the UK’s transport sector as the UK’s supply chain, affecting many increase in price volatility and is
global oil crunch hits home. more companies that are not directly set to continue in the coming years
dependent on oil. Even if the UK as supply constraints become a
The vulnerability of the transport
continues to gradually move away more permanent feature of the oil
sector has important knock-on
from energy-intensive manufacturing, market. While key sectors of the
effects throughout the UK economy.
the central importance of oil- economy remain highly dependent
A wide range of businesses, from
dependent transport to the economy on a secure and stable supply of
supermarkets to manufacturers,
will tie its economic fortunes to the oil at predictable prices, the return
has come to rely on a highly
future of the ‘black gold’. to boom-and-bust cycles in which
integrated transport system that
commodity price rallies give way
delivers goods in a time-sensitive Vulnerability to oil-related shocks
to periods of economic downturn
manner. The adoption of so-called would continue to pose a threat even
would significantly increase the costs
‘just-in-time’ business models has if oil consumption continues to fall in
of doing business in the UK. The
led to a situation where companies the UK as it has done in recent years.
uncertainty about future prices will
have reduced inventories to minimal This is because the downward trend
drive up the costs of capital and raise
levels and intermediate and final in oil demand masks a structural
hurdles for investment.
goods are delivered at more rapid shift in energy consumption. While
and frequent rates, be it to producers electricity generation and heating The effects of increased price volatility
or consumers. Any disruption to have been moving away from oil and will be felt throughout society. With
this complex distribution network towards gas, the transport sector is ever more consumer products being
would have far-reaching economic consuming an ever larger share of delivered through oil-dependent
consequences, as the fuel protests the UK’s oil-based energy demand. and vulnerable transport systems
of 2000 vividly illustrate. Back then, Official statistics show that from the in the retail sector, sudden oil price
supermarkets ran out of essential time of the first oil shock in 1973 to hikes can feed quickly through the
food products as supplies dried up today, domestic households, industry supply chain into higher prices for
and consumers resorted to panic- and services have been able to consumables.
driven hoarding. (For more details reduce their reliance on oil products.
Where food is concerned, the poorest
about possible disruption to oil Not so in the case of transport.
households will be particularly hard
supplies, see Appendix B.) Road and air transport’s share of oil
hit. They have already felt the pinch
demand in the UK has been rising
of rising energy prices in the last five
steadily, exceeding 50 percent of
years, as is evident from the dramatic
overall consumption in 2008. Air
rise in the numbers of households
travel and road haulage are now the
trapped in fuel poverty. Because oil
key reasons behind our dangerous
and gas prices have been closely
addiction to oil.
linked in the past, the recent price
rally in the oil market has driven up
this number to an estimated 4.6
million in 2009. The Office of Gas
and Electricity Markets (Ofgem), the

28
February 2010 Industry Taskforce
on Peak Oil & Energy Security

government’s energy regulator, warns decline in the current output gap will Critics of the ‘peak oil’ scenario
that domestic energy bills may rise soon return the UK economy to a often point out that, while plentiful
by up to 25 percent by 2020 due situation where sudden and persistent reserves await further exploitation,
to rising commodity prices with up oil price rises require monetary global demand for oil has recently
to £200 billion needed for energy authorities to apply a bitter medicine, reached its own peak. This is only
infrastructure investment. with a further economic downturn partially true. Oil demand in the
and rising unemployment in tow. industrialised countries has levelled
The current glut in global gas markets
off in most, and has been falling
and a widely predicted de-coupling
of gas and oil prices should mitigate
4.4 UK energy policy: in some, of the leading Western
against further dramatic increases ready for the coming economies. But while these countries
have achieved a partial de-coupling
in domestic fuel costs. This would oil crunch?
of economic growth and oil demand,
offer a welcome reprieve to the most
The once fashionable view that the two remain closely linked in the
hard-pressed households in the UK.
energy is just another commodity that developing world.
Nevertheless, a rise in living costs - in
is subject only to the forces of the
the form of higher travel and transport Economic analysis suggests that
free market no longer holds. Securing
costs and consumer prices - is firmly developing country growth translates
energy supply and managing
on the agenda. into an equivalent increase in oil
energy demand have become
demand of between 70 and 100
Are we likely to see a re-run of eminently political questions again as
percent (compared to 40 to 50
the 1970s scenario, when two countries race to secure their future
percent in industrialised countries).
OPEC-induced oil shocks drove energy needs. The rise of resource
In fact, the sharp rise in demand for
up the oil price and double-digit nationalism in the world’s leading
oil in China, India and other emerging
inflation rates ensued in many oil-producing regions, combined
economies has been a critical factor
industrialised countries? To some with the geological constraints of an
behind the oil price rise since 2000.
extent, circumstances are more ultimately limited petroleum base,
As their economies pick up speed
favourable today. The monetary policy is redefining the global politics of
again after the global recession, their
environment has changed and is energy. Total oil consumption may be
economic growth will again drive
likely to keep inflationary expectations levelling off or declining in the leading
up oil demand worldwide. The IEA’s
lower than they were in the 1970s industrialised countries; but this
World Energy Outlook expects 80
and 1980s, and the UK economy’s partial easing on the demand side
percent of the world’s increase in
overall oil intensity has declined. will be more than compensated for
demand for liquid fuels to come from
But the experience of the most recent by the growing energy consumption
the nations of non-OECD Asia and
hike in oil prices nevertheless offers a in the BRIC countries (Brazil, Russia,
Middle East, with the transportation
sobering lesson. Rising oil and food India and China) and other populous
sector accounting for 80 percent of
prices pushed up consumer prices and energy-hungry emerging
this increase. The new economic
well above the Bank of England’s economies. If anything, an oil peak
powerhouses of the South will thus
2 percent inflation target to a peak will only accelerate the dramatic
be the main drivers of global oil
of 5.2 percent in September 2008. reconfiguration of the global energy
demand in the foreseeable future.
While this inflationary push was order that has been underway for the
comparatively lower than in past last decade.
decades, a sustained rise in oil
prices over the next five to ten years
will eventually feed through into
higher price levels overall. Economic
recovery after the recession and a
29
Industry Taskforce February 2010
on Peak Oil & Energy Security

The explosive mixture of upward However, while energy security may will be an environmentally damaging
demand pressure, restrained have risen on the political agenda, course. And banking on renewable
investment in oil production and the government has remained resources (e.g. biofuels) alone simply
geopolitical risks is set to cause upbeat about the future of global oil won’t provide an adequate solution.
instability in the global oil market. reserves despite the growing signs of (For more details on biofuels, see
Short-term price inelasticity ensures a looming supply-side oil crunch. In Appendix C.)
that even small supply shocks result the latest government-commissioned
Even if the government’s target to
in a large rise of oil prices. Demand is review of energy security, former
derive 15 percent of energy from
known to be price inelastic because energy minister Malcolm Wicks MP
renewable sources by 2020 is met,
of the inability, particularly of the acknowledges peak oil but merely
an estimated 70 percent of energy will
transport sector, to replace oil-based states that oil production “has already
still be supplied by oil and gas at that
liquid fuels in the short run. Likewise, peaked in most non-OPEC countries
time. A much more rapid transition to
supply is inelastic as it takes many and will peak in most others before
low-carbon energy sources - whether
years for an increase in the price of 2030”. Government policy is starting
wind, solar or nuclear - would thus
oil to feed into higher investment in to change, but still has a long way
have to be achieved if the UK is to
production capacity and an eventual to go to acknowledge the urgency of
respond more effectively to the twin
increase in output. The two forms of taking action now.
threats of global warming and peak
price inelasticity combined create a
oil.
powerful multiplier effect in the global 4.5 Climate change policy:
What is to be done? As a first step,
oil market, which economists estimate help or hindrance?
to be in the region of factor ten. the next government will need to
Could the threat of climate change acknowledge that the era of cheap
In other words, a physical supply
help bring about a speedier change oil is over. This will need to be
shock (as happened in Iraq,
in UK energy policy? Or will the followed by rapid decisions on how
Venezuela and Nigeria prior to the
focus on reducing greenhouse gas to ease potential energy supply
2008 price hike) would cause a
emissions further complicate the constraints and accelerate the
price rise about ten times as large
search for a solution to the looming transition to low-carbon alternatives.
in the short run as would normally
peak oil problem? On this, governmental rhetoric has
happen if demand and supply were
been admirable so far, but not
elastic. Small shocks will thus have Climate change policy is driving
implementation.
ever larger price effects as the world investment in renewable energy
edges closer to its ‘peak oil’ point. sources and energy efficiency No silver bullet exists; instead a
measures. Weaning companies and multitude of approaches will need to
The politicisation of energy is evident
households off their oil dependence be pursued. Investment in current
not least in the change in tone in
will thus have positive effects on oil production capacity will have
recent government pronouncements
energy security. But there are to increase to keep the lights on
on this topic. The UK Energy Review
important conflicts between these two while renewable energy sources are
of 2006 and White Paper of 2007
objectives that cannot be ignored. brought online. But the latter will not
established security of supply
In the medium term, the need to happen unless more innovative and
alongside climate change as the main
reduce greenhouse gas emissions decisive steps are taken to drive up
challenge for future energy policy.
will limit the options available in energy efficiency and develop low-
This recognition is clearly good news.
dealing with the effects of peak oil. carbon technologies. Will the next
Replacing dwindling reserves of government have the mettle to take
conventional oil with more expensive tough, and early, decisions?
and carbon-intensive alternative fuels
(e.g. tar sands and coal-to-liquids)
30
February 2010 Industry Taskforce
on Peak Oil & Energy Security

5. Other points of view


2009 has seen release of 5.1 Wicks’ Review 5.2 Macquarie Bank report
a number of reports, either
On 5 August 2009, the government Macquarie Group Limited is the
specifically on peak oil or published a review of the UK’s energy pre-eminent Australian investment
covering important aspects of security situation called “Energy bank and has its global headquarters
world or UK energy. Some argue Security: A national challenge in a located in Sydney.
all is OK while others agree changing world”. The report was
Their research report of 16
with the Taskforce outlook. specifically commissioned by the September 2009, “The Big Oil
UK Prime Minister, Gordon Brown,
Picture: We’re not running out, but
This section summarises of Malcolm Wicks, a former energy
that doesn’t mean we’ll have enough”,
the main publications in minister.
sees global oil production capacity
chronological order. Wicks focuses on the changing UK topping out at 89.6Mb/d this year, a
and global energy picture, pointing far more pessimistic view than most
out that even with ambitious climate other banks or traditional forecasters.
change targets, the world is still likely Iain Reid, Macquarie’s head of
to be reliant on coal, oil and gas to European oil and gas, who worked
meet over two-thirds of its energy for 16 years at Shell and Amerada
needs by 2030. Hess, says in the report that,
“Capacity has pretty much peaked
On the specific subject of peak oil,
in the sense that declines equal new
Wicks notes, “Few authors advocating
resources.”
an imminent peak take account of
factors such as the role of prices in He expects the current spare-
stimulating exploration, investment, capacity cushion of around 5.2 million
technological development and barrels to be wiped out by 2012 and
changes in consumer behaviour.” global production capacity to fall to
(This observation cannot be levelled 87.3Mb/d by 2015. Global oil demand
at the Taskforce where our Report 1 is expected to rise to 90.9Mb/d by
in 2008 examined all these aspects 2015 from 84.2Mb/d today. He adds
extensively and rigorously.) He goes that, “Adding sufficient productive
on to comment, “proven reserves capacity on time is nearly impossible.”
are equal to over 40 years of current
production”. The sum of Wicks’
recommendations specific to oil
imports are: “to improve transparency
in the oil market, support short-term
efforts to facilitate production in states
capable of increasing production
levels, and reduce our reliance upon
oil in the longer-term.”

31
Industry Taskforce February 2010
on Peak Oil & Energy Security

5.3 IHS Herold study 5.4 UKERC report “….For a wide range of assumptions
about the global URR [ultimately
IHS Herold is a leading, independent The UK Energy Research Centre recoverable reserves] of conventional
research firm serving a global client (UKERC) is the focal point for UK oil and the shape of the future
base with analysis of companies, research on sustainable energy. It production cycle, the date of peak
transactions, and trends in the global acts as a bridge between the UK production can be estimated to lie
energy industry. energy research community and the between 2009 and 2031. Although
wider world, and is the centrepiece this range appears wide in the light of
In their “The 2009 Global Upstream
of the Research Councils’ Energy forecasts of an imminent peak,
Performance Review” published 23
Programme. it may be a relatively narrow window
September they note that investment
in finding new oil is falling this year. Its most recent major research report in terms of the lead time to develop
Exploration spending by listed oil “Global Oil Depletion” launched on 7 substitute fuels.”
companies rose 21 percent and October 2009 concludes that there
development spending 23 percent is “a significant risk of a peak before 5.5 Ofgem report
in 2008, but the average cost of 2020.” It notes:
The Office of Gas and Electricity
replacing a barrel of oil equivalent
“….Although there are around 70,000 Markets (Ofgem) is the government
rose 70 percent to $23.44/b. Total
oil fields in the world, approximately regulator for the electricity and
reserves fell 3 percent, including a
25 fields account for one quarter downstream natural gas markets in
5.2 billion barrel decline. Despite
of the global production of crude Great Britain. It was formed by the
record development spending, up
oil, 100 fields account for half of merger of the Office of Electricity
23 percent from 2007, worldwide oil
production and up to 500 fields Regulation (OFFER) and Office of
and gas finding and development
account for two thirds of cumulative Gas Supply (Ofgas), themselves
replacement rates fell in 2008 to 88
discoveries. ….The average rate of formed when gas and electricity was
percent of production, the first year
decline from fields that are past their privatised in the 1980s. Its primary
since 2004 in which production was
peak of production is at least 6.5 duty is to protect consumers by
not replaced.
percent per year globally, while the promoting competition, wherever
corresponding rate of decline from all appropriate, and regulating the
currently-producing fields is at least monopoly companies which run the
4 percent per year. This implies that gas and electricity networks.
approximately 3Mb/d of new capacity
must be added each year, simply to
maintain production at current levels
- equivalent to a new Saudi Arabia
coming on stream every three years.
….More than two thirds of current
crude oil production capacity may
need to be replaced by 2030, simply
to prevent production from falling. At
best, this is likely to prove extremely
challenging. ….

32
February 2010 Industry Taskforce
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Ofgem is undertaking a 5.6 ASPO annual conference 5.7 Global Witness report
comprehensive review of Britain’s
energy supplies, called “Project The Association for the Study of Global Witness is an international
Discovery”. 9 October 2009 saw Peak Oil (ASPO) is a global network NGO established in 1993, now based
publication of their initial report of scientists and others, having an in London and Washington, that
outlining challenges for Britain’s interest in determining the date and works through investigations and
energy industry over the next 10 impact of the peak and decline of the campaigns to break the links between
-15 years. It drew up four energy world’s production of oil and gas, due natural resource exploitation, conflict,
scenarios to assess the energy to resource constraints. poverty, corruption, and human rights
security risks noting volatile world abuses worldwide. It has become a
The association’s international
energy prices and Britain’s increasing leading authority on identifying and
conference for 2009 was held in
dependence on gas imports. addressing issues concerning how
October in Denver, CO, USA. Analyst
the unaccountable exploitation of
The report implies that real increases Chris Nelder compares the results
natural resources has driven human
of up to 25 percent in energy bills are of this conference with the first of
suffering.
likely due to rising commodity prices this series in 2005: “We now know
and up to £200 billion investment in that conventional crude did in fact Their report published on 20 October
energy infrastructure by 2020. hit its peak-plateau in 2005, having 2009 argues that governments have
It suggests that the additional costs remained around the 74Mb/d level failed to acknowledge a looming oil
projected for electricity consumers ever since. The expected growth supply crunch. The report outlines
by 2020 are least in the two “green” from non-OPEC mostly failed to four underlying oil production
scenarios presented as opposed to materialize, as depletion of mature factors: declining output, declining
the higher energy bill costs projected fields took its toll and the cost of discoveries, increasing demand and
for the “slow growth” and “dash for new projects soared—especially insufficient projects in the pipeline
energy” scenarios. for deepwater and production from
These they state clearly show how
marginal sources. More pessimistic
The two “green” scenarios both the world is facing an imminent oil
observers now think the 87Mb/d all-
assume 30 percent renewable supply crunch. Some of these factors
liquids peak recorded at the height
electricity by 2020, including feed- have been apparent for many years.
of the 2008 boom was the peak, and
in tariffs for sub-5MW renewables Thus the report concludes that the
the more optimistic ones have cut
set to attract investors, while the collective failure by governments
their expectations to under 100Mb/d,
“slow growth” and “dash for energy” means we have lost a decade in
with 90Mb/d looking more likely. …..
scenarios both assume only 15 which action could have been taken.
Most observers believe the globally
percent renewable electricity by 2020.
averaged depletion rate has risen
from 4.5 percent per year in 2007 to
about 5.0 - 5.5 percent now, which
will accelerate to around 6.5 percent
per year by 2014. This is more or less
in line with the average rates from
IEA’s report last year.”

