Hitting the Wall (III)     (11 oktober 2007)

Langzaam aan beginnen de kwartjes te vallen.  Er komt steeds meer aandacht voor het feit dat de productie van conventionele olie binnenkort over de top gaat, of dat - wie weet - al is.

Allereerst een interview met Fatih Birol in Financial Times.  Ik zet er onder reacties hieronder nog een kopie van bij.  Hij luidt de noodklok over wat ik 4 jaar geleden (in 1e instantie binnen Shell) al aanduidde als "de dubbele klem" van te weinig aanbod van olie / aardgas versus het klimaatvraagstuk.

Daarnaast een interview met Christophe de Margerie, baas van Total in die zelfde Financial Times, waarin deze openlijk zijn twijfel uitspreekt of, als het om de olie- productie gaat, de 100 miljoen vaten per dag ooit nog gehaald zullen worden.

Ik ben benieuwd wanneer de topmensen van Exxon en/of Shell ook dit soort verhalen gaan geven.  Nu gebeurt dat nog niet – uit angst van een "afstraffing op de beurs"?? – maar dat is volgens mij slechts een kwestie van tijd.

Mazzel & broge, Evert

Interview with Faith Birol
Fossil Fuel Based Energy – Access and Climate: a Double Clamp
Total chief warns on oil output

Naschrift 12/11/2007:
Onder deze link nog een aardig overzichtje van uitspraken door allerlei topmensen van de diverse oliemaatschappijen.

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Transcript: Interview with Faith Birol

The World Energy Outlook 2007 packs two urgent warnings, about world energy security and climate change. The chief economist of the International Energy Agency elaborates on his dark visions: the wheels may fall off!

Fatih Birol, chief economist of the International Energy Agency, interviewed by Ed Crooks and Javier Blas of the FT

EC There was a phrase in your report that leapt out at me: "Rising global energy demand poses a real and growing threat to the world's energy security." Is that your most important message today?

FB There are two major messages I was getting from the book. The first one is exactly what you say. The energy security risks are so strong, and probably increasing, for an upward event in the markets, and the second is on the climate change, on the CO2 emissions, the levels are reaching a certain level that we are [getting to] an irreversible trend for our planet. For energy security, we may have supply disruptions, huge implications for economy, this and that, but at the end of the day, the world economy can again recover. We can have the prices come to a certain level that people adjust their lives. But in terms of climate change, in terms of the planet's temperature, if it reaches a certain level, this, the implication on our planet and human beings, animals and the plants and everything, these implications are irreversible. So, these are two major issues coming from the book, and when you look at the climate change trends, and the CO2 emission trends, they are very, very worrying, especially in the fact that there are countries that are not doing much, and China and India, their CO2 emissions are exploding. So, these two things put together, the short term security, medium term security of our oil markets, plus the climate change, consequences of this energy use, my message is that, if we don't do anything very quickly, and in a bold manner, the wheels may fall off. Our energy system's wheels may fall off. This is the message that we want to give.

EC That's a very powerful phrase: "The wheels may fall off." What do you mean by that?

FB On the energy security, oil prices part, the numbers, one doesn't need to be a big energy expert or anything: it's just mathematics. I can tell you that we, in the next seven to eight years, need to bring about 37.5 million barrels per day of oil into the markets, for two reasons. One, the increase in the demand, about one third of it, and two thirds, there is a decline in the existing fields [and there is a need] to compensate for the declinem What we have done is that we have looked at all the projects in the Opec countries and the non-Opec countries, all the producing countries of the world, at the 230 oil projects, on a field by field basis, how much oil they will bring to the markets for the next five to seven years. And these are projects which are financially sanctioned projects. If they all see the light of the day in a timely manner, they will come up about 25 million barrels per day. So, 37.5 mlillion on the one hand, what is needed, and what we expect is 25 million barrels per day, and this is in the case of no slippages, no delays in the projects, and everything goes on time, which is very rare. So, there is a gap of 13.5 million barrels per day.

