In October 2009, Nobuo Tanaka, Executive Director of the International Energy Agency (IEA), who was presenting at the International Energy Week and at the Oil Congress held in Moscow, predicted a medium-term stabilization of global oil demand in 2010-11 at a 2007-08 level until 2014, whether World GDP growth is high or low. He also mentioned a very impressive and robust surge in Russia’s oil production for 2009 - from 10mb/d in January 2009 to over 10.2mb/d in September 2009 - that took all observers by surprise. However, the World oil supply capacity growth prospects will be curbed due to the recession and lower investments.
His comments should be contrasted with those of Addallah Jum’ad, former president and CEO of Saudi Aramco, who pretty much said that “oil is here to stay” at the April 2009 U.S. Export-Import Bank Annual Conference. There is no doubt that his opinion may be biased towards the promotion of oil but his keynote address entitled “Interdependence, Integration and Investment: Preconditions for Energy Security and Future Prosperity” stated that “the long-term drivers of energy and oil demand growth remain generally intact, despite short-term financial and economic difficulties” further adding that “future oil demand growth will be powered by two fundamental trends: global population growth and the economic expansion and rising living standards in developing nations.”
Jum’ad went on quoting data from The IEA which predicts that “by 2030, total world primary energy demand will raise by nearly 45 percent over today’s levels, and that despite improvements in the performance of alternative sources, fossil fuels will still satisfy roughly 85 percent of the planet’s expanded energy needs, with oil continuing to represent the world’s single largest source of energy.”
Need for Diversification
The conclusion that can be drawn from these two presentations is simple: no matter what, diversification of suppliers is critical as oil is here to stay and so is our dependency on it. Diversification is needed for practical reasons:
First, it makes more sense for countries like China or the US to import from neighboring or close-by countries with huge potential such as Kazakhstan or Brazil than from the distant Middle East.
Second, the suspension of gas delivery by Russia to European countries due to a payment dispute with Ukraine in January 2009 served as a dire reminder that it does not take much to bring many economies to a shrieking halt and that some countries will not hesitate to use oil as a political and economic pressure tool, even if it damages their reputation and casts a permanent and lasting doubt about their reliability. What is true for gas is true for oil.
Third, violence against the facilities and employees of oil companies such as in the Niger Delta shows how vulnerable oil supply facilities and routes are.
Fourth, the “feel good” speeches about alternative energies are losing momentum. Yes, when the barrel was at $150, everything seemed to make sense and to become financially viable from wind-powered turbines to biofuels. Then when the price of oil went down, more attention was given to the fact that biofuels are costly and have a strong ecological impact.
Similarly, clean coal is appearing to not be so clean after all as reducing CO2 emissions by using geologic sequestration is a costly technical challenge and an unproven technology over time.
Emerging New Players
The question is then: where to go and with whom to partner with? Some will argue the countries considered have questionable regimes but if it is acceptable to do business with Saudi Arabia, Venezuela or Nigeria, doing business with Kazakhstan, Libya or Turkmenistan is acceptable, too, and holding those countries to higher standards would be hypocritical. Though none of these new players are perfect, they have engaged on a path of reforms that should be acknowledged even if not always consistent or on the fast track. Several countries located in Eurasia, South America and North Africa can bring an additional output of at least 1 billion barrels per year but it will not happen overnight.
- Kazakhstan is the rising star. It is not a new player but the regular influx of foreign investment into the oil sector through joint ventures, production-sharing agreements (PSAs), and exploration/field concessions have enabled the country to multiply by 3 its oil production between 1998 and 2008. The discovery of new oil fields such as the Caspian Sea’s Kasaghan Oil Field in 2000 with estimated reserve between 9 to 16 billion barrels is good news but commercial production will not start before the end of 2012 at the earliest and the development of the initial stage will cost $38 billion according to the chief executive of Kazakhstan's state oil and gas company KazMunaiGas. Kazakhstan will have to continue fostering good relations with Russia as Russian pipelines are a vital export route for Kazakh oil and have been a bottleneck fro Kazakh exports.
- The discovery in 2007 of the Tupi deepwater field offshore of Brazil and estimated to hold the equivalent of five billion to eight billion barrels of light crude oil is making of Brazil, and of its oil company Petrobras, a future key player in South America. It is one of the largest oil finds since the Kasaghan Oil Field. In September 2009, the CEO of Petrobras stated that his company would boast crude reserves of 30 billion to 35 billion barrels within three years, thanks to huge finds in deep water off the nation's coast and that the company would maintain its $174.4 billion investment plan for 2009-2013, which was released in January. Though promising, this field will require formidable efforts to cope with major technical challenges as the field lies below over 2,000 meters of water, 1,000 meters of pre-salt, 2,000-meters of salt before reaching the oil that lies between 5,000 to 7,000 meters below sea level. Those challenges will not bring large oil volumes to world market until 2015 at the earliest.
- Another country is Libya. Years of trade sanctions have prevented foreign companies from helping develop the oil industry, and from conducting exploration to find new fields. The lifting of sanctions against Libya by the United Nations Security Council in September 2003 and the auction of oil and gas exploration licenses in January 2005 led to the quiet return of all the oil majors from the US, but also from the UK, France, Italy and Russia. According to the US Energy Information Agency, Libya holds the largest proven oil reserves in Africa, followed by Nigeria and Algeria. As of January 1, 2009, total proven oil reserves stood at 43.7 billion barrels - up from 41.5bn barrels in 2008. Though the potential is high, it is estimated that it will not be until 2015 or 2016 that Libya will reach a production of 3 million barrels per day (bpd). This number is still far away from the 3.7 million bpd produced in 1972. Production in 2008 stood at 1.8 million bpd.
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- Other countries are coming on the radar screen such as Mongolia and Tajikistan. Both countries are not seen as future leaders in the oil sector but proper funding for exploration could yield results justifying the commercial exploitation of certain fields. This would reduce the dependency of these two landlocked countries on their neighbors, as energy supplies have been a tricky issue, notably for Tajikistan. Exploration has already started in Mongolia and the country even has a Petroleum Authority under the Ministry of Mineral Resources and Energy. Estimates of recoverable oil range between 350 million barrels to a possible but unconfirmed 5 billion barrels. In August 2009 Tajikistan saw Tethys Petroleum start the appraisal of drilling operations on the Komsolmolsk field, which could contain up to 2.1 billion cubic meters of natural gas. This could be the first step towards oil exploration in Tajikistan but further investment will be needed to determine if Tajikistan has a potential of its own.
Ultimately, the emergence of new players in the energy market is a good thing but the leverage gained by having more suppliers could be offset by (i) growing demand by the time the new fields are commercially up and running, and (ii) the lack of sufficient long-term structural investment by the existing players, preventing them from significantly increasing input to respond to increasing demand in the future.
by Philip H. de Leon for Oilprice.com
