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Energy analysts discuss future of oil reserves.

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Thursday, 7 August 2003


PETER THOMPSON: The world is running out of oil, and fast. Of the estimated two trillion barrels of oil reserves we started off exploiting, about 900 billion have now been used. That leaves us with about 40 years of oil left. And pumping the 1.1 trillion barrels of oil that remain becomes harder as time goes by. As the wells are emptied they lose pressure, which slows the flow of crude, and of course they have to go after much harder to locate and exploit reserves as time moves on. This means we are likely to reach a peak in production long before we hit critical levels, even soon. Once demand outstrips supply we can expect oil prices to skyrocket, and some say it will drag the global economy into a recession of apocalyptic proportions.


Well, to discuss this state of the world's oil and the alternatives to it I am joined by a trio of experts from three continents. Richard Hardman is the Trustee of the London-based Oil Depletion Analysis Centre and former President of the UK Geological Society. Matthew Simmons is an energy adviser to the former Clinton and current Bush administrations; he is also an energy investment banker and President of Simmons and Company, a Houston-based investment firm. Dr John Wright is Director of the CSIRO Flagship program, Energy Transformed, which is based in Newcastle here in Australia.


Welcome to all three of you for joining us. If I could begin with you, Richard Hardman—it's a broad question: how crucial is oil to the running of the global economy?


RICHARD HARDMAN: It's absolutely vital. The most vital thing is probably for agriculture. I think I am right in saying that about 40 per cent of all usage is for farming. It's not just for the tractors but it's very important in fertiliser production, and of course how you handle crops afterwards. So food prices, which have fallen in real terms quite steadily over the last 10 or 20 years, will start to go up and a great proportion of our budgets will have to be used thereby.


PETER THOMPSON: Some even go so far as to say that food is oil transformed.


RICHARD HARDMAN: Yes, I think that is absolutely right. I mean, I think for every ton of oil you burn you get 12 tons of grain—that's the normal conversion—so it is incredibly important.


PETER THOMPSON: Matthew Simmons, on wider fronts, other than agriculture, how crucial is oil to the running of the global economy?


MATTHEW SIMMONS: It's really the only energy source that we have been able to cope with so far that can essentially turn wheels of transportation, and wheels of transportation are not just the cars and trucks, they are the buses and trains and planes. So in an ever globalising society, without being able to move, you have a double problem so it is not just food and agriculture, it is basically the … the single biggest uses are transportation fuel.


PETER THOMPSON: John Wright, here in Australia, in fact we have a particular reliance on oil for energy, don't we?


JOHN WRIGHT: Particularly for transport and food production as has already been said. So, yes, we certainly have quite a strong reliance. Now, prior to 2000 we've been about 80 per cent to 90 per cent self-efficient in our liquid fuel on a net basis but now that we have passed the year 2000, we are facing exactly the same problems as the rest of the world with a declining resource base in that particular energy area.


PETER THOMPSON: Matthew Simmons, can I go back to a comment you have made and, that is, that no serious person is really taking the depletion of oil seriously enough. Is that so?


MATTHEW SIMMONS: I think it is probably even more insidious in that the few times the topic does get discussed, that we are nearing a peak of oil, too many people hear that and say: Oh, we'll never run out of oil. And 'peaking' does not mean we've run out. In fact it just … but what peaking does mean is that you never grow again. And generally, in oil and gas, once you peak you start into fairly rapid decline. The further the decline goes the longer the tail remains. So we could still have oil being produced 200 or 300 years from now but it is just very, very unlikely it would be anything like the volume that we now use.


PETER THOMPSON: What exactly is meant by 'peaking'?


MATTHEW SIMMONS: Peaking is basically a phenomenon that happens at an individual well, an individual field, an individual basin, and then finally a country and finally the world, and it is basically when you get the maximum amount of oil out of a well possible and you start getting water encroaching in the well and you end up facing a decline curve. A great example is in the North Sea, the Forties Field which was really the crown jewels of British Petroleum for years. The Forties Field peaked in the middle-'80s at almost half a million barrels a day. Earlier this year, BP sold the Field to Apache, a small, an independent in the United States, and the production was already down below 50,000 barrels a day.


