ISBN 978-0-9562121-1-5 The Oil Crunch A wake-up call for the UK economy

Second report of the UK Industry Taskforce on & Energy Security (ITPOES)

For more information February 2010 www.peakoiltaskforce.net | contact [email protected]

ISBN 978- 0- 9562121- 1- 5

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Industry Taskforce on Peak Oil & Energy Security

The Oil Crunch A wake-up call for the UK economy

Second report of the UK Industry Taskforce on Peak Oil & Energy Security (ITPOES)

February 2010

Industry Taskforce on Peak Oil & Energy Security Taskforce member companies Arup, Foster and Partners, Scottish and Southern Energy, Solarcentury, Stagecoach Group, Virgin Group. The chairman of the Taskforce is Will Whitehorn of Virgin, and the editor of this report is Simon Roberts of Arup. Contributors from the companies include John Miles (Arup), Stefan Behling (Foster and Partners), Ian Marchant and Jeff Chandler (Scottish and Southern Energy), Jeremy Leggett (Solarcentury), Steven Stewart (Stagecoach Group), and Nick Fox and Alan Knight (Virgin Group). www.peakoiltaskforce.net

The Oil Crunch A wake-up call for the UK economy Second report of the UK Industry Taskforce on Peak Oil & Energy Security (ITPOES)

Editor Simon Roberts (Arup)

Published 10th February 2010 in the United Kingdom by: Ove Arup & Partners Ltd, 13 Fitzroy Street, London W1T 4BQ, UK

Copyright © 2010 ITPOES

ISBN: 978-0-9562121-1-5 February 2010 Industry Taskforce on Peak Oil & Energy Security

Contents

Foreword 4

Executive summary 6

1 Introduction 8

2 Scene setting 9

3 Opinion A: Chris Skrebowski 15

4 Opinion B: Dr Robert Falkner 27

5 Other points of view 31

6 Taskforce view 35

7 Possible countermeasures 41

8 Recommendations 44

Appendix A: Spare capacity 46

Appendix B: Major disruptive events to oil supplies 48

Appendix C: Biofuels 49

Appendix D: Whole-economy scenarios for the UK to 2025 50

Appendix E: Sources 55 Industry Taskforce February 2010 on Peak Oil & Energy Security

Foreword:

The credit crunch of 2008 Virtually every sector of our economy unrest could lead to shortages in foreshadowed major economic, is still dependent on oil. This is why consumer products and the UK’s political and social upheaval. It stress- it is vital that whichever party forms energy security will be significantly tested the responses of governments, the next government, they have a compromised. This has the potential policy-makers and businesses to coherent set of policies to help the to hit UK business and commerce the extreme. If only there had been UK adapt. This is especially important as well as the most disadvantaged in greater time to prepare for its impact for the UK, and other developed society with yet another crisis. and a greater level of understanding economies, which have been so While responsibility for addressing about the issues. reliant on low-cost oil for decades. these changes must be taken up The next five years will see us face There are two challenges for by government, we must also build another crunch - the oil crunch. government and policy-makers. a coalition of interests including This time, we do have the chance to Firstly, to recognise the situation we businesses and the public if we are prepare. The challenge is to use that face, and secondly to take action to to implement the changes needed to time well. mitigate the worst implications of the help us adapt and prosper. crunch. As we reach maximum oil extraction The energy sector is facing major rates, the era of cheap oil is behind Unless we do so, we face a challenges over the next decade with us. We must plan for a world in situation during the term of the next the need to green the energy mix, which oil prices are likely to be both government where fuel price higher and more volatile and where oil price shocks have the potential to destabilise economic, political and social activity. “Our message to government and businesses is clear. Act now.”

Richard Branson, Founder, Virgin Group Ian Marchant, CEO, Scottish & Southern Energy

4 February 2010 Industry Taskforce on Peak Oil & Energy Security

From recognition to action

maintain security of supply, while at urban developments. We are also Don’t let the oil crunch catch us out the same time minimising the cost looking to deploy new technologies in the way that the credit crunch did. to customers. Scottish and Southern within the fabric of our buildings and Richard Branson, Energy, for instance, are investing in cities that will enable us to generate Founder, Virgin Group renewable generating capacity and cleaner and more efficient energy in decarbonising electricity production, future. Arup and Solarcentury are all Ian Marchant, partly so that the UK is less exposed contributing to the development of CEO, Scottish & Southern Energy to volatile fuel prices. these activities. Brian Souter, Our transport system, which is central The impacts of climate change make CEO, Stagecoach Group to our economy and social fabric, this an urgent task. However the Philip Dilley, is largely dependent on fossil fuels addition of a peak in oil production Chairman, Arup and older combustion technologies. and the need to find replacements Jeremy Leggett, Businesses such as Stagecoach will speed up that urgency and add Chairman, Solarcentury and Virgin are at the forefront of even greater focus. the drive to shift to newer, cleaner Our message to government and technologies and more sustainable businesses is clear. Act now. If we public transport. don’t, we run the risk of a return to Our urban infrastructure also needs the oil price shocks of the 1970s and to respond to these changes. We are 2008 with all the inherent uncertainty placing ever greater emphasis on the and trauma that brought. need for energy efficient buildings and the design of energy efficient

Brian Souter, CEO, Stagecoach Group Philip Dilley, Chairman, Arup Jeremy Leggett, Chairman, Solarcentury

5 Industry Taskforce February 2010 on Peak Oil & Energy Security

Executive summary

This is the second report issued by Opinion A has been prepared by The intervening economic crash ITPOES (the UK Industry Taskforce Chris Skrebowski, a recognised has done little to blunt our on Peak Oil and Energy Security). The independent oil-industry expert. expectations; the time to a peak interpretation of the current position, He looks in some detail at the in global production is, essentially, and the viewpoints expressed in the evidence which defines global oil little changed as cancelled new final recommendations, are those of reserves and extraction rates, and capacity broadly offsets recession- the ITPOES membership - a group concludes that the global peak deferred demand. When combined of private British companies whose production rate for oil is likely to with current demand projections, a interests span a wide range of occur within the next decade (maybe price crunch is still projected to occur business sectors. The work therefore within 5 years) at a value no higher following the peak. represents an independent, business- than 92Mb/d (million barrels per Opinion B has been prepared by minded, view of the national position. day). This compares with the current Dr Robert Falkner of the London record extraction rate of 87Mb/d set Like its predecessor, published School of Economics (LSE). He in July 2008, and the conclusions in the autumn of 2008, this considers the likely effects of tighter drawn are essentially the same as report addresses the question of supply conditions and rising oil prices those reached in the previous ITPOES future oil supply and its potential on the British economy, particularly report. At first sight, this is surprising consequences for the UK. It does focusing on the coming 5 years. He but on closer examination it is clear not address the questions of climate concludes that the economy is not that the fundamental issues identified change and carbon reduction directly as prey to the as might in the 2008 report remain unchanged. - there are many other texts which do be expected at first sight, but there Namely: that - but there are massive areas of are fundamental issues which could overlap between the distinct issues of • The net flow rate data shows nevertheless spring a nasty surprise resource depletion and atmospheric that increases in extraction will on the incoming government. pollution. In some parts of our report be slowing down in 2011-13 and Following the presentation of these that overlap is recognised but the dropping thereafter. Given the long expert opinions, the key findings from main thrust of the report focuses lead-times involved in developing several other reports and reviews on the questions of oil price and the necessary infrastructure, this of the oil-supply situation, all of availability over the coming decade. trend is unlikely to be reversed which were published in 2009, are In particular, it seeks to highlight within the next 5 years. presented. In particular, these reports issues which are likely to confront • The industry is not include the Wicks Review on Energy the new government following the discovering more giant Security for the UK Prime Minister in General Election in 2010. It follows fields at a sufficient rate. August, and the latest major research the style of the first ITPOES report, • There are concerns about the report by the UK Energy Research titled “The Oil Crunch, Securing the levels of reserves quoted by the Centre (UKERC), called “Global Oil UK’s energy future” in that two expert OPEC countries (which are critical Depletion”, in October. opinions have been commissioned to the confidence levels associated and used as the basis for an analysis with future production capacity). The second half of the report reviews by the ITPOES membership. • There are indications that the material put forward above and underinvestment in the oil tries to assess the implications for industry over the past decade business in the UK. Looking through has led to infrastructure and the eyes of the Taskforce members, underskilling problems that will it expresses a view that the price of make it particularly difficult to oil could rise to a new and sustained, increase production capacity level which is well above US$100/b rapidly in the short-term. and that this is very likely to be the 6 February 2010 Industry Taskforce on Peak Oil & Energy Security

case within the next 5 years. In our Transport: Passenger and freight may alleviate some of this, but the view, this could have a significant transport are central to our economy. ground needs to be prepared for impact on a number of important A mix of technological solutions and the introduction of such technology UK industry sectors. It could also policies to incentivise behavioural and all the economic and social have a significant impact on several change and modal shift from the car implications of flexible pricing that key societal indicators such as fuel to public transport are identified as are enabled in this scenario. The poverty and mobility. The penultimate key priorities. We believe maintaining government has often talked of a section of the report looks at some of government investment in public green industrial revolution of late, and the particular negative effects which transport is crucial and a long-term we believe that such a development might afflict industry in the UK and view should be taken of its wider is both feasible and imperative, in suggests some actions designed to economic, social and environmental motive power and generation alike. combat them. benefits. We also highlight the need However, even if such a revolution to lay foundations for alternative takes place, it will not produce results The report concludes with a clear sources of motive power (e.g. quickly enough to make a material message to the incoming UK vehicle electrification) and associated difference to the oil production government that, although the infrastructure. problems we describe. immediate slow-down in the global economy has removed short-term Retail and agricultural: These Heating: Despite the fact that only a pressures on oil consumption, the sectors are both hit by a secondary small fraction of UK heating is directly underlying issues highlighted in last dependence on oil. Retail, because supplied by oil (or oil-based products, year’s report have not changed. of its dependence on sophisticated such as LPG), there is nevertheless Therefore, future government policies just-in-time deliveries (transport), a significant minority of households must explicitly recognise the potential and agriculture because of its that use this form of heating. Once for: dependence on oil-based crop again, government policies need to and soil treatment products as be framed in the interest of protecting • Oil prices on the world markets well as fuels for cultivation and the disadvantaged members of our that are significantly higher than produce transport. In both cases, society. historic averages as soon as oil price rises will feed through to global economic activity revives. The report concludes with a clear consumer prices on the shelves, • The possibility of significant price message to the incoming UK and government policies need to be volatility, with high peaks and government that future policies must shaped to protect the disadvantaged. (possible) supply disruptions. explicitly recognise the potential for Recommendations are put forward for Power generation world oil prices to rise and for the policy consideration in the following and distribution: This sector is possibility of oil supply interruptions. areas: likely to see a significant change Recommendations are put forward in its demand patterns if there is for policy consideration in the areas General policies: National and a significant move in the direction of transport; retail and agriculture; local government policies (particularly of road vehicle electrification. The electricity generation and distribution; those on the social, economic and introduction of Smart Grid technology and commercial/domestic heating. financial fronts) should explicitly acknowledge the potential for high oil prices and promote appropriate contingency planning.

7 Industry Taskforce February 2010 on Peak Oil & Energy Security

1. Introduction

The first report of the Industry this report is focussed on the issue Since our first report, there have Taskforce on Peak Oil and Energy of oil availability. It is not focussed on been a number of important reports Security (ITPOES) was published climate change or carbon reduction, and reviews on energy and oil from during the final quarter of 2008. although there are some important a range of organisations. We list It highlighted the probability that areas of overlap between these two these publications and compare their future oil production volumes are distinct subjects. conclusions to those from our two unlikely to rise much above the record experts. This year’s report starts with a scene global extraction rate of 87Mb/d setting description of ‘peak oil’ to The report is completed by an achieved in July 2008, and that this clarify terms. As in Report 1, we appraisal of the opinions which will not match rising global demand. then present two expert ‘opinions’. have been offered. The Taskforce The consequences of this shortfall Opinion A is (again) offered by Chris concludes that action needs to be were summed up in the phrase ‘an Skrebowski, an independent, and taken by government to protect end to the era of cheap oil’ and highly reputable, oil industry analyst. against the worse scenarios which the term ‘oil crunch’ was coined to He concludes that, although the are identified, and that this action describe it. details of production volumes and must form a priority for the new UK One year on, this second report from timings may have altered, the basic government which will arrive during ITPOES examines the changes which issues remain the same. 2010. have taken place since Q4, 2008, and Opinion B is offered by Dr Robert re-evaluates the conclusions which Falkner of the London School were drawn at that time. It concludes of Economics (Department of that, although many significant International Relations). Dr Falkner economic events have occurred in looks at the potential economic the past 12 months, the very simple consequences of the coming oil fundamental factors which pointed to crunch with particular reference to the the oil crunch have not gone away, UK. He concludes that times ahead and an end to the age of cheap oil is will be tough. indeed with us. Like its predecessor,

8 February 2010 Industry Taskforce on Peak Oil & Energy Security

2. Scene setting

2.1 Low prices sometime). Rather, it relates to the The need to find new super-giant and abundant resources - maximum rate at which we can fields is illustrated by the fact that, extract oil - which, in turn, relates although there are some 70,000 end of an era? to ease of access and rates of known fields in current production The idea that cheap oil is available extraction at the wells. These limits world-wide, the vast majority of these and abundant is one of the great to access, and rates of extraction, produce oil in insignificant volumes. economic presumptions of our may come about for several, quite A mere 120 fields are the source times. The price of oil, adjusted for different, reasons of 50 percent of global production, and one field alone, the super-giant inflation over the period shown in The first possibility is that we are Ghawar field in , yields Fig 2.1, shows that market prices already producing at, or near, the over 5 percent of the world’s current have generally been well below the maximum capacity of our existing production. Ghawar and the world’s equivalent of $30/b (US dollars fields and no more significant oil fields other giant fields are, for the most inflation corrected to today’s prices), can be found, despite increasingly part, quite old, and no new finds of except for the oil shocks of the 70’s intense exploration activity. This is the this size have been reported for a and now. And, over a similar period conventional understanding of the very long time. This suggests that as shown in Fig 2.2, the global rate case for ‘peak oil’. Despite the facts they are not going to be found very of production has been unremittingly that there is a large amount of known easily in future and, as a result, ‘peak upwards, suggesting an abundance oil in the ground (more than we have oil’ is at hand. It is our view that this of reserves. Figs 2.1 and 2.2 extracted to date), and that new finds description of the present state of encapsulate conventional wisdom are constantly being reported, none global oil production is quite credible. on oil production: low prices and of this adds up to enough to replenish abundant resources. the current levels of draw-down. The second possibility is that we But the significant rise in prices over The new, easily accessible, super- are producing oil at, or near, the the past decade presents a cause for giant fields which are necessary to maximum capacity of the existing concern. Is this a temporary market replenish the mainstay of current fields, but large new (and easily aberration, or is it an indication that production are nowhere to be seen. accessible) finds will be brought demand is beginning to run ahead oil price ($/b) 100 of supply? Might it even represent a turning point in the history of oil 90 production: the point where the 80 highest practicable rate of global $ 2008 70 production has now been achieved and from which future levels of 60 production will either plateau, or 50 begin to diminish (so-called ‘peak oil’)? And, if it marks the recognition 40 of peak oil, how big might be the 30 shock to our economic landscape? 20 ‘Peak oil’ is an expression that is 10 widely mis-understood. It does not $ money of the day relate to a prediction that there’s 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 no more oil left to extract from the year earth’s oil fields (although oil is a Fig 2.1 Price of oil over the period 1920 to 2008, both at prices of the day and inflation adjusted to 2008 US dollars. finite resource and it must run-out (Source: BP Statistical Review of World Energy 2009)

