Anglo-Dutch company's search for resources in the Arctic is a sign that the world is running out of options for new oil reserves
In his critically acclaimed 2005 book ‘Twilight in the Desert’, the prominent oil economist Matthew R. Simmons predicted that Saudi Arabia’s oil wells would soon run dry.
His argument was based on the age of the seven main fields, which the kingdom still to this day depends upon to pump the bulk of its 10m barrels per day (bpd) of crude. These fields in the main have been producing for over a generation and, despite official figures placing Saudi Arabia’s proven reserves at over 260bn barrels, Mr Simmons argued that the kingdom would struggle to increase its output to keep pace with the projected increases in the demand over the next half century marking the beginning of a period known as “peak oil”.
The kingdom, which enjoys some of the lowest production costs in the world, has the capacity to pump 12m bpd if required and shows no signs of slowing down. However, the big question remains whether the Middle East’s energy superpower along with the world’s other major oil producers will be able to keep up with the expected increases in demand over the next 25 years?
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By 2040, the
Organisation of the Petroleum Exporting Countries (Opec)predicts the world will need to produce
111m bpd of crude to meet world demand. That represents another 20m bpd on top of existing output which means the world needs to find and develop and additional 800,000 bpd of oil a year on average to keep up with supply. To put that challenge into perspective, this figure represents repeating the US shale oil boom all over again, or finding a developing a new North Sea 20 times over.
Although, Mr Simmons was perhaps wrong in focusing on a potential collapse in Saudi Arabia’s oil production he was right in warning about the dangers of “Peak Oil” but too early in predicting its onset. That time is now upon us. Despite, oil prices being forced lower over the last six months the world is entering into a “peak oil” scenario whereby the cost of a barrel could
feasibly quadruple to around $200 per barrel over the next 10 years.
World will need to repeat US shale revolution to meet future oil demand
Even though the current weakness in
oil prices below $100 per barrel has been caused by a glut in global supply this will be short lived. Most of the new oil has come from three sources, US shale, Iraq and Africa. Each has its own problems going forward that will limit its potential to deliver the incremental increases in supply that will be required to meet even the most pessimistic forecasts for demand by 2040.
In the case of US shale this oil already represents the bottom of the barrel. Lower prices mean that
US output will plateau this year at around 9.3m bpd as oil companies shut down rigs at a record rate. However, even when these rigs eventually return once prices recover, as they have since March, it is unlikely that America’s oil output will ever repeat the staggering growth seen over the last decade. The country’s shale oil wells will be fracked to oblivion long before demand peaks in 2040 creating a potential energy shock in the world’s largest economy.
Then there is Iraq, which is now exporting crude at a record level. The war-torn country is now Opec’s second-largest producer pumping around 3.3m bpd of crude but with big ambitions to potentially double this over the next five years. This is sadly a pipe dream. Boosting Iraq’s production long term would require billions of dollars of investment and a stable secure government. However, the former cannot exist without the latter especially with the
Islamic State (Isis) now controlling Anbar province, one of the country’s biggest regions.
The fact that so much of the incremental increase in net production from the Middle East is forecast to come from Iraq shows the precarious state of the world’s oil supply. Can any oil economist who is currently predicting that low oil prices will last really say with confidence that the government in Baghdad will be able to drive Isis out of the country, or even survive?
Isis onslaught shows World cannot depend on Iraq for oil
After Iraq the next great hope for increasing oil production in the Middle East is Iran. Tehran believes that it can boost oil production to 5m bpd if sanctions are fully lifted. Although a framework agreement with the West over its nuclear programme is in place this is a long way short of a binding deal. Boosting Iranian oil production could take years and would require the investment of international oil majors. It’s still unclear whether Iran is willing to offer the right terms to attract this investment, or indeed whether oil companies are willing to take the risk while the Shiite Mullahs still hold the balance of power in Tehran.
Finally there is Africa, Russia and Latin America. All three regions hold vast oil resources but lack either the political stability or credible leadership. In Russia, the recent actions of President Vladimir Putin have called into question whether it can be relied upon as a mainstay of global energy supply. In Africa, major producers such as Nigeria are hamstrung by corruption, while Libya barely exists as a country. Latin American states such as Brazil hold potential but they won’t be enough to head off “Peak Oil”.
In the UK, the North Sea is in terminal decline and will cease to be productive in 25 years when we need the oil most. Although, the UK has shale oil in places such as the Weald Basin even based on this most optimistic forecasts this won’t be enough.
This brings us to
Royal Dutch Shell and its persistence in gaining a foothold in the Arctic despite the environmental challenges this presents. The Anglo-Dutch company, which is the most cautious of the major international oil companies, is prepared to soak up the bad publicity of hundreds of activists taking to the water in Seattle to confront the arrival of its Arctic drilling rigs over the weekend. It knows that the Chukchi Sea is one of the last remaining regions that contain world-scale oil reserves that can be reached without taking a major geo-political risk.
More companies will follow Shell into the Arctic and it is absolutely vital to the global economy that they do. Shell believes it can eventually produce around 400,000 bpd from the region, which is about half of what the world needs to find and develop ever year for the next 25 years to avoid running out of oil. Therefore, Shell’s Arctic rigs literally represent the real beginning of the era of “peak oil” that Mr Simmons originally predicted which will eventually lead to the $200 barrel.m
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