PETER THOMPSON: So this is something which is not exactly about supply and demand. This really relates to, in fact, the quality of oil that is in the ground and beneath the sea. Is that so?


MATTHEW SIMMONS: Yes, it's physics.


PETER THOMPSON: It's physics?


Is that how you see it, Richard Hardman?


RICHARD HARDMAN: We are not really facing oil running out. What we are facing is we are going to have to pay a lot more for the energy that we actually need. I mean, there are vast supplies of very heavy oil in Canada and in Venezuela, but the cost of getting it out of the ground will put the price way up. So whereas as he says, in 200 years time we still may be using it, it will be trickle. But the real critical bit is when we hit the peak and we can no longer supply all the oil that people need, what is the alternative, and have we got anything which approaches the cost effectiveness of a barrel of oil? Because oil is not just cheap, it's incredibly useful; it's portable, you can put it in aeroplanes. You could imagine that if you had to, say, run on coal you've got to transform that coal into oil if you want to fly in an aeroplane, and then you lose a lot of energy. So all these wonderful schemes that people have are just going to put the cost of energy up.


PETER THOMPSON: Let's get the big picture for a moment. Richard Hardman, where does the world stand in terms of its supply of oil now?


RICHARD HARDMAN: Well, at the moment we've got oil coming from Russia, we've got the Middle East, which is the critical area, where we think that probably as much as 65 per cent of the remaining reserves may be present, and that means of course that we are very reliant on the Middle East. There are lots of other places: there's been a lot of oil found in Matt Simmons's backyard in the Deepwater Gulf, but these do not amount to the sorts of sizes of fuel that we've seen in the Middle East. There was great hopes, of course, for the Caspian and there is one giant field there but unfortunately one giant field does not transform the situation.


PETER THOMPSON: Is it likely that large, very large, sources of oil will be found in future now?


RICHARD HARDMAN: I think that is unlikely. If you pull up the trend of discoveries, the peak of finding was in the sixties and as the peak of production is going to follow that by about 30 years, and that seems to be rule. Now, you could never say never, but it is extremely unlikely. In order to reverse the peak, as we see it, which will probably occur—if is hasn't already occurred—it will occur in the next 10 years. You'd have to find another source about the same size as the Middle East, and I think that is very, very unlikely.


PETER THOMPSON: Matthew Simmons, how self-sufficient is the United States in oil use now?


MATTHEW SIMMONS: Oh heavens. We became a net importer of oil almost 30 years ago. Today we bring in almost 60 per cent of the oil that we use every day as imports.


PETER THOMPSON: Are there still future fields in the United States which have been unexploited, or will this dependency grow above 60 per cent?


MATTHEW SIMMONS: Other than Deepwater, which became really the last sort of frontier of discovery in the United States, there's still a possibility some day, if we ever get back to exploring for oil in the outer continental shelf of both the Atlantic and the Pacific, and if we open up the remaining wildlife preserves in Alaska, that we find a few more fields, but I think that all this would do is put a dampener on the net decline of our production base.


It is actually interesting, in 1970, the United States hit an all-time record production of about 9.7 million barrels a day, and the only person that it warned that we were going to be peaking around that same time, was a senior scientist at Shell that ga ve this warning in 1956, and he became so discredited that by 1970 one of the things his critics liked to most rub his nose in is: 'Remember that guy that said we were going to run out of oil in early seventies? We've never produced more the year we peaked.'


It turns out that a decade later the price had gone up tenfold; we were drilling five times as many wells, and the 9.7 or 9.6 million barrels a day had already fallen to 6.9 million barrels a day. Today it about 3.3, which excludes the last year which didn't have anything to do with the 9.6 and Deepwater. So when you peak you can come down pretty fast.


PETER THOMPSON: This brings us to a bigger problem about crying wolf. For instance, going back to the 1970s and the Club of Rome's forecast that there were declining oil reserves and many other resources were in decline. Are you worried that too many people have said we are running out of oil and that that is the reason why this isn't taken seriously enough?