9 Industry Taskforce February 2010 on Peak Oil & Energy Security

on stream in future despite the fact production (Mb/d) 90 that these sources are currently unidentified. The relative absence of 80 obvious candidates for immediate exploitation merely reflects the 70 comparatively low levels of oil- industry investment in exploration 60 OPEC and production over the past decade 50 (due, mainly, to the relatively low Middle East market prices for oil). Unfortunately, 40 FSU South America even if large new finds are in the Eastern Europe offing, only limited new capacity 30 North America OECD will arrive on stream within the other 20 next decade or so, because large fields take many years to develop. 10 In a world with rapidly rising global other demand, this will inevitably lead to a 0 sharp and sustained rise in oil prices 1920 1930 1940 1950 1960 1970 1980 1990 2000 year over the coming decade, even though Fig 2.2 Global oil production 1920-2008. (FSU: former Soviet Union, since December 1991.) prices may retreat again in the longer (Sources: US Department of Energy for 1920-1964, and BP Statistical Review of World Energy for 1965-2008) term. In our view, this description of the present state of global oil 2.2 The rate of production - production is credible, but unlikely. DEFINITION OF LIQUIDS PRODUCTION are we really at the peak? The third possibility is that there will Oil production figures generally used in The historic global rate of oil be new discoveries of large new oil this report are actually composed of three sources, but they will not be easily production is shown in Fig 2.2. elements: accessed, or they will be difficult For details of “oil” included, see 1. crude and lease condensate production to extract from. The recent deep “Definition of liquids production” in (everything that comes out of an as offshore, sub-salt, finds in South/ box. It is tempting to conclude from a liquid) 2. natural gas plant liquids (the propane, Central America, and the tar sands this that the rate can continue to rise butane and other liquids extracted in gas of Canada, are good examples. indefinitely, even though production processing plants) seems to have plateaued in the past Under these circumstances, even 3. biofuels and other fuel liquids, such as five years. though abundant oil reserves may coal-to-liquids and gas-to-liquids be uncovered with the passing of If we look behind the scenes, the For example, the IEA’s reported all liquids time, the ability to extract that oil current global rate of production production of 85.9Mb/d in November will be limited both physically and is simply the aggregate of a large 2009 would include: • roughly 73Mb/d (85 percent) by the sheer cost of exploration and number of known individual fields. We of crude and lease condensate production. Consequently, there will know how many fields are producing • around 8.4Mb/d (10 percent) of natural be a sharp, and permanent, rise in world-wide, their ages, and (within gas liquids oil prices from which there will be no some important limits) the production • 2.3Mb/d (3 percent) of other liquids retreat. In our view, this description characteristics of those fields - so we • 2.2Mb/d (3 percent) of processing gain of the present state of global oil can predict, with some confidence, (the volume of products after refining production is probably the best that is the ability of those wells to produce exceeds the volume of crude input by the available. oil in future. processing gain)

10 February 2010 Industry Taskforce on Peak Oil & Energy Security

a annual production The typical production profile for a 100% single field is shown diagrammatically 90% in Fig 2.3(a). Production rises quite 80% quickly to a peak, and then subsides 70% at a ‘depletion rate’ which varies from 60% field-to-field, depending on geology 50% and production strategy. Peak 40% 30% production will be established when, 20% typically, around 25-30 percent of 10% the total reserve has been extracted. 0% (Note, however, that the last 25- 0510 15 20 25 30 35 40 45 50 30 percent of the reserve will be year b annual production extremely difficult to extract, so the 100% reserve position at peak is not as 90% 80% rosy as it sounds). If we aggregate 70% this information for all known, and 60% planned, fields we can estimate 50% world-wide future flow rates. An 40% exercise of this type forms the basis 30% for the opinion expressed in Section 3 20% of this report. 10%

0% An interesting characteristic of oil 0510 15 20 25 30 35 40 45 50 production is that a collection of year Fig 2.3 (a) The typical production profile for a single field. (b) The production from a single region made up from fields (in a single region, for example) the aggregation of progressively smaller fields. This shows 15 fields, one field brought into production each year, will almost always demonstrate a each successive field being 10 percent smaller than the previous. However the overall peak is at 12 years, a date unchanged by further fields brought into production. (Source: UKERC “Global ” 2009) collective ‘peaky’ behaviour. If we rise significantly above 92Mb/d Middle Eastern producers that the oil assume that the largest fields are (million barrels per day) unless is more valuable left in the ground as tapped first, and that subsequent some unforeseen giant, and easily a legacy for their future generations, fields are progressively smaller, accessible, finds are reported very casts some serious doubt over and are accessed at successive soon. In our view, this is extremely the conventional ‘abundant future time intervals, the aggregated unlikely. production’ scenario. characteristic is shown in Fig 2.3(b) - no matter how many subsequent, The weak point in such analyses, The real question is whether smaller, finds are added, it is not historically, has been the difficulty significant new supplies of readily possible to remove the peak - in predicting depletion rates and, accessible, cheap, oil are available. there will come a point where in particular, some uncertainty over The answer is ‘certainly not’ - from production moves into decline. the veracity of the stated reserves in the viewpoint of the world’s oil the OPEC countries. These reserves majors, at least. Whilst all the major The prediction of future flows is not are, officially, very high - and this oil companies are reporting new finds, a precise science. However, the assertion leads to the conclusion the accessibility of these finds means analysis presented in last year’s that if demand rises, pumping rates that the cost of producing oil will be report from ITPOES, and reinforced can be easily increased. However, very high in most cases. Or there in Section 3 of this report, suggests the inability of oil producers to keep may be other problems, as with the that global supply rates are currently up with the rising demands of 2007- great resources of the tar sands. This at, or near, their peak and cannot 8, and the statements from some is an energy-intensive and, therefore, 11 Industry Taskforce February 2010 on Peak Oil & Energy Security

extraction cost ($/b) expensive process. It is also likely to 100 be very carbon-intensive. But there is also a physical limit to how fast the oil 90 Canadian tar sands can be extracted from these sands. 80 So, even if the reserves are abundant, the maximum extraction rates are 70 deep offshore likely to be limited, thus constraining 60 the tar sands from becoming the 50 mainstay of future production. conventional non-OPEC Fig 2.4 illustrates the range in costs 40 of extraction of oil found in different 30 / China other OPEC locations at today’s prices; it is other ME 20 clear that we need to find more oil Saudi Arabia at Middle-Eastern-like prices if our 10 historic position of cheap oil is to be 0 maintained. Fig 2.4 For a range of oil sources, comparison of extraction costs. (ME: Middle East countries) (Source: Peak Oil Consulting) New finds at Middle-Eastern-like from the National Oil Companies who near future and this would change the prices are very unlikely to be delivered dominate today’s production scene. outlook dramatically. Iraq is principal by the world’s oil majors. However These oil-producing nations (some amongst these, where it is certain those players no longer dominate the Middle-Eastern, some not) could find that vast reserves of low-cost oil are world scene. The ten largest quoted new low-cost sources of oil in the readily available. But the military and oil companies currently produce only production (Mb/d) about 20 percent of the world’s oil 20 between them. Fig 2.5 shows that they produced only 17.5Mb/d in 2008 18 (out of a total of around 82Mb/d BP in Fig. 2.2). It also shows that this 16 aggregated production volume has Chevron been relatively flat for the past six 14 Conoco Phillips years and is currently in decline (although production at two very 12 important companies, and ExxonMobil PetroChina, is expanding). 10

If the largest, strongest, and best 8 financed companies are having Statoi Hydro difficulty in maintaining (let alone 6 expanding) production, then the Total idea that the world is coming close 4 to an oil supply crunch is not as Petrobras unreasonable as it might first appear. 2 PetroChina It is a fact that the discovery of 0 abundant, easily accessible, new 2002 2003 2004 2005 2006 2007 2008 sources of supply will come (if at all) year Fig 2.5 Aggregated production for the world’s ten largest quoted oil companies. (Source: Peak Oil Consulting) 12 February 2010 Industry Taskforce on Peak Oil & Energy Security

discovery rate 30Mb/d in the future, will be systemically different from the past. To date, the vast majority of world demand for oil has come from the OECD countries (the so-called ‘Western OPEC output 36.7Mb/d world’). But, in future, the principal extra claimed OPEC proved reserves 300Gb reserves 656Gb growth in demand will come from the

non-OPEC output 32.3Mb/d non-OECD countries (the so-called ‘developing world’). The non-OECD FSU output 12.8Mb/d countries comprise the vast majority reserve growth FSU proved reserves 128Gb 25Mb/d of the world’s population (some 5 non-OPEC, non-FSU proved reserves 174Gb billion people of the world’s current Canadian tar sands proved reserves 174Gb population of 6 billion), so the consequences of a steady growth Canadian tar sands output 1.2Mb/d in per capita oil-demand in these nations need no further elaboration.

road 50% The forces of globalisation, now biofuels 1.5 Mb/d unlocked, will be very powerful and air 8% will probably change our outlook on non-fuel 16% sea future oil demand from a fundamental heating 8% & power point of view. Nevertheless, in the 18% short-term (within the context of consumption 84.5Mb/d the next decade, at least), there are arguments both for, and against, a continued strong growth in global oil Fig 2.6 Schematic of the size of oil reserves, supply and demand in today’s market. Non-fuel consumption includes chemicals, solvents, lubricants and asphalt. (Source: Peak Oil Consulting) demand. On the side of the ‘weak growth’ political difficulties in Iraq rule out any 2.3 Global demand - argument, the underlying trend of simple predictions of future supply is it really set to rise? unfettered growth among the OECD from this theatre. And real knowledge countries has been modified by the oil of most other It seems reasonable to assume that shocks of the 70’s, a general maturing assets is cloudy, at best. world demand for oil will continue of demand in the last two decades, to rise for the foreseeable future. It A simple summary of today’s picture and the recent economic collapse. has, after all, risen fairly continuously of reserves, supply, and demand, If we ignore short-term economic for the last 100 years (Fig 2.2). is presented in Fig 2.6 showing the volatilities (economic cycles come A simple extrapolation of this line relative scale of the components, and go), the underlying maturing of would suggest that world demand including biofuels. (For more details the OECD economies suggests that could reach 120Mb/d by 2050, a about biofuels, see Appendix C.) future growth in oil demand might be very similar figure to that predicted expected to flatten off. Indeed, there by an extrapolation of the IEA’s 2009 are even signs that it is beginning to predictions for demand in 2030. decline, as prices rise and nations But a simple extrapolation of historic and consumers become more careful demand could be deceptive, because in their use of natural resources. world economic development, The current economic downturn has

13 Industry Taskforce February 2010 on Peak Oil & Energy Security

accentuated this pattern and the drop oil demand and production cap (Mb/d) 110 in demand over the past 18 months non-OECD projected demand 100 has been dramatic. When economic production cap recovery arrives, will demand rise 90 back to the earlier growth trend very 80 quickly, or will some demand have been permanently destroyed? It is 70 conceivable that the demand from 60 the Western world will never again non-OECDNon historicalOECD demand 50 rise to the levels seen in 2008, and the current excess of capacity will 40 OECD turn into a glut. 30 projected demand OECD OECD historical demand Another argument which puts a limit 20 on global demand is that oil prices, 10 when they rise above a certain 0 threshold ($120/b at today’s prices?), 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 automatically trigger an economic year Fig 2.7 Oil demand by region for the historical period 1920-2008 and extrapolation to 2030 according to the IEA’s recession. This deflates demand, projected 1%/y global growth within which we suggest a 0.5%/y OECD decline. Also shown is the production cap to thus putting an automatic cap on the 2015 according to the megaprojects/depletion analysis of Opinion A (Fig 3.2). (Source: BP Statistical Review of World Energy) maximum required rate of production. Some argue that this happened in economies of the developing world in Section 6 that the IEA prediction 2008. cannot live with oil prices in excess for demand growth is possibly of $120/b - indeed, their economic too low, but, for scene-setting The counter to these arguments lies systems are currently evolving in purposes, it provides a reputable, and in the rate of development of the a climate of higher oil prices and conservative, starting position. non-OECD countries. Historically, therefore might be relatively immune demand from these countries has to it (whereas the OECD economies 2.4 So what is the likely been very low (or even non-existent) did not, and are not). but, as suggested previously, a rise effect on oil prices in per-capita demand from these It seems reasonable, on balance, to and availability? populations could have an explosive expect that the growth in oil demand Based on the foregoing arguments, effect on the global market for oil. For from the non-OECD countries over it seems inevitable that global these reasons, it can be argued that the next few decades will outweigh demand will move to a point where the next phase of demand growth any shrinkage in demand from the it consistently exceeds supply. The will be structurally different from the OECD countries. This view is in effect must be a structural increase in past 50 years. Globalisation has line with the projections of the IEA, oil prices, coupled with the prospects opened up markets and expectations whose most recent World Energy of oil shortages and a consequent that were previously unthinkable, so Outlook (2009) predicts global oil increase in market volatility. The only the flattening demand patterns of demand at levels of 105Mb/d by questions are “how soon, and by how the late 20th century in the OECD 2030 in their “Reference” scenario. much?” countries cannot be used as a basis The demand line associated with this for future extrapolation. Likewise, view is shown in Fig 2.7, along with a the ‘recessionary trigger’ argument production cap which represents the may not be valid. There is no reason current predictions of the ITPOES to believe that the strong emerging members (Section 3). We will argue

14 February 2010 Industry Taskforce on Peak Oil & Energy Security

3. Opinion A: Chris Skrebowski Peak Oil Consulting

3.1 Introduction The next major supply constraint, along with spiking oil prices, will not There are now serious concerns that occur until recession-hit demand the free flow of relatively low cost grows to the point that it removes oil, which has underpinned OECD the current excess oil stocks and the countries economic growth since large spare capacity held by OPEC. 1945, may not be sustainable for very However, once these are removed, much longer. It will be shown in this possibly as early as 2012/2013 and section that low-cost (under $25/b) no later than 2014/2015, oil prices are oil supplies effectively ended in early likely to spike, imperilling economic 2005 and are unlikely to return. The growth and causing economic actual global supply of oil is now dislocation. expected to be limited to 91-92Mb/d Oil supply over the next five to six (million barrels per day) of capacity years is predictable owing to the that will be in place by end 2010/early slow-moving nature of oil supply 2011. Global capacity will then remain and the long lead times for major in the 91-92Mb/d range until 2015 projects. The primary risk is from from which time depletion will more supply shortfalls caused by project than offset capacity growth from then delays over and above those already onwards. announced. The demand side is Between July 2008 and January rather less predictable as the path 2009 virtually all the world’s of economic recovery from the economies went from vigorous recession is uncertain and because growth to economic recession. This 80-90 percent of future demand is has radically changed the short-term expected to come from non-OECD outlook for energy demand in general countries such as China and India and oil demand in particular. The where consumption data is rather less recession has changed the market reliable. In contrast OECD demand, dynamics and potentially moved the which makes up 55 percent of global ‘oil crunch’ point (when demand demand, is expected to see little exceeds production capacity) out demand growth going forward and by around two years. This in turn may even decline. provides one of the few positive The last 15 months have seen aspects to the recession - it gives unparalleled levels of price volatility in companies and individuals more the three main hydrocarbon fuels. Oil time to prepare and adapt to the prices have swung from $147 in July coming oil supply crunch. The 2008 to $32 in late December 2008 great risk is that as prices may and then back up to $70-80 from late remain fairly low for the next year August 2009. or so, and complacency may set in thereby postponing decisions on As both UK Prime Minister Gordon making adaptive investments being Brown and French President Nicholas postponed until oil prices start spiking Sarkozy have publicly observed in again. their calls for greater price stability, this sort of volatility is very damaging 15 Industry Taskforce February 2010 on Peak Oil & Energy Security

to economic activity and one that is Saudi Arabia, to hold spare capacity provided when the UK was self- becoming increasingly expensive for to enforce discipline. As demand sufficient in oil and gas supply is now companies to hedge against. It is also rises and spare capacity disappears, eroding quite quickly. This is likely to true that great price volatility makes OPEC has to cede pricing power to put pressure on the UK balance of investment by both end users and the market as happened in mid-2008. payments and in a world of floating energy suppliers more difficult. exchange rates is also likely to put The UK, because it is now a net and downward pressure on the valuation As this section will make clear, energy rising importer of oil, gas and coal, of the . In other words price volatility is set to continue is becoming increasingly exposed to the positive benefits to the valuation for some time simply because competition for supplies from other of the pound as a petrocurrency are small mismatches in energy importers. The insulation now disappearing. and demand produce wide price from international supply pressures swings as there is no economic price ($/b) actor strong enough to absorb and 140 damp the mismatches. When the global price 120 1 ‘Seven Sisters’ dominated global oil trending price supplies in the 1960s, they were in a 100 position to ensure price stability. Now 80 there is no group in this position in 60 terms of oil or energy supply. OPEC has limited pricing power but only 40 when it holds capacity off the market 20 and this requires key players, usually 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year A B C D E F

production (Mb/d) 88

86

84

82

80 historical production 78

76

74 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 year

Fig 3.1 Global price and historical production for crude oil in the last decade showing the basic forces acting on the industry since 2000. (Source: EIA production and prices)

