Is the City aware of peak oil?

31st Jul '09 by lfc

40 comments 14179 reads

A question I asked 'over there' in the form of a poll;

Is the City peak oil aware?

Results of the poll suggest the majority believe the City either isn't, or is only partially, aware of 'peak oil' or the 'end of easy oil'. This despite the stated views of many official bodies and oil majors regarding access difficulties and costs going forward. Not to mention the overall production profile and price action of the last few years. My own view fwiw is that the City, or certainly that part of it trading oil stocks, IS now broadly aware of the evolving supply situation and the likely consequence for prices.

I was hoping the poll would stimulate a bit of discussion but so far this has not been limited. Hence repeating the question on here where most of the potentially interested parties now seem to reside.

The relevence for me is that, as someone who is neither an O&G expert nor a very good stock-picker (I tend to diversification wherever possible even if I believe a sector offers value) should I still be overweight oil E&P's? Or, in other words, is money to be made from these companies now more dependent on individual company analysis than on a reliance on the PoO to lift all boats - has that 'easy money' already been made?

Thoughts?

lfc

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Mattybuoy

8th Feb '10

CNBC are covering the Branson story in their "Crude Realities" spot. Right now.

Great quote from Robert Hirsch (he of the famous report) "You can't print oil" ...

Impvesta

10th Feb '10

UK industry task force on peak oil report:

http://peakoiltaskforce.net/wp-content/uploads/2010/02/final-report-uk-itpoes_report_the-oil-crunch_feb20101.pdf

The Guardian's take on this:

http://www.guardian.co.uk/environment/cif-green/2010/feb/10/oil-crunch-peril

I wonder if this will liven the market up a bit.

Regards

Impvesta

emptyend

11th Feb '10

In reply to Impvesta (post #22)

Yes - interesting point made in the Grauniad piece:

During the financial crash the world went within weeks from a received wisdom that investment banks had squeezed risk out of complex derivatives, to a spiralling doubt, to a tipping point of disbelief and panic. With peak oil, officials around the world, corporate and governmental, would experience exactly the same collapse of confidence in their cosy cultural assumptions. A second giant industry would have been found to have its asset assessment systemically and ruinously wrong. The net impact would be that oil-producing nations would begin to husband their own resources: keeping exports back for use in their own oil-hungry multi-hundred-billion dollar-and-rouble infrastructure programmes.

As one of the few who spotted the generic overconfidence amongst financial institutions in the early/mid Noughties (even though I didn't spot the precise trigger for the financial collapse) , I am bound to wonder whether the same sort of groupthink issues are affecting OPEC and many (but not all.....eg TOTAL) of the oil majors. It has been a received wisdom of the oil industry that technological innovation will facilitate greater recovery rates and additional discoveries, thus staving off Peak Oil almost indefinitely into the future......

....and there is, of course, a grain of truth in this - because one can certainly observe that such innovations DO result in (for example) pre-salts finds due to better seismic imaging and enhanced recovery due to networks of horizontal wells etc.

BUT..... I certainly wonder if these assumptions don't suffer similar flaws to the lack of concern (amongst the great and good and supposedly well-informed) over the massive systemic leverage in the world of finance? WHAT IF, for example, the water cut at Ghawar rose suddenly in these networks of horizontal wells (it is likely to be more sudden than with vertical wells, due to the lower vertical separation within the reservoirs)? WHAT IF, for example, the new sub-salt oil provinces off Brazil became even more under NOC control, raising the costs of production and decreasing returns for international oilcos? etc etc

The conclusion of the article is a very good one, IMO:

The lessons from the financial crash ought to be stark. The prevailing culture mocked the disbelievers, ahead of the crash. Gillian Tett, capital markets editor at the FT, saw the crisis coming because she was a trained anthropologist and knew how to recognise a cult when she saw one. She was accused of scaremongering from the stage of the World Economic Forum. The pattern is the same this time. BP, in particular, has a tendency to mock the concept of peak oil and its advocates.

Meanwhile, as with the climate crisis, there is a general desperation to believe the comforting narrative ahead of the uncomfortable one. This is why it is so important that companies who understand risk speak out, as the taskforce companies have. It is why governments – who must lead in matters of national security – should listen to the uncomfortable arguments and, given the stakes, buy insurance against them

It is, of course, very tempting to believe that "it'll be alright on the night" and that the major players really DO know what they are doing. It makes it VERY much easier for governments and politicians who can thus hide behind the "experts" and simply avoid taking tough and unpopular decisions.......

....but that doesn't automatically mean that it will prove to have been the right thing to do!

Cuthbert C

I heard an interview with Tony Hayward - CEO of BP yesterday or the day before. The interviewer questioned him about peak oil. TH responded that he expected demand to peak before supply did and that this would happen around 95 mmbopd. Which is of course not that far away from today's level.

