In the dark over oil reserves

Shell says we're entering a 'zone of uncertainty' over oil supply – a frank admission it hasn't a clue what's going to happen


Andrew Simms guardian.co.uk, Monday 28 March 2011
Energy companies are uncertain about how much oil remains, yet have largely abandoned research into renewables. Photograph: Getty

There is a perverse circular logic to George Osborne using tax revenues from the oil companies to subsidise our national car habit. It may worsen long-term energy security, obstruct the shift to a low-carbon economy and leave us vulnerable to uncontrollable global events, but it makes short-term political sense to the government.

Just how big a gamble Osborne is making becomes clear when you look at how the oil companies themselves see the future.

Looking into its crystal ball of energy scenarios, Shell breaks down where it thinks we've got to, and where we might be going in a new report called Signals & Signposts. It warns that we face an upcoming "zone of uncertainty" – a frank admission that, really, it hasn't a clue what is going to happen. Then it labels a large block of time between now and 2050 as a "zone of extraordinary opportunity or misery" (Shell's involvement in the Niger delta demonstrates that the two are not necessarily mutually exclusive).

Using optimistic assumptions, the company nevertheless sees a gap emerging by 2050 between "business-as-usual-supply" and "business-as-usual-demand", a gap so large that it is equal to the size of the whole industry in the year 2000.

The US mission in Saudi Arabia, a country long relied on to increase production when times are hard, recently questioned in a cable made available by WikiLeaks, "whether they any longer have the power to drive [oil] prices down for a prolonged period". Such revelations make the markets jittery. Events like those in Libya make them jump. And the industry is already embroiled in problems elsewhere.

For example, it can no longer safely rely for slack production on the potential of more marginal fields, such as the Macondo prospect in the Gulf of Mexico, now famous as the scene of BP's Deepwater Horizon debacle.

US giant Chevron is paying for big display adverts that declare: "Oil companies should support the communities they're part of." But it's unlikely that they'll do so by complying with the courts in Ecuador who recently fined the company £5bn, half its annual profit, for polluting the communities that "they're part of". Unhappy BP sees output falling in key countries like the US, Russia and the UK, and is now caught up with dark machinations in Russia that smack of the old days of the "great game".

The whole industry is faced with the odd prospect that the more successfully they conduct their core business, of finding and pumping oil, the more quickly they will do themselves out of a job. A comparison of numerous forecasts by Steve Sorrell and colleagues, published in the journal Energy Policy, revealed a list of 56 oil-producing countries already apparently past their point of peak production. They concluded that any forecast putting the global peak and decline of oil production more than a couple of decades away was based on assumptions that were "at best optimistic and at worst implausible". Some thought it had already happened, more still that it would occur in the next five years. When markets decide that the moment has come, the foundations of the economy could change as fast as a Middle Eastern regime.

But within the industry there remains the same kind of blithe confidence in its ability to continue as before, propping up our economy and lifestyles, that governments just a few years ago placed in the banking system.

The cost of oil imports as a share of GDP for the US, Europe and Japan is back around the level it was in 2008, at between 2-3%, roughly double the average for the past four decades. That doesn't sound much, but it's misleading. Because, in effect, 100% of the productive activities that comprise GDP depend on energy.

The Shell report spoke of "volatile transition", and of economic outlooks that range from "severe-yet-sharp" to "deeper-and-longer" and the marvellously catchy, if dated, "Depression 2.0".

With so much insight, it is remarkable then, that Shell, like BP, has reversed at speed out of renewable energy. Shell dropped investment in wind, solar and hydrogen energy in 2009, the same year BP closed the London HQ of BP Alternative Energy, along with its solar plants in the US and Spain.


Fatih Birrol, chief economist at the International Energy Agency, says we have moved beyond Shell's "uncertainty" into the "danger zone" for the global economy.

It's been tempting to speculate that Britain is returning to the 1970s. We're teetering around recession, there's upheaval in the Middle East and concern about the rising price of oil is spilling over from the cost of filling a petrol tank to filling a fridge with food.

But if problems with production, politics and price combine, the danger is that this may be less a repeat of Britain in the 1970s, and more like Cuba in the 1990s when it suddenly lost access to cheap cold war oil.

On the bright side, almost overnight, Cuba took to urban organic farming, walking, cycling, mending, repairing and reusing what it already had. Cubans might not have chosen to be so, but they became the modern age's first previously addicted explorers of a world beyond oil, and they found themselves much healthier and with some of the best mechanics in the world. The harder we cling to the comfort of oil, the sooner we might not have that choice either

Guess who will gonna pay the duck?