1 The ‘Seven Sisters’ refers to the seven oil companies A Oil prices recovering steadily from a $10/b low D Promises of additional Saudi supply produce price that dominated oil production, refining, and distribution in caused by the Asian financial crisis. setback, but absence of additional supply produces the mid 20th century, these being: BP, Chevron, Exxon, B Supply and demand are well balanced. Prices rapid price escalation to peak in mid-July 2008. , Mobil, Royal Dutch Shell, Texaco. Later mergers moving in a narrow range around $25/b. Production E Prices and production fall as recession and banking reduced the original seven down to four following and price dip in 2001 associated with the shallow crisis develop. Prices fall to marginal cost of highest formation of ChevronTexaco (including Gulf Oil) and dotcom recession. cost producer -Canadian tar sands - as the OPEC ExxonMobil. C Prices start to rise steadily initially producing cutback is seen as inadequate. additional supply but then acting as a rationing F Prices rise steadily on announcement of large OPEC mechanism for an essentially flat supply. Rationing production cutback and abating recession, reaching trend extrapolated. Saudi target price of $75/b in the third quarter 2009. 16 February 2010 Industry Taskforce on Peak Oil & Energy Security

3.2 Impact of the price of $75/b in August 2009. Since Recession also impacts on the recent recession that date prices have moved in a supply side making the sanctioning narrow range awaiting clear evidence of new oil field investment more In terms of the energy market, the of a strong revival in oil demand and difficult particularly if the immediate immediate impact of an economic reacting to changes in the value of outlook is for prices to remain recession is to depress demand, the US dollar but have not to date relatively low. A low price expectation either in a temporary or more exceeded $81/b. also renders a number of potential sustained way, and for this to be projects uneconomic and subject Although OPEC announced its first reflected in lower prices. This is to cancellation, delay or complete production cutback in September exactly what was seen between the re-budgeting. Again this is exactly 2008 this was generally seen as third quarter of 2008 and the first what has occurred. It should be inadequate and was followed by a quarter of 2009 (Fig 3.1, period E). noted, however, that with large prolonged standoff between OPEC Prices peaked in July 2008 at $147 capital projects such as major oil field and non-OPEC producers as to who before falling steadily to a low by developments, it is usually cheaper to would cut production to balance the the end of December. There was complete those already well underway market. As a result and in conformity a slow recovery thereafter, largely - even if this may have negative with economic theory, the oil price driven by OPEC’s agreement to consequences for oil prices. Relatively fell all the way to the marginal cost restrict production and its success few oil developments due on stream of the highest cost producer - the after January 2009 in doing so (Fig in 2009 and 2010 have been delayed Canadian tar sands. More or less 3.1, period F). Once oil prices were or cancelled but without a strong at the point when producers would seen to be on an upward trend, and demand recovery these will add to have had to close in tar sands significant financial funds started to the current overcapacity and may production (because out of pocket invest in oil, both in terms of buying depress prices or restrain upward expenditures would have exceeded physical cargoes and selling them price pressures. revenues), OPEC made it clear that later at higher prices and in terms it was prepared to shut in enough The credit crunch, the collapse of of paper transactions on the futures capacity to strengthen oil prices. The oil prices and uncertainty about the markets (Fig 3.1, period F). This self- formal output cuts announced by length and depth of recession mean fulfilling momentum took prices all the OPEC in January 2009 were seen that analysis now has to look at the way up to the OPEC target as enough to put oil prices back on costs of existing and incremental a rising trend which then gathered oil production, the availability of momentum reaching $75/b in August resources to be developed and the 2009. likely impact of recession and price on the trajectory of oil demand growth.

17 Industry Taskforce February 2010 on Peak Oil & Energy Security

a. capacity (Mb/d) project slippage. From these data 8 gross new capacity we see there is a clear bulge in new 6 projects and incremental capacity in 2009 and 2010 and a rather lower 4 level from 2011 to 2013. net new capacity

2 A widely accepted assessment of current depletion rates is that it 0 accounts for 4.7 percent of current 2000 2002 2004 2006 2008 2009 2010 2011 2012 2013 2014 2015 year liquids production. Breaking this -2 down, Peak Oil Consulting puts

-4 current depletion rates at 1.5Mb/d

4.7% depletion and 2.5Mb/d for OPEC and non- -6 OPEC respectively giving a total depletion (Mb/d) annual loss of capacity of 4.0Mb/d

production (Mb/d) or 4.7 percent of current total liquids 92 b. production of 84.5Mb/d. 90 The final column in Table 3.1 is net of depletion. In terms of net new 88 net new capacity capacity, this is overwhelmingly

86 spare capacity concentrated in 2009 and 2010 with minimal additions thereafter. 84 Each annual gross new capacity and

82 depletion combine in Fig. 3.2(a) to form net new capacity each year 80 which go on to derive the production historical production production cap cap, the limit of production capacity, 78 to 2015 in Fig 3.2(b). This shows

76 production as no higher than 92Mb/d. (For a discussion of possible 74 disruptive events to oil production 2000 2002 2004 2006 2008 2009 2010 2011 2012 2013 2014 2015 capacity that might reduce this year production cap, see Appendix B.) Fig 3.2 Derivation of the maximum future production capacity or “production cap”. (a) Annual values of gross new capacity, as summarised in the megaprojects listing in Table 3.1, together with annual depletion of total current production. (b) Historical production projected into the future using first the current spare capacity, then each annual 3.4 Limited discovery and value of net new capacity (net of depletion) as shown in (a). high-cost reserves Table 3.1 shows all projects with a 3.3 Supply to 2015 - One of the many challenges faced by peak flow of 40,000 b/d or greater in megaprojects analysis the industry is that discovery rates each year - that is, the megaprojects have over the last decade averaged Increases in oil supply up to six years - separating them into OPEC and a little over 30Mb/d while demand hence are largely dictated by the long non-OPEC and listing the gross has grown steadily reaching nearly lead times for major projects, so an new capacity. Allowances have 85Mb/d in 2008. This in turn means analysis of these projects gives a been made for the contribution of the world’s store of ‘discovered and calculation of the maximum supply- smaller projects of below 40,000 b/d, in production’ oil is now being run side capacity high confidence. operational uptime as well an average 18 February 2010 Industry Taskforce on Peak Oil & Energy Security

Year of OPEC Non-OPEC Total Annual gross Annual net amounts to about 30Mb/d, again with project projects projects projects new capacity new capacity some limited expansion potential. completion completed completed completed to be to be brought on brought on This means that essentially the world stream stream has around 80Mb/d of production 2009 26 24 50 6.2Mb/d 2.2Mb/d capacity and 5Mb/d of spare capacity 2010 14 25 39 5.7Mb/d 2.1Mb/d which is profitable providing prices 2011 6 17 23 3.2Mb/d 0.2Mb/d are above $60/b and even at this 2012 24 18 42 3.4Mb/d -0.2Mb/d price level new investment can be 2013 14 25 39 4.4Mb/d 0.3Mb/d justified. 2014 15 6 21 4.2Mb/d 0.2Mb/d The real challenge is that the final 2015 4 6 10 2.4Mb/d -1.2Mb/d 5-10Mb/d of global capacity comes Table 3.1 Megaprojects listing of the incremental supply coming on stream in each year for 2009-2015. The gross from the third tranche high-cost new capacity figures have been corrected with a delay to account for an unannounced three-month project slippage sources - predominantly deepwater and 10 percent reduction to account for the typical operational uptime for a project of 90 percent. The net new capacity figures take account of loss to depletion. (Source: Peak Oil Consulting) developments off the West African down at an annual rate of up to production onshore in the Middle coast, in the and 55Mb/d. (The additions to reserves East, Russia and China. This has full offshore Brazil as well as Canadian made when companies revise cycle (investment and production) tar sands. Fully built-up costs at estimates for discovered fields should costs of under $30/b. This is highly the levels required to justify new be treated with some caution as profitable and has some, relatively investments range from $70/b to they extend field life but only rarely limited, expansion potential over and $100/b. Some commentators have expand production capacity.) The above the 4Mb/d of spare capacity claimed that in the light of recent world’s reserves of both developed OPEC currently has. (For an in- price volatility, companies would and undeveloped oil are large but the depth analysis of spare capacity, need to see prices as high as $120/b challenge of expanding output further see Appendix A.) Low-cost onshore before sanctioning new investment is becoming ever harder to meet. If OPEC plus onshore Russia and for these high-cost, multi-billion dollar oil prices remain relatively low over China currently accounts for around projects. This is the group that has the next few years, it will be virtually 55Mb/d of global production including the largest expansion potential and impossible to sanction investments the OPEC spare capacity. The the group from which most of the in high-cost resources, such as large supra-normal profits earned incremental production is expected deepwater offshore oil, offshore Arctic by this group support massive to come from. Existing production is oil and Canadian tar sands. government expenditures. In the profitable at current prices of around case of the Middle East this allows $75/b but incremental investments Fig 3.1 shows that despite an ever minimal taxation and large education, are hard to justify unless oil prices are increasing financial incentive in the health and welfare benefits for the in the $100-120/b range. form of higher oil prices from around population. May 2005 to mid 2008, there was The challenge is that if oil prices little or no increase in supply which The next tranche essentially reach the levels necessary to moved in a narrow range at just over comprises all other onshore justify these high-cost investments, 84Mb/d. production in the world and the economic growth may be imperilled. relatively shallow water production This results from the higher cost of Fig 3.3 shows the oil cost split by from Mexico, the North Sea and other oil and the fact the first production the volumes of production capacity. continental shelves. Here fully built- group (OPEC plus onshore Russia It is possible to divide current global up costs are in the $50-60/b range. and China) is making massive supra- oil production of around 85Mb/d into Production from this group currently normal profits. Because these extra three tranches. The first comprises profits are not readily absorbed, they 19 Industry Taskforce February 2010 on Peak Oil & Energy Security

a. production cost ($/b) are usually partly remitted to the 110 banking centres of London and New

100 York. This is the classic which led to the South 90 high price American debt crisis in the 1980s and

80 arguably was a key contributor to the financial crisis of 2008. 70 It therefore appears that there may

60 be real constraints to the widely low price held idea that shortfalls in oil supply 50 profit current production cost can be met by mobilising high-cost

40 reserves.

30 3.5 Recent history

20 reconciling static supply marginal production cost and rising demand 10 Between 2004 and 2008 Chinese 0 010 20 30 40 50 60 70 80 90 100 demand grew by 1.2Mb/d and current production rate (Mb/d) Indian demand by 0.3Mb/d. As there b. production cost ($/b) 110 was only a very limited expansion high price of supply in this period, supply 100 and demand had to be reconciled tar sands 90 by using high prices to depress

Orinoco demand in the OECD area. Rapid 80 Asian demand growth was met current price by depressing US, European and 70 Japanese demand by over 1.5Mb/d

60 from 2004 to 2008. The effect was accentuated because much of the 50 deep offshore rapidly growing Middle East and low price 40 Asian demand enjoyed subsidised, low oil products prices while OECD 30 profit countries generally experienced the full rise in oil prices 20 Iraq Another way of understanding what 10 production costs happened between 2004 and 2008

0 might be to consider the marginal 10 20 30 40 50 60 70 80 90 100 utility or the marginal productivity current and future possible production rate (Mb/d) of an extra barrel of oil. This may Fig 3.3 Progressively higher production costs ($/b) related to global capacity (Mb/d). (Source: Peak Oil Consulting) (a) Analysis of current production with a price range, $60-80/b, that allows most production types to be be much higher in fast growing but profitable. If the price were to go much lower than $60/b, the marginal production costs show how much relatively poor non-OECD countries production would be viable, though covering only direct costs and operating at a loss. (b) Addition of possible new production from 2015 with extra investment in: Iraq, deep offshore (Brazil), than it is in much richer OECD Orinoco () and tar sands (Canada). Horizontal lines representing low $40, current $70 and high countries. This would lead to the $100 oil prices show both the viability for production from high-cost types as well as the degree of profit from low cost types. 20 February 2010 Industry Taskforce on Peak Oil & Energy Security

apparently non-intuitive conclusion maintains a plateau capacity in this of US GNP have been associated that because additional oil supply range until mid-2015. This is when with every US recession since 1960 brought greater benefits, the capacity starts to be overwhelmed by apart from the one after the dotcom developing countries could afford depletion and lack of new capacity bubble burst. Association does high oil prices more readily than additions, and consequently declines. not prove causality but this close richer developed economies. The oil crunch or peak occurs when association is highly suggestive. At demand reaches 91-92Mb/d or the moment 4 percent of US GNP The global supply demand behaviour somewhat less if after mid-2015 when would equate to $80/b oil. It also in the 2005-2008 period immediately capacity is declining. suggests there is an oil price level too begs a number of important high to be afforded without negative questions. The first is whether the economic consequences. demand decline in the OECD area will 3.6 Future supply-demand reverse in the face of sustained lower dynamic Fig. 3.4 overlays the global prices and easier supply conditions? production cap derived from the The long lead times for major oil Or whether a fundamental change megaprojects analysis above with developments and the attempt to to a declining demand trajectory has projections of global demand. bring on new supplies quickly led occurred? A further key question is Projected demand exceeding the to huge inflation in all oil field costs whether fuel subsidies are a valid or production cap gives an indication of which doubled between 2005 and an invalid policy tool? And if invalid, when the price crunch will begin. 2008. This required ever higher oil how could and should countries be prices to justify the ever higher cost The demand projections in Fig. 3.4 dissuaded from their use? Finally of investment. In 2009 costs have are all from the IEA’s Oil Market and at a more profound level should eased back a little declining by Reports (OMR) but from different the richest countries encourage around 20 percent from the 2008 times to illustrate the difficulties efficiency in use in order to depress highs. The general expectation is that inherent in such predictions. The their own oil demand in order to free prices will soften while few contracts oldest projection shown is from the up oil supplies for the rapidly growing are being awarded but will inflate Medium-Term OMR of July 2008. developing economies of the non- again once more contracts start to be A year later, the Medium-Term OMR OECD countries? awarded. of July 2009 shows the effect of the While all of these questions really recession, indicating much reduced The general assumption had been start to apply as we approach the demand and cross over with the that there would be smooth transition oil crunch or peak, addressing production cap out to 2015. However to higher cost oil supplies and that them earlier could make adaptation since late summer 2009 the IEA these higher prices for oil would to peaking oil supplies rather less has been steadily revising demand be acceptable in the end markets. disruptive to economic activity, projections upwards for 2009 and What the events of 2008 brutally growth and employment. 2010. It would now appear that, in demonstrated was that if oil prices terms of the impact on oil demand, Although there has been some move too high too quickly the only the recession has been much less suggestion that the July 2008 economic adaptation is recession. severe than earlier anticipated. production of 87.0Mb/d represents There is no accepted idea of what the peak oil output, this report In the December 2009 Oil Market oil price is absorbable and what level shows that this is unlikely. At a Report, the IEA offered two demand causes recessions. Recent work time of depressed demand it is scenarios. The first is for annual oil done in the US shows that high oil more useful to think of the size of demand growth of 1.4 percent for prices and recessions are linked. production capacity. It has been 2009-2014 which gives an oil crunch The work showed that rapid price shown that this reaches 91-92Mb/d in 2014, little changed from the rises with oil costs reaching 4 percent by end 2010/early 2011 and then projected date in the ITPOES report 21 Industry Taskforce February 2010 on Peak Oil & Energy Security

of 2008, or a semi-recessionary production on demand (Mb/y) 94 growth of just 0.5 percent which OMR December 2009 postpones the oil crunch to some @ higher GDP time after 2015 (see Fig 3.4). 92

