Oil users facing crude awakening

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The world has enough oil to meet demand for the next decade — but only if oil-producing countries invest in new fields.

And after the next decade? Oil analysts and experts have differing opinions about how soon the oil resource will peak, and then begin to decline.

“Fifteen years? 20? 25? There’s some debate about that,” said Richard Nehring, owner of NRG Associates in Colorado Springs, a company that studies oil fields and capacities for major oil companies. “There’s a difference between peaking because the resource is at its top production and peaking — then declining — because investment hasn’t been made. That investment is what needs to be made in order to meet world demand.”

But that investment isn’t simple or cheap, Nehring said. Many oil producing countries — Venezuela, Mexico, Russia — have industries that are run and controlled by the government. Politicians, not oil experts, are making the investment decisions.

“And they might want to take the oil revenues and turn them into social services for their people; or for the military,” he said. “And those oil fields that don’t have wells to them, they do us no good.”

While the industry is investing in oil fields, it isn’t enough, said Britt Dearman, manger of special projects at the Apache Corp., a global energy company.

“Oil and gas investments from 2000 to 2005 increased by 70 percent,” he said. “However, adjusted for inflation, it is only a 5 percent increase. In our view, more investment needs to be made — and needs to be made quickly to keep up with demand.”

$5 billion for an oil field

New wells don’t come cheaply, Nehring said. In Saudi Arabia — probably the least expensive place to develop fields — it costs $5,000 to add one barrel per day of production. In places where there is civil unrest, such as Iraq or Nigeria, it could cost up to $10,000. Developing an oil field in Saudi Arabia costs about $5 billion.

Dearman said the cost of developing a field in Russia is 10 times that.

“Costs vary around the world,” he said. “In the U.S., the industry has to drill deeper and in more remote areas to find significant volumes of oil. The cost of funding and developing oil in the U.S. is much more than in Saudi Arabia.”

U.S. oil production peaked in the late 1970s, Dearman said. Now, the country is producing about 60 percent of that peak.

Analysts agree that investment is the key to solving the short-term energy needs of the United States.

“In some places they’re doing that,” Nehring said. “Aramco (in Saudi Arabia) is working on a project that will add half a million barrels a day for a year. That’s the kind of investment we need. It’s not going on everywhere.”

Some countries are not allowing outside investment, leading to capacity problems, he said.

“The problem for international oil companies is that most of the world’s oil reserves are off-limits,” Dearman said. “I think that I’ve seen estimates that only 15 percent of the world’s oil reserves are open to international oil companies. The rest of the reserves are controlled by national oil companies. As a result, the world depends on national oil companies to continue spending money to increase production.”

Declining spare capacity

Oil prices have remained low, Dearman said, because of spare production capacity built during the ’80s and ’90s — due to massive investment from international oil companies.

“Today that spare capacity is probably about 2.5 million barrels per day, and all of it resides in OPEC countries,” he said. “It takes a lot of money for companies to find and produce oil. These funds come from revenue generated from production. One reason spending has increased is because prices increased and provided oil companies with more funds to drill. If the federal government imposes higher taxes on the oil and gas industry, the industry will have less money with which to drill. And this will only exacerbate the production problem.”

Oil demand is increasing 1 percent each year, Nehring said, which equals 850,000 barrels per day. That demand is easy to meet with today’s oil fields. But there also is decreasing capacity — between 4 percent and 5 percent that also must be made up for — meaning millions of additional barrels are needed.

“We’re looking at a long term problem,” Nehring said. “One that’s going to take the rest of this century to solve. And day-to-day events are taking up our attention. Day-to-day isn’t where the results lie.”

And day-to-day isn’t where the profits are, Dearman said. It can take years for companies to recover their investments — and that often requires anticipation of long-term oil prices.

“Rising costs and volatile oil prices increase the difficulty in making decisions about how much to invest, and where to invest,” he said.

A non-conventional solution

Jeremy Boak, project manager for the Colorado Energy Resource Institute at the Colorado School of Mines, said the solution lies in non-conventional methods to exploit all the hydrocarbon resources available.

“We’ve got to develop all the existing oil fields, using secondary and tertiary methods, branching out to some experimental uses,” he said. “Using heavy oil, like the Canadian oil sands, getting oil from oil shale, as it’s economically feasible.”

Nehring expects to have the results of a November meeting among oil executives ready in April. The report will outline the challenges facing the oil industry, he said.

To Boak, there’s no debate about oil resources. Companies are experimenting with advanced and developing renewable resources, he said. But they also are enhancing ways to create new hydrocarbon resources.

“There are companies working with coal bed methods to turn it direct to gasification,” he said. “And many companies are working on turning coal directly to liquid. All these are being developed. The hard thing to know is how much of each we need.”

The issues rely on the economics of developing ways to maximize returns from oil fields, he said.

“Gasification is being used in some South African countries,” he said. “And other places are looking at a combined cycle plants that can be developed in the future. BP is definitely looking at using hydrogen for power.”

Companies are using forced carbon dioxide flushes to make sure oil fields are as productive as they can be, he said. But companies also are increasingly focused on using low-carbon energy resources.

“BP and Shell are definitely recognizing that CO2 management is mandatory to operating in the petrol business,” he said. “Companies believe that management of carbon gases is in the future, and they want to be involved in the development of the carbon market.”

In the meantime, the debate about oil should be focused how to reduce consumption, save money and lengthen the time before an alternative source has to be developed, said Amory Louvins of the Rocky Mountain Institute.

“Using energy more efficiently offers an economic bonanza … because saving fossil fuel is a lot cheaper than buying it,” he wrote in Scientific American. “Over the past decade, chemical manufacturer DuPont has boosted production nearly 30 percent, but cut energy use 7 percent and greenhouse gas emissions by 72 percent … saving more than $2 billion so far.”

Increasing end-use efficiency can “yield huge savings in fuel, pollution and capital costs,” he said, “because large amounts of energy are lost at every stage of the journey from production sites to delivered services.”

In 2004, the Boulder-based scientist wrote “Winning the Oil Endgame,” a book that explores ways to reduce oil-dependency by building vehicles out of lightweight materials.

“RMI’s analysis shows that full adoption of efficient vehicles, buildings and industries could shrink projected U.S. oil use in 2025 — 28 million barrels a day — by more than half, lowering consumption to pre-1970s levels,” he wrote.

Louvins estimates that the United States could save $70 billion by 2025 by improving automobile efficiency and finding substitutes for oil.

“With the help of efficiency improvements, and competitive renewable energy sources, the U.S. can phase out oil use by 2050. Profit seeking businesses can lead the way,” he said.

But until the demand is reduced, prices could continue to rise, Nehring said. For instance, a mild winter in the northeast led to reduced prices.

“We have to look at potential capacity and make sure it equals investment,” he said. “And investment isn’t free. But production hasn’t peaked, and it won’t for the next decade, as long as investment is made to develop the capacity that we know is there.”