33
Industry Taskforce February 2010
on Peak Oil & Energy Security

5.8 IEA’s World Energy economic recovery to reach $100/b worldwide. The company was formed
by 2020 and $115/b by 2030 (in year- in 1983 and acquired by IHS Energy
Outlook 2009
2008 dollars). in 2004.
The International Energy Agency
Whilst this is all about demand, CERA’s latest report “The Future of
(IEA) is an intergovernmental
there is little analysis in the Outlook Global Oil Supply: Understanding
organisation based in Paris which
on capacity to meet this demand the Building Blocks” published on 17
acts as energy policy advisor to 28
apart from noting “energy investment November sees no oil peak through
member countries in their effort to
worldwide has plunged over the past 2030 thanks to technology. The
ensure reliable, affordable and clean
year” and that “energy companies report’s lead author, Peter Jackson,
energy for their citizens. Founded
are drilling fewer oil and gas wells”. comments: “It would be easy to
during the oil crisis of 1973-74, the
Simply noting that the investment interpret the market and oil price
IEA’s initial role was to co-ordinate
needed is a significant proportion of trends from 2003 through 2009 in
measures in times of oil supply
GDP implies this is the only limitation. isolation to support the belief that a
emergencies. As energy markets have
peak in global supply has passed or
changed, its mandate has broadened Release of the Outlook was preceded
is imminent. But this only illustrates
to incorporate the “Three E’s” of by controversy. The Guardian
that the market continues to act as
balanced energy policy making, these newspaper reported from an un-
the shock absorber of major volatility.”
being: energy security, economic named senior IEA official that the
Beyond 115Mb/d at 2030, the report
development and environmental decline of existing reserves is being
says, production will stay on an
protection. underplayed, and the prospects of
undulating plateau through 2050.
finding more overplayed, in order
The IEA’s annual “World Energy Of more than 1,000 fields examined
to stop panic buying. Their source
Outlook for 2009” was released on in detail for the study, 60 percent
claims, “Many inside the organisation
10 November. It provides updated were found to have production levels
believe that maintaining oil supplies
projections that take into account that were either steady or climbing.
at even 90 to 95Mb/d would be
the implications of the global credit While they estimate decline rate of
impossible but there are fears that
crisis, the economic slowdown and all fields currently in production to be
panic could spread on the financial
the recent slump in the prices of 4.5 percent, Jackson notes, “Supply
markets if the figures were brought
oil and other forms of energy. The evolution through 2030 is not a
down further. And the Americans fear
Outlook notes that “global energy question of resource availability. The
the end of oil supremacy because
use is set to fall in 2009 - for the first crucial issue lies not belowground.
it would threaten their power over
time since 1981 on any significant It is the aboveground factors that
access to oil resources.”
scale - as a result of the financial will dictate the ultimate shape of the
and economic crisis; but, on current supply curve.”
5.9 IHS CERA report
policies, it would quickly resume
Clearly this report is considerably
its long-term upward trend once Cambridge Energy Research
more bullish than the IEA’s WEO
economic recovery is underway.” Associates, also known as CERA, is
2009 earlier in the month. CERA
In their Reference Scenario, world an international consulting company
regards all limiting factors to their
primary energy demand is projected headquartered in Massachusetts,
reference scenario as being above
to increase by 1.5 percent per year USA, that specialises in advising
ground rather than below, although
between 2007 and 2030. Oil demand governments and private companies
they allow themselves an extremely
is projected to grow by 1 percent per on energy markets, geopolitics,
broad set of ‘aboveground driver’
year on average over the projection industry trends, and strategy. CERA
caveats to explain any degree of
period, from 85Mb/d in 2008 to has research and consulting staff
variance in the future.
105Mb/d in 2030, and oil prices across the globe and covers the
are assumed to rebound with the oil, gas, power, and coal markets
34
February 2010 Industry Taskforce
on Peak Oil & Energy Security

6. Taskforce view
6.1 Since last year India and China, to shrink the growth Oil is a key commodity within the
in global demand and keep it in line UK economy, and business activity
Clearly, a lot has happened since the with supply. is affected by large swings in the
first ITPOES Report was published in oil price and oil availability. The
Very little of substance has occurred
2008. Much of this has already been consequence of the very high oil
in the intervening year between the
remarked upon in Sections 3 and 4, prices, and the shortages of supply,
first and second ITPOES reports
and requires no further elaboration in the 70s and 80s was that the
to change our concerns. There is,
here. The reports issued by others national economy fell into recession
therefore, a fundamental difference
(summarised in Section 5) underline on both occasions (Fig 6.1). The
between the ITPOES members and
the growing interest in the peak oil implication from our research is that
the government’s advisor (Wicks).
proposition, and several of those high and volatile oil prices, coupled
The following analysis seeks to
publications support the general with supply uncertainties, are likely
explain the Taskforce’s position.
thrust of the ITPOES argument. to become a characteristic of future
However, it remains the case that UK world oil markets.
Government policies and attitudes are
6.2 Taskforce analysis
Today, the aftermath of the financial
dismissive of these possibilities. In this section, we interpret the
crisis has already kicked the national
Of all the reports mentioned in the opinions offered in Sections 3 and 4,
economy into one of the severest
previous section, the Wicks Review and respond from the perspectives of
recessions on record. Oil price
is notable because it gives an insight the Taskforce members.
uncertainties over the coming few
into government thinking. Peak years could make economic recovery
oil is mentioned only once. The for the UK particularly difficult.
relevant passage concludes: “Few
authors advocating an imminent
peak take account of factors such oil price ($/b)
100
as the role of prices in stimulating
exploration, investment, technological 80
oil price ($ 2008)
development and changes in
60
consumer behaviour.”
The Taskforce report of 2008 40

ignored none of these factors. Prices 20


do stimulate exploration but - we
argued - not quickly enough. We 0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
discussed the intervals between oil year
discoveries and bringing capacity to annual growth (%/y)
6
the market. We discussed investment,
and concluded that there have been 4

dangerous shortfalls even when


2
prices have been high. We discussed
annual GDP
technological developments, such as 0
enhanced oil recovery, and concluded 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
year
that they tend only to slow depletion -2
recessions
rates. We discussed changes in
-4
consumer behaviour and worried that
Fig 6.1 UK annual GDP growth and oil price from 1960 to the present with periods of recession marked by
they will not be sufficient, especially in shading. (Sources: ONS and BP Statistical Review)

35
Industry Taskforce February 2010
on Peak Oil & Energy Security

6.3 Where will oil prices go 15


real GDP annual growth (%/y)

in the next few years? People's Republic of China

The heady peaks of oil price in 2008


10
deflated very rapidly a year ago with
the onset of the recession, and prices Russian Federation India

sank from a peak of nearly $150/b


5
to a figure below $40/b. An oil price Brazil
G7
collapse is what we might expect in
a recession (although this one was
pretty dramatic), but prices have 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
subsequently bounced back more year

quickly than we might have expected.


With today’s prices firmly lodged -5

around $80/b, oil is again at very high


prices by historical standards, even
though the world is still struggling -10

with recessionary forces. This is Fig 6.2 Actual real annual GDP growth of the BRIC and the G7 group of developed economies for 2000-2008 and
with estimates and projections to 2010. (Source: IMF)
unusual, and very few pundits
predicted it 12 months ago. So, we Some may say that the recent of Iraqi oil to the world markets is
are already in unusual territory. recovery in oil prices has been also very significant. In the long-run
encouraged by OPEC’s decision these two sources, alone, could add
The future movement in oil prices
to reduce flows (a move that was more than another 10-15Mb/d to
will depend, in particular, on demand
designed to achieve precisely that global capacity, but this is unlikely to
from the non-OECD countries (as
goal). It is argued that, once demand materialise very quickly.
argued in Section 2). These are
recovers, flows will be increased
dominated by the BRIC countries However, the problem with both these
again and price increases will be
whose recent growth compared to sources is time: the pre-salt oil is
ameliorated. But this argument
the G7 economies, shown in Fig 6.2, difficult to access and will take 5-7
misses a crucial point. Once world
suggests that the picture of growing years to bring into full production.
demand returns to pre-crisis levels
world demand, fuelled by the growth Even then, the oil will be expensive,
(around 87Mb/d), it will be the inability
of the non-OECD nations, seems to as suggested in Fig 2.4 for deep
to extract faster that will cause the
be being developing without serious offshore, so it is unlikely to make
problem, not an absolute lack of oil.
interruption from the financial crisis. an appearance at less than $80/b,
Extracting oil faster will require new
Coupling GDP projections to oil as shown in Fig 3.3(b). And the
fields to be brought on stream, and
demand leads to the conclusion that political uncertainties in Iraq will
this is where the problem really lies.
demand could soon be back beyond inevitably slow down developments
the 86.4Mb/d seen in the first half of On a positive note, there has been in that country - as witnessed by the
2008. Unless extraction rates can be some very good news in the past complex manoeuvrings in the recent
lifted to meet this level of demand year with regards to new production. rounds of negotiations between the
before it becomes a reality (unlikely, The pre-salt finds in the Gulf of Iraqi authorities and the bidders for
as previously argued), the general Mexico and offshore Brazil are their development contracts. So,
level of prices should be expected to significant, indicating the continued significantly increased flows at low
rise again quite soon - certainly within ability of the industry to find new prices from either of these new
the lifetime of the next government. sources of oil. The potential return

36
February 2010 Industry Taskforce
on Peak Oil & Energy Security

UK production and net trade (kb/d) the case. According to this analysis,
2,000
peak extraction capacity will be
net imports
reached within the next few years (if it
1,500
hasn’t already been reached). Against
the background of rising world (non-
1,000 OECD) demand, this can only mean
indigenous use
that oil prices will rise well beyond
current levels, and remain high until
500
extraction rates can be increased to
meet these rising levels of demand.
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 So, the ‘crunch’ is most likely upon
year
us. Massive, easily accessible, new
-500
net exports finds could restore the medium-long
term outlook (5-10 years), but there is
-1,000 little that can be seen that will prevent
the short-term problem other than the
-1,500
continued contraction of demand in
Fig 6.3 The import and export of oil from the UK. (Source: DUKES) the OECD nations and an immediate
flattening of demand in the non-
consumption (kb/d)
OECD countries.
1,600
This combination may allow prices
to ease in the immediate future
1,400
(2-3 years), but the long-term trend
other
1,200
of growth in demand from the
industry domestic
non-OECD countries looks set to
1,000
overtake this temporary decline
rail transport
air transport
comfortably within the next five
800
years. In the longer term, the IEA’s
water transport
prediction is that global demand will
600 reach 105Mb/d by 2030 (a figure
that is well beyond our current
400 road transport expectations of the world’s ability to
deliver). However, in our view, this
200 figure could easily be exceeded.
A few simple calculations serve to
0 underline this suggestion.
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
year
The current global split of oil usage
Fig 6.4 UK consumption of oil by sector. (“air transport” covers total inland deliveries in the UK to international and
other airlines, British and foreign Governments including armed services, and for private flying.) (Source: DUKES) is shown in Fig 2.6. We can make
some simple predictions for the likely
sources seem very unlikely to occur wells will have reduced flow-rates at
rise in demand within each of the
within the next few years. that stage by more than the increase
main categories of use, as follows.
from the incremental finds. The
When these sources do eventually
expert Opinion A offered in Section
come on stream, it will be a question
3 concludes that this will, indeed, be
of whether the depletion of existing
37
Industry Taskforce February 2010
on Peak Oil & Energy Security

Ground transportation 800


road transport consumption (kb/d)

It is projected that the number of


vehicles in the world will triple to 700

around two billion vehicles by 2050.


