ASPO the Association for the Study of Peak Oil

Proceedings of the 2nd International Workshop on Oil Depletion, Paris, France, May 26-27 2003,
Edited by K. Aleklett, C. Campbell and J. Meyer, www.peakoil.net/iwood2003 .

Non-OPEC Oil Supply: Economics and Energy Policy Options
Maarten van Mourik & Richard K. Shepherd

Apart from the enigmatic FSU, there is little prospect of long term growth for non-OPEC oil supply and a strong likelihood that over the next few years the trend will flatten and then decline irrevocably. Decline will come faster if the spectacular discoveries in the deep water offshore plays of the southern Atlantic and the Gulf of Mexico attract sufficient investment to match the loss of production in the North Sea. Deep water oil supply might be expected to reach a peak of as much as 6-7 million barrels a day by the time the North Sea has lost more than half its current output in the period beyond 2010. But economics play as strong a role as geology in real world oil business. Current indicators suggest that the prolific deep water wells are delivering less oil than expected and for a shorter period. That means less revenue. This paper outlines the disappointing performance of recent offshore fields, in both deep water and conventional water depths, and suggests consequences for global supply in the next decade.

The 30 year success story of non-OPEC oil supply stems directly from the oil price revolution of the 1970s, without which the North Sea and most other offshore oil plays would not have been economic. The non-OPEC oil boom was also necessary because access to the cheap oil of the Persian Gulf and a few other plays were simply not available to the international private sector oil industry, as they had been before. That era is now over. It is ending not because oil is too cheap, but because there are powerful reasons for change. Firstly there is not enough oil left to make a difference beyond the next few years. Secondly, the economics of deep water and other offshore oil may not be attractive enough. Thirdly the doors to the Middle East are now being opened again to companies that can write those assets on their balance sheets and generate profits, allowing better return on investment and their higher share prices. There is no more compelling reason for a shift in investment strategy than the lure of better profits.

However strong the evidence of an imminent peaking of offshore and perhaps total non-OPEC oil supply, the reality is that governments will not readily recognise a “bad news” scenario that will inevitably tarnish their own political image. It follows that a global and permanent threat to their economies and energy security from a shortfall in oil supply outside the Persian Gulf and central Asia will only become a policy assumption if viable and attractive energy policy options are available. If there is single focus to any energy supply threat, then it is the market for transportation fuels, the strongest growing segment of the energy market and the only segment of the energy market where there are no significant alternatives already on offer.

The second half of this paper suggests that there are industrial or financial obstacles to the large-scale introduction of fuels other than current specification gasoline and diesel. Almost all the current initiatives to explore and encourage alternative fuels address a long-term future in which fuel cells or hydrogen or “California-clean” liquids replace the current fuels at the pump. Further, most research concentrates on the environmental aspects of the alternatives rather than their large-scale industrial availability. Yet the hard reality is that any solution to the global oil supply dilemma must be large scale (at least 10% of the total market for transportation fuels) and soon, which means within a decade.

The technical facts are that fuels such as ethanol and methanol can be produced in very large volumes and delivered to the consumer without any significant change to the huge infrastructure constituted by the global internal combustion engine manufacturing industry and by the existing fuel distribution networks. This large, immediate and obvious opportunity has not been grasped so far for the excellent reason that the status quo is profitable and convenient for those who now control the fuel business. It is after all, the duty of integrated oil companies to deliver best value for their shareholders, not to find secure, competitive, long-term energy solutions to the needs of consumers and their governments.

In short, there is no need for a massive metamorphosis in fuels, or engines, or cars or delivery systems which fuel cells and other alternatives necessitate. Instead, it is entirely feasible that any growth in transportation fuel demand in the critical period a decade from now can be met by simple changes in the specification of current fuels through blending of biodiesels, methanol from natural gas, ethanol and other products. This process will deliver a transportation fuel continuum that does not form a significant part of any national energy policy outside Brazil, a country which has plainly demonstrated what is possible for many years. For politicians, these policy options are profitable in terms of balance of payments savings, employment and energy security. For investors, non-crude oil transportation fuels are likely to enjoy long-term demand growth, controllable political risk, large volumes and an opportunity to break into a market until now the exclusive domain of large integrated oil companies.

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