Oil pressure  rising
The world is badly placed to cope with another oil crisis

Oil and the Arab world's unrestFeb 24th 2011
from the print edition

.A MONTH ago Brent crude oil stood at around $96 a barrel and Hosni Mubarak was ensconced as Egypt’s ruler. Now he is gone, overthrown by a display of people power that is shaking autocratic leaders across north Africa and the Middle East. And oil has surged above $115. Little wonder. The region provides 35% of the world’s oil. Libya, the scene of growing violence this week, produces 1.7m of the world’s 88m barrels a day (b/d).

So far prices have not been pushed up by actual disruptions to supply. Oil hit a peak even before news emerged that some foreign oil firms operating in Libya would cut production and that the country’s ports had temporarily closed. As Adam Sieminski at Deutsche Bank points out, oil prices are driven both by current conditions and by future expectations.

Oil markets don’t like surprises. The sudden ousting of Mr Mubarak and the unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a tenth of the world’s oil) had added 20% to oil prices by the middle of this week. The big worry is that spreading unrest will culminate in another shock akin to the oil embargo of 1973, the Iranian revolution or Iraq’s invasion of Kuwait.

Oil is more global than it was during those previous crises. In the 1970s production was concentrated around the Persian Gulf. Since then a gusher of non-OPEC oil has hit markets from fields in Latin America, west Africa and beyond. Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009; OPEC’s share of production has gone from around 51% in the mid-1970s to just over 40% now.

.Yet the globalisation of oil supply has not diminished OPEC’s clout as the marginal supplier of crude. Markets are tight at the moment. Bumper inventories, built up during the downturn, are running down as the rich world recovers and Asia puts on a remarkable growth spurt. Demand rose by a blistering 2.7m b/d last year, according to the International Energy Agency, and is set to grow by another 1.7m b/d this year by Deutsche Bank’s reckoning. Many other producers are already running at full capacity; OPEC has its hands on the only spare oil (see chart).

If Libya’s oil stopped flowing importers would look to Saudi Arabia to make up the shortfall. The oil could probably flow to fill the gap in Europe, Libya’s main market, in a matter of weeks. OPEC claims that it has 6m b/d on tap but that looks wishful. Analysts think the true number is nearer 4m-5m b/d, with 3m-3.5m b/d in Saudi hands. That is ample to plug a Libyan gap but would hasten the day when growing world demand sucks up all spare production capacity. Analysts at Nomura reckon that it would only take a halt of exports from Algeria as well to absorb all the slack and propel oil to a terrifying $220 a barrel.

Despite saying it stands ready to produce more oil, Saudi Arabia has so far been reluctant to turn its stopcocks. OPEC claims that the world is amply supplied with oil and seems content with a price around $100 a barrel. Traders hope that Saudi Arabia will boost production stealthily or that OPEC will call a special meeting to raise quotas and calm markets.

The worst-case scenario for oil prices would be some kind of disruption to Saudi supply itself. That concern has become livelier given the unrest in neighbouring Bahrain. The tiny island kingdom produces little oil but is of vital strategic importance in the Persian Gulf, a seaway that carries 18% of the world’s oil. America’s 5th Fleet uses the country as a base.

The Saudis may also fear that protests by Bahrain’s Shia population could spill over their own borders. Saudi Arabia’s eastern provinces are home to both its oil industry and most of its Shias, who may also have cause for grievance with their Sunni rulers. The king this week announced $36 billion in benefits for his people. One crumb of comfort is that oil facilities across the region are generally located far from the population centres, where protests tend to be concentrated, and are well defended against anything but a concerted military assault.


What might be the effects of a more general supply crisis in the Middle East and north Africa? The oil shocks of the 1970s spurred the world to build stockpiles, such as the 727m barrels of crude oil in America’s strategic petroleum reserve, to be drawn on in the event of upheaval in the Middle East and elsewhere. China is building up a strategic reserve of its own. America’s Energy Information Administration puts total rich-world stocks in the hands of governments and industry at 4.3 billion barrels, equivalent to nearly 50 days of global consumption at current rates.

The impact of a crisis would therefore depend on how much oil production was lost and for how long. Even seismic shocks in oil-producing countries might not cut off supplies for very long. Yet the example of Iran shows what can go wrong. Leo Drollas of the Centre for Global Energy Studies, a think-tank, points out that pre-revolutionary Iran pumped 6m b/d. The new regime ditched Western oil experts and capital, and it has never come close to matching that level of output since; it now produces just 3.7m b/d. Middle Eastern oil is largely state-controlled but, as Amrita Sen of Barclays Capital observes, foreign investment remains vital to north Africa’s oil industry. If new regimes emerged that were more hostile to outsiders, that might have a lasting effect on production.

The world could probably weather a short-lived crisis. But the damage if oil prices spiked and stayed high for a long time could be severe for the recovering economies of the rich world. As for the prospects of reducing the importance of the Middle East to global oil supplies, forget it. Strong Asian demand is likely to mean that OPEC’s share of oil production rises again as it pumps extra output eastward. A troubled region’s capacity to cause trouble will not diminish.