Running On Empty

The Australian
Thursday, 24 Oct 1996
page 27

The world still has plenty of oil, but extracting it is becoming increasingly expensive.
JOHN MACLEAY reports.

ALL numbers are wrong - that much we know. The question is: "by how much?" ask international petroleum geologists Dr Colin Campbell and Dr Jean Laherrere at the beginning of their landmark, but controversial, study of the world's oil supply.

In a report for oil industry analysts Petroconsultants, the two turn the conventional view about the continuing availability of cheap oil on its head, drawing conclusions that market conditions are fast approaching for another oil price shock similar to the two in the 1970s that played havoc with the world economy.

Unlike both industry and government forecasts, the data in the Swiss-headquartered Petroconsultants' report brings forward the timing of the peak in world oil production by several decades, from the middle of the next century to as soon as 2000. Campbell and Laherrere forecast a sharp decline in the supply of cheap-to-extract crude oil thereafter.

"No-one is saying that we are about to run out of oil, although I think journalists often jump at such a headline. What the evidence suggests is that conventional oil production is about to peak," says 65-year-oldCampbell from France, where he now lives in semi-retirement.

He says that with OPEC's share of world oil production climbing back to the 30 per cent level, where during the 1970s it was able to control the global market, the economics - although maybe not the immediate politics are being created for at least a doubling or tripling of oil prices in the next decade as world production begins to decline and OPEC takes up the shortfall from non-OPEC producers.

Similar concerns about oil depletion and growing supply dependence from the politically unstable Middle East are now being discussed by organisations such as the US Department of Energy and by political leaders such as Indonesia's President Suharto.

US Department of Energy deputy assistant secretary Dr Joseph Romm was quoted in a news report last January as saying: "It's pretty clear there's going to be another oil crisis some time. I would say in the next 10 years."

Oil imports already account for 52 per cent of US consumption.

Just this month at the annual congress of the Indonesian Petroleum Association, Suharto urged State-owned oil company Pertamina to step up its efforts to find new reserves and expand into geothermal energy, as experts warned that Indonesia could turn from the region's biggest exporter of oil into a net importer by the turn of the century.

Campbell, who has worked as an executive for oil majors such as BP and Texaco, says it is unassailable logic that peak discovery is followed, after a time lag, by peak production. He says the discovery of new oilfields peaked around 1965. Few, if any, large fields have been found since then.

Campbell also draws a clear distinction between conventional oil - the crude oil that costs mostly between $US2 to $US5 and up to $US15 a barrel to get out of the ground - and dearer-to-produce non-conventional oil, usually sourced from shale, very small accumulations, deep-water production and enhanced recovery techniques.

Conventional oil, which has supplied the vast majority of world production, will continue to do so for the next 20 years or so until the Middle East fields begin to decline. It has a bell-shaped production curve and will soon peak, while non-conventional oil has a production curve that rises very slowly to a long, low plateau. Campbell says the restraints on production are not the amount of resource but the sheer scale and expense of producing oil from more non-conventional sources.

While the oil industry takes issue with the interpretation of Campbell's and Laherrere's report, Petroconsultants has as its clients virtually all the oil majors. Its greatest asset is a 50-year-old database of all the world's oilfields. Petroconsultants, which is an authority on petroleum reserves, production and exploration, explains that the world has been pretty much fully explored for cheap oil.

At the time of the first oil shock in late 1973, the world had consumed 250 billion barrels of oil out of a total estimated global reserves of about1800 billion barrels. By 1995, it had consumed 800 billion barrels, with consumption running at 25 billion barrels a year and only about 7 billion barrels a year being discovered in new fields.

"The cheap-to-get-at stuff, if you like, falls into the first part of the bell curve and after production peaks it gets more costly to extract. That is why it's only economic ever to get out of a field about 40 per cent to60 per cent to the total amount of resource," says Campbell.

However, while Robert Mabro, director of the British-based Oxford Energy Centre, agrees with Petroconsultants' findings that the world has now been fully explored for new sources of cheap oil, he says Campbell and Laherrere ignore the role of technology in increasing the yields from existing fields, which pushes out the timing when production eventually peaks.

Mabro says additions to existing reserves will come from better methods of extracting the remaining oil.

Peter Cochrane, acting chief executive of the local peak body, the Australian Petroleum Production & Exploration Association, says that in1970 Australian production was forecast to have 14 years left to depletion. Since then new discoveries and a near revolution in extraction methods have pushed the timing for depletion out by another 43 years from 1995.

Cochrane points to a study of world supply by BP Energy which indicates that the ratio of global production to supply is currently 35 years before depletion, although that ratio can change dramatically depending on future changes to consumption patterns and production.

Cochrane says that it is inevitable that one day oil will run out but he estimates it will not occur until at least the middle decades of the 21st century.

Not surprisingly, Cochrane is highly optimistic that the industry will discover new prospective fields and that improvements, particularly to deepwater drilling, will stave off the eventual oil "crunch".

But Brian Fleay, a former Perth engineer and now associate of Murdoch University's Institute for Science and Technology Policy, says that since 1980 three-quarters of all additions to existing reserves have come from revisions to existing fields and not new discoveries. Fleay takes issue with the oil industry's assumption that technology will come to the rescue in helping to better the yield from existing fields.

"Ultimately, there comes a point where diminishing returns set in and, I think, most of the improvements in getting higher yields have already occurred in those fields where it's easy enough to do over the past 15years," he says.

Fleay, convenor of the West Australian Greens' Economic Policy Working Group, draws heavily on the data provided by Petroconsultants in his book, The Decline Of The Age Of Oil, subtitled Petrol Politics: Australia's Road Ahead (which has been endorsed by Campbell).

In fact, Fleay's Green credentials shine strongly in the book. He explains that without cheap oil, economic globalisation would come to a shuddering halt and many of the private tollways either proposed or being built would become uneconomic, especially if the price of crude oil was to double or triple - as Campbell believes it will do once the crunch approaches.

Fleay's economic heresy extends to questioning whether oil from coal and other sources will ever come to the rescue.

At some point, he says, the amount of energy needed to extract oil from a field or an alternative source exceeds the energy value of the oil. He calls this balance the energy/profit ratio.

Fleay bases the ratio on the work of two ecologists, Howard Odum and Robert Costanza, who found that from an energy perspective all economic activity is ultimately driven by energy flows from nature. This is unlike neo-classical theory, where value is founded primarily in human relationships through exchanges in the market.

Fleay says Odum's and Costanza's theories do not displace conventional economics, but rather integrate them within the proper environmental context.