Questioning Peak Oil

27 November 2007 (Last Updated November 27th, 2007 18:30)

Economist and advisor, Duncan Clarke, shares the secrets of the corporate oil game with Ozge Ibrahim.

Questioning Peak Oil

Duncan Clarke does not believe the world is about to run out of oil. Nor does he believe that biofuels will save the planet. Instead he uses analysis of the current oil and gas climate, based on his detailed knowledge of economics and history, to offer a unique insight into the future of the global upstream market.

Ozge Ibrahim of Offshore Technology caught up with Duncan Clarke to ask him about the issues facing the upstream industry today.

"We are in a different crude price world than before and companies have had to become ultra competitive to survive."

OI: 'Peak oil' theorists claim global oil resources are fast reaching the point of decline. Is the world about to run out of oil?

DC: I don't think the world is going to run out of energy or oil and certainly not out of gas. A lot of its [peak oil's] proponents claim it will lead to a catastrophic economic period.

But in the real world there is a process of investment and expansion of frontiers and untested wells that are not mature. Ranges of fuels including biofuels are going to underpin the energy supply cycle to meet demand. There have been many theories but it's quite a complex debate which should not only just be about conventional oils but also unconventional oils.

There are also a lot of interfuel transitions between oil and gas and heavy investment in LNG (liquefied natural gas) so it depends on what point you are trying to make.

OI: The latest UN Law of the Sea Convention has opened up the possibility of exploring the seabed. How will the law affect the global industry?

DC: Under UN laws countries must apply for extension of the economic zones. On the one hand it's created a huge opening for ultra-deep-water potential and on the other hand it can cause jurisdiction issues. Arbitration requirements are also needed, which means deciding maritime boundary claims in the EEX extensions for littoral states that file applications and where there might be overlapping zones.

OI: Crude oil continues its meteoric price rise. What does this mean for the companies?

DC: We are in a different crude price world than before and companies have had to become ultra competitive to survive.

There is a very substantial upward lift in crude prices, much larger bargaining power and huge revisions of contracts and relations.

OI: Can you explain how we have found ourselves in a different crude price world. What are the effects of this?

DC: There has been a tremendous paradigm shift since the end of the last century by which I mean the shift away from Anglo-American dominance towards new influences in world politics and most importantly the world energy markets.

"Undoubtedly the offshore skills shortage has some impact
and will take some years to rectify."

Following the end of the Cold War and the new world balance of interests, competitors have entered from China, Asia, Middle East, Russia and elsewhere, with local companies on all continents and more that 30 state competitors in the upstream world.

This has been combined with resource nationalism to squeeze access and options for the Western firms.

The shift has been very fast and changed the environment: on the one hand between the national companies and on the other between the corporates.

OI: How has the marketplace changed in light of this new environment?

DC: Companies are realigning their strategies and shifting to unconventional oil, new frontiers and forming new companies and a shift in technology, which is very important.

New frontiers are found in deepwater, deserts, new countries, frontier basins and the Arctic to name a few. Greenland is a case in point. They also reflect deep gas targets and deep drilling.

OI: How are the companies reacting to these changes?

DC: International companies now have to work in more difficult environments, in places with social complications and political struggles. For example where there are protests and other social problems.

In the Niger Delta you have conflict and hostile difficulties. Bolivia for different reasons causes complications for western companies, supermajors and others.

OI: Which countries should we watch out for?

DC: Angola and Nigeria are growing significantly in oil and gas and also volume. Both countries have large reserves, high discovery success, new entrants and leasings made open and export potential.

"The big technologies being used are heavy oil, oil sands, offshore technologies and recovery technologies."

But I think opportunities for finding oil exist worldwide. Places that come to mind are the US Gulf, Venezuela and Brazil. There is also high potential in West Africa, East Africa, Columbia and Peru.

Angolan LNG will probably come on-stream in 2010–11. In Nigeria new trains are being added and greenfield plant Brass LNG and OK LNG is currently being commissioned for the future.

Also Nigeria's LNG is expanding while Sudan and Chad have been kept back from performing to maximum potential due to political struggles.

OI: How will new technologies drive the market forward?

DC: I'm not a technology expert, but if you look at what's happening, the big technologies being used are heavy oil, oil sands, and offshore and recovery technologies.

Heavily oil technologies allow the exploitation of unconventional oil and open vast reserves worldwide. EOR (enhanced oil recovery) technologies have enabled more recovery from existing and future fields while ultra-deep technologies have enabled the opening of vast tracts offshore worldwide.

OI: What about biofuels? What role will they play in the future?

DC: It's a small and relatively fast growing part of a tiny proportion of hydrocarbons. Biofuels are not going to change the basic paradigm and particularly not ones without hydrocarbons.

It will have an impact on some local areas and regional markets but I don't think that overall it is going to transform the world.

OI: Where do you see the market in ten years' time?

DC: Companies are doing pretty well overall but sometimes there are some who could do better. In general they are very quick at going into and exploring new areas.

Some supermajors are constrained by their own portfolio and they make investment choices accordingly because all super-majors have only so much capacity and firepower in capital and skills available.

OI: What else can be done in light of current restraints and how can companies overcome capacity problems?

DC: They [companies] only have so much capacity unless they engineer a corporate acquisition. They must in the first instance maximise from their existing portfolio and optimise returns, as well as seek to upgrade assets.

I think the supermajors Total, Chevron, Shell and so on will still be there investing globally. I wouldn't exclude the possibility of more consolidation between the independents and larger private companies, for example companies like ConoccoPhiliips and Burlington Resources.