MATTHEW SIMMONS: You know, it's actually interesting … I, finally, three years ago, read for the first time the Club of Rome's Limit to growth because I'd had so many people say, you sound like a Club of Rome. Remember those guys said that we were going to run out by 1990 or 2000, and ironically, they weren't talking about that at all. They were talking about the world starting to run out of resources, including energy, in 2050 to 2070. So I think even the people that did cry wolf have been loudly and widely misunderstood.


PETER THOMPSON: John Wright, in terms of Australia's dependence on its own sources of oil, much was said, going back into the eighties and nineties, about the decline, particularly, of our petroleum. But that's been largely made up for by natural gas discoveries, hasn't it?


JOHN WRIGHT: Certainly we've discovered a lot more gas since then and, certainly, you can make liquids from natural gas. It's a matter of cost and it's a matter of our distribution of gas. Most of our large gas deposits are off the North West Shelf of Western Australia, a long way from where we actually have to bring it on-shore and then process it and turn it into liquids and then get it distributed around the rest of the country. It is all a matter of cost. It also requires a lot more energy to convert natural gas to liquids and, of course, that leads to increased CO 2   emissions which obviously we don't want. We are looking at sequestration technologies to cope with that but that's again an added cost. So, yes, we could produce our liquid fuel from gas but it's going to come at a cost and that's the real problem. Certainly if we wanted to produce all our liquid fuels from our gas then it would just about use up all the gas production that we have now.


PETER THOMPSON: John Wright, staying with you, on the issue of alternatives, which Richard Hardman has touched on already, your Flagship program, Energy Transformed, do you see the embracing of alternatives to the conventional fuels we have been using for our energy?


JOHN WRIGHT: I think we must. I don't think we have much, much choice. Gas to liquids is one way. It won't be any one thing; it will be a whole mixture of things, and the alternatives to petroleum are really quite wide. We've got the whole span of biofuels. We can use more compressed natural gas, for example. LPG is another substitute. We have got very large deposits of oil shale; we have obviously problems with that. And of course we are well endowed with coal, and going down a route of coal gasification—turning the coal into gas—and then making liquids from that gas product is also a very strong possibility for the future.


PETER THOMPSON: Richard Hardman, in a global sense, what are the alternatives and, as you did mention, the question is: are they cost-effective?


RICHARD HARDMAN: The most cost-effective is probably nuclear, and it's a thing we don't like to talk about but it is a thing that we are going to have to talk about. I think if we are going to supply an increasing world population to energies so they can have the increasing living standards, I think we are going to have to turn to nuclear. And there are two questions about nuclear.


The first question is how do you get rid of the waste? And the second question is how do you decommission? If you can solve those then we have a wonderful source of electricity which we can generate hydrogen—there are lots of things we can do with that—an d we can continue to live at the standards at which we've been living. Otherwise, I think all the alternatives are going to be much more costly because, as Mr Wright said, there is an energy absorption in all these transformations which just puts the price up.


PETER THOMPSON: Nuclear, till now, has been seen as a source of electricity. You are suggesting that the next stage of nuclear power might in fact be … where it plays, if you like, a catalytic role in creating hydrogen.


RICHARD HARDMAN: Yes, and I think that we are looking quite a long way ahead. We are talking about oil peaking—if it hasn't already peaked within the next 10 years. There is an awful lot of gas around so what we are really looking at is when the gas starts to peak. And the gas might peak in the next 20, 30 years, again, depending on how hard we pull it. If we use it very hard as a substitute for oil we are going to have to start really thinking about a slightly longer term future, and I think that's where nuclear comes in.


PETER THOMPSON: Matthew Simmons, what's your perspective on alternative fuels?


MATTHEW SIMMONS: The good news is we have a lot of different alternatives. The bad news is there's limitations with every single one of them. If you start, for instance, with unconventional oil, which Richard has already touched on, in Canada and Venezuela, and oil shale which has been mentioned. The problem with all of those is that it is unbelievably energy intensive to turn unconventional oil into conventional energy, and so in the face of possible energy allocations you don't want to basically start relying on sources of energy that are consuming 20 per cent to 50 per cent of the energy that they are creating.


