Preparing for post-peak

South Africans trying to fill their cars with petrol last week will have some idea of what it would be like to live in a world of diminishing oil supply.

Though sector strikes were the reason this time, future oil price shocks, supply disruptions and shrinking economies could be the outcome of a continuing global dependence on oil, says the Association for the Study of Peak Oil SA (Aspo ).

“The world is addicted to oil,” says Aspo chairman Jeremy Wakeford. Oil accounts for 34% of total global energy and 95% of transportation fuel.

The concern about a situation where there is not enough oil to go around is known as the peak oil debate, which asks when production will peak and start to decline.

What’s in store for economies if they continue to hinge growth on this finite resource? “Peak oil is not about running out of oil, it’s about no longer being able to extract it at an increasing flow rate,” says SA National Energy Association director Chris Cooper . “We need to understand that physical constraints and thermodynamics are ultimately going to dictate what happens to our economy.”

Those who are not concerned about a diminishing oil supply say oil discoveries and production can continue to rise with global demand. The latest BP statistical review shows that oil production has increased 3% over the past year and should increase by 2,2% in 2011, indicating that oil production has not yet peaked . BP’s data, however, extends beyond conventional crude supply to the heavier oils and Canadian tar sands.

“If we’re looking at conventional oil, then we probably have peaked,” says Chris Bredenhann, PwC energy industry leader for Southern Africa. Wakeford says production of conventional oil drilled from wells in liquid form reached its plateau in 2005 (with increases and decreases within a 5% band). He says the decline in production should begin in about three years.

But the International Energy Agency (IEA), in its “2010 World Energy Outlook”, states that production of what is termed unconventional oil — oil from tar sands or made from gas, for instance — will continue to rise and start to play an increasingly important role. According to the outlook, there are two probable scenarios.

In the first, total production peaks in 2020, but not because of supply constraints. In this scenario, governments will have implemented rigorous policies designed to stop global warming from rising above 2% (which is improbable). Demand for oil therefore drops as the world shifts to alternative, low-carbon technologies and increases efficiency. And all is well.

In the more probable scenario, however, economists see production reaching a wavering plateau in 2020, but not actually peaking until 2035. Demand continues to rise and short-term price volatility is the order of the day. The agency also makes it clear that if governments do little more than what is being done, “the economic burden of oil use will grow, vulnerability to supply disruptions will increase and the global environment will suffer serious damage” .

Research on the costs to economies indicates this is where the debate should be focusing, not on physical increases in discoveries, but rather on what really matters: the economics. Answering questions such as whether we will have enough oil at affordable prices to allow for sustainable economic growth, studies and economists’ research indicates that in the long term, the answer is no and economic growth will be stifled.

Though unconventional sources of oil are several times larger than conventional ones, they are also much more expensive to extract. As the world uses up all the “easy to get” oils, like light crude, it becomes more and more expensive to extract a barrel of oil. Not only that, but it takes more energy (oil) to extract a barrel of oil (see graph).

“As resource quality declines, we are now using more energy to produce the same amount of available energy,” says Cooper. “If more and more of your GDP is being used to get energy, what happens to the rest of the economy?” If an increasing amount of energy is being used to extract energy, then less energy is available to drive the remainder of the economy.

So though critics of the peak oil scenarios argue that market forces will prevail and higher oil processing will allow production to increase, “constraints on investment mean that higher prices lead to only modest increases in production”, says the IEA.

The concept of diminishing energy returns from every unit of GDP invested must surely ring alarm bells for those who believe in infinite economic growth based on resource extraction.

The scenario s that pan out will depend on the efficacy of solutions. According to Bredenhann, SA’s solutions lie in hydrocarbons (gas) and renewable energy, and efficiency.

Gas could substitute petrol or diesel by either using Sasol and PetroSA’s gas-to- liquids technologies, or compressed natural gas technology. However, Bre denhann says: “Building a GTL plant is significantly more expensive than a traditional crude oil refinery, so the costs associated with that are probably not sustainable .” Sasol declined to disclose costs associated with producing a barrel of oil using this technology.

Compressed natural gas, however, would be a practical alternative, according to Stephen Rothman, managing director of CNG Group. Rothman says using natural gas brings efficiency savings of 25%-50% compared with petrol, but says introducing it on a national scale would require investments in infrastructure, conversion of engines, and political will. “ This is one of the alternatives; you’ll also have electric vehicles and biodiesel.”

SA has a biofuels strategy and aims to have 2% penetration in liquid fuels by 2013.

Renewable energy is a good but not complete substitute, says Bre denhann. While SA aims to produce 42% of its new energy requirements from renewables, the regulatory environment has put a brake on progress to date.

SA’s own major natural energy resource, coal, is a major CO² emitter and therefore tied up with the political pressure to decarbonise. Sasol, for example, has said that building a new coal-to- liquids refinery will depend on finding carbon-capture and -storage solutions. And Wakeford says that coal production in SA is likely to peak by 2020.

But gas and coal are finite resources themselves, so these would bring only short-term solutions. Wakeford also points out that renewable energies require more energy to produce a unit of energy than oil historically did.

The upshot is economic growth can no longer be dependent on cheap energy. The “business as usual” approach to economic growth must be traded for a “sustainability mobilisation”, says Wakeford.

Efficiency of energy use must be a cornerstone of this. “We have choices but need to actually implement them now. We need to invest in alternatives and not continue to invest in oil.”

FM.co.za