Source
In a earlier diary, I commented on the first half of the recent survey of oil which came out in the last edition of The Economist. I described that half as a very well informed take the oil market and the biggest players, the oil majors. In this second part , I will critique the other half, i.e. their views on peak oil and the future of alternative energies, which reflects the deliberately rosy official view of corporate America, which still encourages monstruosities like the one in the picture.
In a third part (which can now be found here), I also comment on their article in the same edition about the recent Energy bill (see the link for the above picture - this one is freely accessible)
The Economist survey comprises 6 articles; I discussed the first 3 in the
previous diary and will continue now with the last three::
Oil in troubled waters (Intro article)
Not so shocking (about oil prices)
Global or National (about the threats to the oil majors)
The incredible shrinking companies (about how oil reserves are booked)
The bottomless beer mug (about peak oil)
Consider the alternatives (the conclusion - there will be alternatives).
4 The incredible shrinking companies
We left off this table, which I think is fundamental to the understanding of the oil industry:
The reserves of what we call the oil majors are actually tiny compared to those held by national oil companies of a number of countries, and are actually behind the reserves of the semi-private Russian oil&gas companies (note in that respect that Gazprom holds one quarter of the world reserves of natural gas, so the number for them is incorrect - they should be above 100,000 mboe and thus in the top 5 of this list).
This fourth article focuses on the recent reserve reevaluations that have occurred in the past year, most publicly in the case of Shell, which had to reevaluate its reserves downwards significantly.
The article essentially describes how the SEC requirements, which drive the reserve disclosures of the (quoted) Western oil majors, are imperfect and cause arbitrary changes in reserve bookings:
For example, oil companies are required to recalculate the viability of their reserves each year, using the oil price at year-end. Never mind that no oilman plans his investments using that arbitrary price. In 2004, the price of heavier grades of crude oil collapsed at the end of the year. Even though that proved a brief and unrepresentative blip, firms listed on American stockmarkets had to write off vast quantities of reserves on paper.
The Economist also laments about the fact that new technology (such as sophisticated seismic studies) is not taken into account, and, to their credit, that there is little transparency in how each oil company books its reserve. It suggests that the oil industry provide what the mining industry does, i.e. a public database of all fields so that independent assessments of reserves can be made. This would of course require the big reserve-holding nations to cooperate, which they have so far been unwilling to do.
Although the arguments presented by the Economist are reasonable, the article does not go into the details of the reasons why reserve estimates may be wrong or not in various countries, and sounds like the whining that comes from corporates unhappy to comply with rules that give out unpredictable results that may surprise the capital markets...
This leads us to the most interesting article of the survey, that on peak oil, whose title says it all:
5. A bottomless bear mug
The Economist does not believe in peak oil. They do mention it, and provide some links to serious websites about peakoil (such as http://www.peakoil.net and http://www.hubbertpeak.com/), but the whole article is meant to contradict them.
I'll give you a taste of their arguments:
[T]his argument is wrong both on a philosophical and a practical level. The philosophical problem, says Michael Lynch of EnergySEER, a consultancy, is that the pessimists treat the level of recoverable oil resources as fixed--like the amount of beer in that mug. In fact, expert estimates on the ultimate recoverable resource base have consistently grown over the past few decades, even though the world has been guzzling oil as if there was no tomorrow (see chart 5).
Peter Odell of Rotterdam's Erasmus University points out that "since 1971, over 1,500 billion barrels have been added to reserves. Over the same 35-year period, under 800 billion barrels were consumed. One can argue for a world which has been `running into oil' rather than `out of it'."
What makes the estimates go up continuously is a combination of economics and innovation. The IEA explains the process this way: "Reserves are constantly revised in line with new discoveries, changes in prices and technological advances. These revisions invariably add to the reserve base."