If you get into solar and wind, the problem is they don't dispatch; they are only usable in intermittent parts of the day. So until we figure out a way to store electricity … and they are really just creators of electricity, then they have a role but it is only a minor role in the long-term picture. And there lurking in the background of all of this is a strange world that we live in, where we have almost 6.5 billion people and about half a billion of those people use over 50 per cent of the world's energy. And so over the next 20 years we have to start addressing the rich-poor gap. As we address that the other five billion people who hardly use any energy at all are going to basically want to start having lifestyles that we have, and the energy demands that gets created out of that is just astonishing. So where that all comes from I haven't any idea….


PETER THOMPSON: I was going to say you'd be better placed than anyone, as an adviser to presidents, on the political difficulties of addressing this issue of the imbalance of use.


MATTHEW SIMMONS: It's a tough question. It's a question that got largely ignored for the last couple of decades and is just finally starting to get some serious conversation, but just.


PETER THOMPSON: John Wright, what about renewables? We haven't spent much time talking about those in this broader discussion. What sort of role can they play?


JOHN WRIGHT: A small but important role. As I say, there is no one silver bullet; it's going to be a mix of all these things. Biofuels is a renewable source of fuel.


PETER THOMPSON: By 'biofuels', do you mean crops?


JOHN WRIGHT: Yes, energy crops. We haven't really moved down that path. There is a bit of a controversy in this country at the moment about ethanol, for example, made from sugar, molasses, but that's going to have to play its role in the future. There is actually a biofuel production facility in the Hunter that you can drive up with your truck and fill up with biofuels made from waste—discarded fat and oil products. That's just a small step in the right direction.


But that throws up a whole lot of issues. If you are going to plant crops to produce biofuels it takes out crop land for food production, for example. You've got to bring fertiliser to it, you've got to bring water to it—there's a whole range of issues you have to think about. Producing hydrogen for example from, say, photovoltaics or wind is possible but, again, the cost of that fuel is rather high. The real problem is that if we are going to end up running down the road of a hydrogen economy—and I believe that's inevitable; the time scale is a bit questionable but it will happen—you need the distribution, the infrastructure, the storage for the hydrogen and the appropriate technology to use that hydrogen.


PETER THOMPSON: Where, by the way, do you see the hydrogen coming from?


JOHN WRIGHT: Initially I see it coming mainly from fossil fuels, and why I say that is because our country relies heavily on coal. You can make hydrogen from coal but you have to capture the carbon dioxide and store it appropriately. And there's lots of work going on right around the world on that but that will eventually lead you going from coal directly to hydrogen. And once you've got large amounts of hydrogen then we are going to learn how to use that hydrogen, and we need to take those first steps to walk down that path. And then if we use that in fuel cell powered cars—this is, if you like, the Holy Grail of where the energy situation is heading—eventually we are going to have to produce that hydrogen from renewable sources and possibly nuclear in the future.


PETER THOMPSON: Richard Hardman, do you see, just in winding up this discussion, do you see this transition as being monstrously difficult?


RICHARD HARDMAN: It's a question of people not being really aware and there's also, I believe, a naïve assumption that the free market will take care of it, and this is a pretty big issue. I don't think that free market companies, oil companies, can really admit that this is going on because they'd frighten the shareholders. So we've got this conspiracy of silence. We've got governments that would rather not face the problem saying: Okay, let the free market do it. The free market doesn't want to face the problem and doesn't want to frighten the shareholders. So who do we turn to? And that's really, to me, the key question.


PETER THOMPSON: Matthew Simmons, what's your take on this final point?


MATTHEW SIMMONS: That we've waited far too long to address this issue. That there are still too many people that cynically say, 'We've been talking about running out of oil since the end of World War I', and that it will be one of the singly biggest problems that the world is going to have to cope with, and there is not an easy answer.


PETER THOMPSON: There certainly isn't. But it has been very good to talk to all three of you. Thank you very much indeed.


Richard Hardman, who is a trustee of the London-based Oil Depletion Analysis Centre, and former President of the UK Geological Society. Matthew Simmons, an energy adviser for former President Clinton and current President Bush; he is also an energy investment banker and President of Simmons and Company, which is a Houston-based investment firm. And Dr John Wright is Director of the CSIRO Flagship program, Energy Transformed, which is based here in Australia at Newcastle.