3.7 Review of future over 90 four time periods MTOMR July 2008 88 The foregoing discussion has historical demand derived a production cap to 2015 and discussed interaction with 86 OMR December 2009 demand. This can now be reviewed @ lower GDP by considering how both supply and 84 prices might develop over four time MTOMR July 2009 periods with reference to Fig. 3.5 considering also the forces 72 that could alter their impact and historical production production cap duration. Prices are ultimately going 80 to reflect underlying supply/demand 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 balances although speculative year Fig 3.4 Comparing predictions of demand to production capacity, as derived in Fig 3.2, to 2015. The ‘oil crunch’ pressures or OPEC actions have occurs at the point when demand matches or exceeds the production cap. The most recent projected demand trend the ability to move price levels away (IEA Oil Market Report December 2009) is given for higher and lower GDP growth outlooks. Older projected demand trends (IEA Medium-Term Oil Market Reports) are shown for July 2009 and July 2008. Also shown are historical from fundamentals, sometimes for production and historical demand. extended periods. 3.7.2 Supply satisfies to engender an upward price 3.7.1 Low prices during economic growth, momentum as supply tightens or appears to tighten. Prices are likely to recovery to 2011 2011-2013 be higher than in the earlier period in The first period is to 2011 when The second period is 2011-2013 the $70-90/b range but could also be supply is likely to be adequate and when economic recovery from the quite volatile. prices relatively low. How low will recession should be complete and largely depend on how successful economic growth re-established 3.7.3 Tightening oil supplies, OPEC is in both defending prices around the world. As a result, oil 2014-2015 around the preferred $75/b level and demand would be expected to be The third time period would be 2014- in ensuring they don’t rise too far growing strongly with prices starting 2015 when the oil market would be above this level in order to minimise to rise and supply to begin tightening. starting to experience rapidly rising the risk to recovering economic For the 2011-2013 period prices prices and tightening oil supplies. As growth. are likely to increase as rising these trends establish themselves demand absorbs the spare capacity increasing amounts of money will overhang. The danger is anticipation seek a return invested in oil - in by producers leading to excess oil companies, and in oil futures and coming onto the market ahead of as physical oil contracts. In effect demand growth and leading to lower this could easily become a repetition prices. The counter pressure will be of what happened in 2008 and is financial market activity attempting the period in which the oil crunch 22 February 2010 Industry Taskforce on Peak Oil & Energy Security

price ($/b) 160 3.7.4 Recessionary forces with high price projection 140 volatile prices from 2015 on

120 The fourth time period is 2015-2020 historical price when we would expect a repetition 100 of the post-2008 experience - a rapid

80 price fall caused by recessionary low price projection forces followed by a price recovery. 60 Unlike 2009-2010 where there is

40 spare OPEC capacity and large volumes of incremental capacity 20 coming on stream, after 2015 0 depletion will be eroding capacity 2006 2008 2010 2012 2014 2016 2018 2020 year steadily with only limited new capacity 12 34 production (Mb/d) coming on stream. The expectation 92 will be that companies will make

90 heroic efforts to bring on new capacity although it is unlikely that 88 this will be sufficient to fully offset 86 depletion. A possible outcome is an undulating production plateau at 84 around 90Mb/d, as indicated in 82 Fig. 3.5. historical production production cap long term production 80 There is, however, a plausible 2006 2008 2010 2012 2014 2016 2018 2020 alternative scenario for this period. year Here, adaptation and new technology Fig 3.5 Prices and global production projections for the period 2009-2020. Historical data is shown for 2006-2009. will have reached the point where The production cap to 2015 is based on megaprojects currently in build, as derived in Fig 3.2. The production projection beyond 2015 is shown as a plateau. declining usage of oil in the OECD area and not-too-rapid non-OECD growth are just enough to reconcile supply and demand at around 90Mb/d even though production is most likely to occur. It is notable will wish to avoid a repetition of 2008. capacity is likely to be declining. Oil that the CEO of Total, Christophe de Their ability to do so largely depends prices are likely to be fairly high to Margerie, is already warning of such on how far the fuel mix has changed maintain the pressure to minimise an outcome in the 2014/15 period. and how responsive demand is to usage. This relatively benign outlook rising prices. This means there is becomes less likely if non-OECD For the UK, this is exactly the period potentially a relatively benign outcome growth proceeds at over 3 percent when the next UK government will be in which prices rise above $100 but and OECD growth reappears as seeking re-election. economies are broadly able to absorb this would give overall growth In the 2014-2015 period it is expected this. There is also the oil crunch approaching 2 percent per year. that demand will start to outrun outcome in which oil prices are bid (OECD and non-OECD are likely immediately available supply with up to levels that produce a recession each to take half of global supply by prices advancing strongly. All parties and we get a repetition of 2008-2011. around 2013.)

23 Industry Taskforce February 2010 on Peak Oil & Energy Security

3.8 Gas - the wild card Companies are now scouring the now enjoy LNG costs of around $6-8 globe to identify and exploit shale mn BTU, roughly a third of the levels There has been much recent gas reserves. In Canada where both paid in early 2008. discussion of the undoubted gas reserves and gas production It is widely accepted that gas prices development success of US shale have been in sustained decline, since in the $6-9 range would allow gas reserves and the possibility that 1996 and 2002 respectively, the profitable development of both LNG this success can be repeated around discovery of the Horn River resources and the unconventional the world allowing a partial transition accumulation provides the first hard gas reserves such as shale gas and to gas to offset potential shortfalls evidence that Canada may be able coal bed methane. On a calorific in oil supply. This is a development to the repeat the US gas turnaround. equivalence basis gas at $6-9mn that would also lower the cost of Potential shale gas reserves have also BTU is equivalent to oil prices of $36- energy as the calorific cost of gas is been identified in Spain and Poland, 54/b. Historically oil has commanded around half that of oil. The associated France and Germany and at least a 20 percent premium to the strict possibility is that relatively cheap gas among some companies there are calorific equivalence which would will pressure and reduce oil prices. high hopes that significant European translate to $43.2-64.8/b. Over the last five years aggressive shale gas resources will be identified. In terms of primary energy supply development of unconventional gas The rest of the world appears to be the proportion of gas in the energy reserves has reversed the US gas on the cusp of a scramble for mix varies widely. In the UK gas supply decline and boosted US gas shale gas. constitutes 39.9 percent of primary reserves. Most notable has been the Already the global gas market is in energy a little ahead of oil’s 37.2 Barnett shale in Texas as well as the upheaval thanks to the US shale gas percent share. Probably the most more conventional ‘unconventional success. In addition the last year has gas-dependent economy is Russia gas’ reserves such as coal bed seen a massive increase in liquified with a 55.2 percent share for gas. methane. Between end 1998 and natural gas (LNG) supplies with the In sharp contrast the two Asian end 2008, US gas reserves grew start up of massive trains in Qatar, giants - China and India - have by 2.08tn cm or 44.7 percent with Sakhalin, Irian Jaya (Indonesia) and minimal gas utilisation with primary most of the increase coming from most recently Yemen. 2010 will see energy shares of 3.6 percent and unconventional gas resources. This even more LNG export capacity 8.6 percent respectively. Australia in turn has allowed a 7.5 percent coming on stream from Qatar, Peru despite its abundant gas resources increase in production in 2007-2008 and Yemen. only achieves a 17.9 percent share for alone taking US gas production In one sense the timing could not be gas. Asia’s two largest LNG importers to a record high. The short-term worse as economic recession has - Japan and South Korea - also consequence has been to drive hit gas demand globally while US have a remarkably low gas utilisation US gas prices down to levels not shale gas has already backed out in their energy mix at 16.6 percent seen since the start of the decade LNG supplies into the US. In 2007 and 14.9 percent respectively. What as winter gas storage filled early US LNG imports were 21.82bn cm this clearly indicates is there is and recession hit demand failed but these fell to 9.94bn cm in 2008 enormous potential for gas to capture to take up the slack. This is likely - a 54.4 percent decline which took market share driven by its economic to rebalance as demand rises and utilisation of recently expanded US attraction versus oil and its lower CO excess stocks clear. 2 LNG import capacity down to just 8 emissions versus both oil and coal. percent. This diverted LNG supply has increased LNG availability in Asian and European markets which

24 February 2010 Industry Taskforce on Peak Oil & Energy Security

Because gas has the potential to be The detractors point out that the The recent takeover of the largest US so disruptive of energy markets it has economics of shale gas are suspect independent shale gas producer XTO attracted rather strident advocates because production falls off between Energy by ExxonMobil for $31 billion and detractors. The advocates claim 50 percent and 65 percent in the first and the buy-ins of shale gas acreage it as the fuel of the future, pointing year with an economic production and production from Chesapeake out that the world hasn’t really been limit for each well of 10 years and Energy by BP and Total strongly explored for shale gas and other maybe as little as five years. The suggest the oil supermajors now see unconventional gas supplies, and that counter to this is that even if the unconventional gas as a growth area huge volumes are potentially available decline curves are very sharp and for them. Whether the development at prices rather below current oil development drilling has to be almost of unconventional gas supplies is fast prices. In addition ever greater continuous that doesn’t mean it is enough to have an impact on the oil quantities of remote or stranded gas uneconomic, just that it requires crunch remains to be seen. It is clear, can be mobilised as LNG particularly a very different approach from however, that unconventional gas will as the new floating LNG technology conventional gas fields. There have be a key incremental energy supply has the potential to mobilise smaller also been water supply and water in ameliorating the impact of the oil gas accumulations which to date contamination problems associated crunch. have been uneconomic but are with the hydrofraccing that is the actually very numerous around key to shale gas development the world. They also suggest that with the detractors seeing this greater gas utilisation could reduce as a fundamental constraint and dependence on oil imports from the advocates as a learning curve OPEC countries and restrict OPEC’s problem. Detractors also believe it and Russia’s power. The advocates would be dangerous to depend on also suggest that a determined move a new and not fully proven resource to utilise gas in transport would both particularly as the quality and drive the utilisation of gas and reduce producibility varies widely between the dependence on oil for transport gas shale formations. across the world. For the large quoted oil companies gas presents a great challenge. Almost all have shale gas and LNG investments but if plentiful gas supply keeps oil prices down they will be unable to develop their high- cost deepwater, Arctic and tar sand reserves. The challenge is whether they can make gas as profitable as oil.

25 Industry Taskforce February 2010 on Peak Oil & Energy Security

3.9 Conclusion There has been much recent The severity and impact of the discussion that the undoubted oil crunch in terms of economic The recession caused by the credit development success of US shale disruption will be largely determined crunch and the 2008 price spike has gas reserves and the possibility this by the degree to which the period to delayed the oil crunch by at least two success can be repeated around 2014 is used to plan and adapt to the years. the world allowing a partial transition real threat of restricted oil supplies. to gas to offset potential shortfalls Potentially greater gas utilisation in oil supply. This is a development offers an amelioration of the oil supply that would also lower the cost of challenge. It should be remembered energy as the calorific cost of gas is however, that fuel supply changeovers around half that of oil. The associated take time and investment even when possibility is that relatively cheap gas there is a clear economic incentive. will pressure and reduce oil prices. Companies will want to see more gas The danger is that a period reserves proved up and the attractive of relatively low oil prices by price differential maintained before recent standards may induce they are prepared to invest in a large- complacency and inhibit investment scale move to gas. in both adaptive technologies and incremental oil production capacity.

26 February 2010 Industry Taskforce on Peak Oil & Energy Security

4. Opinion B: Dr Robert Falkner London School of Economics (Department of International Relations)

4.1 Introduction be made to fill the growing gap in the country’s oil trade balance. For the UK, ‘peak oil’ is no longer Is Britain facing a knock-out blow a matter of theoretical debate. Ever from peak oil? A future tightening since oil production in the North Sea of oil supply conditions is unlikely to started to decline just over a decade produce a sudden and catastrophic ago, the prospect of continuously effect in the short-term (5 years) to dwindling reserves has medium term (10 years) term, and become part of the country’s new the global economic recession has economic reality. As the UK is delayed the ‘oil crunch’ point by at becoming more dependent on energy least two years. Still, the short-term imports, the parameters of energy consequences, i.e. over the likely policy are shifting. Peak oil has lifetime of the next government, are emerged from the fringes of political serious enough and will be felt in and economic debate, and security important sectors of the economy, as of energy supply has risen to the well as among some of the poorest top of the political agenda. Will the parts of society. As the world begins next government face up to this new to feel the consequences of tightening reality? supply conditions, the UK may have 4.2 Beyond the peak: to deal with a toxic mix of greater oil import dependence, rising yet volatile the UK experience oil prices, inflationary pressures and Few analysts doubt that the UK the risk of sudden disruptions to the passed its regional oil peak in 1999. transport system. Annual oil production in the North Sea has since fallen from 137 million 4.3 Economic consequences tonnes to 72 million tonnes in less for the UK than a decade. Responding to this Of all the different sectors of the challenge is as much an international British economy, transport is most as a national issue. As the UK is exposed to the effects of global facing growing dependence on oil supply constraints and price shocks. imports (it became a net importer Despite efforts to promote energy of crude oil in 2005), it will have to efficiency and the use of alternative tackle the growing global supply fuels, ground and air transport remain constraints head on, with an ever stubbornly dependent on petrol, smaller cushion of a safe source of diesel and kerosene. These oil- domestic oil. Not only will this put based liquid fuels simply cannot be pressure on the country’s balance substituted in the short to medium of payments, but it will also turn term. Biofuels, for example, currently energy policy firmly into a foreign only account for 2.6 percent of the policy concern. As more and more fuel supplied for road transport in the global oil reserves are concentrated UK (for more details about biofuels, in countries that are either unstable or see Appendix C). If anything, current unpalatable, hard choices will have to trends in the growth of air travel and 27 Industry Taskforce February 2010 on Peak Oil & Energy Security

road haulage suggest that future The lesson from this experience is Continued dependence on oil, demand growth will more than clear. Sudden supply-side shocks coupled with a more uncertain global compensate for any energy-saving generated by oil supply restrictions energy environment and fluctuating or oil-substitution measures. Global or hikes in oil prices would not be oil prices, will cost the UK economy supply restrictions and price volatility isolated economic events. They would dearly. The recent rollercoaster ride will therefore pose a growing threat quickly reverberate throughout the of oil prices marks a significant to the UK’s transport sector as the UK’s supply chain, affecting many increase in price volatility and is global oil crunch hits home. more companies that are not directly set to continue in the coming years dependent on oil. Even if the UK as supply constraints become a The vulnerability of the transport continues to gradually move away more permanent feature of the oil sector has important knock-on from energy-intensive manufacturing, market. While key sectors of the effects throughout the UK economy. the central importance of oil- economy remain highly dependent A wide range of businesses, from dependent transport to the economy on a secure and stable supply of supermarkets to manufacturers, will tie its economic fortunes to the oil at predictable prices, the return has come to rely on a highly future of the ‘black gold’. to boom-and-bust cycles in which integrated transport system that commodity price rallies give way delivers goods in a time-sensitive Vulnerability to oil-related shocks to periods of economic downturn manner. The adoption of so-called would continue to pose a threat even would significantly increase the costs ‘just-in-time’ business models has if oil consumption continues to fall in of doing business in the UK. The led to a situation where companies the UK as it has done in recent years. uncertainty about future prices will have reduced inventories to minimal This is because the downward trend drive up the costs of capital and raise levels and intermediate and final in oil demand masks a structural hurdles for investment. goods are delivered at more rapid shift in energy consumption. While and frequent rates, be it to producers electricity generation and heating The effects of increased price volatility or consumers. Any disruption to have been moving away from oil and will be felt throughout society. With this complex distribution network towards gas, the transport sector is ever more consumer products being would have far-reaching economic consuming an ever larger share of delivered through oil-dependent consequences, as the fuel protests the UK’s oil-based energy demand. and vulnerable transport systems of 2000 vividly illustrate. Back then, Official statistics show that from the in the retail sector, sudden oil price supermarkets ran out of essential time of the first oil shock in 1973 to hikes can feed quickly through the food products as supplies dried up today, domestic households, industry supply chain into higher prices for and consumers resorted to panic- and services have been able to consumables. driven hoarding. (For more details reduce their reliance on oil products. Where food is concerned, the poorest about possible disruption to oil Not so in the case of transport. households will be particularly hard supplies, see Appendix B.) Road and air transport’s share of oil hit. They have already felt the pinch demand in the UK has been rising of rising energy prices in the last five steadily, exceeding 50 percent of years, as is evident from the dramatic overall consumption in 2008. Air rise in the numbers of households travel and road haulage are now the trapped in fuel poverty. Because oil key reasons behind our dangerous and gas prices have been closely addiction to oil. linked in the past, the recent price rally in the oil market has driven up this number to an estimated 4.6 million in 2009. The Office of Gas and Electricity Markets (Ofgem), the

