Petroleum Review Editorial December 2006
Stern costs climate change mitigation while IEA predicts non-Opec peak by 2015
The last month has seen a definitive report on the costs of mitigating climate change (the Stern report, see p12), the publication of the International Energy Agency’s (IEA) latest World Energy Outlook (p3) and the UK energy portfolio once again having representation in Cabinet.
In a quiet ministerial reshuffle, UK Energy Minister Malcolm Wicks was moved to take up the post of Science and Innovation Minister at the Department of Trade and Industry (DTI), at Minister of State level. His responsibilities as Energy Minister are to be taken on directly by Alistair Darling, Secretary of State for Trade and Industry. As Darling already sits in the Cabinet, the move clearly upgrades the importance of energy in terms of government priorities. Whether this presages the rebuilding of the expertise and power of a full UK Energy Ministry remains to be seen.
Security of energy supply has clearly become of much greater concern over the last year or so. The complex interrelationship between climate change mitigation, the energy supply needed to support economic growth and security of energy supply are issues that will be an increasing challenge to governments around the world.
The just issued Stern review, The Economics of Climate Change, is important because it breaks the sterile stand-off between those who believe climate change is such a threat that drastic action should be taken immediately, and those still contesting the linkage with human activity or advocating adaptation rather than mitigation.
Sir Nicholas Stern, a prominent economist and former Chief Economist of the World Bank, has, potentially, broken the deadlock by modelling and costing the impacts of climate change and mitigation measures. His primary conclusion is that effective mitigation actions, if taken early enough, are both affordable and acceptable in terms of their social and political impact. For the energy industries, the conclusions are probably rather less palatable, as it will involve governments deliberately seeking to reduce fuel usage and encouraging alternative fuels. Pressure to develop and use carbon sequestration techniques will clearly increase over the next few years (p5).
Under the headline ‘How much carbon for your cash?’, measuring the effectiveness of climate change investments, BP and the City of London are the core sponsors of ‘A proposal for co-operative investment research into climate change initiatives’, which has already attracted interest and participation from a number of City investment houses such as Deutsche Bank, Morgan Stanley, HSBC, Sarasin and Societé Générale among others. Clearly some sort of turning point has been reached in which the perception of climate change is moving from ill-defined threat to potential market opportunity. An initial conference is to be held in March 2007 and a closing one in October 2007, in which the research reports will be published. It is to be hoped that the project develops along these positive lines and avoids being hijacked by those simply opposed to change.
World energy outlook
Some idea of the threats to future energy supplies is contained in the latest World Energy Outlook (WEO 2006) just published by the IEA. In what is probably the clearest statement by any official body to date, the IEA notes (p85 of the report) that ‘non-Opec conventional crude oil peaks by the middle of the next decade, though natural gas liquids production continues to rise’. It illustrates the impact with a graph (p95) showing non-Opec conventional crude and NGLs production holding steady at 52mn b/d from 2010 onwards. The consequence of its prediction about non-Opec production peaking is that the world becomes increasingly dependent on Opec supplies. As the report puts it: ‘The share of production controlled by members of the Organisation of Petroleum Exporting Countries, particularly in the Middle East, grows significantly.’
The IEA then points out in a footnote that: ‘Opec is assumed to be willing to meet the portion of global oil demand not met by non-Opec producers at the prices assumed. A special analysis of the effect of lower Opec investment in upstream capacity is presented at the end of this chapter’ (Chapter 3).
The analysis continues: ‘Their [Opec’s] collective output of crude oil, NGLs and non-conventional oil grows from 34mn b/d in 2005 to 42mn b/d in 2015, and 56mn b/d in 2030, boosting their share of world oil supply from 40% now, to 48% in 2030.’ Then, somewhat confusingly in the light of earlier comments, it states: ‘Non-Opec production increases much more slowly, from its current level of 48mn b/d to 55mn b/d in 2015, and 58mn b/d by 2030.’ The accompanying table (3.2) reveals the explanation, all the non-Opec output growth is coming from non-conventional oil – primarily Canadian tar sands.
The WEO 2006 should also give pause for thought to those who see new supply as a simple mechanistic process in which prices rise and supply expands. The report shows that oil and gas exploration as a percentage of upstream investment fell steadily from 1990, with the first upturn only occuring in 2006 – and even that is on the basis of plans.
Much more disturbing is that although E&P expenditure doubled between 2000 and 2005, cost inflation has been such as to reduce the real gains to a fifth (20%). Inflation in labour costs (p11), equipment supply, rig rates and the rest are severely restricting the industry’s ability to increase supply. In fact, most quoted companies are having great difficulty in consistently maintaining their own production volumes, with a few honourable exceptions. To complete the litany of woes, the WEO 2006 shows that for integrated mining operations, the cost of producing synthetic crude from Canadian tar sands is now about $33/b, while the lower cost in-situ method now costs $16/b for just extracting the bitumen. The tar sands may be a plentiful resource, but oilfield inflation and high gas prices mean it is now a high-cost source of supply.
Chris Skrebowski
The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.
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