EC The gap of that size emerges by when?

FB Within the next seven years. So, if this gap cannot be closed - and there are two ways to close it, which I will tell you in a minute - if that gap cannot be closed, we may end up with the supply shock approach: an escalation of the prices. This is what I meant, the wheels may fall off. And what are the two ways to fix that? On the one hand, what we can do is, in the OECD countries, in China and India, we can try to slow down the demand growth, so through more efficiency, more biofuels and other means. Of course, saying that is easy, but there are difficulties, but just to give you the dimensions, this is one line: slowing down the demand growth in OECD countries, China and India. The second one is that we need to see much more investment coming from the oil-producing countries. First of all, they should pursue the projects that they have on the books, but plus, we need even more investments from these countries. If this doesn't work out, if this combination of this two doesn't work out, then we may have special problems in the markets. Thi s is what I meant, when I say, the wheels may fall off, we may end up with seeing prices very high, which has implications of course for the economy, and other parts of our system.

EC When you say, very, very high, what does that mean? That means, a price that is high enough to choke off demand? What price would then bring supply and demand into balance?

FB The problem is now that what we are experiencing with demand is the following. There are three major demand centres now, China, India and the Middle East. When you look at the numbers in the last seven quarters, about 70 per cent of the growth in global oil demand came from China and India, and this is followed by the Middle East, and in all of these three countries, for different reasons, oil prices do not have an immediate effect on demand. China and India, for two reasons. One, the economy is growing so strongly, that the price effect is completely unimportant, compared to the economic effect. Their economy is growing. Their pockets are getting bigger, and perhaps a bigger portion goes from their pocket to the oil expenditures, but since the economy is growing so strongly, it doesn't have a big effect. The second reason is that, especially in China and India, there are significant subsidies on the oil product prices. According to our analysis, in these two countries, each year $15bn goes to oil product subsidies, which filters the effect on the consumers. Then come the Middle Eastern countries. Again, the high oil price in those countries does not have much effect, because the income effect is much higher, and plus, in those countries, also the oil prices are very heavily subsidised. So, since the growth of the demand is not coming anymore from the OECD countries, where the force of the markets works. Therefore it is very difficult to see, even with high prices like this, that we have a major impact on demand. So, demand wi ll grow, and I think, if the governments of OECD, China and India, leave everything to the markets, in terms of slowing down the demand, they will make a historical mistake. In addition to the price related adjustments on demand, we need regulatory measures, such as efficiency improvements in the markets.

EC So, what sort of price increase might we see?

FB The prices we are experiencing now are very, very high in any case, and they are starting to hurt the economies of the developing nations which are not major oil producers, or which do not have strong economies, like China. And we see some slowdown, even in the OECD countries, such as the United States. As I told you already, this is fertile ground for prices to go beyond that, if we don't make the actions on the consumer side and on the producer side, this will go beyond the levels that we are experiencing today. For example, we have a scenario which we call the high growth scenario, in which China and India grow stronger than what we have assumed in the reference scenario. But still in the high growth scenario, economic growth assumptions are lower than what China has today. China has today about 11 per cent [growth], and our high growth assumption for China is, for the next ten years, about 8 per cent. If they grow like this, an unchecked growth in China and India, this will bring our price expectations for oil prices even at the levels of today for the next ten years to come. This is a level which is at about $90, $87.

EC So you'd expect prices to stay at about average $87 over the next ten years in your high growth scenario for China and India?

FB In a high growth scenario, exactly at that level, yes.

EC And then there will be fluctuations around that level?

FB Exactly.

EC Looking back. I think the all-time record is about $110 in today's money

FB $110, yes.

EC And it's certainly plausible we could get back above that level?

FB Exactly, if we don't do anything, is what I'm saying. I can tell you something, just information about prices. For example, we talk about $90 today, but this is one day in a couple of weeks of crisis. If you look at the average price for 2007, from the 1st January to 5th November, it is $68. So we should put it in context.

