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When oil peaks ... - Asia Times - Hong Kong
Fertilizer, DVDs, rubber, cheap flights, plastics and metals. None of these things have anything in common, right? Think again. An ingredient in all of them, in one form or another, is oil.
Oil is the precious primer of the world economic engine, making it hum. Oil provides 40% of the world's energy needs, and nearly 90% of all transportation. It's also a building block for many products and goods. Cut supplies of this natural resource and life as we know it could change.
But while some experts say the world runs no risk of running out of oil, others disagree. Sounding the alarm is the Association for the Study of Peak Oil and Gas. Its president is Kjell Aleklett, a physics professor at Sweden's Upsalla University.
"[During] the next 30 years we will find more than 150, maybe 200, but probably not, but 150 billion barrels of oil is roughly what you're going to find," Aleklett said. "And during the same period, we will consume 1,000 [billion barrels of oil]. So that means we are now digging deep into the reserves we have at the moment."
Aleklett is among a group of international experts - ex-oil executives and geologists - who believe there is less oil percolating under the ground than the oil industry acknowledges. They say the world has burned up nearly half of all its oil - an estimated 900 billion barrels of crude.
In industry jargon, that halfway point is the "peak", after which reserves no longer rise but drop. No one denies this will happen eventually. After all, oil is a finite resource. But these oil skeptics - so-called "peak" oil analysts - say the "peak" is coming sooner rather than later, maybe even in 2008. They paint a gloomy picture: falling oil supplies plus rising demand will equal shortages - and perhaps a rising risk of war.
Mainstream experts, however, dismiss such talk as scaremongering. They say predictions about the end of petroleum have been made since shortly after the first commercial oil rig went up in western Pennsylvania back in 1859. The reality, they say, is that supplies are growing, with more oil coming out of Iraq, Russia, the Caspian Sea and elsewhere.
And if supplies dip and prices rise, these experts say that will spur the industry to explore for more. Plus, breakthroughs in technology will make it easier to extract oil hard to get at now, such as the petroleum locked in sands in Canada.
Michael Lynch, a critic of the peak oil movement, said the movement's guru, geologist Colin Campbell, has a long record of making inaccurate predictions. "The people who predict peak oil have been predicting it any day now for 15 years," Lynch said. "Like Colin Campbell said in '89 that this is the peak right now, in '91 he said the peak is next year, and in '95 he said it's in '97 and so forth. I've generally been predicting continued rise [in oil supplies] since I started working on this; really making forecasts in the late '80s. I think over the next 30 years you won't see a peak unless it's from the demand side."
But with oil breaking the US$50-a-barrel barrier in October, and amid other concerns, the peak oil crowd is grabbing more attention. One of their most startling claims is the following: six barrels of oil are now used for every new barrel discovered. Major oil finds - that is, more than 500 million barrels - peaked in 1964. In 2000, there were 13 such discoveries; in 2001, six; in 2002, two; and in 2003, zero - the first time that had ever happened.
The "peak" oil analysts also say oil-industry investment patterns seem to indicate that there isn't much oil left to discover.
In 2004, the Financial Times quoted a study by Scottish energy consultant Wood Mackenzie showing that major oil companies had invested $35 billion to develop existing oilfields in 1998. Five years later in 2003, the amount was $50 billion, a record, according to the Mackenzie study. During the same time period, spending on oil exploration dropped from $11 billion to $8 billion. Peak oil analysts contend that the oil companies were putting their money where the oil is - and that's not oil exploration.
Analyst Lynch refuted that claim. Exploration is down, he said, because companies are drilling even more oil from existing fields. He said there are other factors at play as well. "When you look at oil discoveries and production, these are partly influenced by geology, but they are heavily influenced by politics, economics and infrastructure, and things like that," Lynch said. "So they [the peak oil people] are mistakenly assuming that what they're seeing is a lack of oil. In other words, geology is determining it, when in reality what's happened is that people in the Middle East cut back drilling because they had a huge surplus of oil and they nationalized their operations in the '70s and so forth."
Saudi Arabia holds one-quarter of the world's proven oil reserves - some 260 billion barrels. But even here there are signs of field depletion. No major fields have been discovered since 1970.
Aquifers are being drained to pump oil out from deeper and deeper in the ground, a sign that the easier and cheaper-to-drill oil near the surface is gone or going. The Saudis, and the world's biggest oilfield, Ghawar - a 500-kilometer-long sliver of land near the Persian Gulf - are not as robust as they once were.
Mathew Simmons, an energy investment banker and onetime adviser to US President George W Bush, said no one really knows how much oil the Saudis have. The state-owned oil company Saudi Aramco has not provided production data for more than two decades. But Simmons noted that the Saudis have been talking about the risk of depleting their own reserves since the 1970s.