Seems to me that for demand to peak - ie to get choked off around the 95mmbopd level - implies a price very significantly higher than today. For that matter very significantly higher than last year's peak of $150-$160.

With R Branson et al starting to speak about Peak Oil with the fervour of the recently converted, one must expect a significant rise in awareness of PO even if many remain sceptical/agnostic.

Similar kind of awareness trajectory as global warming.

SW10Chap

In reply to emptyend (post #23)

whether the same sort of groupthink issues... It has been a received wisdom of the oil industry that technological innovation will facilitate greater recovery rates and additional discoveries, thus staving off Peak Oil almost indefinitely into the future.

That'll be me, then ;-)

What does Branson want? His airline in particular is highly sensitive to oil prices, so cheaper or more readily-available fuels would be attractive to him. There's no way anyone is going to start investing in this just yet because no-one sees a need - at least a need that can be economically exploited. Perhaps he's hoping for government intervention to subsidize research to keep his planes in the air on cheap fuel.

But perhaps he should reconsider his own priorities. He's already flown a plane between London and Amsterdam with one engine being fed by biofule - a stunt that was roundly condemned by Friends of the Earth (the flight was a "gimmick", distracting from real solutions to climate change) and Greenpeace (a "high-altitude greenwash.")

If you consider oil to be an increasingly-rare resource, is air travel the right place to splurge that resource? Perhaps that is for the market to decide? If so, perhaps governments should re-examine the subsidies keeping aeroplanes in the air? And of course there are other subsidies already distorting the market for certain biofules which are causing farmers to move production from food-crops to biofuel crops - with the serious - if unintended - consequence of driving up prices of staples such as maize.

Maybe he should have a shot at campaigning against subsidies - for aviation and biofuels. That would be an interesting and courageous stand to take with plenty of publicity potential - and one which would begin to pose some more interesting ethical questions.

SW10

In reply to SW10Chap (post #25)

What does Branson want?

Perhaps I am too trusting but I had assumed that the report (after all it isn't just a Richard Branson report) was a genuine attempt to address peak oil matters.

I had also assumed that the report had been commissioned by the Government, but this is probably incorrect, as I can't find any information, on first skim reading, on how the contributors were appointed or what were their terms of reference. Maybe it is a "less official" report than I thought?

In reply to emptyend (post #23)

whether the same sort of groupthink issues... It has been a received wisdom of the oil industry that technological innovation will facilitate greater recovery rates and additional discoveries, thus staving off Peak Oil almost indefinitely into the future.

That'll be me, then ;-)

Well I obviously had your previous comments in my mind - though clearly you are far from alone and (with due respect) many other adherants to that view are a bit more influential! ;-)

Obviously Branson has a big axe to grind on the issue and a track record of lobbying for changes that may create commercial opportunities for him (eg over lottery regulation). So I attach no weight whatsoever to the fact that he's becoming vocal on the topic of Peak Oil, especially in view of your well-justified observations on (non-)taxation of aviation fuel.

I'd also agree with tournesol's comments, in that I think the point of peak demand will be reached some way above today's price levels (mainly because many alternative technologies need somewhere north of $80 oil to be cost-competitive).....and some overshoot will be necessary (probably for a longer period this time) in order to trigger sufficient investment to make a difference in the supply/demand balance.

None of these angles, however, has any bearing on the aspects of the Peak Oil case that I think are weakest - namely the thought that supply can be continually grown due to technological innovation. There remains a (biggish, IMO) risk that there will be a supply shock of some sort well before demand peaks and alternative energy investments really gear up - and this is, IMO, the main reason why oil prices continue to be structurally stronger than the present day fundamentals would suggest is necessary. Whether that supply shock will involve a geopolitical event or a geological/technological event is difficult to say - but if the world should get a sudden sense of fear over either issue then there could be very sharp price consequences!

rgds

repobear

In reply to tournesol (post #24)

I listened to that interview whilst I was in the gym and was struck by a couple of things.

Demand peaking before supply does imply some pretty strong technological developments in weaning people off oil. Another interview I listened to with the head of Renault indicated that electric cars will play a greater part, and maybe quicker than expected, I still can't get my head around this. The latter made no attempt whatsoever to play down the importance of oil for cars too. What struck me about what Hayward said was the difficulty in getting the supply anywhere near 95mbpd. With the world, and big oil inparticular, having to run even harder/smarter to keep still at 85mbpd this seemed a big leap of faith to me. The likes of BP seem increasing powerless in making these strides forward which added to my surprise;-)

I listened to something else today which suggested that the global population would peak around 9bn in 2040. Unless petrol/diesel driven cars become obsolete pretty quickly, the chances of oil demand not growing fairly rapidly, with the development of Asia in particular, and a strong growth in population seem pie in the sky to me.