EC When oil was at $110 real terms at the beginning of the 1980s, we had a very serious global recession. Is that a real risk again?

FB Definitely a risk, and we are coming into that risk. The very reason why we are a bit away from that, is that the growth of the world economic system is now not only in OECD countries, where t he economy and the demand is directly affected by the higher prices, but in addition to that, we have China, India and the Middle East, and the one thing which is very important to note is that China's economic growth is perhaps, as many people think, is not so much coupled anymore to the US economic growth. There is a different effect, the interaction there. There are trade links, etc, but we see certain signs of decoupling and [the support for growth] is on the internal dynamics of China's economy, and trade with the other developing Asian economies. Just to give you an example, we had the subprime crisis, when all the stock markets started to shake and so on, the Shanghai stock markets were still up, and the performance of the Shanghai stock market this year, it has doubled the value, compared to the beginning of the year, and the OECD, Dow Jones and others are more or less stable.

EC Comparing the figures from last time, in terms of oil s upply, just having a look at some of the numbers, there seem to be some quite big differences. You seem to be more negative about non-Opec production out to 2030, and quite a lot more positive about Opec production, is that right?

FB The main issue here is that we think that, in the Opec countries, there are enough reserves. We are not sure if there is a political will to make something out of those reserves, but there are enough reserves as officially reported. However, as you rightly say, we are getting more pessimistic about non-Opec production.

EC You've gone down about four million barrels a day by 2030?

FB Close to four, yes. The main reason here is, this is very important to perhaps note, unlike the Opec countries, we think there are some geological problems in the non-Opec areas. This is not an investment issue, not a political issue, but it is more geology, because of a huge decline in the non-Opec countries.

EC Which countries does that particularly effect?

FB We are getting more pessimistic in terms of the North Sea, Gulf of Mexico, the United States, Mexico, these are the major countries we are thinking lots of decline coming there.

EC I think you quote a figure, is it a 3.7 per cent average global decline rate, is that right?

FB May I just say something. This is very important for all your colleagues to understand. I mentioned this in the Oil and Money Conference [at the end of October]People mix up two things. One, is the natural decline rate, and the other one is the observed decline rate. The nature of decline rate is that everything declines, and we are using an assumption for the global rate of 7 per cent, but if you inject money to a given field, you can slow down the nature of the decline, and you can make the decline less pronounced, and it comes to 3.7%.

EC OK, I now understand that distinction. What I'm wondering is, are both the natural and observed decline rates going to be significantly higher in the non-Opec countries?

FB Exactly.

EC What are the numbers?

FB For example, in the North Sea, it is close to 20 per cent, [the natural decline rate]. In the Gulf of Mexico, it is 11 to 15 per cent. Iin Opec countries, it is much lower, and of course, in the less mature areas, it is much, much lower.

EC And, the observed rates in the North Sea are about 8 per cent?

FB 8 per cent, on that level, yes

EC And the same in the Gulf of Mexico, or is it a bit less there?

FB Less.

EC Wh at about unconventional oil supply?

FB We are more optimistic because of the price effect and lots of projects are coming there, because we look at all on a project by project basis, and in unconventional oil, the Canadian tar sands, which is the most important one, will reach about three million [b/d] most probably in 2015, which is still only 3 per cent of the global oil production, which is still very small. So despite what some people think, I don't think that unconventional oil will either replace the Middle East, or be a major way of addressing energy security. It makes some positive contribution, but it is very limited.

JB We have the Opec summit coming in Saudi Arabia, and they are going to shape OPEC policy for the next ten years. What do you think that Opec's main challenge is now?