If we postulate that oil demand will 600

rise in a manner that reflects this


500
growth (but make some allowances
cars and taxis
for improving fuel efficiency and the
400
introduction of electric vehicles),
simple calculations suggest that world 300

oil demand for ground transportation


will be cruising towards 100Mb/d by 200 light goods vehicles

2050.
100
‘Other uses’ heavy goods vehicles

We could postulate that the demand 0

for all other uses (for example, 2000 2002 2004 2006 2008
year
heating, petrochemical feedstocks
Fig 6.5 Breakdown of transport usage. (Source: DUKES)
and hydrocarbon-based materials)
will rise in proportion to the rising Working backwards from this, we the expected levels of demand at
standard of living associated with the might expect demand levels to anywhere near historic oil prices.
world’s urban population. Around 750 exceed 120Mb/d by 2030, a figure Short of a series of super-giant, easily
million people in the OECD countries which is comfortably in excess of the accessible finds in the next few years,
consume the vast majority of today’s IEA’s latest projection of 105Mb/d (the it looks like we are headed for a
‘other uses’ (most of them in the ‘Reference’ scenario). sharp and permanent increase in oil
urban context), and this yields a prices. Market prices well in excess
These estimates, of course, assume
consumption rate of around 35Mb/d of $100/b (maybe $150/b), plus
a fairly rapid rate of growth for the
per billion urban-dwellers. inflation, should be anticipated within
developing world. But the economic
the next decade.
It is reckoned that around 7 billion growth records for some of the non-
people will live in cities by 2050. Let OECD countries (particularly the BRIC For the UK, at least, this could
us now postulate that the demand countries) over the past decade, represent a structural change in the
from the OECD urban populations will as shown in Fig. 6.2, suggest that shape of our economy. The only
stabilise, and that the demand from sustained high rates of growth in the medium-term restorative possibility is
the non-OECD urban populations developing nations must be noted that aggregated world demand will
will head towards 25 percent of the and included. continue to drop - but this requires
comparable OECD figure (i.e. about such a sharp reduction in growth
The potential mismatch between
9Mb/d per billion urban dwellers). amongst the non-OECD nations that
world oil supply and demand is
This suggests that oil demand under it seems a very unlikely scenario.
shown in Fig 6.6. This diagram
this heading could rise to around And, if it does happen, the world
shows the ITPOES postulation to
80Mb/d by 2050. will be plunged into even deeper
2050, alongside the IEA projection
recession. So this is not something
Adding these components together to 2030. It also shows the
we should wish for!
suggests that world demand in 2050 corresponding ITPOES and IEA
could be in the region of 180Mb/d. supply curve predictions. It is clear
that there is no realistic vision of
future oil production that will meet
38
February 2010 Industry Taskforce
on Peak Oil & Energy Security

180
oil demand and production cap (Mb/d) coach networks and many of their rail
ITPOES strong growth prostulation services.
160 However, the role of transport in the
economy has mushroomed. People
125 Mb/d @ 230
140
travel for business, social, domestic
105 Mb/d @ 230
and pleasure purposes, and the
120
sustained level of oil consumption
associated with transport since 2000,
IEA projected growth
despite improvements in engine
100
ITPOES production cap
efficiency, is shown in Fig 6.5 (which
also sub-divides small and large
80
non-OECD historical demand
vehicles).
The freight component of light and
60
OECD historical demand long term projection
heavy goods vehicles, though smaller
than cars and taxis, must not be
40
ignored. Manufacturing and retail
businesses widely depend on just-in-
20 time business models, and transport
is fundamental to this approach (as
0 has been remarked in Section 4). This
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
means that the prices of most goods
year
on the retail shelves have a significant
Fig 6.6 Oil demand for the historical period 1920-2008, with extrapolations to 2050 for the IEA ‘Reference Case’
(1% growth rate) and the ITPOES ‘strong growth’ case as described in the text. Also shown are two projections transport component in their build-
for production: a plateau (based on Shell’s paper in the first ITPOES Oil Crunch Report, 2008), and the ITPOES
production cap (Section 3) followed by a 1 percent per annum net depletion rate. (Sources: BP Statistical Review of
up, and availability on the shelves
World Energy and the IEA’s World Energy Outlook 2009) is acutely vulnerable to oil supply
shortages. Thus, a hike in oil prices
6.4 Consequences of a high oil worse. North Sea oil was just coming
will quickly find its way through to
on stream in the late 70s, and this
price for the UK the shelves, and into people’s weekly
turned the UK into an oil exporter for
shopping bills. A shortage of oil will
The possible shock to the UK the next 25 years. That era has now
likewise be quickly felt as a shortage
economy of higher oil prices must come to an end and the UK is, once
of goods in the shops (again, as
be set in context. On the one hand, again, a net importer of oil (Fig 6.3).
remarked previously). These problems
the national consumption picture is The reversion to importing oil, and the
apply all the more when goods are
much better now than it was in the spike in world prices, represents an
brought in from abroad.
70s and 80s. Oil is no longer used unpleasant ‘double whammy’ for the
as a significant source of electricity UK economy. Apart from transport, the other
generation; it was replaced in this sectors of the UK economy which
Today within the UK, despite
role by coal, nuclear, and gas during have vital oil-based ingredients are
the focus on renewables and
the early 80s, precisely because of farming and materials manufacturing,
alternative fuels, oil still turns the
the oil price spikes and availability such as plastics. In both cases, while
wheels of the transport sector (Fig
uncertainties which dominated that the absolute volumes of oil consumed
6.4). Furthermore 97 percent of
era. This is good news. are relatively small, but, in both cases,
transport energy consumption is
the prices of the products for sale in
However, on the other hand, the from petroleum products. In addition
the shops are directly affected by the
national supply picture is much to cars, public transport operators
cost and availability of oil.
depend on diesel to run their bus and
39
Industry Taskforce February 2010
on Peak Oil & Energy Security

Based on this assessment, we might 6.5 Restatement of In terms of contingency planning,


expect to see the following effects Government needs to ensure that,
underlying issues
reflected in our economy within the as well as prioritising key worker
term of the next government: Although the immediate slow- groups in times of fuel shortage
• Markedly higher prices down in the global economy has or disruptions to oil supply, public
for all forms of travel (air, removed short-term pressures on oil transport is also prioritised, bearing in
sea, rail and road) consumption, the underlying issues mind its ability to move large numbers
• Increased food prices highlighted in last year’s report have of people extremely efficiently. Public
• Increased general retail prices not changed. These underlying issues transport is well placed to deliver the
• Increased domestic utility we identified in 2008 were: low-cost, quick win solutions that we
bills for heating and power need.
• We are surprised that the industry
It is an unfortunate by-product of has not discovered more giant All of this requires partnership
these factors that the disadvantaged fields, given that oil prices have between transport operators and
members of society are likely to be hit been high for several years and local authorities. It also needs brave
first, and hardest. investment has been “affordable”. politicians with long-term vision.
• We are concerned by the Technology will take us some way
Our concern, therefore, centres
infrastructure problems, along the road. But behavioural
around a situation on which it
underskilling and underinvestment change, modal shift to greener,
seems that future oil prices will be
in new exploration, which smarter bus, coach and train travel
significantly higher, in real terms, than
have become evident and measures to support these
they have ever been in the past, and
throughout the oil industry. modes will make or break our efforts
in which disruptions to oil supply
• We are worried by allegations to deliver a reduced oil-dependant,
cannot be ruled out.
that OPEC governments have low carbon transport future.
(Some scenario work on been less than transparent
consequences for the UK of higher about the size of their national
imports of increasingly expensive reserves, since deciding to
fossil fuels is briefly described in fix quotas based on the size
Appendix D.) of reserves in the 1980s.
• We are disappointed, given the
long lead times of oil production
infrastructure, that the net flow
rate data which shows a slow
down in 2011-13 and a reduction
thereafter, has not galvanised
a more active response from
governments and industry.
There is a real need for more
integration of sustainable transport
policies with land use planning.