28 February 2010 Industry Taskforce on Peak Oil & Energy Security

government’s energy regulator, warns decline in the current output gap will Critics of the ‘peak oil’ scenario that domestic energy bills may rise soon return the UK economy to a often point out that, while plentiful by up to 25 percent by 2020 due situation where sudden and persistent reserves await further exploitation, to rising commodity prices with up oil price rises require monetary global demand for oil has recently to £200 billion needed for energy authorities to apply a bitter medicine, reached its own peak. This is only infrastructure investment. with a further economic downturn partially true. Oil demand in the and rising unemployment in tow. industrialised countries has levelled The current glut in global gas markets off in most, and has been falling and a widely predicted de-coupling in some, of the leading Western of gas and oil prices should mitigate 4.4 UK energy policy: economies. But while these countries against further dramatic increases ready for the coming have achieved a partial de-coupling in domestic fuel costs. This would oil crunch? of economic growth and oil demand, offer a welcome reprieve to the most The once fashionable view that the two remain closely linked in the hard-pressed households in the UK. energy is just another commodity that developing world. Nevertheless, a rise in living costs - in is subject only to the forces of the the form of higher travel and transport Economic analysis suggests that free market no longer holds. Securing costs and consumer prices - is firmly developing country growth translates energy supply and managing on the agenda. into an equivalent increase in oil energy demand have become demand of between 70 and 100 Are we likely to see a re-run of eminently political questions again as percent (compared to 40 to 50 the 1970s scenario, when two countries race to secure their future percent in industrialised countries). OPEC-induced oil shocks drove energy needs. The rise of resource In fact, the sharp rise in demand for up the oil price and double-digit nationalism in the world’s leading oil in China, India and other emerging inflation rates ensued in many oil-producing regions, combined economies has been a critical factor industrialised countries? To some with the geological constraints of an behind the oil price rise since 2000. extent, circumstances are more ultimately limited petroleum base, As their economies pick up speed favourable today. The monetary policy is redefining the global politics of again after the global recession, their environment has changed and is energy. Total oil consumption may be economic growth will again drive likely to keep inflationary expectations levelling off or declining in the leading up oil demand worldwide. The IEA’s lower than they were in the 1970s industrialised countries; but this World Energy Outlook expects 80 and 1980s, and the UK economy’s partial easing on the demand side percent of the world’s increase in overall oil intensity has declined. will be more than compensated for demand for liquid fuels to come from by the growing energy consumption But the experience of the most recent the nations of non-OECD Asia and in the BRIC countries (Brazil, Russia, hike in oil prices nevertheless offers a Middle East, with the transportation India and China) and other populous sobering lesson. Rising oil and food sector accounting for 80 percent of and energy-hungry emerging prices pushed up consumer prices this increase. The new economic economies. If anything, an oil peak well above the Bank of England’s powerhouses of the South will thus will only accelerate the dramatic 2 percent inflation target to a peak be the main drivers of global oil reconfiguration of the global energy of 5.2 percent in September 2008. demand in the foreseeable future. While this inflationary push was order that has been underway for the comparatively lower than in past last decade. decades, a sustained rise in oil prices over the next five to ten years will eventually feed through into higher price levels overall. Economic recovery after the recession and a 29 Industry Taskforce February 2010 on Peak Oil & Energy Security

The explosive mixture of upward However, while energy security may will be an environmentally damaging demand pressure, restrained have risen on the political agenda, course. And banking on renewable investment in oil production and the government has remained resources (e.g. biofuels) alone simply geopolitical risks is set to cause upbeat about the future of global oil won’t provide an adequate solution. instability in the global oil market. reserves despite the growing signs of (For more details on biofuels, see Short-term price inelasticity ensures a looming supply-side oil crunch. In Appendix C.) that even small supply shocks result the latest government-commissioned Even if the government’s target to in a large rise of oil prices. Demand is review of energy security, former derive 15 percent of energy from known to be price inelastic because energy minister Malcolm Wicks MP renewable sources by 2020 is met, of the inability, particularly of the acknowledges peak oil but merely an estimated 70 percent of energy will transport sector, to replace oil-based states that oil production “has already still be supplied by oil and gas at that liquid fuels in the short run. Likewise, peaked in most non-OPEC countries time. A much more rapid transition to supply is inelastic as it takes many and will peak in most others before low-carbon energy sources - whether years for an increase in the price of 2030”. Government policy is starting wind, solar or nuclear - would thus oil to feed into higher investment in to change, but still has a long way have to be achieved if the UK is to production capacity and an eventual to go to acknowledge the urgency of respond more effectively to the twin increase in output. The two forms of taking action now. threats of global warming and peak price inelasticity combined create a oil. powerful multiplier effect in the global 4.5 Climate change policy: oil market, which economists estimate help or hindrance? What is to be done? As a first step, to be in the region of factor ten. the next government will need to Could the threat of climate change acknowledge that the era of cheap In other words, a physical supply help bring about a speedier change oil is over. This will need to be shock (as happened in Iraq, in UK energy policy? Or will the followed by rapid decisions on how Venezuela and prior to the focus on reducing greenhouse gas to ease potential energy supply 2008 price hike) would cause a emissions further complicate the constraints and accelerate the price rise about ten times as large search for a solution to the looming transition to low-carbon alternatives. in the short run as would normally peak oil problem? On this, governmental rhetoric has happen if demand and supply were been admirable so far, but not elastic. Small shocks will thus have Climate change policy is driving implementation. ever larger price effects as the world investment in renewable energy edges closer to its ‘peak oil’ point. sources and energy efficiency No silver bullet exists; instead a measures. Weaning companies and multitude of approaches will need to The politicisation of energy is evident households off their oil dependence be pursued. Investment in current not least in the change in tone in will thus have positive effects on oil production capacity will have recent government pronouncements energy security. But there are to increase to keep the lights on on this topic. The UK Energy Review important conflicts between these two while renewable energy sources are of 2006 and White Paper of 2007 objectives that cannot be ignored. brought online. But the latter will not established security of supply In the medium term, the need to happen unless more innovative and alongside climate change as the main reduce greenhouse gas emissions decisive steps are taken to drive up challenge for future energy policy. will limit the options available in energy efficiency and develop low- This recognition is clearly good news. dealing with the effects of peak oil. carbon technologies. Will the next Replacing dwindling reserves of government have the mettle to take conventional oil with more expensive tough, and early, decisions? and carbon-intensive alternative fuels (e.g. tar sands and coal-to-liquids) 30 February 2010 Industry Taskforce on Peak Oil & Energy Security

5. Other points of view

2009 has seen release of 5.1 Wicks’ Review 5.2 Macquarie Bank report a number of reports, either On 5 August 2009, the government Macquarie Group Limited is the specifically on peak oil or published a review of the UK’s energy pre-eminent Australian investment covering important aspects of security situation called “Energy bank and has its global headquarters world or UK energy. Some argue Security: A national challenge in a located in Sydney. changing world”. The report was all is OK while others agree Their research report of 16 specifically commissioned by the with the Taskforce outlook. September 2009, “The UK Prime Minister, Gordon Brown, Picture: We’re not running out, but This section summarises of Malcolm Wicks, a former energy that doesn’t mean we’ll have enough”, the main publications in minister. sees global oil production capacity chronological order. Wicks focuses on the changing UK topping out at 89.6Mb/d this year, a and global energy picture, pointing far more pessimistic view than most out that even with ambitious climate other banks or traditional forecasters. change targets, the world is still likely Iain Reid, Macquarie’s head of to be reliant on coal, oil and gas to European oil and gas, who worked meet over two-thirds of its energy for 16 years at Shell and Amerada needs by 2030. Hess, says in the report that, “Capacity has pretty much peaked On the specific subject of peak oil, in the sense that declines equal new Wicks notes, “Few authors advocating resources.” an imminent peak take account of factors such as the role of prices in He expects the current spare- stimulating exploration, investment, capacity cushion of around 5.2 million technological development and barrels to be wiped out by 2012 and changes in consumer behaviour.” global production capacity to fall to (This observation cannot be levelled 87.3Mb/d by 2015. Global oil demand at the Taskforce where our Report 1 is expected to rise to 90.9Mb/d by in 2008 examined all these aspects 2015 from 84.2Mb/d today. He adds extensively and rigorously.) He goes that, “Adding sufficient productive on to comment, “proven reserves capacity on time is nearly impossible.” are equal to over 40 years of current production”. The sum of Wicks’ recommendations specific to oil imports are: “to improve transparency in the oil market, support short-term efforts to facilitate production in states capable of increasing production levels, and reduce our reliance upon oil in the longer-term.”

31 Industry Taskforce February 2010 on Peak Oil & Energy Security

5.3 IHS Herold study 5.4 UKERC report “….For a wide range of assumptions about the global URR [ultimately IHS Herold is a leading, independent The UK Energy Research Centre recoverable reserves] of conventional research firm serving a global client (UKERC) is the focal point for UK oil and the shape of the future base with analysis of companies, research on sustainable energy. It production cycle, the date of peak transactions, and trends in the global acts as a bridge between the UK production can be estimated to lie energy industry. energy research community and the between 2009 and 2031. Although wider world, and is the centrepiece In their “The 2009 Global Upstream this range appears wide in the light of of the Research Councils’ Energy Performance Review” published 23 forecasts of an imminent peak, Programme. September they note that investment it may be a relatively narrow window in finding new oil is falling this year. Its most recent major research report in terms of the lead time to develop Exploration spending by listed oil “Global Oil Depletion” launched on 7 substitute fuels.” companies rose 21 percent and October 2009 concludes that there development spending 23 percent is “a significant risk of a peak before 5.5 Ofgem report in 2008, but the average cost of 2020.” It notes: The Office of Gas and Electricity replacing a barrel of oil equivalent “….Although there are around 70,000 Markets (Ofgem) is the government rose 70 percent to $23.44/b. Total oil fields in the world, approximately regulator for the electricity and reserves fell 3 percent, including a 25 fields account for one quarter downstream natural gas markets in 5.2 billion barrel decline. Despite of the global production of crude Great Britain. It was formed by the record development spending, up oil, 100 fields account for half of merger of the Office of Electricity 23 percent from 2007, worldwide oil production and up to 500 fields Regulation (OFFER) and Office of and gas finding and development account for two thirds of cumulative Gas Supply (Ofgas), themselves replacement rates fell in 2008 to 88 discoveries. ….The average rate of formed when gas and electricity was percent of production, the first year decline from fields that are past their privatised in the 1980s. Its primary since 2004 in which production was peak of production is at least 6.5 duty is to protect consumers by not replaced. percent per year globally, while the promoting competition, wherever corresponding rate of decline from all appropriate, and regulating the currently-producing fields is at least monopoly companies which run the 4 percent per year. This implies that gas and electricity networks. approximately 3Mb/d of new capacity must be added each year, simply to maintain production at current levels - equivalent to a new Saudi Arabia coming on stream every three years. ….More than two thirds of current crude oil production capacity may need to be replaced by 2030, simply to prevent production from falling. At best, this is likely to prove extremely challenging. ….

32 February 2010 Industry Taskforce on Peak Oil & Energy Security

Ofgem is undertaking a 5.6 ASPO annual conference 5.7 Global Witness report comprehensive review of Britain’s energy supplies, called “Project The Association for the Study of Global Witness is an international Discovery”. 9 October 2009 saw Peak Oil (ASPO) is a global network NGO established in 1993, now based publication of their initial report of scientists and others, having an in London and Washington, that outlining challenges for Britain’s interest in determining the date and works through investigations and energy industry over the next 10 impact of the peak and decline of the campaigns to break the links between -15 years. It drew up four energy world’s production of oil and gas, due natural resource exploitation, conflict, scenarios to assess the energy to resource constraints. poverty, corruption, and human rights abuses worldwide. It has become a security risks noting volatile world The association’s international leading authority on identifying and energy prices and Britain’s increasing conference for 2009 was held in addressing issues concerning how dependence on gas imports. October in Denver, CO, USA. Analyst the unaccountable exploitation of The report implies that real increases Chris Nelder compares the results natural resources has driven human of up to 25 percent in energy bills are of this conference with the first of suffering. likely due to rising commodity prices this series in 2005: “We now know and up to £200 billion investment in that conventional crude did in fact Their report published on 20 October energy infrastructure by 2020. hit its peak-plateau in 2005, having 2009 argues that governments have It suggests that the additional costs remained around the 74Mb/d level failed to acknowledge a looming oil projected for electricity consumers ever since. The expected growth supply crunch. The report outlines by 2020 are least in the two “green” from non-OPEC mostly failed to four underlying oil production scenarios presented as opposed to materialize, as depletion of mature factors: declining output, declining the higher energy bill costs projected fields took its toll and the cost of discoveries, increasing demand and for the “slow growth” and “dash for new projects soared—especially insufficient projects in the pipeline for deepwater and production from energy” scenarios. These they state clearly show how marginal sources. More pessimistic The two “green” scenarios both the world is facing an imminent oil observers now think the 87Mb/d all- assume 30 percent renewable supply crunch. Some of these factors liquids peak recorded at the height electricity by 2020, including feed- have been apparent for many years. of the 2008 boom was the peak, and in tariffs for sub-5MW renewables Thus the report concludes that the the more optimistic ones have cut set to attract investors, while the collective failure by governments their expectations to under 100Mb/d, “slow growth” and “dash for energy” means we have lost a decade in with 90Mb/d looking more likely. ….. scenarios both assume only 15 which action could have been taken. Most observers believe the globally percent renewable electricity by 2020. averaged depletion rate has risen from 4.5 percent per year in 2007 to about 5.0 - 5.5 percent now, which will accelerate to around 6.5 percent per year by 2014. This is more or less in line with the average rates from IEA’s report last year.”

33 Industry Taskforce February 2010 on Peak Oil & Energy Security

5.8 IEA’s World Energy economic recovery to reach $100/b worldwide. The company was formed Outlook 2009 by 2020 and $115/b by 2030 (in year- in 1983 and acquired by IHS Energy 2008 dollars). in 2004. The International Energy Agency Whilst this is all about demand, CERA’s latest report “The Future of (IEA) is an intergovernmental there is little analysis in the Outlook Global Oil Supply: Understanding organisation based in Paris which on capacity to meet this demand the Building Blocks” published on 17 acts as energy policy advisor to 28 apart from noting “energy investment November sees no oil peak through member countries in their effort to worldwide has plunged over the past 2030 thanks to technology. The ensure reliable, affordable and clean year” and that “energy companies report’s lead author, Peter Jackson, energy for their citizens. Founded are drilling fewer oil and gas wells”. comments: “It would be easy to during the oil crisis of 1973-74, the Simply noting that the investment interpret the market and oil price IEA’s initial role was to co-ordinate needed is a significant proportion of trends from 2003 through 2009 in measures in times of oil supply GDP implies this is the only limitation. isolation to support the belief that a emergencies. As energy markets have peak in global supply has passed or changed, its mandate has broadened Release of the Outlook was preceded is imminent. But this only illustrates to incorporate the “Three E’s” of by controversy. The Guardian that the market continues to act as balanced energy policy making, these newspaper reported from an un- the shock absorber of major volatility.” being: energy security, economic named senior IEA official that the Beyond 115Mb/d at 2030, the report development and environmental decline of existing reserves is being says, production will stay on an protection. underplayed, and the prospects of undulating plateau through 2050. finding more overplayed, in order The IEA’s annual “World Energy Of more than 1,000 fields examined to stop panic buying. Their source Outlook for 2009” was released on in detail for the study, 60 percent claims, “Many inside the organisation 10 November. It provides updated were found to have production levels believe that maintaining oil supplies projections that take into account that were either steady or climbing. at even 90 to 95Mb/d would be the implications of the global credit While they estimate decline rate of impossible but there are fears that crisis, the economic slowdown and all fields currently in production to be panic could spread on the financial the recent slump in the prices of 4.5 percent, Jackson notes, “Supply markets if the figures were brought oil and other forms of energy. The evolution through 2030 is not a down further. And the Americans fear Outlook notes that “global energy question of resource availability. The the end of oil supremacy because use is set to fall in 2009 - for the first crucial issue lies not belowground. it would threaten their power over time since 1981 on any significant It is the aboveground factors that access to oil resources.” scale - as a result of the financial will dictate the ultimate shape of the and economic crisis; but, on current 5.9 IHS CERA report supply curve.” policies, it would quickly resume Clearly this report is considerably its long-term upward trend once Cambridge Energy Research more bullish than the IEA’s WEO economic recovery is underway.” Associates, also known as CERA, is 2009 earlier in the month. CERA In their Reference Scenario, world an international consulting company regards all limiting factors to their primary energy demand is projected headquartered in Massachusetts, reference scenario as being above to increase by 1.5 percent per year USA, that specialises in advising ground rather than below, although between 2007 and 2030. Oil demand governments and private companies they allow themselves an extremely is projected to grow by 1 percent per on energy markets, geopolitics, broad set of ‘aboveground driver’ year on average over the projection industry trends, and strategy. CERA caveats to explain any degree of period, from 85Mb/d in 2008 to has research and consulting staff variance in the future. 105Mb/d in 2030, and oil prices across the globe and covers the are assumed to rebound with the oil, gas, power, and coal markets 34 February 2010 Industry Taskforce on Peak Oil & Energy Security