The other thing was that Hayward was pretty firm that a level of $70 was pretty much the minimum for investment now and he felt that above $100 demand gets choked off I came away thinking that he'd be pretty happy with a price around the $85-90 mark. Was it less than 5 years ago that $40 was the threshold. How times have changed even if some of these people still seem like dinosuars in not recognising publicly that supply in certain huge fields could fall off dramatically some time soon.

I caught another interview with a guy from OPEC and that $70 figure came up again.

All these interviews are here somewhere for the better informed amongst you who are able to listen, perhaps a bit more attentively, whilst not hammering away at the treadmill, crosstraiiner or exercise bike.

http://www.bbc.co.uk/podcasts/genre/factual/a-z/page2

Will the head of BP be talking about a threshold of $100 in 2015 i ask myself.

In reply to repobear (post #28)

The other thing was that Hayward was pretty firm that a level of $70 was pretty much the minimum for investment now....
Will the head of BP be talking about a threshold of $100 in 2015 i ask myself.

Those of us with long memories of the last 10 years will recall that in 2000 Shell/BP were using a $13-14 threshold.....this was later moved up to $20......and then to $40. I wouldn't bet against so few projects getting sanction at $70 that the threshold moves up to $100 over the next 5 years - or higher.

OTOH there have recently been some analyst notes suggesting that the likes of Soco were trading at levels that discounted $63 oil and Afren was discounting $54 (MS - 12/1/10).....which begs a question or two ;-)

dbfromgb

Indeed EE. One of the facts that I also find surprising is the enthusiasm for gold, when oil (similar characteristics but has a ready use) appears to be overlooked as a store of value. Tim Guinness (Guinness Atkinson) regularly picks up on these issues in his monthly ebrief . ... excerpt....

How might 2010 treat this fund? My view remains that energy equities represent a good store of value and potential for above average returns if the oil price stabilises around the level sought by OPEC ($60 - $80/ barrel) and the gas price recovers to its long term relationship with oil ($9 eventually $7/mcf this year). We believe this the most plausible scenario.
We believe energy equities discount an oil price well below $70/barrel and unlikely more than $55 and a gas price well below our projected $7 let alone $9/mcf and more like $5.50/mcf. We still find it easier to see how energy equities can rise from their current level than for the broad market to do the same.

dbfromgb

I remember Lord Browne being dismissive of peak oil and adamant that supply would keep ahead of demand into the foreseeable future. I was reminded of that famous comment about Maggie Thatcher - don't know who said it -
"I wish I was as sure of anything as she is of everything".

What we know for sure is that per capita usage of oil has been increasing in the west for the past 100 years - and is still increasing even in the most developed economies. And developing countries like China are only in the early stages of following the west along the path to oil dependency. And lots of third world countries are somewhere in the distance waiting to get onto the same development train. And population growth continues - even in developed/mature western countries like ours. (maybe because of immigration but that still has a positive effect on total oil demand/consumption) All of which equates to a substantial continuing increase in demand.

And oil reserve figures in many countries look about as honest as MP's expenses.

And development of alternative energies/technologies repeatedly fails to live up to the hype and optimism of those who believe in a technical fix.

So the most likely outcome in my opinion remains a crunch - if not in my lifetime, certainly in my children's.

When I was a little boy in the 50's and 60's it was said that nuclear energy would be too cheap too meter. It hasn't quite turned out like that has it?

Since I was born the population of the earth has more or less tripled. We are behaving like bacteria in a petri dish. Seems to me that we have already passed the limits of sustainability but we still think economic growth is a good thing.

I watched an interview with the Minister for the Environment in India a few weeks ago. He said that in the next 10 years half a billion Indians would be connected to the national electricity grid for the first time. And most of the energy used for power generation will come from coal. Half a billion people. That's equivalent to the population of the UK every year. The scale is difficult to comprehend. And those half billion are unlikely to stop once they get a 40 watt bulb and a fridge. They will want mopeds, vans, cars, trucks. They will want to remodel their economy along the same lines as ours. The impact on oil consumption will be significant.

IMHO the problem with the way we organise society is that it is not in the personal interest of people like Browne or Hayward to think outside the organisational box that they have spent their lives mastering. If Hayward espoused PO and limits to growth he would be removed from office. So we are led by people who are afflicted with tunnel vision wrt tthe dangers of system collapse.

Sorry for ranting.

In reply to dbfromgb (post #30)

My view remains that energy equities represent a good store of value and potential for above average returns if the oil price stabilises around the level sought by OPEC ($60 - $80/ barrel) and the gas price recovers to its long term relationship with oil ($9 eventually $7/mcf this year). We believe this the most plausible scenario......We still find it easier to see how energy equities can rise from their current level than for the broad market to do the same.

