Beyond the Storm there will be no calm

Predicting that the next energy crisis is closer than most folk realize is, unfortunately, in some ways the easier part of a look into our future. Because the expectation, fostered by TV movies and our experience from last year, is that should there be another crisis, that it will last only a short time before there is some remedial measure, whether it be a surge in production from Saudi Arabia; withdrawals from the strategic reserve, or some more mythical remedy, somehow, after a short time, the crisis will be resolved.

But the unfortunate reality is that the next time we dance this particular waltz the tune will require a different set of dance steps. Because the solutions that have helped in the recent past to help ameliorate the reduction in traditional supplies of crude have not got the investment, nor have they carried out the development that will allow additional supplies of oil to suddenly spring into being. One of the more obvious examples of this is the increase in supply from the oil sands of Alberta. It was not that long ago that we were looking toward output levels of 3.5 mbd from those deposits, initially by 2015. But just today Standard and Poor’s has lowered the credit rating for companies working in those fields.

“The downturn in oil prices that began in the second half of 2008 brought to the forefront the rapid increase in operating costs that oil-sands producers reported,” Standard & Poor’s said. “At the time we originally rated oil-sands producers, we expected operating costs to be in the teens. We have seen operating costs rise to more than C$30 ($26.75) per barrel on average and rise above C$40 a barrel for some producers in 2008.”

The investments that would be required to bring the production to 3.5 mbd in 2020, the more recent target are not being made. Syncrude has been cutting production, Suncor is merging with PetroCanada as a better place to invest, rather than just in the oil sands. It is this lack of investment, or the curtailment or delay in moving previous investments forward that are now of concern. As the IEA has just noted

Over the last six months many planned large scale upstream oil and gas projects involving around 2 million barrels per day of oil production capacity and 1 billion cubic feet per day of gas supply were cancelled indefinitely, the IEA’s executive director Nobuo Tanaka today told the Asia Oil and Gas Conference in Kuala Lumpur, Malaysia.

A further 35 projects involving 4.2 million barrels per day of oil capacity and 2.3 billion cubic feet per day of gas capacity were delayed by at least 18 months.

His comments were matched by those from the Chief Executive of Shell:

Despite the current economic crisis, he said demand was projected to double by 2050 as the world population grows from 6 billion to 9 billion by that time. He said oil corporations should invest now in technology and develop new sources to reap benefits when the recovery comes.

"The oil and gas industry cannot supply all this additional demand ... this means the next price spike is in the making," he told more than 1,000 delegates at a two-day oil and gas conference here.

Some of the delays have been identified:

Though information is not always available, there has been in 2009 major projects deferment or cancellation in our region such as the Al Zour (615 thousand bpd), Al Shaheen (250 thousand bpd) and Al Jubail (400 thousand bpd) refineries in Kuwait, Qatar and Saudi Arabia respectively and the development of the Manifa (900 thousand bpd) oil field in Saudi Arabia which is said to be deferred by at least 18 months.

The Karan gas field in Saudi Arabia also is said to be delayed for a short while to allow a contract renegotiation.

A similar lack of investment in Russia (which is running at about 9.8 mbd of production significantly above the 8.35 mbd production from Saudi Arabia) is also raising concern

"Unless we invest large sums in the development of new fields in East Siberia, Yamal and the Arctic, in a certain period we will see the prime cost of oil production in Russia hike, which could affect the situation on the global market," Viktor Vekselberg said during discussions on oil prices at the St. Petersburg International Economic Forum.

These investments are not being made, and the time for them to have impact is passing. Thus as we begin to see the crisis develop over the next twelve months, one can also anticipate that the available production will not increase, but rather slide further, so that any growth in the world economy and end to the recession will likely be severely threatened by the increasing price of fuel.

Further, at that point, we may reach a situation where supply begins to fall, despite the higher prices, because of an inability to provide the greater volumes. At which time the lack of willingness to address this crisis will be brought home in a hurry, to those who currently ignore it.