40
February 2010 Industry Taskforce
on Peak Oil & Energy Security

7. Possible countermeasures
We concluded in the last section that Rail is already a relatively energy But there is a real danger that the
we probably face a future in which oil efficient mode of transport, with a focus on technological advances
prices are significantly higher, in real lower environmental impact than in cars is making consumers and
terms, than they have ever been in other modes and a good combination government complacent. New
the past, and in which disruptions to of high speed and efficiency. technologies in cars - or buses -
oil supply cannot be ruled out. However, the long lead times for rail will not be a complete solution.
improvements mean we need to plan Central to our transport revolution
In this section we draw upon the
ahead now for tomorrow’s railway, has to be a package of measures
experience of the Taskforce members
particularly for new lines. There to deliver behavioural change and
to suggest possible countermeasures.
needs to be a long term strategy secure modal shift. We also have to
which looks beyond the current take steps to redress the balance of
7.1 Transport
five-year programme to a time when the relative cost versus convenience
We all have a legitimate need to travel the public and private sectors can of different transport modes.
and transport is key to the economy invest in increased capacity and Importantly, politicians have to be
and so many aspects of society and enhancements which encourage brave in pursuing pro-public transport
our daily lives. Yet we cannot escape people to switch from cars and taxation and funding regimes and in
the fact that the sector faces two planes. Ongoing electrification must allocating road space based on the
massive converging challenges - oil be a priority, as well as greater use most fuel and carbon efficient modes
depletion and climate change - both of regenerative braking and designs for the transport journeys we are
of which require significant changes. for more efficient rolling stock. High- looking to undertake.
speed rail could deliver modal shift
Lower carbon technology for cars is Commuter and business travel
from domestic airlines as we have
advancing rapidly, with mainstream account for nearly 40 percent of all
already seen on the West Coast main
hybrids and a push for mass-market miles driven by car. Even switching
line in recent years. However, the
electric vehicles with a supporting to public transport one or two days
cost is significant - anything from £34
plug-in charging network. Buses and a week can have a huge impact in
billion to £69 billion. In addition, the
coaches are also benefiting from this area. Workplace travel plans can
timescales are 20 years away and
advances developed for cars. The also cut business costs, improve staff
passenger projections already point
first hybrids are on the road today. retention and reduce commuter car
to some rail lines being full up by
We are also seeing cleaner engines, travel by 10 to 30 percent.
2020 or 2025.
trials of sustainable biofuels, fuel-
efficient driver training programmes
and in-cab technology, as well
as steps to reduce the weight of
vehicles.

41
Industry Taskforce February 2010
on Peak Oil & Energy Security

Bus and coach park-and-ride also All of this requires partnership 7.2 Power generation
has a proven track record in reducing between transport operators and
journey times, a major influence on local authorities. It also needs brave In addition to the transport
commuter transport choices. For politicians with long-term vision. considerations described above,
every 1,000 park and ride spaces, Technology will take us some way there will be impacts on the power
research suggests there follow along the road. But behavioural generation sector. Extended
250,000 fewer car journeys per year. change, modal shift to greener, electrification of the railways and
smarter bus, coach and train travel the potential conversion of road
Rural areas, due to the demographics
and measures to support these vehicles to electric power will
of remoteness, present a particular
modes will make or break our efforts increase demand. This will be
challenge. Tailored solutions, such
to deliver a reduced oil-dependant, further compounded by the possible
as demand responsive transport,
low-carbon transport future. adoption of ‘green electricity’ for
are better than a regular but virtually
heating in response to climate
empty bus service at present. Finally, in the current challenging
change fears. Thus there will be
economic environment, it is vital that
There is a real need for more major changes in the demand
government investment in public
integration of sustainable transport pattern for electricity on the nation’s
transport is maintained.
policies with land use planning. power-generation and transmission/
On the railways, there is a need for distribution infrastructure. This
In terms of contingency planning,
more rolling stock, infrastructure consideration, plus more general
government needs to ensure that,
work to lengthen platforms to take concerns about energy supply,
as well as prioritising key worker
longer trains and investigation of the prompted Ofgem (the Office of Gas
groups in times of fuel shortage
potential for new lines (particularly and Electricity Markets) to initiate
or disruptions to oil supply, public
for high-speed rail). Government “Project Discovery”, a comprehensive
transport is also prioritised, bearing in
must also take a long-term view review of Britain’s energy supplies.
mind its ability to move large numbers
of the wider economic, social and The Ofgem preliminary report
of people extremely efficiently. Public
environmental benefits of bus, coach, was published in October 2009
transport is well placed to deliver the
tram and train travel, and the positive (as referred to in Section 5), and
low-cost, quick win solutions that we
impact of major integrated transport presented four alternative scenarios.
need.
infrastructure projects.
The scenarios range in their required
energy infrastructure investment
from £95 billion to £200 billion. They
all result in increases in domestic
energy bills of between 14 percent
and 25 percent by 2020 (from 2009
levels), and raise the possibility that
wholesale price spikes could lead to
an increase in domestic energy bills
of up to 60 percent in the interim.

42
February 2010 Industry Taskforce
on Peak Oil & Energy Security

Apart from these headline figures A common theme across the four A transmission charging regime which
to illustrate impact on end users, Ofgem scenarios and stress tests is allows efficient sharing of capacity
a number of key aspects must be the necessity for flexible generation. will become increasingly desirable as
addressed for the power industry to As the penetration of wind-powered renewables penetration increases.
invest and deliver their side. generation increases, load factors for In particular, the role of energy
conventional plants will on average storage (e.g. pumped storage) needs
Over the next decade, significant
fall and become more uncertain. to be recognised and encouraged.
investment will be required, not only
Given these lower running times, For these reasons the transmission
in new renewable generation capacity,
conventional plants will require charging regime is in serious need of
but also in the broad spectrum of
higher prices to cover fixed costs review.
established generation technologies
and to earn an adequate return on
to ensure that the UK continues Smart grid technology could play
investment.
to benefit from a balanced, flexible a major role in maintaining the
and efficient generation portfolio. A stable market framework is reliability of the electricity system in
Critical to this will be investment fundamental to ensuring sufficient the future by helping to reduce peak
in new transmission infrastructure, thermal plant investment is demand and to manage fluctuations
both on and offshore. Delivery of maintained during this period. in renewables output. There are three
this infrastructure will require a pro- In particular, it is important that key areas for focus in realising the
investment regulatory and political wholesale price spikes which reflect potential of this technology:
climate. The single most important supply and demand fundamentals
1. Developing appliances and
aspect for this investment will be during periods of low wind are not
infrastructure which allow
for the UK government and Ofgem unduly restricted by regulation, since
automated demand response.
to provide a stable and attractive these will be crucial to allow thermal
2. Finding effective ways of co-
investment climate in the UK that plants with low load factors to pay
ordinating the various parties
will allow companies to finance their back their capital costs. Even the
involved in smart demand
activities. threat of potential restrictions on price
(i.e. customers, suppliers, network
spikes may be sufficient to deter
operators and generators).
investment.
3. Providing funding for the
development of smart networks.
Energy efficiency and microgeneration
can also play vital roles in the policy
response.

43
Industry Taskforce February 2010
on Peak Oil & Energy Security

8. Recommendations
The next government will very likely 8.2 Transport policies • Introduce fiscal measures to
need to steer the UK economy promote more carbon and fuel
through a period of unusually high oil Surface transport is the largest user efficient modes of travel.
prices, with possible effects of the of oil products. Petrol and diesel (with For example, remove the current
types such as those suggested in limited volumes of LPG) account for annual £9 billion tax break
Sections 6 and 7. The members of over 50 percent of all UK oil usage. on fuel for domestic airlines
ITPOES therefore recommend that all The Taskforce members suggest and channel the income to
political parties actively consider the the following: public transport investment.
consequences of this and prepare • Continue measures to improve • Maintain short, medium and
themselves to weather a change in energy efficiency and wean long-term public investment to
the UK economy driven by a volatile transport from its dependence support bus, coach and rail travel
oil price which increasingly sits in the on oil. These include promoting (even in the current challenging
range $120-150/b. technological developments economic environment).
such as hybrid engines, • Change the regulatory environment
Apart from driving new legislation,
vehicle electrification and so that regulators are mandated
the new government will have an
weight reduction, both for to encourage the uptake of
important role to play in incentivising
cars and public transport. more fuel-efficient technologies.
private sector companies, public
• Coordinate a package of For example, giving the CAA
sector organisations and individuals,
measures to deliver behavioural a mandate to encourage the
to change their behaviour in terms of
change and secure modal shift uptake of biofuels for aviation in a
reducing oil demand. A combination
from cars to sustainable public manner that parallels the mandate
of legislation and ‘encouragement’ is
transport. These could include: for the FAA in North America.
therefore recommended, as follows.
• workplace travel plans to reduce Within all of the above, transport
8.1 General policies long-distance commuting in policies designed to protect the
cars as well as increasing their disadvantaged members of society
• We call on the UK government, occupancy level, should be regarded as particularly
local government, businesses • support for the growth of car important. Examples include the
operating in the UK market and sharing, provision of better public and
other key stakeholders to join • measures to incentivise using community transport services, and
us in an effort to appraise the public transport (for example by policies to help operators maintain
risk from oil-supply difficulties, introducing fare structures that affordable fares. Contingency
and plan proactive and reactive support home working, such as planning is also essential in the event
strategies - local and national - carnet-style ticketing products of fuel shortages to prioritise key
for facing up to the problem. to complement weekly, monthly work groups, public transport and
• Government policies (particularly and annual tickets). essential deliveries.
those concerned with social,
economic and financial matters)
should explicitly acknowledge
the potential for high oil prices
and promote appropriate
contingency planning.