6. Taskforce view

6.1 Since last year India and China, to shrink the growth Oil is a key commodity within the in global demand and keep it in line UK economy, and business activity Clearly, a lot has happened since the with supply. is affected by large swings in the first ITPOES Report was published in oil price and oil availability. The Very little of substance has occurred 2008. Much of this has already been consequence of the very high oil in the intervening year between the remarked upon in Sections 3 and 4, prices, and the shortages of supply, first and second ITPOES reports and requires no further elaboration in the 70s and 80s was that the to change our concerns. There is, here. The reports issued by others national economy fell into recession therefore, a fundamental difference (summarised in Section 5) underline on both occasions (Fig 6.1). The between the ITPOES members and the growing interest in the peak oil implication from our research is that the government’s advisor (Wicks). proposition, and several of those high and volatile oil prices, coupled The following analysis seeks to publications support the general with supply uncertainties, are likely explain the Taskforce’s position. thrust of the ITPOES argument. to become a characteristic of future However, it remains the case that UK Taskforce analysis world oil markets. Government policies and attitudes are 6.2 Today, the aftermath of the financial dismissive of these possibilities. In this section, we interpret the crisis has already kicked the national opinions offered in Sections 3 and 4, Of all the reports mentioned in the economy into one of the severest and respond from the perspectives of previous section, the Wicks Review recessions on record. Oil price the Taskforce members. is notable because it gives an insight uncertainties over the coming few into government thinking. Peak years could make economic recovery oil is mentioned only once. The for the UK particularly difficult. relevant passage concludes: “Few authors advocating an imminent peak take account of factors such oil price ($/b) 100 as the role of prices in stimulating exploration, investment, technological 80 oil price ($ 2008) development and changes in consumer behaviour.” 60 The Taskforce report of 2008 40 ignored none of these factors. Prices 20 do stimulate exploration but - we argued - not quickly enough. We 0 discussed the intervals between oil 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 year discoveries and bringing capacity to annual growth (%/y) 6 the market. We discussed investment, and concluded that there have been 4 dangerous shortfalls even when prices have been high. We discussed 2 annual GDP technological developments, such as 0 , and concluded 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 year -2 that they tend only to slow depletion recessions rates. We discussed changes in -4 consumer behaviour and worried that Fig 6.1 UK annual GDP growth and oil price from 1960 to the present with periods of recession marked by they will not be sufficient, especially in shading. (Sources: ONS and BP Statistical Review)

35 Industry Taskforce February 2010 on Peak Oil & Energy Security

real GDP annual growth (%/y) 6.3 Where will oil prices go 15

in the next few years? People's Republic of China

The heady peaks of oil price in 2008 10 deflated very rapidly a year ago with the onset of the recession, and prices Russian Federation India sank from a peak of nearly $150/b 5 to a figure below $40/b. An oil price Brazil G7 collapse is what we might expect in a recession (although this one was pretty dramatic), but prices have 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 subsequently bounced back more year quickly than we might have expected. With today’s prices firmly lodged -5 around $80/b, oil is again at very high prices by historical standards, even though the world is still struggling -10 with recessionary forces. This is Fig 6.2 Actual real annual GDP growth of the BRIC and the G7 group of developed economies for 2000-2008 and unusual, and very few pundits with estimates and projections to 2010. (Source: IMF) predicted it 12 months ago. So, we Some may say that the recent of Iraqi oil to the world markets is are already in unusual territory. recovery in oil prices has been also very significant. In the long-run encouraged by OPEC’s decision these two sources, alone, could add The future movement in oil prices to reduce flows (a move that was more than another 10-15Mb/d to will depend, in particular, on demand designed to achieve precisely that global capacity, but this is unlikely to from the non-OECD countries (as goal). It is argued that, once demand materialise very quickly. argued in Section 2). These are recovers, flows will be increased dominated by the BRIC countries However, the problem with both these again and price increases will be whose recent growth compared to sources is time: the pre-salt oil is ameliorated. But this argument the G7 economies, shown in Fig 6.2, difficult to access and will take 5-7 misses a crucial point. Once world suggests that the picture of growing years to bring into full production. demand returns to pre-crisis levels world demand, fuelled by the growth Even then, the oil will be expensive, (around 87Mb/d), it will be the inability of the non-OECD nations, seems to as suggested in Fig 2.4 for deep to extract faster that will cause the be being developing without serious offshore, so it is unlikely to make problem, not an absolute lack of oil. interruption from the financial crisis. an appearance at less than $80/b, Extracting oil faster will require new Coupling GDP projections to oil as shown in Fig 3.3(b). And the fields to be brought on stream, and demand leads to the conclusion that political uncertainties in Iraq will this is where the problem really lies. demand could soon be back beyond inevitably slow down developments the 86.4Mb/d seen in the first half of On a positive note, there has been in that country - as witnessed by the 2008. Unless extraction rates can be some very good news in the past complex manoeuvrings in the recent lifted to meet this level of demand year with regards to new production. rounds of negotiations between the before it becomes a reality (unlikely, The pre-salt finds in the Gulf of Iraqi authorities and the bidders for as previously argued), the general Mexico and offshore Brazil are their development contracts. So, level of prices should be expected to significant, indicating the continued significantly increased flows at low rise again quite soon - certainly within ability of the industry to find new prices from either of these new the lifetime of the next government. sources of oil. The potential return

36 February 2010 Industry Taskforce on Peak Oil & Energy Security

UK production and net trade (kb/d) the case. According to this analysis, 2,000 peak extraction capacity will be net imports reached within the next few years (if it 1,500 hasn’t already been reached). Against the background of rising world (non-

1,000 OECD) demand, this can only mean that oil prices will rise well beyond indigenous use current levels, and remain high until 500 extraction rates can be increased to meet these rising levels of demand. 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 So, the ‘crunch’ is most likely upon year us. Massive, easily accessible, new -500 net exports finds could restore the medium-long term outlook (5-10 years), but there is -1,000 little that can be seen that will prevent the short-term problem other than the

-1,500 continued contraction of demand in Fig 6.3 The import and export of oil from the UK. (Source: DUKES) the OECD nations and an immediate flattening of demand in the non- OECD countries. consumption (kb/d) 1,600 This combination may allow prices to ease in the immediate future 1,400 (2-3 years), but the long-term trend other 1,200 of growth in demand from the non-OECD countries looks set to industry domestic

1,000 overtake this temporary decline rail transport comfortably within the next five air transport

800 years. In the longer term, the IEA’s water transport prediction is that global demand will

600 reach 105Mb/d by 2030 (a figure that is well beyond our current

400 road transport expectations of the world’s ability to deliver). However, in our view, this 200 figure could easily be exceeded. A few simple calculations serve to

0 underline this suggestion. 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 year The current global split of oil usage Fig 6.4 UK consumption of oil by sector. (“air transport” covers total inland deliveries in the UK to international and other airlines, British and foreign Governments including armed services, and for private flying.) (Source: DUKES) is shown in Fig 2.6. We can make some simple predictions for the likely sources seem very unlikely to occur wells will have reduced flow-rates at rise in demand within each of the within the next few years. that stage by more than the increase main categories of use, as follows. from the incremental finds. The When these sources do eventually expert Opinion A offered in Section come on stream, it will be a question 3 concludes that this will, indeed, be of whether the depletion of existing 37 Industry Taskforce February 2010 on Peak Oil & Energy Security

road transport consumption (kb/d) Ground transportation 800 It is projected that the number of vehicles in the world will triple to 700 around two billion vehicles by 2050. If we postulate that oil demand will 600 rise in a manner that reflects this growth (but make some allowances 500 cars and taxis for improving fuel efficiency and the 400 introduction of electric vehicles), simple calculations suggest that world 300 oil demand for ground transportation will be cruising towards 100Mb/d by 200 light goods vehicles 2050. 100 ‘Other uses’ heavy goods vehicles

We could postulate that the demand 0 for all other uses (for example, 2000 2002 2004 2006 2008 year heating, petrochemical feedstocks Fig 6.5 Breakdown of transport usage. (Source: DUKES) and hydrocarbon-based materials) will rise in proportion to the rising Working backwards from this, we the expected levels of demand at standard of living associated with the might expect demand levels to anywhere near historic oil prices. world’s urban population. Around 750 exceed 120Mb/d by 2030, a figure Short of a series of super-giant, easily million people in the OECD countries which is comfortably in excess of the accessible finds in the next few years, consume the vast majority of today’s IEA’s latest projection of 105Mb/d (the it looks like we are headed for a ‘other uses’ (most of them in the ‘Reference’ scenario). sharp and permanent increase in oil urban context), and this yields a prices. Market prices well in excess These estimates, of course, assume consumption rate of around 35Mb/d of $100/b (maybe $150/b), plus a fairly rapid rate of growth for the per billion urban-dwellers. inflation, should be anticipated within developing world. But the economic the next decade. It is reckoned that around 7 billion growth records for some of the non- people will live in cities by 2050. Let OECD countries (particularly the BRIC For the UK, at least, this could us now postulate that the demand countries) over the past decade, represent a structural change in the from the OECD urban populations will as shown in Fig. 6.2, suggest that shape of our economy. The only stabilise, and that the demand from sustained high rates of growth in the medium-term restorative possibility is the non-OECD urban populations developing nations must be noted that aggregated world demand will will head towards 25 percent of the and included. continue to drop - but this requires comparable OECD figure (i.e. about such a sharp reduction in growth The potential mismatch between 9Mb/d per billion urban dwellers). amongst the non-OECD nations that world oil supply and demand is This suggests that oil demand under it seems a very unlikely scenario. shown in Fig 6.6. This diagram this heading could rise to around And, if it does happen, the world shows the ITPOES postulation to 80Mb/d by 2050. will be plunged into even deeper 2050, alongside the IEA projection recession. So this is not something Adding these components together to 2030. It also shows the we should wish for! suggests that world demand in 2050 corresponding ITPOES and IEA could be in the region of 180Mb/d. supply curve predictions. It is clear that there is no realistic vision of future oil production that will meet 38 February 2010 Industry Taskforce on Peak Oil & Energy Security

oil demand and production cap (Mb/d) coach networks and many of their rail 180 ITPOES strong growth prostulation services.

160 However, the role of transport in the economy has mushroomed. People 125 Mb/d @ 230 140 travel for business, social, domestic and pleasure purposes, and the 105 Mb/d @ 230 sustained level of oil consumption 120 associated with transport since 2000, IEA projected growth despite improvements in engine 100 efficiency, is shown in Fig 6.5 (which ITPOES production cap also sub-divides small and large 80 vehicles). non-OECD historical demand The freight component of light and 60 OECD historical demand long term projection heavy goods vehicles, though smaller than cars and taxis, must not be 40 ignored. Manufacturing and retail businesses widely depend on just-in- 20 time business models, and transport is fundamental to this approach (as 0 has been remarked in Section 4). This 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 means that the prices of most goods year on the retail shelves have a significant Fig 6.6 Oil demand for the historical period 1920-2008, with extrapolations to 2050 for the IEA ‘Reference Case’ (1% growth rate) and the ITPOES ‘strong growth’ case as described in the text. Also shown are two projections transport component in their build- for production: a plateau (based on Shell’s paper in the first ITPOES Oil Crunch Report, 2008), and the ITPOES production cap (Section 3) followed by a 1 percent per annum net depletion rate. (Sources: BP Statistical Review of up, and availability on the shelves World Energy and the IEA’s World Energy Outlook 2009) is acutely vulnerable to oil supply shortages. Thus, a hike in oil prices worse. was just coming 6.4 Consequences of a high oil will quickly find its way through to on stream in the late 70s, and this price for the UK the shelves, and into people’s weekly turned the UK into an oil exporter for shopping bills. A shortage of oil will The possible shock to the UK the next 25 years. That era has now likewise be quickly felt as a shortage economy of higher oil prices must come to an end and the UK is, once of goods in the shops (again, as be set in context. On the one hand, again, a net importer of oil (Fig 6.3). remarked previously). These problems the national consumption picture is The reversion to importing oil, and the apply all the more when goods are much better now than it was in the spike in world prices, represents an brought in from abroad. 70s and 80s. Oil is no longer used unpleasant ‘double whammy’ for the as a significant source of electricity UK economy. Apart from transport, the other generation; it was replaced in this sectors of the UK economy which Today within the UK, despite role by coal, nuclear, and gas during have vital oil-based ingredients are the focus on renewables and the early 80s, precisely because of farming and materials manufacturing, alternative fuels, oil still turns the the oil price spikes and availability such as plastics. In both cases, while wheels of the transport sector (Fig uncertainties which dominated that the absolute volumes of oil consumed 6.4). Furthermore 97 percent of era. This is good news. are relatively small, but, in both cases, transport energy consumption is the prices of the products for sale in However, on the other hand, the from petroleum products. In addition the shops are directly affected by the national supply picture is much to cars, public transport operators cost and availability of oil. depend on diesel to run their bus and 39 Industry Taskforce February 2010 on Peak Oil & Energy Security

Based on this assessment, we might 6.5 Restatement of In terms of contingency planning, expect to see the following effects underlying issues Government needs to ensure that, reflected in our economy within the as well as prioritising key worker term of the next government: Although the immediate slow- groups in times of fuel shortage • Markedly higher prices down in the global economy has or disruptions to oil supply, public for all forms of travel (air, removed short-term pressures on oil transport is also prioritised, bearing in sea, rail and road) consumption, the underlying issues mind its ability to move large numbers • Increased food prices highlighted in last year’s report have of people extremely efficiently. Public • Increased general retail prices not changed. These underlying issues transport is well placed to deliver the • Increased domestic utility we identified in 2008 were: low-cost, quick win solutions that we need. bills for heating and power • We are surprised that the industry It is an unfortunate by-product of has not discovered more giant All of this requires partnership these factors that the disadvantaged fields, given that oil prices have between transport operators and members of society are likely to be hit been high for several years and local authorities. It also needs brave first, and hardest. investment has been “affordable”. politicians with long-term vision. • We are concerned by the Technology will take us some way Our concern, therefore, centres infrastructure problems, along the road. But behavioural around a situation on which it underskilling and underinvestment change, modal shift to greener, seems that future oil prices will be in new exploration, which smarter bus, coach and train travel significantly higher, in real terms, than have become evident and measures to support these they have ever been in the past, and throughout the oil industry. modes will make or break our efforts in which disruptions to oil supply • We are worried by allegations to deliver a reduced oil-dependant, cannot be ruled out. that OPEC governments have low carbon transport future. (Some scenario work on been less than transparent consequences for the UK of higher about the size of their national imports of increasingly expensive reserves, since deciding to fossil fuels is briefly described in fix quotas based on the size Appendix D.) of reserves in the 1980s. • We are disappointed, given the long lead times of oil production infrastructure, that the net flow rate data which shows a slow down in 2011-13 and a reduction thereafter, has not galvanised a more active response from governments and industry. There is a real need for more integration of sustainable transport policies with land use planning.

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7. Possible countermeasures

We concluded in the last section that Rail is already a relatively energy But there is a real danger that the we probably face a future in which oil efficient mode of transport, with a focus on technological advances prices are significantly higher, in real lower environmental impact than in cars is making consumers and terms, than they have ever been in other modes and a good combination government complacent. New the past, and in which disruptions to of high speed and efficiency. technologies in cars - or buses - oil supply cannot be ruled out. However, the long lead times for rail will not be a complete solution. improvements mean we need to plan Central to our transport revolution In this section we draw upon the ahead now for tomorrow’s railway, has to be a package of measures experience of the Taskforce members particularly for new lines. There to deliver behavioural change and to suggest possible countermeasures. needs to be a long term strategy secure modal shift. We also have to 7.1 Transport which looks beyond the current take steps to redress the balance of five-year programme to a time when the relative cost versus convenience We all have a legitimate need to travel the public and private sectors can of different transport modes. and transport is key to the economy invest in increased capacity and Importantly, politicians have to be and so many aspects of society and enhancements which encourage brave in pursuing pro-public transport our daily lives. Yet we cannot escape people to switch from cars and taxation and funding regimes and in the fact that the sector faces two planes. Ongoing electrification must allocating road space based on the massive converging challenges - oil be a priority, as well as greater use most fuel and carbon efficient modes depletion and climate change - both of regenerative braking and designs for the transport journeys we are of which require significant changes. for more efficient rolling stock. High- looking to undertake. speed rail could deliver modal shift Lower carbon technology for cars is Commuter and business travel from domestic airlines as we have advancing rapidly, with mainstream account for nearly 40 percent of all already seen on the West Coast main hybrids and a push for mass-market miles driven by car. Even switching line in recent years. However, the electric vehicles with a supporting to public transport one or two days cost is significant - anything from £34 plug-in charging network. Buses and a week can have a huge impact in billion to £69 billion. In addition, the coaches are also benefiting from this area. Workplace travel plans can timescales are 20 years away and advances developed for cars. The also cut business costs, improve staff passenger projections already point first hybrids are on the road today. retention and reduce commuter car to some rail lines being full up by We are also seeing cleaner engines, travel by 10 to 30 percent. 2020 or 2025. trials of sustainable biofuels, fuel- efficient driver training programmes and in-cab technology, as well as steps to reduce the weight of vehicles.

