Unsolved global oil supply and demand equation poses risks: Dr Mosongo Moukwa

Soon, the world will not be able to produce all the oil it needs as demand is continually rising while supply is falling. According to International Energy Agency (IEA), oil consumption will rise by 56% between now and 2040, with China and India, both responsible for half of this increase in consumption.
 
A study by Pickering, Holt &Co, an investment bank focusing on energy, estimates that more than 50 billion barrels of oil and gas have been consumed in 2013 against only 20 billion barrels of conventional oil discovered. The study has examined 400 exploration wells and has concluded that companies have found less oil than anticipated, despite heavy investments in capital and technology. Deep-sea exploration, where more hydrocarbons are being discovered at about 1500 meters, is becoming ever more important.
 
None of the discoveries made in 2013 exceeded one billion barrels of oil equivalent. The largest one was made by the Italian ENI off the coast of Mozambique, with two deposits of 700 million barrels, followed by the Lontra (Angola) by the American Cobalt (900 million) and that of a field in Malaysia by Newfield Exploration (850 million). Others have been unsuccessful, such as in Ethiopia and Cote d’Ivoire by British Tullow Oil. Oil explorations by Shell and Total off the coast of French Guyana has produced very little.
 
According to the French Institute of Petroleum (IFPEN), reserves discoveries between 2008 and 2012, including deposits in hard places to operate, cover only 40% of global consumption of conventional oil. This is far from offsetting the decline of mature fields. According to the IEA, who studied the profile of 1600 fields having passed their peak production, production has fallen to an average rate of 6% per annum.
 
Richard Miller, a former BP geologist, and Steve R Sorrels, a co director of the Sussex Energy Group at the University of Sussex (UK), have stated that squeezing more oil out of older reserves and exploring new ones in the deep seas will not be sufficient to meet the production levels required to address the demand. They have estimated that we would need to bring on stream new productions equivalent to a minimum of 3 million barrels per day to compensate for declining crude oil production. This is equivalent to a New Saudi Arabia every 3 to 4 years in order to meet the demand. The oil peak is the result of declining production rates, not declining reserves.
 
Professor David J Murphy of Northern Illinois University, an expert in the role of energy in economic growth, has stated that the Energy Return on Investment (EROI) for global oil and gas production is about 15 and declining. EROI is the amount of energy produced compared to the amount of energy invested to get and use it. EROI of oil and gas production is 11 for the US and is also declining. It is generally less than 10 for unconventional oil and biofuels. As the EROI decreases, energy prices increase. The dependence on shale could worsen the decline rates in the long run, since these wells decline extremely fast.
 
The current rise in oil production in North America, one million barrel a day, has helped offset any outages coming from other oil producer countries and has helped the market remain in balance. Looking out a few years, global demand for oil will continue to increase because of rising prosperity in emerging economies. Supply, however, will still remain constrained.
 
Last year, IEA predicted that over the 2012-18 period, the largest contributors of new supplies to world markets, after the US and Canada, would be Iraq and Brazil. Iraq is expected to contribute to 45% of global oil growth between now and the end of the decade.  Technical challenges seem insurmountable in Brazil, and Iraq has exploded to chaos again, implying that geopolitical factors are the wild cards in the oil equation and they can outdistance the “market only” factors.
 
The price of oil has continuously risen since 2004, where it was at $30. Then, it spiked to $150 to come down to a floor of $100 per barrel in 2008. Today the oil price is at about $110 per barrel and the markets have been relatively calm, as investors have assumed that Baghdad will not fall. But, the risk is to the upside. While the price of oil has been high, exploration costs have also taken the same trajectory. According to Goldman Sachs, oil companies would need the price of oil to be at $120 per barrel in order for them to balance their own budgets.
 
The relationship between economic growth and energy consumption is straightforward: the former is a function of the latter. With national economies around the world forced to pay more than $120 for every barrel of oil consumed, a critical question must be asked: what happens when the world’s most important source of energy becomes unaffordable? 
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The author is an Independent Consultant based in Chapel Hill, NC, USA, and was recently Vice President - Technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association. Email: mosongo@mosongomoukwa.com