44
February 2010 Industry Taskforce
on Peak Oil & Energy Security

8.3 Retail and agricultural 8.4 Power generation 8.5 Heating policies including
policies and distribution policies fuel poverty
• The huge dependency on road Further electrification of the railways • For those that still rely on oil,
freight for just-in-time delivery and the potential conversion of road or oil-derived fuels, for domestic
from centralised warehouses vehicles to electric power (plus the heating (mainly LPG), an increase
makes retail goods (particularly possible adoption of ‘green electricity’ in the fraction of the population
food) very vulnerable to fuel- for heating in response to climate caught in fuel poverty can be
related price rises and supply change fears) will change the demand anticipated. The government
shortages. Government policies pattern for electricity on the nation’s needs to acknowledge this
must plan to mitigate these power-generation and transmission/ possibility and plan action to
effects (again, with particular distribution infrastructure. protect the disadvantaged.
reference to the disadvantaged). The programme to improve the
• Government policies must plan
• Farming is highly dependent on energy efficiency of buildings
to accommodate a significant
the use of oil-related products must be accelerated.
upswing in electricity consumption
such as diesel fuel, soil improvers, • Encouraging the use of heat
and, in the short-term, must
crop treatments, and so on. pumps is one solution. Based
plan for the possibilities of price
Government will need to consider on the renewable heat scenarios
spikes and supply interruptions.
mechanisms for preventing published by DECC, heat pumps
• The single most important
unreasonable oil-driven price would increase electricity demand
aspect that will allow the UK to
rises feeding through into the by 8TWh/y in 2020, but substitute
manage the above uncertainties
basic food supply chain. for heat energy from primary fuels
and its 2020 vision for a low
equivalent of up to 32TWh/y.
carbon economy is for the
government to provide a stable
and pro-investment regulatory
and political climate in the
UK that will allow companies
to finance their activities.
• The ‘cleantech revolution’ in the
use of renewable energy for
generating electrical and motive
power, and heating, requires
continuing support. Although its
short-term impact will be limited,
UK plc can aspire to be a major
player in the new industries
that are being created, thus
abating the long-term risks from
peak oil, more general energy
security, and climate change.

45
Industry Taskforce February 2010
on Peak Oil & Energy Security

Appendix A: Spare capacity


Spare capacity is the key variable in its members totalling 4.2Mb/d. The unattractive (unsaleable) because
terms of sustaining or undermining $75/b target price was first achieved of its sulphur and metals content or
oil prices. When there is little or in August 2009. Since that date whether it is regarded as an ‘iron
no operable spare capacity - as the price has held in the $70-$80 reserve’ producers are reluctant to
occurred in June and July of 2008 range. In the early summer OPEC exploit. However in practical terms
- oil prices become very inflationary. compliance with the agreed output it represents an effective minimum
In contrast large quantities of spare cuts of 4.2Mb/d had been around OPEC producers do not go below.
capacity tend to undermine prices 70 percent but then gently eroded [Note that the lowest spare capacity
because holders of the excess or to 58 percent by November without recorded in the last three years was
spare capacity have a financial undermining oil prices. Increased 2.12Mb/d in December 2007. It may
incentive to ‘leak out’ additional capacity coming on stream during be appropriate to regard this as the
cargoes. Initially an extra cargo or the period to November meant that effective minimum for OPEC ‘spare’
two does not undermine the price OPEC still had around 3Mb/d of production.]
level but does bring a financial operable spare capacity at year end
The latest IEA figures (December
reward to the producer of the extra 2009.
2009) give OPEC spare capacity as
cargoes. Eventually once a number of
Spare capacity is defined by the IEA 6.24Mb/d which reduces to 5.35Mb/d
producers are leaking out additional
as the extra capacity that can be once the notional spare capacity
cargoes the oil price is undermined
brought on stream within 30 days of Iraq, Nigeria and Venezuela are
and falls.
and sustained for 90 days. Since the excluded. The reason for excluding
This tendency to production ‘leakage’ 1970s spare capacity has essentially these three is that Iraqi capacity is
has always been the key challenge to been an OPEC phenomenon as operated as flat out as the security
OPEC as an organisation. It occurs all the non-OPEC producers aim situation will allow (over recent
whenever OPEC tries to defend or to produce as close as possible to months it has been using virtually all
establish a price level by restricting capacity while only OPEC producers its capacity). Nigerian production is
output by means of quotas. Currently ration production to achieve price
OPEC appears to have an unofficial targets.
price target of $75/b. This is the
For this reason conventional analysis
price that King Abdullah of Saudi
usually assumes that only OPEC
Arabia has announced represents a
holds any significant, non-transitory,
‘fair’ price for both consumers and
spare capacity. Using the IEA data
producers. To achieve this price
shows that OPEC spare capacity
OPEC has announced output cuts by
on the IEA’s definition averaged
3.03Mb/d in 2006, 3.34Mb/d in
2007 and 2.64Mb/d in the first
half of 2008. The lowest spare
capacity recorded by the IEA
was 2.35Mb/d in July 2008 - the
month when oil prices peaked at
$147/b and all producers were
straining to maximise production.
It is not clear if this 2.35Mb/d was
unused because it represents not
readily available spare capacity,
or capacity that is commercially

46
February 2010 Industry Taskforce
on Peak Oil & Energy Security

constrained by the security situation The conclusion, as at end 2009, is The year 2010 is unlikely to provide
in the Niger Delta region. So Nigeria’s that after deducting the 2Mb/d of any alleviation as net (after allowing
large notional spare capacity has spare capacity below which OPEC for depletion) new capacity is around
been inaccessible and possibly does not go, the organisation has 1.6Mb/d and essentially all OPEC.
declining due to lack of maintenance 3Mb/d of immediately operable spare Only quite limited amounts of this
access to the fields. The recent capacity and a further 1-2Mb/d of could be delayed as the most of the
peace agreement with the rebels spare capacity that given the right increase is from fields brought on
in the Delta region appears to be circumstances could potentially be stream in 2009 building up output,
holding and production has been brought to market. Iranian developments and liquids
rising as field maintenance work associated with gas export (LNG)
However, spare capacity is a dynamic
recommences. This means more of projects.
not a static phenomenon. In 2009,
Nigerian ‘spare’ capacity may now
according to Peak Oil Consulting Latest oil demand growth estimates
be brought into production. In the
calculations, the net capacity (gross for 2010 over 2009 are 1.4Mb/d
case of Venezuela a steady erosion
capacity additions minus depletion) which means OPEC is likely to go into
of capacity has been seen since
addition is likely to be 2.3Mb/d made 2011 with as much spare capacity
the Chavez government came to
up of 1.9Mb/d for OPEC and 0.5Mb/d as it had at end 2009. Indirect
power in 2001. This will be slow and
for non-OPEC. confirmation of this weak outlook is
difficult to reverse as the Venezuelan
provided by a recent interview on
government recently nationalised the Latest data suggests an oil demand
September 22, 2009, reported by
oil field contractors to avoid paying growth of only 1Mb/d between the
Bloomberg with the Saudi Aramco
the contractors’ outstanding bills, first quarter of 2009 and the fourth
CEO Khalid al-Falih. In this he
while the earlier expropriation of a quarter of 2009. If the non-OPEC
indicated that they were prepared
number of international oil company producers follow the usual pattern
for the long haul and there was little
operations has continued to hold of utilising their capacity flat out
chance of reactivating the 4Mb/d of
heavy oil production below its then OPEC producers will have to
idled Saudi production capacity in
notional capacity. It has, however, increase their spare capacity by over
2010 unless they saw an acceleration
just announced new bidding terms 1Mb/d if they have brought all their
of economic recovery which he said
in November for an auction of joint new capacity on stream and want to
is not yet apparent.
venture partnerships in the to be held defend prices in the $70-80 range.
in the Orinoco Belt. It seems fairly certain that OPEC will
Thus by year end 2009 OPEC is
delay projects where it is economic
likely to have immediately operable
to do so. As most projects are
spare capacity of over 3-4Mb/d with
heavily front end loaded only a limited
a further 1-2Mb/d of spare capacity
amount of incremental capacity is
which in the right circumstances
likely to be postponed
could potentially be brought to
market.

