The Outlook for Energy- an Industry Perspective
By Donna Mosher, May 2006
Today the world is using 40,000 gallons of oil a second. We use it in our cars, trucks, buses, boats, planes, and trains. We use it to power equipment. We rely on it not only for transportation, but also for food, warmth, and water. A day without oil is unimaginable. And yet we must begin to contemplate it. We are running out. The question is: how much is left?
We’re adding 10,000 people a day to the planet. As the world population reaches a projected eight billion in 2030, as living standards improve in developing countries like China and India, and as demand for oil and gas increases, supplies of hydrocarbons must increase by 50 to 60 percent. We must look to technological advances to recover hydrocarbon sources, we must exploit increased energy efficiencies, and we must develop alternative sources of energy. Our future depends on it.
Oil dominates as the world’s primary source of energy, while natural gas follows closely behind. The good news is that there are adequate world hydrocarbon supplies to meet demand for the next two decades. The worrisome news is that much of those supplies are in what the U.S. would consider unstable and even hostile regions of the world. And what remains of oil will be more difficult and more expensive to recover.
Such was the consensus of industry executives speaking this spring at the University of St. Thomas’ Global Energy Series. Representatives of ExxonMobil, BP, and Chevron presented their companies’ views on the outlook for energy, hotspots around the globe, and predictions for the future.
U.S., 12 Years – Middle East, 80 Years
The planet was endowed with an estimated 3 trillion barrels of recoverable oil, accounting for undiscovered resources and projected increases in already producing fields. The world’s remaining recoverable reserves are estimated to be between 1.1 trillion and 2.4 trillion barrels. Globally, it is estimated that production can be sustained for 40 years.
North America and Europe consume 60 percent of the world’s oil. The North American oil reserves are estimated at five percent of the global total, or 61 billion barrels. And North America’s oil production is shrinking; our country has produced over half our supply. Based on today’s reserve-to-production rate, the United States can sustain oil production for an estimated 12 years.
The oil reserves in the Middle East are estimated to be 61 percent, with 733 billion barrels in reserve. The region’s reserve-to-production ratio is 80 years. OPEC owns 70 percent of the total oil reserves, while its share of daily oil production required to meet demand is 30 percent, or around 50 million barrels a day.
However, production is in decline in all the major fields, while very few discoveries have been made in the last twenty years. Significant growth in oil capacity is needed to meet the growth in demand anticipated over the next 25 years.
Growing Demand and Cost for Gas
The outlook for natural gas is more optimistic. The world can expect to sustain production of natural gas for another 70 years. Resources are more widely scattered around the world; Europe and the Asia Pacific region – the former Soviet Union in particular ¬– have significant reserves, compared to the Middle East. By 2030, it is anticipated that natural gas supplies will be imported primarily from Africa and the Middle East. The largest gas reservoir in the world was discovered in the last decade in Qatar, with an estimated 700 trillion cubic feet.
North America and Europe own 40 percent of the world supply of gas, yet they consume 70 percent. Japan and Europe demand the most natural gas, used primarily for power and heating. The U.S. now consumes 12 percent of the global consumption of 92 trillion cubic feet a year. Our country’s demand is predicted to rise to 27 percent by 2020. While the U.S. has been able to meet its own natural gas demands, with our domestic production declining, we can expect to import more from Canada and the Middle East.
Demand will also grow in Europe, and it is expected to increase dramatically in the Asia Pacific region: India, China, Malaysia, Japan, Thailand, Korea, and Vietnam.
Natural gas, a combustible gaseous mixture of hydrocarbons, mostly methane, is produced from wells drilled into underground reservoirs of porous rock. The challenge is to remove the heat to liquefy it at the lowest cost possible. The process is expensive; extensive safety and environmental concerns must be addressed. To deliver it economically, it must be cleaned of carbon dioxide, mercury, and sulfur, and cooled to -260ºF, which shrinks it to 1/600 of the volume, making it easier to transport. Because it is highly flammable, it must be handled appropriately.
