Fossil fuel will be civilization’s engine for long

There are voices, and influential ones, emphasizing on absolute independence and moving away from the Middle Eastern oil. There are others talking of environmental considerations and the necessity of switching away from fossil fuel to alternatives. At the same time, the echo of ‘Peak Oil’ fails to die down. This all is despite the fact that most now acknowledge that the world needs fossil fuel, and in abundance, for many more decades to come. This uncertainty now is a cause of concern to all.

“Uncertainties pose massive investment risks to OPEC members,” the Organization of Petroleum Exporting Countries’ research division director, Hasan Qabazard, told the 18th Middle East Petroleum and Gas Conference in Kuwait.

Qabazard said uncertainty about future oil demand puts the producers in a dilemma about investing tens of billions of dollars for production capacity increases to meet potential future rises in demand.

The future demand scenarios envisage sharp fluctuations, with demand for OPEC output estimated at between 29 million barrels per day (bpd) and 36 million bpd by 2020 depending on the oil market, Qabazard said. “This would mean OPEC has to spend between $180 billion and $430 billion depending on growth in demand, a staggering difference of $250 billion,” he said.

Demand has already peaked in western, industrialized countries — everyone from IEA to OPEC — now agree. This too is a significant development, with a lot of implications to the industry. The concept of peak demand has now apparently crept into the industry mainstream. The drop in global oil use last year caused by the economic slow down, coupled with efforts to combat climate change and the efficient use of oil are starting to hurt the industry psyche.

With peak demand a reality investment casualties are coming to the fore, something one can’t help noticing. Projects that appeared interesting earlier, while demand security was not that big an issue, are no more attractive to the investors.

Earlier this year, ConocoPhillips announced opting out of the Yanbu refinery project that was to be built jointly with Saudi Aramco to process heavy crude. ConocoPhillips’ decision is being seen by many as the direct casualty of current market dynamics with dwindling crude demand and fast approaching peak demand.

International interest in the export-oriented Jazan refinery also appear faded in the meantime, resulting in the handing over of the entire project to Aramco for execution.

At the same time, the Manifa field development that could have added 900,000 bpd of heavy crude has also been delayed by at least a couple of years because of the emerging scenario.

Implementation of a number of developmental oil projects already planned are lagging behind their original schedule, either due to a lack of funding or question marks about the very feasibility of such projects. OPEC member states had planned to undertake around 120 projects until 2013 in the upstream “exploration and production” area at costs exceeding $120 billion, but it is estimated that 70 percent of these projects are not proceeding as planned.

The WEO ’09 pointed out that investment in upstream oil and gas was severely cut by over $90 billion last year as compared to 2008. This is despite the fact the energy is a costly affair. It requires huge investments and project gestation periods are usually long enough. In case the required investments are not made in the sector, the capacity of the industry to fill the gap would become a major sword dangling over the global demand-supply picture.

This is despite the fact that there is a growing concern within the energy fraternity that the world needs more energy from fossil fuel in the months and years to come so as to provide energy and hence power to the two billion plus people on the globe who currently do not have access to energy at this stage.

This is a staggering task at hand. According to some estimates, the energy sector requires trillions of dollars of investments so as to be ale to meet the challenge. Hence, in its previous World Energy Outlook, released late last year, the IEA called for an energy revolution, underlining that up to 2030, the cumulative upstream investments requirements for the industry were to be around $2.3 trillion (in 2008 dollar terms).

“The biggest challenge will be to ensure there is funding to back this energy transformation, with substantial support for developing countries,” said Nobuo Tanaka, executive director of IEA. “In 2020, the energy sector in non-OECD countries would need to make $200 billion of extra investments in clean power, energy efficiency measures in industry and buildings and next-generation hybrid and electric vehicles,” he said.

“Every year of delay adds an extra $500 billion to the investment needed between 2010 and 2030 in the energy sector,” he added.

Saudi Arabia, the global energy gas station, continues to be on alert. However, the question remains for how long? Aramco does not seem to be lowering the guard as yet. The world’s largest integrated oil company intends to directly spend approximately $90 billion over the next five years on increasing production capacity. An additional roughly $80 billion is anticipated to be spent on joint refining and marketing projects. This is despite the fact that the company has already spent over $62 billion over the past five years on increasing crude production capacity to the current 12.5 million bpd.

Saudi Aramco planned to drill at least 300 development wells on and offshore and 48 exploratory wells in 2010, Zuhair Al-Hussain, vice president for drilling and workover, was quoted as saying earlier this year. “We are proceeding with our development and exploration program, (and) this year we are going to drill 48 exploration wells and 300 plus development wells,” he told Reuters.

The numbers of rigs in operation are often regarded as a fair barometer of ongoing drilling activity. Aramco also confirmed then that it would maintain the level of rigs it is now operating at 96, of which 17 are for exploration and the rest for development wells. However, the interesting point to notice was that the focus is shifting. In past 70 percent rigs used to be for oil and 30 percent for gas. But the divide is now even and the emphasis seems on gas.

Khaled Al-Falih, the CEO of Aramco, told the World Energy Congress in Montreal last month that Aramco was also endeavoring to develop Shale gas in the Kingdom. With almost 4.5 million bpd capacity mothballed, the level of activity in the oil sector has to be low, one could easily deduce.

However, most now agree that the unrealistic drift or push toward an immediate transition away from fossil fuel is hampering investments in the energy sector. This very prospect is chilling to say the least. Despite all the noise, the fact remains that fossil fuel would continue to drive this civilization for many more decades to come. Investment in the sector is essential to continue the forward march of the world. The unwarranted noises all around are making this task of fueling the future difficult, if not impossible.

ArabNews