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Bus and coach park-and-ride also All of this requires partnership 7.2 Power generation has a proven track record in reducing between transport operators and journey times, a major influence on local authorities. It also needs brave In addition to the transport commuter transport choices. For politicians with long-term vision. considerations described above, every 1,000 park and ride spaces, Technology will take us some way there will be impacts on the power research suggests there follow along the road. But behavioural generation sector. Extended 250,000 fewer car journeys per year. change, modal shift to greener, electrification of the railways and smarter bus, coach and train travel the potential conversion of road Rural areas, due to the demographics and measures to support these vehicles to electric power will of remoteness, present a particular modes will make or break our efforts increase demand. This will be challenge. Tailored solutions, such to deliver a reduced oil-dependant, further compounded by the possible as demand responsive transport, low-carbon transport future. adoption of ‘green electricity’ for are better than a regular but virtually heating in response to climate empty bus service at present. Finally, in the current challenging change fears. Thus there will be economic environment, it is vital that There is a real need for more major changes in the demand government investment in public integration of sustainable transport pattern for electricity on the nation’s transport is maintained. policies with land use planning. power-generation and transmission/ On the railways, there is a need for distribution infrastructure. This In terms of contingency planning, more rolling stock, infrastructure consideration, plus more general government needs to ensure that, work to lengthen platforms to take concerns about energy supply, as well as prioritising key worker longer trains and investigation of the prompted Ofgem (the Office of Gas groups in times of fuel shortage potential for new lines (particularly and Electricity Markets) to initiate or disruptions to oil supply, public for high-speed rail). Government “Project Discovery”, a comprehensive transport is also prioritised, bearing in must also take a long-term view review of Britain’s energy supplies. mind its ability to move large numbers of the wider economic, social and The Ofgem preliminary report of people extremely efficiently. Public environmental benefits of bus, coach, was published in October 2009 transport is well placed to deliver the tram and train travel, and the positive (as referred to in Section 5), and low-cost, quick win solutions that we impact of major integrated transport presented four alternative scenarios. need. infrastructure projects. The scenarios range in their required energy infrastructure investment from £95 billion to £200 billion. They all result in increases in domestic energy bills of between 14 percent and 25 percent by 2020 (from 2009 levels), and raise the possibility that wholesale price spikes could lead to an increase in domestic energy bills of up to 60 percent in the interim.

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Apart from these headline figures A common theme across the four A transmission charging regime which to illustrate impact on end users, Ofgem scenarios and stress tests is allows efficient sharing of capacity a number of key aspects must be the necessity for flexible generation. will become increasingly desirable as addressed for the power industry to As the penetration of wind-powered renewables penetration increases. invest and deliver their side. generation increases, load factors for In particular, the role of energy conventional plants will on average storage (e.g. pumped storage) needs Over the next decade, significant fall and become more uncertain. to be recognised and encouraged. investment will be required, not only Given these lower running times, For these reasons the transmission in new renewable generation capacity, conventional plants will require charging regime is in serious need of but also in the broad spectrum of higher prices to cover fixed costs review. established generation technologies and to earn an adequate return on to ensure that the UK continues Smart grid technology could play investment. to benefit from a balanced, flexible a major role in maintaining the and efficient generation portfolio. A stable market framework is reliability of the electricity system in Critical to this will be investment fundamental to ensuring sufficient the future by helping to reduce peak in new transmission infrastructure, thermal plant investment is demand and to manage fluctuations both on and offshore. Delivery of maintained during this period. in renewables output. There are three this infrastructure will require a pro- In particular, it is important that key areas for focus in realising the investment regulatory and political wholesale price spikes which reflect potential of this technology: climate. The single most important supply and demand fundamentals 1. Developing appliances and aspect for this investment will be during periods of low wind are not infrastructure which allow for the UK government and Ofgem unduly restricted by regulation, since automated demand response. to provide a stable and attractive these will be crucial to allow thermal 2. Finding effective ways of co- investment climate in the UK that plants with low load factors to pay ordinating the various parties will allow companies to finance their back their capital costs. Even the involved in smart demand activities. threat of potential restrictions on price (i.e. customers, suppliers, network spikes may be sufficient to deter operators and generators). investment. 3. Providing funding for the development of smart networks. Energy efficiency and microgeneration can also play vital roles in the policy response.

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8. Recommendations

The next government will very likely 8.2 Transport policies • Introduce fiscal measures to need to steer the UK economy promote more carbon and fuel through a period of unusually high oil Surface transport is the largest user efficient modes of travel. prices, with possible effects of the of oil products. Petrol and diesel (with For example, remove the current types such as those suggested in limited volumes of LPG) account for annual £9 billion tax break Sections 6 and 7. The members of over 50 percent of all UK oil usage. on fuel for domestic airlines ITPOES therefore recommend that all The Taskforce members suggest and channel the income to political parties actively consider the the following: public transport investment. consequences of this and prepare • Continue measures to improve • Maintain short, medium and themselves to weather a change in energy efficiency and wean long-term public investment to the UK economy driven by a volatile transport from its dependence support bus, coach and rail travel oil price which increasingly sits in the on oil. These include promoting (even in the current challenging range $120-150/b. technological developments economic environment). • Change the regulatory environment Apart from driving new legislation, such as hybrid engines, so that regulators are mandated the new government will have an vehicle electrification and to encourage the uptake of important role to play in incentivising weight reduction, both for more fuel-efficient technologies. private sector companies, public cars and public transport. For example, giving the CAA sector organisations and individuals, • Coordinate a package of a mandate to encourage the to change their behaviour in terms of measures to deliver behavioural uptake of biofuels for aviation in a reducing oil demand. A combination change and secure modal shift manner that parallels the mandate of legislation and ‘encouragement’ is from cars to sustainable public for the FAA in North America. therefore recommended, as follows. transport. These could include: • workplace travel plans to reduce Within all of the above, transport 8.1 General policies long-distance commuting in policies designed to protect the cars as well as increasing their disadvantaged members of society • We call on the UK government, occupancy level, should be regarded as particularly local government, businesses • support for the growth of car important. Examples include the operating in the UK market and sharing, provision of better public and other key stakeholders to join • measures to incentivise using community transport services, and us in an effort to appraise the public transport (for example by policies to help operators maintain risk from oil-supply difficulties, introducing fare structures that affordable fares. Contingency and plan proactive and reactive support home working, such as planning is also essential in the event strategies - local and national - carnet-style ticketing products of fuel shortages to prioritise key for facing up to the problem. to complement weekly, monthly work groups, public transport and • Government policies (particularly and annual tickets). essential deliveries. those concerned with social, economic and financial matters) should explicitly acknowledge the potential for high oil prices and promote appropriate contingency planning.

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8.3 Retail and agricultural 8.4 Power generation 8.5 Heating policies including policies and distribution policies fuel poverty

• The huge dependency on road Further electrification of the railways • For those that still rely on oil, freight for just-in-time delivery and the potential conversion of road or oil-derived fuels, for domestic from centralised warehouses vehicles to electric power (plus the heating (mainly LPG), an increase makes retail goods (particularly possible adoption of ‘green electricity’ in the fraction of the population food) very vulnerable to fuel- for heating in response to climate caught in fuel poverty can be related price rises and supply change fears) will change the demand anticipated. The government shortages. Government policies pattern for electricity on the nation’s needs to acknowledge this must plan to mitigate these power-generation and transmission/ possibility and plan action to effects (again, with particular distribution infrastructure. protect the disadvantaged. reference to the disadvantaged). The programme to improve the • Government policies must plan • Farming is highly dependent on energy efficiency of buildings to accommodate a significant the use of oil-related products must be accelerated. upswing in electricity consumption such as diesel fuel, soil improvers, • Encouraging the use of heat and, in the short-term, must crop treatments, and so on. pumps is one solution. Based plan for the possibilities of price Government will need to consider on the renewable heat scenarios spikes and supply interruptions. mechanisms for preventing published by DECC, heat pumps • The single most important unreasonable oil-driven price would increase electricity demand aspect that will allow the UK to rises feeding through into the by 8TWh/y in 2020, but substitute manage the above uncertainties basic food supply chain. for heat energy from primary fuels and its 2020 vision for a low equivalent of up to 32TWh/y. carbon economy is for the government to provide a stable and pro-investment regulatory and political climate in the UK that will allow companies to finance their activities. • The ‘cleantech revolution’ in the use of renewable energy for generating electrical and motive power, and heating, requires continuing support. Although its short-term impact will be limited, UK plc can aspire to be a major player in the new industries that are being created, thus abating the long-term risks from peak oil, more general energy security, and climate change.

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Appendix A: Spare capacity

Spare capacity is the key variable in its members totalling 4.2Mb/d. The unattractive (unsaleable) because terms of sustaining or undermining $75/b target price was first achieved of its sulphur and metals content or oil prices. When there is little or in August 2009. Since that date whether it is regarded as an ‘iron no operable spare capacity - as the price has held in the $70-$80 reserve’ producers are reluctant to occurred in June and July of 2008 range. In the early summer OPEC exploit. However in practical terms - oil prices become very inflationary. compliance with the agreed output it represents an effective minimum In contrast large quantities of spare cuts of 4.2Mb/d had been around OPEC producers do not go below. capacity tend to undermine prices 70 percent but then gently eroded [Note that the lowest spare capacity because holders of the excess or to 58 percent by November without recorded in the last three years was spare capacity have a financial undermining oil prices. Increased 2.12Mb/d in December 2007. It may incentive to ‘leak out’ additional capacity coming on stream during be appropriate to regard this as the cargoes. Initially an extra cargo or the period to November meant that effective minimum for OPEC ‘spare’ two does not undermine the price OPEC still had around 3Mb/d of production.] level but does bring a financial operable spare capacity at year end The latest IEA figures (December reward to the producer of the extra 2009. 2009) give OPEC spare capacity as cargoes. Eventually once a number of Spare capacity is defined by the IEA 6.24Mb/d which reduces to 5.35Mb/d producers are leaking out additional as the extra capacity that can be once the notional spare capacity cargoes the oil price is undermined brought on stream within 30 days of Iraq, Nigeria and Venezuela are and falls. and sustained for 90 days. Since the excluded. The reason for excluding This tendency to production ‘leakage’ 1970s spare capacity has essentially these three is that Iraqi capacity is has always been the key challenge to been an OPEC phenomenon as operated as flat out as the security OPEC as an organisation. It occurs all the non-OPEC producers aim situation will allow (over recent whenever OPEC tries to defend or to produce as close as possible to months it has been using virtually all establish a price level by restricting capacity while only OPEC producers its capacity). Nigerian production is output by means of quotas. Currently ration production to achieve price OPEC appears to have an unofficial targets. price target of $75/b. This is the For this reason conventional analysis price that King Abdullah of Saudi usually assumes that only OPEC Arabia has announced represents a holds any significant, non-transitory, ‘fair’ price for both consumers and spare capacity. Using the IEA data producers. To achieve this price shows that OPEC spare capacity OPEC has announced output cuts by on the IEA’s definition averaged 3.03Mb/d in 2006, 3.34Mb/d in 2007 and 2.64Mb/d in the first half of 2008. The lowest spare capacity recorded by the IEA was 2.35Mb/d in July 2008 - the month when oil prices peaked at $147/b and all producers were straining to maximise production. It is not clear if this 2.35Mb/d was unused because it represents not readily available spare capacity, or capacity that is commercially

46 February 2010 Industry Taskforce on Peak Oil & Energy Security

constrained by the security situation The conclusion, as at end 2009, is The year 2010 is unlikely to provide in the region. So Nigeria’s that after deducting the 2Mb/d of any alleviation as net (after allowing large notional spare capacity has spare capacity below which OPEC for depletion) new capacity is around been inaccessible and possibly does not go, the organisation has 1.6Mb/d and essentially all OPEC. declining due to lack of maintenance 3Mb/d of immediately operable spare Only quite limited amounts of this access to the fields. The recent capacity and a further 1-2Mb/d of could be delayed as the most of the peace agreement with the rebels spare capacity that given the right increase is from fields brought on in the Delta region appears to be circumstances could potentially be stream in 2009 building up output, holding and production has been brought to market. Iranian developments and liquids rising as field maintenance work associated with gas export (LNG) However, spare capacity is a dynamic recommences. This means more of projects. not a static phenomenon. In 2009, Nigerian ‘spare’ capacity may now according to Peak Oil Consulting Latest oil demand growth estimates be brought into production. In the calculations, the net capacity (gross for 2010 over 2009 are 1.4Mb/d case of Venezuela a steady erosion capacity additions minus depletion) which means OPEC is likely to go into of capacity has been seen since addition is likely to be 2.3Mb/d made 2011 with as much spare capacity the Chavez government came to up of 1.9Mb/d for OPEC and 0.5Mb/d as it had at end 2009. Indirect power in 2001. This will be slow and for non-OPEC. confirmation of this weak outlook is difficult to reverse as the Venezuelan provided by a recent interview on government recently nationalised the Latest data suggests an oil demand September 22, 2009, reported by oil field contractors to avoid paying growth of only 1Mb/d between the Bloomberg with the the contractors’ outstanding bills, first quarter of 2009 and the fourth CEO Khalid al-Falih. In this he while the earlier expropriation of a quarter of 2009. If the non-OPEC indicated that they were prepared number of international oil company producers follow the usual pattern for the long haul and there was little operations has continued to hold of utilising their capacity flat out chance of reactivating the 4Mb/d of heavy oil production below its then OPEC producers will have to idled Saudi production capacity in notional capacity. It has, however, increase their spare capacity by over 2010 unless they saw an acceleration just announced new bidding terms 1Mb/d if they have brought all their of economic recovery which he said in November for an auction of joint new capacity on stream and want to is not yet apparent. venture partnerships in the to be held defend prices in the $70-80 range. It seems fairly certain that OPEC will in the Orinoco Belt. Thus by year end 2009 OPEC is delay projects where it is economic likely to have immediately operable to do so. As most projects are spare capacity of over 3-4Mb/d with heavily front end loaded only a limited a further 1-2Mb/d of spare capacity amount of incremental capacity is which in the right circumstances likely to be postponed could potentially be brought to market.

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Appendix B: Major disruptive events to oil supplies Major disruptive events are by their There is also the potential for By global standards Cantarell is not very nature unpredictable but there unexpected events in the oil fields. an old field. Large numbers of still are always geopolitical tensions that The world is heavily dependent producing Middle East fields started have the potential to become major on 120 oil fields that collectively up in the 1930s, 1940s and the early disruptive events. These are the account for 50 percent of world 1950s. The lesson to be drawn is that possible events which could radically production and contain two thirds production from elderly oil fields may alter outcomes. of the remaining reserves of fields in not be as reliable or as predictable as production. Their average age is 42 is generally supposed. In the context of future oil supplies years and although the expectation we can already identify a number of is that their production will slowly important areas of tension: decline in a predictable manner this is • ’s nuclear ambitions and the not always the case. consequent actions by the US The Cantarell field offshore Mexico and others determined to avoid was one of the world’s largest fields Iran becoming a nuclear armed when it was discovered in 1975. power. Iran as OPEC’s second Following the start of production in largest producer has a production 1980, field production rose steadily capacity of just under 4Mb/d. and by 2000 it was producing over • Al Qaeda’s ambition to destabilise 1Mb/d. Nitrogen injection was used and take over Saudi Arabia. to enhance oil recovery from 2000 • The instability of Afghanistan/ and in 2005 production peaked at Pakistan and the possible 2.2Mb/d. At this point Cantarell was consequences in the event the second most productive oil field of partial or total takeover by on earth only exceeded by Saudi Taliban/Al Qaeda groups. Arabia’s Ghawar field. However, in • The civil war in Yemen late 2005 a sustained and rapid and its possible spill over decline in production started and into Saudi Arabia. has continued ever since. By August • Assorted threats to the free 2009 production from Cantarell was passage of oil tankers both down to 0.65Mb/d amid hopes that in restricted channels such production may finally be stabilising. as the Straits of Hormuz and the Malacca Straits and on the high seas from pirates or groups such as Al Qaeda. • Continuing or escalating action by ‘rebel’ groups in areas such as Nigeria, Sudan or other areas where the central authority is weak in relation to regional ambitions with armed groups contesting the central authority.

