Oil may have peaked – but don’t panic

Experts acknowledge that conventional oil production has peaked or at least plateaued, writes Vlado Vivoda. But we shouldn’t be too alarmed about a future beyond “peak oil”. This is the first in The Drum’s series on energy policy and oil.

Qatar is one of the world’s richest nations, and its wealth has been built on export revenues from its oil and gas. Qatar also has the largest carbon footprint per person in the world.

Curiously, Qatar recently hosted the United Nations Climate Change Summit, the outcome of which was an agreement on a compromise text which falls far short of what is needed to keep the world on a pathway of limiting global average temperature rises.

One key development of climate talks in Doha was the future of the Kyoto Protocol, which was extended until 2020. Importantly, several key countries including Canada have recently dropped out of the mechanisms, and those that remain represent just 15 per cent of global emissions.

With its highly lucrative oil sands industry, Canada’s decision to opt out is clear indication that Ottawa aims to boost Canada’s unconventional oil production.

Oil is a finite and non-renewable resource and its production is going to peak. “Peak oil” is the point at which half of the world’s original endowment of oil has been extracted. This is the point at which we can extract oil at the maximum rate. After that time, the rate of extraction will decline.

In many major producing countries, the majority of reserve claims have not been subject to outside audit. There is a lack of transparency about remaining oil reserves in numerous countries and there is no enforcing international mechanism to ensure disclosure of such information. In other words, it is impossible for any government, international organisation, petroleum consultancy or geologist to accurately predict the exact time when oil production will peak.

Notwithstanding this lack of transparency, many in the academic and policy communities have acknowledged that most of the easy-to-extract oil has been found and that conventional oil production has peaked or at least reached a plateau. While some argue that peak oil should present a cause of concern for oil-importing governments and the global economy as a whole, such concern is unwarranted.

Until recently, declared oil reserves and predictions about peak oil have not included reserves and likely future production from unconventional sources such as heavy crude oil, oil sands or oil shale. Many industry analysts believe that the world’s ultimate reserves of unconventional oil are several times as large as those of conventional oil and have become highly profitable for companies as a result of higher oil prices.

While the largest conventional oil reserve-holder is Saudi Arabia, with 265.4 billion barrels, Canada’s Athabasca oil sands reserves amount to 169.2 billion barrels, only 25.9 billion barrels (or 15 per cent) of which are under active development. Reserves in Venezuela’s Orinoco Belt amount to 220 billion barrels.

Moreover, the International Energy Agency (IEA) recently predicted that the amount of oil that is technically recoverable in the United States (mainly in Colorado, Utah and Wyoming) is 1.442 trillion barrels, and this mainly includes technically recoverable oil from shale. That amounts to over five times the reserves of Saudi Arabia and is close to the total world proven oil reserves in 2011.

Against the backdrop of such ample reserves of unconventional oil, the peak oil debate is irrelevant. The world consumes approximately 32 billion barrels of oil each year, which is very little in the context of massive unconventional oil reserves in the Americas.

However, what this implies is that the era of cheap oil is truly over. Producing oil from unconventional sources involves higher marginal cost of production than with conventional sources, meaning that new supply from these sources will come at a much higher cost.

Many unconventional oil projects involve marginal extraction and production costs between $70 and $90 per barrel, leading some to suggest that a new oil price floor is at this level. Unconventional oil reserves are not just costly to extract, but also face major political, environmental and social issues.

A major factor affecting global oil supply is the nationalisation of oil reserves by producing nations. For example, major international oil companies operating in Venezuela, which has massive unconventional oil reserves, have found themselves in a difficult position because of the growing nationalisation of oil as part of Hugo Chávez’s Bolivarian Revolution.

Unconventional sources of oil also require more greenhouse gas emissions per barrel, which includes the carbon emitted from combustion of the final product. For example, production from Canada’s oil sands emits 5-15 per cent more carbon dioxide, over the “well-to-wheels” lifetime analysis of the fuel, than average crude oil.

As with all forms of mining, there are large amounts of hazardous tailings and waste generated from the varied processes of unconventional oil extraction and production, and extraction often requires large volumes of water.

In Canada, many environmental groups criticise extraction and production from the Athabasca oil sands, arguing that government and industry measures taken to reduce environmental and health risks posed by mining operations are inadequate and that unacceptable damage is being caused to the natural environment and human welfare.

Similarly, in the United States, potential investors in shale oil face pressure due to emerging environmental liabilities and community opposition that limits access to resources.

Consequently, political issues related to access to unconventional oil reserves, and social and environmental issues related to climate change and increased greenhouse gas emission, may present more of a limit to future oil production than the actual peak in production.

The future of global oil production will depend on the outcome of the political battle between the governments of countries such as Canada and the United States and the oil industry, on one side, that support increased unconventional oil production on economic and energy security grounds, and NGOs and activist groups on the other side, who oppose it on environmental, social and moral grounds.

abc,net