"What I find interesting is that there clearly has been a running debate going on within the ranks of Aramco going all the way back to the 1970s when Saudi Arabia had the market opportunity, or, you could argue, was forced into opening its valves faster and faster to keep global markets supplied," Simmons said. "And by 1974, when their oil production had grown from under 3 [million] to over 8 million barrels a day in a four-year period of time, there were already debates going on within Aramco as to whether they were already overproducing these fields."
On the record, Saudi Aramco officials confidently speak of increasing production in the future. But "peak oil" analysts are not so sure. After the "peak", these analysts say, oil supplies will start to drop, prices will rise and then risk of conflicts over resources will grow.
Bullish oilmen, however, still enthusiastically point to possible new discoveries in places as far-flung as Colombia and Sudan. Or the Caspian region, which has long been cited as a potential paradise of oil riches.
In 1997, the US State Department put the possible value of Caspian Sea oil at an amazing $4 trillion. One field, Kashagan in Kazakhstan, was thought to be particularly bountiful. But as Simmons explained, Kashagan - and Caspian oil - might have been more hype than reality.
"Now, there's an enormous project that got sanctioned to begin development spending in the middle of 2004 called Kashagan that is being billed by some people as the biggest oilfield found in the last 30 years," Simmons said. "Interestingly enough, three of its original partners who held collectively 30% have already bailed out."
Even oilmen admit that Caspian Sea prospects were probably overblown, although reserves there are still significant. But new discoveries often do not have a major impact on world oil supply.
"Fifty percent of all the oil we are using today is just from something like 150 oilfields, and there are something like 40,000 [oilfields] in the world," said Aleklett of Upsalla University.
But if discoveries are down and supplies dipping, demand is up. Driving it is population growth led by China, with 1.3 billion people. Buoyed by an economic boom, China has overtaken Japan as the world's second oil-consuming country after the United States.
The US Department of Energy predicts that through 2020, energy consumption in China will rise about 4.3% a year, and by at least 3% in three other large developing countries: India, Brazil and Mexico.
Aleklett and other peak oil analysts warn that meeting future demand without seriously drawing down reserves is impossible. Aleklett said China is aware that oil will be scarcer in the future and is scrambling to buy up or contract for as much oil as it can - even negotiating with Canada, America's top energy supplier.
Possible Sino-American jousting for Canadian oil could be just a glimpse of what will be a more fierce global competition for black gold. Michael T Klare, author of Resources Wars, noted that the biggest oil supplies are found in some of the most volatile regions: the Middle East, the Caucasus and Central Asia. He said major world powers won't be drawn into direct conflict there but they won't sit on the sidelines, either.
"But rather, proxy conflicts where all these countries get involved in local disputes within Kazakhstan, within Georgia, Azerbaijan, these other countries; one side favoring one party to a dispute, the other side favoring the other side to a dispute," Klare said. "So you get these big powers getting involved in local conflicts and escalating into something larger."
Klare highlighted the Caspian region. The five states that share its shores - Kazakhstan, Russia, Iran, Azerbaijan and Turkmenistan - have been haggling for years on how to divide the sea and divvy up its riches. As oil and gas become more precious, Klare said, that competition could become more intense and less compromising.
Aleklett and other peak oil analysts have argued that the West must curb its hunger for oil now to avoid problems later. He pointed out that the US has 5% of the world's population, but uses 25% of its resources.
The father of the peak oil movement, US geologist M King Hubbert, said an economic model based of infinite growth but fueled by finite natural resources is doomed. Ironically, there's also a saying from oil-rich Saudi Arabia that goes: "My father rode a camel. I drive a car. My son flies a jet airplane. His son will ride a camel."
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In Venezuela, clouds are forming over oil - International Herald Tribune
Venezuela may be increasing tension in energy markets with decisions that are confounding international oil companies, but the government there says it is merely seeking more income and new markets for its oil.
Peter Hill, chief executive of Harvest Natural Resources of Houston, which gets all its oil from Venezuela, has one view of the policies unfolding there. Harvest's stock lost a quarter of its value last week after the Venezuelan national oil company unexpectedly told it to suspend exploration efforts.
ConocoPhillips's plan to develop a new oil field in Venezuela was put on hold about two weeks ago, and Rafael Ramírez, the Venezuelan energy minister, said last week that the government would review its 33 operating agreements with oil companies from the 1990s to see if they still made sense for Venezuela.
Those delays come as officials have held talks over the last month with government-run oil companies from China, Russia and Iran.