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Appendix C: Biofuels

The promotion of the use of biofuels There are three major threats to Great hopes have been invested in to increase self-sufficiency and to the increased output of biofuels. the development of the so-called mitigate climate changing emissions The first is changes to government second generation biofuels - ones is now established policy in much subsidy regimes. This particularly that come from non-food material of the world and biofuels volumes applies to biofuels crops grown in such as wood waste - that do not are increasing quite rapidly. The temperate regions. The second is compete with food supplies. To use of biofuels additions to gasoline rising prices for the food use of the date this remains an experimental and diesel supplies impacts the oil crop. Increased sugar prices are technology and one that is not fully industry in three ways. The loss of currently restricting the attractions proven technically or economically. product sales volume impacts the of bioethanol production from sugar Large scale investments are being requirement for crude production cane. Similarly high prices for cooking made but any significant supplies are or crude purchase. The loss of oil in Asia are a more profitable use some years away. refinery throughput impacts refinery for palm oil than biodiesel blendstock. The other much-promoted profitability particularly as refinery Governments have recently become biotechnology is the use of algae to capacity is currently greater than increasingly sensitive to the food produce oils or even oil fuels such immediate requirements. The addition versus fuel debate which may inhibit as diesel. Despite some promising of a lower cost (or subsidised) biofuels expansion hopes. experimental results this technology is biofuels blendstock tends to reduce One of the key drivers in the at a very early stage of development. the profitability of gasoline and diesel expansion of biofuels supply It is, however, attracting considerable sales as oil companies usually have particularly in temperate regions, investment finance, notably from to buy in the biofuels rather than has been government subsidy. The ExxonMobil. Despite the investment owning and creating them. global recession has put many if not and the numerous experimental Total biofuels production reached most government budgets under facilities significant production is 1.6Mb/d in 2009 and is expected to severe strain. It remains to be seen if 5-10 years away at best. reach 1.8Mb/d by 2010 and 2.2Mb/d governments see these subsidies as by 2014 according to the IEA. priorities or whether they will be seen Although as discussed above biofuels as areas where expenditure cuts are exert a leveraged impact as a share acceptable. of global liquids production, biofuels only accounts for 1.75 percent in 2008 and 2.4-2.5 percent in 2014.

49 Industry Taskforce February 2010 on Peak Oil & Energy Security

Appendix D: Whole-economy scenarios for the UK to 2025 D.1 Introduction In the reactive scenario, demand for D.2 Overview of the oil and gas continues to increase 4see framework This section briefly examines through economic growth typical scenarios for the UK to 2025 of the last two decades. Increasing The 4see framework aggregates using a socio-economic-energy imports of these two fuels and at the UK economy into just a few framework developed at Arup known higher prices puts pressure on broad groupings of capital stocks as 4see. The primary purpose of balance of payments. Using the (assets), these being: the energy the framework is to show what is 4see framework with this scenario supply sector, industry, the service physically possible - that is, the suggests that a reactive consequence sector, transportation, agriculture maximum physical envelope for any could be continuous devaluation of and the domestic sector (Fig. D.1). given future scenario. Two such sterling at an average of about The framework also covers the main constraining physical limits are the 1 percent per year. “flows”, these being: energy, goods output of industry, which goes to and services, interaction of these with In the proactive scenario, a small supplying household consumption the balance of payments, growth of proportion of the output of goods and reinvestment in the economy, capital stocks and utilisation of the for personal consumption is diverted and available energy. In reality, actual working population. to other investments. Specifically, industry output can always be less, this investment is directed to The capital stocks interact through as during a recession when there is increased implementation of energy flows as shown in Fig D.2. One of loss in confidence, but it can never efficiency on all buildings and growth the distinguishing features of the be more than this physical limit. of renewable energy as fast as framework is that metrics for the A unique feature of the 4see reasonably possible. A policy to bring capital stocks and flows are not framework is that the rate of growth about this diversion could be taxation money but, where possible, more does not have to be predetermined, applied specifically to personal resilient, physically related units. as in most economic forecasting consumption of goods. There is no Flows of energy are in petajoules models, but is endogenous, change in the total output of goods, (10 15 joules or PJ) per year. Capital generated by the 4see framework just in their mix, but the consequence stocks and flows of goods are both itself. would be reduced demand for gas. in embodied energy units (virtual The first scenario presented is based Meanwhile, the historical trend of petajoules or VPJ). Flows of services on business-as-usual behaviour of increasing personal transport by are kept in inflation-corrected pounds “reactive” policies, while the second car is reversed by stick-and-carrot sterling for lack of any better metric scenario contrasts implementation of policies. The result of these policies that captures their innate value. “proactive” policies. Both scenarios would be to keep oil imports at a UK have a level of industrial activity roughly constant level. Using the 4see and expansion of the service sector framework, the overall observation that continue economic growth, from this scenario suggests that, in energy transport service sector one benefit being to keep the level contrast to the reactive scenario, of unemployment in check. Both the balance of payments would be scenarios include decline of North sufficiently healthy for sterling not to industry agriculture domestic Sea oil and gas production with devalue. the scenarios showing how the consequences of this on imports play Fig D.1 Main capital stocks (assets) of the 4see out. framework within the system boundary of the UK economy.

50 February 2010 Industry Taskforce on Peak Oil & Energy Security

a. b. c.

UK UK UK

energy transport service sector energy transport service sector energy transport service sector

consumption consumption

industry agriculture industry agriculture domestic industry agriculture domestic domestic

Fig D.2 The main interactions in the economy are shown as flows between the main sectors of the 4see framework. (a) Flows of energy from the energy sector. (b) Flows of goods from industry. (c) Flows of service. Double-ended arrows in Fig D.2 energy demand or we have to D.3 Business-as-usual crossing the UK system boundary change the output of goods so as to assumptions represent international trade in invest in renewable energy capacity. the flows of energy, goods and Another example is that if household The reactive scenario, also known services. Each of these flows has a purchasing were to shift from as business-as-usual, has policies related monetary transaction. These shopping (consumption of goods) essentially reacting to events. For monetary transactions form part to leisure services, the services instance, the historical period has of the balance of payments that sector would have to be increased shown substantial growth of the also includes other transactions on to cope with the additional demand. service sector. The 4see framework the current, capital and financial This might necessitate construction derives relationships between sector accounts. which would impact back on the flow demand for services and size of of goods through the demand for each sector. These relationships are The benefits of trade are the construction goods. extrapolated in the scenario to model interchangeability of flows of energy, the continuing growth in demand for goods and services. For example, Application of the 4see framework services, and consequent growth in net exports of services can be first involves examining historical data the service sector. For investment in “exchanged” for the net import of (chosen to be for the period from industry and housing, this continues energy and goods, the balance of 1990 to the present) in terms of the at the same roughly constant levels payments and exchange rate enabling framework’s groupings for capital as in recent years. The resultant this process. stocks and flows, as quantified by increase in goods and services the framework’s metrics. Next, the In contrast, one of the principles of shows as around 1 percent per year sizes of flows are related to the sizes the 4see-based view is to recognise (annual GDP growth). of capital stocks as a calibration and highlight the fundamental nature process capturing the socio- Other trends are assumed to of energy, goods and services, and economic behaviour. This calibrated continue. These include the low level that within the economy they are not socio-economic behaviour can then of improvement of energy efficiency as easily interchangeable as they are be applied to future scenarios as a over the last decade (essentially in trade. For example, if we want to form of sophisticated trend analysis through replacement of stock) reduce the flow of fossil energy, either working within the system dynamics and increase in travel in terms of we have to reduce activity of the represented by the flows in Fig D.2. passenger-km and freight-tonnes sectors to reduce their per year.

51 Industry Taskforce February 2010 on Peak Oil & Energy Security

primary energy demand (PJ/y) and industry. (Economists describe 12,000 historical data scenario this phenomenon by its inverse, the increase of capital employed per unit 10,000 agriculture of labour, a trend they encourage in order to achieve economic

8,000 growth.) The downward trends of transport staff employed per unit of assets in the service sector and industry are 6,000 assumed to continue for the scenario. domestic Meanwhile the service sector is 4,000 growing, as already mentioned, so service sector these trends compensate to a degree

2,000 and unemployment stays at around 4 percent. industry

0 1990 1995 2000 2005 2010 2015 2020 2025 D.4 North Sea output year Fig D.3 Primary energy demand by sector (excluding utilities and mining) for the historical period to 2007 and Output of oil and gas from the North projected to 2025 according to the proactive scenario. Sea is past its peak and that we A projection for the expected total dominated by fossil fuels with only are now set on a path of permanent energy demand can be derived from small proportions of electricity from decline is now generally accepted. this set of conditions, shown in Fig renewables and nuclear power. A decline level of 5 percent per year D.3. The energy demand by 2025 for oil and gas is used for domestic Over the historical period, there in this scenario is over 10,000 PJ/y production in Fig D.4. has been a trend to reduce the (in terms of total primary energy). number of staff employed per unit Within the energy demand profile This primary energy demand is of assets, in both the service sector of the reactive scenario shown in energy flow (PJ/y) Fig D.3, the shortfall in domestic oil 12,000 historical data scenario production for the oil component will result in increasing imports. These 10,000 gas imports coal imports could grow at about 10 percent per year, as shown in Fig D.4. gas production used 8,000 D.5 Reactive consequences oil imports 6,000 oil production used to the business-as-usual scenario

4,000 At this point in developing a scenario coal production used (based on the assumptions above),

0 we have to conjecture how this vision 1990 1995 2000 2005 2010 2015 2020 2025 of the economy might respond to the year unprecedented situation for the UK of -2,000 oil exports gas exports becoming an overwhelmingly major energy importer.

-4,000 Fig D.4 Extraction, use and trade of coal, oil and gas for the historical period to 2007 and projected to 2025 according to the reactive scenario. Decline of North Sea oil and gas production into the future is shown at 5 percent per year. 52 February 2010 Industry Taskforce on Peak Oil & Energy Security

exchange rate indexed to 1990 At the same time as oil imports start 1.2 historical data scenario to rise, a consequence of global peak

1.1 oil is that the global price of oil is also likely to rise, and substantially. For the 1 purposes of this scenario, the price is put at doubling by 2025 with the 0.9 price of gas moving in tandem at a

0.8 constant 50 percent of the oil price 1990 1995 2000 2005 2010 2015 2020 2025 by energy content. year net trade @ 1990 prices (£b/y) 100 The net components making up the exports and incomings complete balance of payments are 75 financial a/c in shown in Fig. D.5. The increasing dependence on imported fuel is 50 fuel exports income in clearly evident in the lower half for outgoing funds. This balance of 25 service exports payments projection includes the 0 conjecture for the strength of sterling 1990 1995 2000 2005 2010 2015 2020 2025 year as it responds to events, shown in -25 the upper part of Fig D.5. This is in financial a/c out goods (less fuel) imports income out no way intended to “predict” balance -50 current transfers out of payments to 2025, an impossible

-75 fuel imports task, but simply to get a feel for

imports and outgoings the relative magnitude of balance of -100 payments components. Fig D.5 Strength of sterling and balance of payments showing net components for the UK for 2007 with a projection So, shows the reaction as to 2025 based on the reactive scenario with the change in strength of sterling shown. Fig D.5 1 percent devaluation each year. primary energy demand (PJ/y) 12,000 The explanation of this behaviour is historical data scenario that the valuation of sterling enables

10,000 the “income in” (from UK owned agriculture foreign assets) to compensate or “pay for” fuel imports. Given that the 8,000 transport scenario has 1 percent growth, the simultaneous devaluation of sterling

6,000 by the same amount means that,

domestic seen from abroad, the UK as zero growth. 4,000 The key message to take from this service sector scenario is that the features of the 2,000 UK’s balance of payments mean industry the UK could possibly “afford” an

0 increasing fuel imports bill, but really 1990 1995 2000 2005 2010 2015 2020 2025 this is not a situation to get into in the year first place. Fig D.6 Primary energy demand by sector (excluding utilities and mining) for the historical period to 2007 and projected to 2025 according to the proactive investment scenario. 53 Industry Taskforce February 2010 on Peak Oil & Energy Security

energy flow (PJ/y) D.6 Proactive scenario 12,000 historical data scenario The alternative scenario investigated here proposed that some of the 10,000 coal imports industrial output to consumer goods gas imports gas production used is diverted to investment in energy 8,000 efficiency and renewable energy, as described above. By diverting oil imports 6,000 oil production used industrial output in this way, other aspects of the scenario described earlier, of 4 percent unemployment 4,000 and 1 percent growth, still apply. coal production used To complete the scenario, a highly 0 1990 1995 2000 2005 2010 2015 2020 2025 coordinated approach is proposed to year reducing passenger car and freight -2,000 oil exports gas exports consumption of oil. This might include higher pump prices, encouraging -4,000 multi-occupant driving and a modal Fig D.7 Extraction, use and trade of coal, oil and gas for the historical period to 2007 and projected to 2025 shift to rail. according to the proactive investment scenario together with decline of North Sea oil and gas production at 5 percent per year. The resulting effect on sector exchange rate indexed to 1990 demand for primary energy is shown 1.2 in Fig D.6, which shows a marked historical data scenario 1.1 reduction in demand compared to

Fig D.3 of the reactive scenario. 1 The resulting reduction in fossil fuel 0.9 demand, and thus fuel imports, is shown in Fig D.7. 0.8 1990 1995 2000 2005 2010 2015 2020 2025 Finally, the effect on balance of year net trade @ 1990 prices (£b/y) payments of this proactive investment 100 exports and incomings scenario is shown in Fig D.8. 75

Compared to Fig D.5 of the reactive income in scenario, the fuel component is much 50 financial a/c in fuel exports income in smaller and now comparable with 25 variability of the other components service exports of the balance of payments. A low 0 1990 1995 2000 2005 2010 2015 2020 2025 likelihood of devaluation of sterling year is the conclusion that can be drawn -25 financial a/c out goods (less fuel) imports from this scenario. Both scenarios income out -50 have the same growth and low current transfers out unemployment of the reactive -75 fuel imports scenario, but the proactive scenario imports and outgoings has much improved energy security. -100 Fig D.8 Strength of sterling and balance of payments showing net components for the UK for 2007 with a projection to 2025 based on the proactive investment scenario with no change in strength of sterling. 54 February 2010 Industry Taskforce on Peak Oil & Energy Security

Appendix E: Sources

ASPO annual conference: www.aspo.tv BP Statistical Review of World Energy 2009: www..com/multipleimagesection.do?categoryId=9023755&contentId=7044552 DUKES: www.decc.gov.uk/en/content/cms/statistics/publications/dukes/dukes.aspx EIA oil supply: www.eia.doe.gov/ipm/supply.html EIA oil import prices: tonto.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=wtotworld&f=w Global Witness report: www.globalwitness.org/media_library_detail.php/854/en/heads_in_the_sand_governments_ignore_the_oil_suppl/ IEA Oil Market Report December 2009: omrpublic.iea.org IEA’s World Energy Outlook 2009: www.worldenergyoutlook.org IHS CERA report: www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDetails.aspx?CID=10746 IHS Herold study: press.ihs.com/article_display.cfm?article_id=4135 IMF: www.imf.org/external/news/ ITPOES: www.peakoiltaskforce.net Macquarie Bank report: www.calgaryherald.com/business/surplus+peaking+this+year+bank+says/2003877/story.html Ofgem report: www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=2&refer=Markets/WhlMkts/Discovery ONS (Office of National Statistics): www.statistics.gov.uk/statbase/TSDdownload1.asp Peak Oil Consulting: www.peakoilconsulting.com UKERC “Global oil depletion” 2009: www.ukerc.ac.uk/support/Global%20Oil%20Depletion US Department of Energy for 1920-1964: ‘Historical Data’ DeGolyer and MacNaughton Wicks Review: www.decc.gov.uk/en/content/cms/what_we_do/change_energy/int_energy/security/security.aspx 55

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