FB What Opec needs, for me the most important thing, is to be able to read the market in the right way. This is what they have to do, and I think the Opec countries should understand that the high oil prices will hit Opec, perhaps with a time lag, compared to OECD countries, but they will hit Opec and Opec's economic interest as well. If we do not see enough oil in the markets, if Opec does not increase its production levels, the high prices will stay like this, and I can tell you that high oil prices only give an impetus for alternative policy decisions in the OECD countries. I think for Opec, the main challenge is to have a price level which brings good profits to them, good incentives for the investments, but at the same time, to prevent prices going to very high levels.

FB For Opec, what they have always underlined is the security of demand. In order to reassure Opec, I can tell you the following. In an alternative policy scenario, which looks at the policies and measures in the OECD countries, China and India, all the pol icies under efficiency, biofuels, nuclear and all of these things, if they were to be implemented as of tomorrow - all these efficiency policies, renewable policies, everything - still Opec's market share and Opec oil demand will go up. So, the call on Opec, whatever the policy the countries have, will increase. Therefore I do not see any problem from the security of demand point of view. The issue is today that Opec countries and the industrialised countries [must] work together, in order to make the oil markets much more stable, and have a price which is good for the producers and good for the consumers. If we continue to experience such high prices, I'm afraid it will be also not good news for the producers.

JB Looking at the OPEC call, at some point we need a solution on Iran and Iraq, to get more investment. So when do we need to resolve the situation in both countries, not to be too late for the energy security?

FB I can talk from an energy point of view, that in both countries, it is very important that both countries see investments and the restoration of their fields as soon as possible. In terms of Iran, Iran is experiencing a very strong decline. You were talking about the North Sea, Mexico and others, but Iran is a very exceptional case in Opec, it is experiencing decline rates in some of their fields of up to 15 per cent per year, and Iran needs money and new technology to address this decline issue. Iran needs a lot of investment, but whether or not Iran will be able to raise this investment, in the political context they are in, is another issue. Iraq [has]huge potential, easy geology, but Iraq has also lots of political issues. If Iraq, as soon as possible comes to the markets as a major producer, and increases their current production levels, it will definitely help the markets, and ease the tensions in the markets, but looking at the current situation we are in, I think it will be very optimistic to think in one or two yeas, for Iraq to increase the production significantly, unfortunately.

EC You've talked quite a lot about what you need to see from Opec. What about from the consuming countries, from the OECD, India and China, what do they need to do, on those two fronts, both on energy security, and climate change?

FB The good thing is that there are some policies which are good for both energy security and climate change at the same time, and make economic sense. So, these policies, we have three major policy pillars. The first one is to improve energy efficiency. This is very important and in most cases, very cost effective. Let me give you one example from China, which is a key country here. In China, the richer the people become in China, one of the first thing they do is to buy appliances, which makes their life easier. For example, it is booming in China, the number of refrigerators and air conditioners, both are booming, but their efficiency is so low that they consume a lot of electricity. What we have said is that, if these efficiency standards in refrigerators and air conditioning in China would come to the level of the European standards, not a huge revolution, just European standards, in 2015, they would save electricity which is equivalent to the Three Gorges Dam, so instead of building the Three Gorges Dam, they just need to bring the standards to European levels. In 2030, they will save two Three Gorges Dams, so what I am trying to say is that there is a lot of efficiency improvement possibility there, in China, India and the OECD countries, which would make sense, in terms of cost effectiveness, in terms of energy security, and therefore, by using less energy, for the climate change. This is the first area, efficiency. The second is making more use of renewables definitely makes economic sense, especially wind and hydro power, and the third and most important one is the nuclear power, in the countries where there is no public opposition, when the government is determined, and when the public is in agreement, we see nuclear power being a major contributor to both energy security and climate change issues, so these are the three policy pillars, and we have given examples of that, and 1,500 policy measures, we have analysed and given in our book, to look at, for the OECD and China and India.

EC And that might include measures such as tougher fuel economy standards on cars?