"I'm a businessman, and I don't like to get involved in politics," Hill, whose company has operated in Venezuela for more than a decade, said in an interview Monday.
"But there's been a demonstrable change in the way things are done in Venezuela."
In Venezuela, the view is somewhat different. The government of President Hugo Chávez has said it would negotiate its disputes with Harvest and ConocoPhillips to reach agreement on production and spending. But analysts add that at a time of high crude oil prices and a shift in attention toward China, Venezuela is also trying to exert greater control over its resources and expand its range of buyers, as well as getting more lucrative deals.
Access to some of the most coveted oil reserves in the Western Hemisphere is at stake, with Venezuela exporting about 1.2 million barrels of oil a day to the United States, or nearly 15 percent of American imports. But the overtures to the Chinese, Russians and Iranians have added to worries among private oil companies that Venezuelan policies toward them are becoming increasingly unpredictable.
Concern is also rising over the possibility that Venezuela may eventually divert shipments from the United States, which receives more than half of the country's total production. The Venezuelans say they still consider the United States their principal market, adding that only new production would be moved to China.
All this concern has been acutely felt in Houston in recent days.
Shares in Harvest, which produces about 30,000 barrels of oil a day in Venezuela, have plunged almost 30 percent since it said that Petróleos de Venezuela, the government-controlled oil company, had told it to effectively cut its production by one-third.
"I'm not able to read the mind of the Venezuelan government," said Hill, who added that officials from the Venezuelan Energy Ministry had signaled they were open to negotiations on Harvest's activities in the country.
He said he did not know why the government oil company "would want to restrict investment and production."
"The interface for communication with the government is becoming much cloudier to read," Hill added.
Investors are focusing on the Venezuelan operations of ConocoPhillips, one of the largest international energy companies operating there, after its $480 million plan to develop an oil field off the eastern coast was put on hold this month amid feuding with Petróleos de Venezuela over the project's terms. ConocoPhillips gets about 7 percent of its worldwide production from Venezuela. The Dow Jones news wire quoted Ramírez as saying Monday that the government was close to an agreement with the company.
Paul Sankey, an analyst at Deutsche Bank, wrote in a note to investors last week that "we are extremely concerned about what seems to be an escalating situation in Venezuela." He recommended reducing holdings of ConocoPhillips shares. Sankey said that American companies in Venezuela, including ConocoPhillips, Harvest and ChevronTexaco were the "main potential losers from the unpredictable situation."
Shares of ConocoPhillips, based in Houston, fell more than 3 percent late last week amid greater scrutiny of its differences with Petróleos de Venezuela but rebounded 1.3 percent on Monday. A spokeswoman for the company declined to comment on its relations with the Venezuelan company.
Higher oil prices, which increased the flow of hard currency to Venezuela's treasury, appear to have emboldened the dealings of Chávez's leftist government with foreign energy companies, as the rise in oil revenue offset the effects of declining production.
Output fell to an estimated 2.7 million barrels a day from nearly 3.5 million barrels a day in the late 1990s, after strife in the state oil company resulted in a purge of employees, many of them virulently anti-Chávez. Venezuela's output is about 400,000 barrels a day short of its OPEC production quota of 3.11 million barrels a day, according to the International Energy Agency.
But even as Venezuelan oil production has declined over all, foreign companies have contributed more of the output, accounting for roughly 1.2 million barrels a day - a result of the opening of the Venezuelan energy industry to greater foreign investment by previous governments in the 1990s. With oil prices and demand high, Chávez appears to be seizing the moment to get more favorable contracts from the oil companies and greater control of his oil resources.
"I tend to believe that these disputes have to do the government wanting a bigger share of the pie," said Roger Tissot, director for markets and countries at PFC Energy, a consulting group in Washington. He added that "in the past, they have been notoriously clumsy in asking for it."
But there is growing concern that oil production in Venezuela, which has the largest reserves in Latin America, could decline further if exploration ventures with international companies were suspended.
That, in turn, could restrict global energy supplies and push prices even higher, producing an even larger windfall for Chávez's government.
"This type of strategy is fine as long as oil remains high," said Antonio Szabo, a former executive at Petróleos de Venezuela, who now runs an energy and software consulting company in Houston.
"But if prices retreat, they'll have grave difficulty in fulfilling the promises that are now being made.
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China's Russian oil courtship - The Straits Times - Singapore
The most interesting diplomatic visits are those which the concerned parties would like to go unnoticed. This was certainly the case with the trip made by Russian Energy Minister Viktor Khristenko to China last week.
Both sides kept mum, and the sensitivity attached to the visit was understandable as it concerned one of the most critical developments in Asia: competition between China and Japan for Russia's energy resources. But all the indications are that, far from clarifying matters, Khristenko's mission merely muddied the waters even further. Russia now looks set to continue enjoying the courtship of both China and Japan.
Last year alone, China's energy consumption jumped by an estimated 12 percent as a result of the country's phenomenal economic growth. From fairly modest beginnings, the Chinese are now the biggest consumers of oil after the United States and may yet overtake the world's biggest economy. Much of China's supplies currently come from unpredictable sources and are expensive to transport. Diversifying its sources of energy has now become one of China's most important preoccupations.
The Chinese are wooing Middle Eastern governments and - to the increasing irritation of the United States - they are investing heavily in Iran and Sudan. Beijing also justifies the rapid expansion of its navy by pointing to a need to protect its sea transportation routes. One way or another, the growing dependency on oil is rapidly transforming the country's foreign and military policies. China is becoming a true global power not so much as a result of predetermined policy but more out of necessity.
Nowhere is this clearer than in its relations with Russia.
Having dismissed the Russians as a spent force, an old superpower in decline which, apart from weapons, has little to offer, the Chinese have suddenly shifted to assiduously courting Moscow. Early last year, China National Petroleum Corporation, a wholly owned government outfit which accounts for 79 percent of domestic oil supplies, offered to take a major stake in Russia's energy industry.
The strategy made perfect sense. With vast oil and natural gas resources, Russia, already the world's single largest oil supplier, is a perfect match for its southern neighbor which looks set to soon become the world's biggest consumer. The Chinese understood only too well that Russia could not divert its supplies overnight, even if it wanted.
Since the 1960s, the bulk of Russian oil and gas has gone to Europe, Moscow's main energy market. And although there are vast proven reserves in eastern Siberia - much closer to the Chinese border - to exploit them will require a huge investment, particularly in new pipelines.
Beijing was prepared to give precisely such a commitment. During talks in Moscow last September, Chinese Prime Minister Wen Jiabao offered no less than $12 billion in financial loans and grants. The Russians smiled politely but offered no response.Meanwhile, every Chinese effort to buy a stake in a Russian oil company has been rebuffed or obstructed through bureaucratic measures. And, to make matters worse, the Russians let it be known that, while considering the construction of a pipeline to China, they were also pondering a Japanese offer to construct an alternative pipeline to the Sea of Japan.
During the last few weeks, though, everything appeared to be changing. Having re-nationalized Yukos, Russia's second-largest oil company, President Vladimir Putin suddenly announced that he was considering inviting the Chinese to take a stake in its assets. Moscow even went a step further by specifying that China National Petroleum Corporation may be allowed to take a 20 percent stake in the old assets of Yukos. No wonder then that Khristenko was received with open arms in China last week.
But has there been a major breakthrough for Beijing? Hardly. It's just a continuation of the old Russian game with a few new twists. Russia clearly has an immediate political interest in suggesting that China could invest in its oil industry. Western shareholders who lost money after the state snatched Yukos back are now pursuing their claims through U.S. courts. By playing the China card, the Russians are maneuvering to deter the United States from pushing the legal process too far.
Secondly, Putin, who had previously opted for the pipeline to Japan rather than China, wanted to avoid upsetting Beijing any further. So touting the possibility of future Chinese investments in Russia's oil industry without making any specific commitment represents a clever exercise in political damage control.
But, when such immediate needs dissipate, the chances are that Moscow will remain opposed to forging deeper energy partnerships with China. The reasons for this reluctance, which baffle Beijing, are deeply ingrained in Russia's history and politics.
Siberia is sparsely populated, and for years the Russians have expressed fears for their territory because of what they claim is increasing illegal migration from neighboring China into the province. Just about the last thing any Russian leader would consider is granting China either exploration rights or a financial stake in Siberian oil fields.
Putin has been adamant about retaining absolute government control over his country's pipelines. It is considered a matter of national security. The Chinese offers to build new pipelines will therefore continue to fall on deaf ears.
Though the Russians are only too aware of China's growing importance, there are greater political considerations. Germany, Europe's pivotal state, is increasingly dependent on Russian energy supplies. This dependency has given Moscow a unique influence over European affairs, something which an energy link with China cannot offer. And oil deliveries to Japan, as well as the possibility of future direct sales to the United States, are more alluring than China.
In short, the strategic benefits of China are still considered too slender, if compared to the political advantages Russia derives from its existing customers. It's certain that China will get a slice of Russia's natural gas industry, the energy resource of the future. But the Chinese will receive less than a fifth of its eventual output.
So the China-Russia courtship will continue, but it seems that China is destined to remain the unfulfilled partner in the relationship.
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