47
Industry Taskforce February 2010
on Peak Oil & Energy Security

Appendix B: Major disruptive


events to oil supplies
Major disruptive events are by their There is also the potential for By global standards Cantarell is not
very nature unpredictable but there unexpected events in the oil fields. an old field. Large numbers of still
are always geopolitical tensions that The world is heavily dependent producing Middle East fields started
have the potential to become major on 120 oil fields that collectively up in the 1930s, 1940s and the early
disruptive events. These are the account for 50 percent of world 1950s. The lesson to be drawn is that
possible events which could radically production and contain two thirds production from elderly oil fields may
alter outcomes. of the remaining reserves of fields in not be as reliable or as predictable as
production. Their average age is 42 is generally supposed.
In the context of future oil supplies
years and although the expectation
we can already identify a number of
is that their production will slowly
important areas of tension:
decline in a predictable manner this is
• Iran’s nuclear ambitions and the not always the case.
consequent actions by the US
The Cantarell field offshore Mexico
and others determined to avoid
was one of the world’s largest fields
Iran becoming a nuclear armed
when it was discovered in 1975.
power. Iran as OPEC’s second
Following the start of production in
largest producer has a production
1980, field production rose steadily
capacity of just under 4Mb/d.
and by 2000 it was producing over
• Al Qaeda’s ambition to destabilise
1Mb/d. Nitrogen injection was used
and take over Saudi Arabia.
to enhance oil recovery from 2000
• The instability of Afghanistan/
and in 2005 production peaked at
Pakistan and the possible
2.2Mb/d. At this point Cantarell was
consequences in the event
the second most productive oil field
of partial or total takeover by
on earth only exceeded by Saudi
Taliban/Al Qaeda groups.
Arabia’s Ghawar field. However, in
• The civil war in Yemen
late 2005 a sustained and rapid
and its possible spill over
decline in production started and
into Saudi Arabia.
has continued ever since. By August
• Assorted threats to the free
2009 production from Cantarell was
passage of oil tankers both
down to 0.65Mb/d amid hopes that
in restricted channels such
production may finally be stabilising.
as the Straits of Hormuz and
the Malacca Straits and on
the high seas from pirates or
groups such as Al Qaeda.
• Continuing or escalating action
by ‘rebel’ groups in areas such
as Nigeria, Sudan or other areas
where the central authority is
weak in relation to regional
ambitions with armed groups
contesting the central authority.

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February 2010 Industry Taskforce
on Peak Oil & Energy Security

Appendix C: Biofuels
The promotion of the use of biofuels There are three major threats to Great hopes have been invested in
to increase self-sufficiency and to the increased output of biofuels. the development of the so-called
mitigate climate changing emissions The first is changes to government second generation biofuels - ones
is now established policy in much subsidy regimes. This particularly that come from non-food material
of the world and biofuels volumes applies to biofuels crops grown in such as wood waste - that do not
are increasing quite rapidly. The temperate regions. The second is compete with food supplies. To
use of biofuels additions to gasoline rising prices for the food use of the date this remains an experimental
and diesel supplies impacts the oil crop. Increased sugar prices are technology and one that is not fully
industry in three ways. The loss of currently restricting the attractions proven technically or economically.
product sales volume impacts the of bioethanol production from sugar Large scale investments are being
requirement for crude production cane. Similarly high prices for cooking made but any significant supplies are
or crude purchase. The loss of oil in Asia are a more profitable use some years away.
refinery throughput impacts refinery for palm oil than biodiesel blendstock.
The other much-promoted
profitability particularly as refinery Governments have recently become
biotechnology is the use of algae to
capacity is currently greater than increasingly sensitive to the food
produce oils or even oil fuels such
immediate requirements. The addition versus fuel debate which may inhibit
as diesel. Despite some promising
of a lower cost (or subsidised) biofuels expansion hopes.
experimental results this technology is
biofuels blendstock tends to reduce
One of the key drivers in the at a very early stage of development.
the profitability of gasoline and diesel
expansion of biofuels supply It is, however, attracting considerable
sales as oil companies usually have
particularly in temperate regions, investment finance, notably from
to buy in the biofuels rather than
has been government subsidy. The ExxonMobil. Despite the investment
owning and creating them.
global recession has put many if not and the numerous experimental
Total biofuels production reached most government budgets under facilities significant production is
1.6Mb/d in 2009 and is expected to severe strain. It remains to be seen if 5-10 years away at best.
reach 1.8Mb/d by 2010 and 2.2Mb/d governments see these subsidies as
by 2014 according to the IEA. priorities or whether they will be seen
Although as discussed above biofuels as areas where expenditure cuts are
exert a leveraged impact as a share acceptable.
of global liquids production, biofuels
only accounts for 1.75 percent in
2008 and 2.4-2.5 percent in 2014.

49
Industry Taskforce February 2010
on Peak Oil & Energy Security

Appendix D: Whole-economy
scenarios for the UK to 2025
D.1 Introduction In the reactive scenario, demand for D.2 Overview of the
oil and gas continues to increase
This section briefly examines
4see framework
through economic growth typical
scenarios for the UK to 2025 of the last two decades. Increasing The 4see framework aggregates
using a socio-economic-energy imports of these two fuels and at the UK economy into just a few
framework developed at Arup known higher prices puts pressure on broad groupings of capital stocks
as 4see. The primary purpose of balance of payments. Using the (assets), these being: the energy
the framework is to show what is 4see framework with this scenario supply sector, industry, the service
physically possible - that is, the suggests that a reactive consequence sector, transportation, agriculture
maximum physical envelope for any could be continuous devaluation of and the domestic sector (Fig. D.1).
given future scenario. Two such sterling at an average of about The framework also covers the main
constraining physical limits are the 1 percent per year. “flows”, these being: energy, goods
output of industry, which goes to and services, interaction of these with
In the proactive scenario, a small
supplying household consumption the balance of payments, growth of
proportion of the output of goods
and reinvestment in the economy, capital stocks and utilisation of the
for personal consumption is diverted
and available energy. In reality, actual working population.
to other investments. Specifically,
industry output can always be less,
this investment is directed to The capital stocks interact through
as during a recession when there is
increased implementation of energy flows as shown in Fig D.2. One of
loss in confidence, but it can never
efficiency on all buildings and growth the distinguishing features of the
be more than this physical limit.
of renewable energy as fast as framework is that metrics for the
A unique feature of the 4see
reasonably possible. A policy to bring capital stocks and flows are not
framework is that the rate of growth
about this diversion could be taxation money but, where possible, more
does not have to be predetermined,
applied specifically to personal resilient, physically related units.
as in most economic forecasting
consumption of goods. There is no Flows of energy are in petajoules
models, but is endogenous,
change in the total output of goods,
15
(10 joules or PJ) per year. Capital
generated by the 4see framework
just in their mix, but the consequence stocks and flows of goods are both
itself.
would be reduced demand for gas. in embodied energy units (virtual
The first scenario presented is based Meanwhile, the historical trend of petajoules or VPJ). Flows of services
on business-as-usual behaviour of increasing personal transport by are kept in inflation-corrected pounds
“reactive” policies, while the second car is reversed by stick-and-carrot sterling for lack of any better metric
scenario contrasts implementation of policies. The result of these policies that captures their innate value.
“proactive” policies. Both scenarios would be to keep oil imports at a UK

have a level of industrial activity roughly constant level. Using the 4see
and expansion of the service sector framework, the overall observation
that continue economic growth, from this scenario suggests that, in energy transport service sector

one benefit being to keep the level contrast to the reactive scenario,
of unemployment in check. Both the balance of payments would be
scenarios include decline of North sufficiently healthy for sterling not to industry agriculture domestic
Sea oil and gas production with devalue.
the scenarios showing how the
consequences of this on imports play Fig D.1 Main capital stocks (assets) of the 4see
out. framework within the system boundary of the UK
economy.

50
February 2010 Industry Taskforce
on Peak Oil & Energy Security

a. b. c.

UK UK UK

energy transport service sector energy transport service sector energy transport service sector

consumption consumption

industry agriculture industry agriculture domestic industry agriculture


domestic domestic

Fig D.2 The main interactions in the economy are shown as flows between the main sectors of the 4see framework.
(a) Flows of energy from the energy sector. (b) Flows of goods from industry. (c) Flows of service.

Double-ended arrows in Fig D.2 energy demand or we have to D.3 Business-as-usual


crossing the UK system boundary change the output of goods so as to
assumptions
represent international trade in invest in renewable energy capacity.
the flows of energy, goods and Another example is that if household The reactive scenario, also known
services. Each of these flows has a purchasing were to shift from as business-as-usual, has policies
related monetary transaction. These shopping (consumption of goods) essentially reacting to events. For
monetary transactions form part to leisure services, the services instance, the historical period has
of the balance of payments that sector would have to be increased shown substantial growth of the
also includes other transactions on to cope with the additional demand. service sector. The 4see framework
the current, capital and financial This might necessitate construction derives relationships between sector
accounts. which would impact back on the flow demand for services and size of
of goods through the demand for each sector. These relationships are
The benefits of trade are the
construction goods. extrapolated in the scenario to model
interchangeability of flows of energy,
the continuing growth in demand for
goods and services. For example, Application of the 4see framework
services, and consequent growth in
net exports of services can be first involves examining historical data
the service sector. For investment in
“exchanged” for the net import of (chosen to be for the period from
industry and housing, this continues
energy and goods, the balance of 1990 to the present) in terms of the
at the same roughly constant levels
payments and exchange rate enabling framework’s groupings for capital
as in recent years. The resultant
this process. stocks and flows, as quantified by
increase in goods and services
the framework’s metrics. Next, the
In contrast, one of the principles of shows as around 1 percent per year
sizes of flows are related to the sizes
the 4see-based view is to recognise (annual GDP growth).
of capital stocks as a calibration
and highlight the fundamental nature
process capturing the socio- Other trends are assumed to
of energy, goods and services, and
economic behaviour. This calibrated continue. These include the low level
that within the economy they are not
socio-economic behaviour can then of improvement of energy efficiency
as easily interchangeable as they are
be applied to future scenarios as a over the last decade (essentially
in trade. For example, if we want to
form of sophisticated trend analysis through replacement of stock)
reduce the flow of fossil energy, either
working within the system dynamics and increase in travel in terms of
we have to reduce activity of the
represented by the flows in Fig D.2. passenger-km and freight-tonnes
sectors to reduce their
per year.