FB Exactly, efficiency improvements in the cars. This is very important, both for US, Europe, especially and in Japan, because they are performing very well. It is the share of renewables, on the efficiency standards on the motors and the industry, for households. Let me give you an example about China as well, because this is very important. It is the locked in, our future is being locked in. In China, in the next eight years, the amount of power plants we are going to build is about close to 800 gigawatts, which is they are at what Europe has, and 90 per cent of it is coal, and when you build a power plant, it will last about 50, 60 years, because it is the last time, so it is very difficult to ask China or India to shut them down, because its economic lifetime is over. So, it is locked in and they will have CO2 emissions for 50 to 60 years. It is the reason why I said planning is very important, in the next ten years, or another efficiency issue, buildings. Today, every second square metre building built in the world is in China, one square metre, the rest of the world, one square metre in China, and what kind of insulation they use is very poor, and if we don't have standards in those countries, we will have serious problems for the next 50 to 60 years. So, both for China and India, as well as the OECD countries, we need to act and we should not only put a lot of targets, goals, meetings and so on, but nothing is happening. We want more action, instead of more targets and more meetings and more talks.

EC And, we really need that action right away?

FB Exactly, right away and in a bold manner.

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Hier volledigheidshalve ook nog het stukje over Christophe de Margerie uit Financial Times

Total chief warns on oil output
By Ed Crooks in London

The world’s capacity to produce oil will fall well short of official forecasts, the chief executive of Total warned on Wednesday

In an unusually stark prediction for the head of one of the world’s biggest oil companies, Christophe de Margerie, CEO of the French group, said it would be difficult to reach even 100m barrels a day.

The International Energy Agency, the rich countries’ watchdog, in its “business as usual” projections, has said oil supply will reach 116m barrels a day by 2030, up from about 85m b/d today. The US government has a similar forecast of 118m b/d in 2030, including a relatively small contribution from biofuels.

Mr de Margerie, however, said while forecasts could always change, “100m barrels [per day]?.?.?.?is now in my view an optimistic case”.

He added: “It is not my view: it is the industry view, or the view of those who like to speak clearly, honestly, and not?.?.?.?just try to please people.”

He refused to speculate on the outlook for oil prices but suggested the tightness of supplies would be likely to keep prices higher.

Mr de Margerie said the problem was not with the amount of oil in the ground. “Reserves have never been so big,” he said, partly because advances in technology had made more sources of oil accessible.

Instead, the constraints were the industry’s ability to produce the oil quickly enough and oil-rich countries’ willingness or ability to develop their reserves.

“We have been, all of us, too optimistic about the geology. Not in terms of reserves, but in terms of how to develop those reserves: how much time it takes, how much realistically do you need.”

He said the industry had also “misunderstood” that resource-rich countries would want to preserve some of their best oil fields for the future, while offering smaller and more difficult fields to foreign investors.

In many countries, including Iraq, Nigeria and Venezuela, political and security problems were holding back supplies, he added, and there was great uncertainty over the outlook.

“100 [million barrels per day] is difficult, because in the 100 you have already additional production in Iraq, in Venezuela, [and] in Nigeria; you have additional production everywhere. And we know that today those developments are not under way,” he said.

He was speaking at the Oil & Money conference in London, which had heard several other speakers warn of the limits to the expansion of oil output.

Nobuo Tanaka, the IEA’s executive director, warned on Tuesday: “We’re confident that reserves will be enough to meet needs through 2030 and beyond, but less confident that enough investments will be made.”

Few oil company leaders have spoken out about the limits to oil output in such uncompromising terms as Mr de Margerie, even though most have been struggling to increase production. Total is one of the fastest-growing of the “big five” international oil companies in terms of volume growth, but it was recently forced to trim back its projections of extra output.

Last year Thierry Desmarest, Mr de Margerie’s predecessor, created a stir when he predicted that world oil production would peak around 2020.

Rex Tillerson, chairman of ExxonMobil, the world’s biggest oil company, told the FT earlier this year that he believed oil production from sources outside the Organisation of the Petroleum Exporting Countries could have “a little more growth”, but would soon level off.