A few decades ago, the average oil recovery rate from reservoirs was 20%; thanks to remarkable advances in technology, this has risen to about 35% today. But despite this improvement, two-thirds of the oil known to exist in reservoirs is still abandoned as uneconomic, leaving room for tomorrow's discoveries or innovations to lift recovery rates and magically push the global Hubbert's peak even further towards the horizon.
It is a bit sad to see the Economist use an argument which is fully covered by the peak oil analysts, i.e. the difference between total physical reserves and economically recoverable reserves. There have been significant improvements to the second category, through the use of new technology or cost savings, and it is likely that durably higher oil prives will allow to increase that number again by making previously too costly reserves economical under the new price conditions. But that misses the point that physical reserves do not change, and that the discovery rate HAS been declining.
Saying that we squeeze more of what we know we have is fine, but does not really contest peak oil, it just moves it by a few years. Focusing on the date only obfuscates the underlying reality.
(Focusing on improving recovery rates to say that we still have time to move in an orderly way to another organisation of our economy, not based on cheap energy anymore, is another point, but that's certainly NOT what the Economist is saying.)
They then focus on under-explored areas of the world, such as Russia, some of the Persian Gulf countries and ultra-deep offshore. They quote the head of exploration and production at Total, the French oil giant:
Total's Mr de Margerie points to frontiers that will be opened up by technology: "There may not be any more glamorous Ghawar fields, at least onshore, but there is tremendous opportunity if we look at `deep horizons'." He believes that there are large deposits 10,000 metres (32,800 feet) or more underground. The snag is that they are usually under very high pressure or very hot, and may be extremely acidic. But as technology improves, he thinks, "these very strange hydrocarbons" will become economic.
It is ironic in that Total is the only one of the big oil majors to have acknowledged peak oil and to have actually put a date on it - around 2025 (see a comment I wrote on Kevin Drum's blog last June about it) - and they are also one of the few to have made more actual discoveries than they produce. So Mr de Margerie is essentially saying that all the technology that they are using or expect to use will be useful for another 20 years or so at most (the Economist quotes him only as saying: "The peak will come, but we can keep the plateau for a long time with technology."
Of course, the problem is that a plateau is not good enough at times of growing demand, and it does not negate the concept of peak oil.
The Economist goes on to discuss who controls the technology that will allow to exploit more reserves, and makes the more interesting point that a lot of that technology is not controlled directly by the oil majors themselves, but by the oil serivce companies liike Schlumberger and Halliburton:
That points to the most explosive criticism levelled at the oil majors: that they no longer have the capacity to innovate. A few decades ago these firms were fiercely proud of their proprietary technologies, which they believed gave them a competitive edge. But during the 1990s most majors slashed funding in this area, leaving service firms such as Schlumberger and Halliburton to pick up the slack.
"Ten-dollar oil killed upstream research," says one executive. Ivo Bozon of McKinsey, a consultancy, reckons that the majors slashed upstream R&D spending from $3 billion in 1990 to below $2 billion in 2000 (both in current dollars). Over the same period, the service companies increased their investment in research from $1.1 billion to $1.7 billion. The sharpest cuts, adds Mr Bozon, were made by American companies.
"These guys need to explore, but they don't know how to do it any more," complains Roice Nelson of Geokinetics, which makes reservoir visualisation software for the oil industry. Mr Nelson helped found Landmark Graphics, an industry pioneer in imaging software, so his criticism stings. He notes that the industry sacked many of its best-qualified technical staff, and that relatively few college students now are going into petroleum engineering. "We'll be working till we're past 80," he sighs.
The majors now realise that this shift away from technology, once their core strength, was a mistake that has benefited three groups of rivals: the service companies, the "mini-majors", and the NOCs. Mr Lesar at Halliburton is delighted: "There's been a fundamental shift in ownership and development of technology from the majors to the service companies." The problem is that the service companies are less capable of investing for the long term, because their balance sheets tend to be weaker than the majors'. Moreover, they need their customers to adopt those technologies to make them commercially viable--but the majors have proved gun-shy.
