Energy Agency warns that oil has peaked

Energy Matters0

From Jeremy Legget in The Guardian

Another year passes, another climate change summit arrives, the 14th in the annual series. The community of nations have been talking for more than 18 years now about how to stop humanity’s remorseless effort to cook its own home. These gabfests have largely been action-free zones. I have attended too many of them, but this year it was time to risk my blood-pressure on another.

I took the train to Poland, a prospect that sounds like a recipe for slow-travel hell, but in fact was both easy and productive. You take the afternoon Eurostar to Brussels, the evening express to Cologne, the night train to Poland, disembark after eight hours sleep just in time for breakfast, with a massive reading backlog dismantled along the way. Much less carbon emitted than would have been the case flying, and Ryanair’s boss – Michael O’Leary – deprived of his thin margin. All in all, a good day’s work.

At the talks, little had changed since my visit to the Montreal summit of 2005. Thousands of delegates throng in cavernous halls, trying to find out what is going on behind the closed doors of the intergovernmental side meetings where most of the serious stalling is done. The “Fossil of the Day” award – a statue given each day by environmental groups to the worst foot-dragger among the 100-plus national governments and dozens of industry lobby groups – is still being dished out. The star renegades in the first week of this summit were Poland and Japan. Candidates are never in short supply. During my stay they included Chancellor Merkel, who is angling for massive exclusions for German heavy industry in carbon permitting, and Kuwait and Qatar, who are claiming they should qualify for the putative fund compensating victims of climate change because sea-level rise may damage their offshore oil rigs.

One of my missions was an effort to raise the peak oil issue. I suspect that most of the 9,000-plus attendees – diplomats, lobbyists and journalists – may have little idea how strong the evidence is that a global energy crisis lurks just a few years in the future, and that it will have massive implications for climate change policymaking.

Some of that evidence was aired by the International Energy Agency at an open meeting on its recently-completed World Energy Outlook 2008. Between the lines of the IEA’s latest weighty annual lies an early warning of a premature peak in global oil production. I say “between the lines”, because the IEA is a somewhat inconsistent organisation. Set up by developed governments essentially to promote fossil fuels, it has to wrestle with considerable internal tensions when warning both of fossil fuel depletion and the environmental impacts of fossil fuel burning. These tensions are often discernible in the wording of the agency’s committee-written reports, and in public presentations by its officials.

This year, for the first time, the IEA has conducted an oilfield-by-oilfield study of the world’s existing oil reserves. It shows that the fields currently in production are running out alarmingly fast. The average depletion rate of 580 of the world’s largest fields, all past their peak of production, is fully 6.7% per annum.

IEA executive director Nobuo Tanaka showed a slide illustrating the situation. It is, he said, his most important diagram. It shows crude oil production from all the world’s existing fields climbing unevenly from just below 60 million barrels a day (mbd) in 1990 to a peak – more exactly a brief plateau – of just over 70 mbd between 2005 and 2008. In 2009, however, crude production begins a steep descent, falling steadily all the way below 30 million barrels a day by 2030. The depletion factor charted by his team, as I see it, could better be called a fast-emptying factor.

This is indeed alarming, Tanaka said. The more so because, even with demand for oil being destroyed fast by recession in the west, the rate of demand growth – led by China, and India – is such that the world will need to be producing at least 103 million barrels a day by 2030.

Can that be done? Yes, he said, but only if massive investment is thrown at the challenge, especially by the Opec nations. Global production today totals 82.3 mbd if we subtract biofuels and add to existing crude production the 1.6 mbd of “unconventional” oil squeezed from the tar sands and 10.5 mbd of oil produced during gas-field operations. To reach production of 103 mbd, therefore, would require oil-from-gas to expand almost to 20 mbd, unconventional production to expand almost 9 mbd, and on top of that more than 45 million barrels a day of crude oil capacity yet to be developed and yet to be found. All this adds up to 64 mbd of totally new production capacity needed onstream within 22 years. That, said Tanaka, pausing for effect, is fully six times the production of Saudi Arabia today.

I imagined I could detect a desire in Tanaka to say more about his thoughts on the likelihood of this. But of course, in his position, he can’t.

Here is the bottom line. At oil prices below around $70 a barrel, producing oil becomes uneconomic in many settings today. With the oil price where it currently languishes, at less than $50 a barrel – in a market where pricing has become completely disconnected from “fundamentals” by the volume of paper trading – oil development and exploration projects are being cancelled around the world on a daily basis. How on earth is the industry going to bring on six new Saudi Arabia’s from this kind of dead-in-the water start?

That is before you even consider the shrinking rate of large-field discovery, the state of the industry’s rusting infrastructure, its ageing workforce, its long history of under-investment, the consistent delays in bringing oilfields onstream once discovered, and other problems.

Tanaka closed by saying that the world needs a “clean energy new deal”, as the IEA is calling it. Insurance must be taken out, via clean energy, in case the oil industry fails to meet projected demand. The perils of climate change require such a course of action anyway. So too does the rebuilding of economies made necessary by the financial crisis. It all makes sense in a win-win-win sort of way.

The IEA, in Poznan, thereby added its name to the growing list of institutions calling for what is now widely referred to as a green new deal. I asked Tanaka whether he knew of the recent study by a group of eight UK companies, the UK Industry Taskforce on Peak Oil and Energy Security.These companies, including my own, have conducted a business-risk assessment of the likelihood of the “six Saudi Arabias”.

Our conclusion is that it is unlikely that the oil industry will close the widening gap between depletion and demand within a few years. Peak oil, we fear, is going to hit the oil-dependent world hard. Many oil-importing countries risk experiencing peak oil not as an energy crisis, but an energy famine, as producers cut off their exports for use at home. Peak oil might, if we are smart and lucky, galvanise a proactive mass mobilisation of the alternatives that can abate both the energy-security and climate threats, and so soften the landing in the global energy crisis. On the other hand, if many governments choose to forget about climate change in their scramble for alternatives, it could also mobilise technologies like tar sands and liquids-from-coal on a scale that would drown any effort to deal with global warming.

“There is a risk, as you say, of a constraint on the supply side,” Tanaka replied cautiously. We hope the climate-change issue will drive the world to take proactive action, he said. “It’s a choice: peak oil or you yourself (meaning the community of nations) will drive energy efficiency and alternatives.” Tanaka hadn’t mentioned the words “peak oil” once in his presentation. Only now, in discussion, did the seemingly taboo term emerge.

Afterwards, an IEA official came up to me to offer words of encouragement. “There’s a real risk that this thing could collapse,” he said. He meant the operating model for the world’s energy markets. Where financial markets can go today, in other words, so can energy markets tomorrow.

Perhaps 100 of the 9,000 delegates in Poznan attended Nobuo Tanaka’s presentation. The next day, I give a talk of my own, on the UK taskforce report. Around a dozen people attended that.

And so to the train journey home. Somehow it seemed to take longer than the journey out.