51
Industry Taskforce February 2010
on Peak Oil & Energy Security

12,000
primary energy demand (PJ/y) and industry. (Economists describe
historical data scenario this phenomenon by its inverse, the
increase of capital employed per unit
10,000
agriculture of labour, a trend they encourage
in order to achieve economic
8,000 growth.) The downward trends of
transport
staff employed per unit of assets in
the service sector and industry are
6,000
assumed to continue for the scenario.
domestic
Meanwhile the service sector is
4,000 growing, as already mentioned, so
service sector these trends compensate to a degree
2,000
and unemployment stays at around 4
industry
percent.

0
1990 1995 2000 2005 2010 2015 2020 2025
D.4 North Sea output
year

Fig D.3 Primary energy demand by sector (excluding utilities and mining) for the historical period to 2007 and Output of oil and gas from the North
projected to 2025 according to the proactive scenario. Sea is past its peak and that we
A projection for the expected total dominated by fossil fuels with only are now set on a path of permanent
energy demand can be derived from small proportions of electricity from decline is now generally accepted.
this set of conditions, shown in Fig renewables and nuclear power. A decline level of 5 percent per year
D.3. The energy demand by 2025 for oil and gas is used for domestic
Over the historical period, there
in this scenario is over 10,000 PJ/y production in Fig D.4.
has been a trend to reduce the
(in terms of total primary energy).
number of staff employed per unit Within the energy demand profile
This primary energy demand is
of assets, in both the service sector of the reactive scenario shown in
12,000
energy flow (PJ/y) Fig D.3, the shortfall in domestic oil
historical data scenario production for the oil component will
result in increasing imports. These
10,000 coal imports gas imports
could grow at about 10 percent per
gas production used
year, as shown in Fig D.4.
8,000

D.5 Reactive consequences


6,000 oil production used
oil imports
to the business-as-usual
scenario
4,000
At this point in developing a scenario
coal production used (based on the assumptions above),
0 we have to conjecture how this vision
1990 1995 2000 2005 2010 2015 2020 2025
of the economy might respond to the
year
unprecedented situation for the UK of
-2,000 oil exports
gas exports becoming an overwhelmingly major
energy importer.
-4,000
Fig D.4 Extraction, use and trade of coal, oil and gas for the historical period to 2007 and projected to 2025 according
to the reactive scenario. Decline of North Sea oil and gas production into the future is shown at 5 percent per year.

52
February 2010 Industry Taskforce
on Peak Oil & Energy Security

exchange rate indexed to 1990 At the same time as oil imports start
1.2
historical data scenario to rise, a consequence of global peak
1.1 oil is that the global price of oil is also
likely to rise, and substantially. For the
1
purposes of this scenario, the price
is put at doubling by 2025 with the
0.9
price of gas moving in tandem at a
0.8 constant 50 percent of the oil price
1990 1995 2000 2005 2010 2015 2020 2025 by energy content.
year
net trade @ 1990 prices (£b/y)
100 The net components making up the
exports and incomings
complete balance of payments are
75 financial a/c in shown in Fig. D.5. The increasing
dependence on imported fuel is
50
fuel exports income in clearly evident in the lower half for
25
outgoing funds. This balance of
service exports payments projection includes the
0 conjecture for the strength of sterling
1990 1995 2000 2005 2010 2015 2020 2025
year
as it responds to events, shown in
-25
financial a/c out
the upper part of Fig D.5. This is in
goods (less fuel) imports
income out no way intended to “predict” balance
-50
current transfers out of payments to 2025, an impossible
-75 fuel imports task, but simply to get a feel for
imports and outgoings
the relative magnitude of balance of
-100 payments components.
Fig D.5 Strength of sterling and balance of payments showing net components for the UK for 2007 with a projection
to 2025 based on the reactive scenario with the change in strength of sterling shown.
So, Fig D.5 shows the reaction as
primary energy demand (PJ/y)
1 percent devaluation each year.
12,000
The explanation of this behaviour is
historical data scenario
that the valuation of sterling enables
10,000
the “income in” (from UK owned
agriculture
foreign assets) to compensate or
“pay for” fuel imports. Given that the
8,000
transport
scenario has 1 percent growth, the
simultaneous devaluation of sterling
6,000 by the same amount means that,
domestic
seen from abroad, the UK as zero
growth.
4,000

service sector
The key message to take from this
scenario is that the features of the
2,000
UK’s balance of payments mean
industry the UK could possibly “afford” an
0
increasing fuel imports bill, but really
1990 1995 2000 2005 2010 2015 2020 2025 this is not a situation to get into in the
year
first place.
Fig D.6 Primary energy demand by sector (excluding utilities and mining) for the historical period to 2007 and
projected to 2025 according to the proactive investment scenario.
53
Industry Taskforce February 2010
on Peak Oil & Energy Security

D.6 Proactive scenario 12,000


energy flow (PJ/y)

historical data scenario

The alternative scenario investigated


here proposed that some of the 10,000 coal imports

industrial output to consumer goods gas imports


gas production used
is diverted to investment in energy 8,000

efficiency and renewable energy,


as described above. By diverting oil imports
6,000 oil production used
industrial output in this way, other
aspects of the scenario described
earlier, of 4 percent unemployment 4,000

and 1 percent growth, still apply. coal production used

0
To complete the scenario, a highly 1990 1995 2000 2005 2010 2015 2020 2025
coordinated approach is proposed to year

reducing passenger car and freight -2,000 oil exports


gas exports
consumption of oil. This might include
higher pump prices, encouraging
-4,000
multi-occupant driving and a modal
Fig D.7 Extraction, use and trade of coal, oil and gas for the historical period to 2007 and projected to 2025
shift to rail. according to the proactive investment scenario together with decline of North Sea oil and gas production
at 5 percent per year.
The resulting effect on sector
exchange rate indexed to 1990
demand for primary energy is shown 1.2
historical data scenario
in Fig D.6, which shows a marked
1.1
reduction in demand compared to
Fig D.3 of the reactive scenario. 1

The resulting reduction in fossil fuel


0.9
demand, and thus fuel imports, is
shown in Fig D.7. 0.8
1990 1995 2000 2005 2010 2015 2020 2025
Finally, the effect on balance of year
net trade @ 1990 prices (£b/y)
payments of this proactive investment 100
exports and incomings
scenario is shown in Fig D.8.
75

Compared to Fig D.5 of the reactive income in

scenario, the fuel component is much 50 financial a/c in


income in
fuel exports
smaller and now comparable with
25
variability of the other components service exports
of the balance of payments. A low 0

likelihood of devaluation of sterling 1990 1995 2000 2005


year
2010 2015 2020 2025

-25
is the conclusion that can be drawn financial a/c out goods (less fuel) imports
from this scenario. Both scenarios income out
-50
have the same growth and low current transfers out

unemployment of the reactive -75

scenario, but the proactive scenario imports and outgoings


fuel imports

-100
has much improved energy security.
Fig D.8 Strength of sterling and balance of payments showing net components for the UK for 2007 with a projection
to 2025 based on the proactive investment scenario with no change in strength of sterling.
54
February 2010 Industry Taskforce
on Peak Oil & Energy Security

Appendix E: Sources
ASPO annual conference:
www.aspo.tv
BP Statistical Review of World Energy 2009:
www.bp.com/multipleimagesection.do?categoryId=9023755&contentId=7044552
DUKES:
www.decc.gov.uk/en/content/cms/statistics/publications/dukes/dukes.aspx
EIA oil supply:
www.eia.doe.gov/ipm/supply.html
EIA oil import prices:
tonto.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=wtotworld&f=w
Global Witness report:
www.globalwitness.org/media_library_detail.php/854/en/heads_in_the_sand_governments_ignore_the_oil_suppl/
IEA Oil Market Report December 2009:
omrpublic.iea.org
IEA’s World Energy Outlook 2009:
www.worldenergyoutlook.org
IHS CERA report:
www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDetails.aspx?CID=10746
IHS Herold study:
press.ihs.com/article_display.cfm?article_id=4135
IMF:
www.imf.org/external/news/
ITPOES:
www.peakoiltaskforce.net
Macquarie Bank report:
www.calgaryherald.com/business/surplus+peaking+this+year+bank+says/2003877/story.html
Ofgem report:
www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=2&refer=Markets/WhlMkts/Discovery
ONS (Office of National Statistics):
www.statistics.gov.uk/statbase/TSDdownload1.asp
Peak Oil Consulting:
www.peakoilconsulting.com
UKERC “Global oil depletion” 2009:
www.ukerc.ac.uk/support/Global%20Oil%20Depletion
US Department of Energy for 1920-1964:
‘Historical Data’ DeGolyer and MacNaughton
Wicks Review:
www.decc.gov.uk/en/content/cms/what_we_do/change_energy/int_energy/security/security.aspx
55
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