New LNG terminals require between $700 million to $1 billion to build. Tankers equipped with the insulated aluminum tanks necessary to transport LNG cost $200 million each. Such costs account for the doubling of natural gas prices in the last five years. Other factors on price have included the recent hurricanes, increased winter demands, and increased demands by countries like the United Kingdom and Spain.
The Geopolitics of Oil and Gas
The lack of stability in the Middle East continues to stimulate highly speculative oil commodities. In ten years, the industry estimates that 80 percent of all traded oil will come from Africa, Russia, and the Middle East. These oil and gas supplies are in great abundance in what the U.S. considers to be politically sensitive areas:
- Iraq has 10 percent of the world oil reserves, but has been producing less today than when Saddam Hussein was in power.
- Qatar, with 14 percent of the world reserves of natural gas, will become the leading LNG exporter.
- Iran has huge reserves of oil and gas; its reserves-to-production ratios are 76 years for oil and 176 years for gas.
- Kuwait, a country in political turmoil now, has 8 percent of world reserves
- Algeria is a leader in gas production
- Libya boasts a reserve-to-production ratio of 38 years for oil and 40 years for gas.
Energy security will be an ongoing challenge. The Middle East and North Africa regions will continue to be strategic suppliers of oil and gas for years to come.
We are seeing a re-emergence of nationalism as well. Governments of oil-producing nations are benefiting from huge revenues, and see little incentive to bring in international companies. As Venezuela is wrestling back control of its oil, Bolivia is considering nationalization of its gas supplies.
Security of supply is becoming a competitive issue also. Countries like China and India are taking extra measures to assure an ongoing supply of oil and gas and are competing aggressively for that supply.
Future Outlook and Opportunities
As a whole, the companies are declaring there will be “ample” supplies through the next twenty-five years, with caveats.
The world population is expected to reach eight billion by 2030, with growth strongest in Africa and the Asia-Pacific region. Developing countries now account for 50 percent of the world’s energy use. That percentage is expected to grow significantly.
There is no shortage of hydrocarbon resources, but a very limited number of key suppliers. Additionally, that oil sits in troubled areas with challenging countries. Political upheavals impact the global commodity market.
Hydrocarbons will remain dominant through 2030, while consumption of hydroelectricity and nuclear energy will grow. Non-crude liquids – heavy oil, tar sands, bio-fuels, and synthetic liquids – will become more important. With such a dependence on crude oil and fossil fuels, energy security is emerging as a key policy driver.
Environmental constraints, including tighter regulations to control pollution and the impact of climate change, are driving future policies.
Whatever optimism the industry brings to the energy outlook is predicated on some key factors:
- Technological developments are critical to maintaining adequate supplies.
- Fuel efficiency trends in transportation must accelerate dramatically.
- Alternative energies must be found and developed.
As a group, the industry executives speaking at the University of St. Thomas stated confidently that our country might look forward to adequate fossil fuel supplies for the next 40 to 50 years. We won’t return to an earlier way of living. We cannot tell people who have emerged from poverty to not improve their livelihoods. Yet, we cannot tell the developed world to give up theirs either. We do not have to choose between economic growth and improved living standards on the one hand, and security of supply on the other and a clean environment on the other.
These are grand assurances, to be sure. The foundations on which they rest will only be proved over time. Americans are betting our way of life on the possibility of advancing technology, the improvement of fuel efficiency in our vehicles, the development of alternative energies that are effective and environmentally sound – and our country’s ability to keep the oil flowing to us from the countries that have it. The economic future of these energy companies depends on the outcome of these bets. But what are the costs to the environment, to the U.S.’s position among its fellow humans around the planet, and to the lives of American soldiers directed to guarantee energy security? It’s a big wager, and one we all need to consider.
Upcoming: Matthew Simmons of Simmons & Company International presents his argument for the imminence of peak oil.