One of my last contributions elsewhere was to start a thread on this topic. The above extract has been the gist of my position for the last couple of years or so.

http://peakoiltaskforce.net/wp-content/uploads/2010/02/final-report-uk-itpoes_report_the-oil-crunch_feb20101.pdf

Thanks to impvesta in that other awful place.

12th Feb '10

In reply to Impvesta (post #26)

Yep - clever branding I think - aided by the use of words like "Taskforce" and "UK" which have strong connotations of Government and officialdom, along with a logo and report cover that look like they could come from a Government department. But don't.

In reply to repobear (post #33)

Thanks to impvesta in that other awful place.

and also post 22 in this place! :-)

15th Feb '10

Saudi Arabia is making a push into renewable energy and is
starting its first carbon capture project, Oil Ministry adviser
Mohammad al-Sabban said today at the World Economic Forum in the
Saudi city of Jeddah. The country will start injecting carbon
dioxide into Ghawar, the world’s largest oil field, in 2012, he
said.

....according to Bloomberg. Perhaps I'm a cynic, but....... ;-)

Meanwhile, the same article goes on to say:

World demand may plateau at 100 to 105 million barrels a
day, Adnan Shihab-Eldin, a former acting OPEC secretary general,
said in Jeddah today

....which fits with the IEA expectations:

While oil demand has dropped sharply, in the Reference Scenario it starts recovering in 2010, reaching 88 mb/d in 2015 and then 105 mb/d in 2030. “Calling for increased investment in fossil-fuel supply is not inconsistent with the need to move to a low-carbon energy pathway,” stressed Mr. Tanaka.

.....though that of course still leaves a question of how to get from current capacity levels, even when one allows for the 4mn bopd spare capacity that the Saudis claim.

Isaac

20th Aug '10

This is an interesting article

Goldman Sachs

Global crude oil demand may have exceeded supply in the past two months as inventories stored on tankers fell to an 18-month low. World oil demand exceeded supply by 600,000 barrels a day in June and July

“We continue to expect the WTI forward curve to flatten in the second half, lifting prompt WTI prices into the $85-$95 a barrel range,” Goldman said.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aY9NaVLXOVJI

10th Feb '11

The Guardian reports that Wikileaks has revealed US concern over Saudi reserves:

The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.

The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.

There will continue to be stuff like this coming out, especially with some room for doubt over their ability to raise production, even before Ghawar comes off plateau.

Actual Saudi Production has ranged as follows on a monthly basis:

2006: 10.26 -10.91mn bopd

2007: 10.12 - 10.63 mn bopd

2008: 9.96 - 11.23 mn bopd

2009: 9.46 - 10.02 mn bopd

2010: 9.83 - 10.27mn bopd

There have been only two months in this period when Saudi production has been over 11mn bopd (July and August 2008; from EIA data source) and accordingly the Saudi claims for production capacity (assessed here by the EIA)......

Saudi Arabia maintains the world's largest crude oil production capacity, estimated by U.S. Energy Information Administration (EIA) at over 12 million bbl/d at end-2010. Over 2 million bbl/d of capacity was added in 2009 with the addition of increments at Khurais, AFK (Abu Hadriya, Fadhili and Khursaniyah), Shaybah, and Nuayyim.

....have never really been tested to date.

In the context of the Middle East political environment, these issues seem likely to continue to weigh heavily, though as a blogger on the FT site points out, suggestions of this aren't new.

marben100

Demand peaking before supply does imply some pretty strong technological developments in weaning people off oil.

...or, if one is less optimistic, for the price to rise to a level that does choke off demand. Wouldn't be so great for the global economy or fostering peace, however. :0(

Ultimately, technological solutions will be developed (e.g. if we started now, we could build enough nuclear power plants that could produce hydrogen for transport fuel, or charge electric cars) ... but there is a risk of a nasty gap if the world doesn't act soon enough. As ee points out, China has clearly recognised this, and is acting - in all possible ways (fossil fuels, nuclear, hydro, wind). The "West" risks being left in the dust.

As the POO rises, more expensive technologies (including some within the oil industry) become more viable but the outcome will be a question of timing/time-lags.

Mark

...incidentally, I'll just point out that Brazil is really blessed, with regard to transport fuels. Not only does it have huge offshore resources, it also has the world's most favourable climate for sugar cane production, which leads to cheap ethanol. All petrol stations there offer either gasoline or alcohol (no subsidy necessary) and many cars are "dual fuel". It is the consumers choice (which is generally price led) whether to fill up with gasoline or alcohol.

So, Brazil will be able to export most of its oil production (when it comes, which is some way off), if the price is right. ;0)

Is the City aware of peak oil?

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Lfc

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