So, a Halliburton conspiracy to keep everybody happy? Probably not (as I wrote elsewhere, Halliburton et. al. make more money from governments than from big oil), but it does point yet again to the unwillingness and/or unability of big oil to invest. This time, it was the focus on their short term balance sheet shich can be blamed. This is a more general lesson (which the Economist does not really make, celebrating instead the "independents" that take more risks and supposedly fill the gap): quarterly results make companies risk adverse and makes them limit their investments.
Again, the Economist provides some valuable perspective for the short and medium term management of the big oil companies, but provides really a really rosy vision of the long term, based on the firm belief that technology and good ol' American entrepreneurship will solve the problem.
6. Consider the alternatives
In the last section, the Economist tries to mix all issues to find a conclusion. It provides contradictory insights:
- oil use has been pretty much narrowed down to transportation in the West, but that has made that sector even more vulnerable to oil prices, not less;
- government intervention in the oil sector works (gasp! The Economist is usually like the WSJ Op-Ed pages on that topic): CAFE standards worked, pollution requirements have worked, urban planning would work, and there is a strategic rationale for governments to intervene (dependency on potentially unreliable imports)
- they indirectly underline the difficulty to reduce petroleum demand with this Chinese example:
As soon as ordinary Chinese become wealthy enough to buy a car, they happily abandon public transport. Shanghai's economic boom has been accompanied by an annual rise of 15% in the number of cars in the past few years, which explains the city's miserable traffic and smog. Officials have tried to curb this by introducing an auction system for new car permits, but have been taken aback by the demand. The price of new permits has shot up past $5,000 per car and is still rising.
In short, public transport is vitally important, but it will never dislodge the car. For the world's aspiring billions, it is the ultimate symbol of status and freedom, even if it perpetuates mankind's addiction to oil.
People are willing to pay a lot to drive, so they must be forced to pay A LOT MORE not to drive is the unstated conclusion...
The Economists then cursorily examines alternative fuels, such as biofuels (polluting and a poor or negative EROEI) and GTL (gas-to-liquids, gasoline manufactured from natural gas) and ends up with an ode to the fuel cell, and to GM's efforts in promoting it.
Strangely, they conclude by publishing this graph from Exxon which shows that alternatives will not amount to much, and yet concluding as follows:
Even the most powerful man in the oil patch, Saudi Arabia's Mr Naimi, seems to acknowledge that his world is changing. Five years ago, when asked about the prospects for hydrogen, he immediately replied: "Hydrocarbons will remain the fuel of choice for the 21st century." Asked the same question again recently, he reflected before replying. He had been surprised by the size of the investment the global car industry is making in fuel cells, and he was concerned about efforts to tackle climate change, which he believed would hurt oil. Most revealingly, he said that his country was now looking into carbon-sequestration technologies. Eventually he got back to the question: "Oil will still dominate for the next 30-50 years, because there are no meaningful substitutes."
Old lags in the industry have long quipped: "The stone age did not end for lack of stone, and the oil age will end long before the world runs out of oil." Nowadays that sounds less like a joke and more like a forecast.
(yeah, that's their actual final words)
So basically: don't worry, be happy, the big companies will save the day with new technology, so we won't need more oil, but there is enough oil anyway should we need it...
It's pretty disappointing, but not surprising really. As a part of the Establishment, The Economist plays a role in setting the meme for the global corporate elite. This is clearly a very professional, interesting "don't rock the boat" piece. will it be overtaken by facts quickly or will it help perpetuate out countries noxious blindness on the topic of energy?
If you think this is too severe, a final note: the only time the issue of conservation is raised, it is to bring up Dick Cheney's sentence: "Conservation may be a sign of personal virtue, but it is not a sufficient basis, all by itself, for a sound, comprehensive energy policy."
I'll do one more diary on their article on the energy bill, which is actually a lot more critical, but overall, it's still disappointing.
Remember where the oil goes: