Thursday, February 10, 2005

An interesting exchange with the Petroleum Exploration Association of New Zealand.

The press release
Booming Oil & Gas Ind. Seeks Level Playing Field on the 2nd February 2005 in Scoop prompted me to ask further questions of Petroleum Exploration Association of New Zealand.

PEANZ claimed that New Zealand could become self-sufficient in regard to it's production of oil. I asked the question what kind of investment would required to ensure this. What follows is Mike Patricks reponse for Donald Morgan, Chairman. And my subsequent response to Mike.

In order for NZ to become self-sufficient in oil supplies, you’re looking at approximately 5M tonnes per year – and we currently produce 1M locally. Can NZ have the reserves to meet this level of indigenous production? Yes, the industry and its scientific backup believe so. The costs to obtain this level of production is impossible to predict because it depends entirely upon whether the new reserves are onshore or offshore, if the latter how far offshore, how close to infrastructure, etc etc. Certainly large though.

Should not this money be preparing for the future oil supply shortfall? Hmm, will there be one in our lifetimes? Or our children’s? The world is not running out of oil, it’s running out of cheap oil – as price rises, technology gains and economics means that a lot of oil in the ground currently uneconomic to extract (and not booked in formal reserves figures) becomes economic to extract.

This is how, strange as it seems, that some fields can increase reserves after many years of pumping – the economic factor! Yes, the industry believes that one day world demand will exceed physical supply, but it also believes that economics will play the larger role in the shift to other forms of fuel before that time, with marine and aviation being the last ‘kids off the block” – to quote Sheik Yermani, former OPEC head, “the stone age didn’t end because we ran out of stones, and the oil era will not end because we run out of oil” – ie other technologies and fuels will become more economic and hence oil demand will drop to about 30% or so of its current levels (that’s the level required for the plastics in your computer and a lot of the pharmaceuticals you and others take, for fibres and other oil-derived chemicals)

To which I replied...

Firstly thank you for the response but what I really wanted to know however was what kind of investment was required for NZ to become self-sufficient.

Interestingly if the "costs to obtain this level of production are impossible to predict" as you say this indicates to me that it is possible (if not probable) that the costs could in fact exceed the returns in terms of the current NPV of oil. Of course this would be a ridiculous scenario. Not quite as ridiculous as it sounds. I am sure you are aware that the total world discovery of oil in 2004 was about 7Gb, 2Gb located in deep water finds. Less than half of this discovery was fields with reserves greater than 100mb. Interestingly however the cost of the exploration alone (let alone development) exceeded the net present value of the discoveries in absolute terms.

Obviously this bodes well for those speculating on oil futures markets. Just today the IEA warned that "greater-than-expected demand and disappointing world production growth could strain world supplies". (Reuters). The IEA have revised their demand growth figures upwards and their discovery figures downward - how long can these adjustments continue before demand supplants supply?

Actually you are wrong, the world is running out of oil, it began running out the day the first barrel was extracted. What is at issue is the timing. What is more important however is that we are approaching (if not already at) the end of the first half of global oil production. The second half will of course be characterised by a gradual decline as we try harder and harder to squeeze out the remnants. Most Saudi oil already is cut with about 30% artifact seawater. This is no secret.

I've never really been able to fathom the claim "the stone age didn't end because we ran out of stone..." Remind yourself that the transition from tools such as axes and arrowheads made of stone to more effective weapons made from iron and bronze occurred over several centuries - the transition was about moving to something more effective than stone. Yet we are looking to transition a planet of 8 billion people, the agricultural systems that feed us - a global economy based on cheap oil technologies to one that is dependant on some other yet to be developed technology. All this must occur within a few short decades. Your argument that the "oil age won't end because we run out of oil" presumes by the analogy that some other more efficient alternative will be found such that endless economic growth can continue.

I'm not sure how you come up with the argument that oil demand will drop to about 30% of it's current level??? What will take it's place? Rather than dropping in demand oil demand per capita in NZ has grown steadily since the 70s. At what price per barrel do you expect oil demand to begin dropping, where and what is the infrastructure to replace the 70% - will this just magically appear overnight, or the day structural supply deficits become self-evident? If you want to replace oil with somethink like say biodesiel what energy are you going to use to cultivate, harvest and process the biomass. If you want to replace it with hydrogen where will that come from? We can barely keep Auckland running on electricity without everyone plugging their hybrids in for a recharge every night. You have to follow the energy equation from the beginning to the end. Technology or capital doesn't create energy Mike.

Anyway NZ will become 100% self-sufficient in regards to oil supply so we won't need the alternatives right?

I wish you luck in your venture Mike - excuse my brashness but I think your dreaming. Remind yourself of Thomas Khuns observation - "but there are always some men who cling to one or other of the older views, and they are simply read out of the profession, which thereafter ignores their work."


No comments: