The former chairman of Shell will issue a stark warning about the world’s oil supply at a conference in Ireland later this week. Lord Oxburgh expects that global oil demand will outstrip supply within twenty years as production hits plateau, and that the oil price may well hit $150 in the long term. He accuses some in the industry of having their heads “almost in the sand” about oil depletion, and concludes “we may be sleepwalking into a problem which is actually going to be very serious and it may be too late to do anything about it by the time we are fully aware”.
Lord Oxburgh joins a growing chorus of senior oilmen who predict trouble ahead in the oil supply. A long standing non-executive at Shell, he was parachuted into the chairman’s seat in the midst of the reserves scandal to try to restore the company’s battered reputation. He is now the chairman of D1 Oils, a British company developing biofuels that can be produced in the tropics on sub-agricultural land. He also sits as a crossbencher (independent) in the House of Lords. On Tuesday he will deliver a speech at the Cork conference of the Association for the Study of Peak Oil (ASPO) entitled Out of Oil, Into Hot Water. Lastoilshock.com secured an exclusive preview.
Q: Your talk at the Association for the Study of Peak Oil conference in Cork this week is called ‘Out of Oil, Into Hot Water’. What exactly do you mean by that?
A: Hot water basically refers to the fact that world energy demand is continuing to rise. It’s rising because of increases in population, and that population is not only becoming more numerous but more wealthy as well. As it becomes more wealthy per capita energy use increases too. So the world energy demand is just rising relentlessly. In parallel, we have clearly got tightening supplies of fossil fuels. We know that in an ultimate sense reserves are finite; they’re not being made any more, if I can put it that way. And I think we know enough about the world to say the majority – perhaps not all – but the majority of the big oil and gas fields have been discovered. Modern exploration methods are just so effective that it would actually be hard to miss any of those. So we think that the big supplies have all been found – or should I say the big easy supplies. It’s worth pointing out the world is never actually going to run out of oil, what it’s going to do is run out of cheap, accessible oil. And fundamentally our world transport infrastructure which is based on the internal combustion engine, and which needs a high energy-density liquid fuel, that is really what is going to suffer. We’re going to find we are not going to be able to afford to get the oil out that will keep that system working. So we have to think of other ways of feeding the internal combustion engine, and in parallel we have to think of moving away from internal combustion engine wherever we can. At the same time we have real concerns about climate change and the accumulation of greenhouse gases in the atmosphere from the burning of fossil fuels. And even if you don’t believe the science on that for moving away from fossil fuels I think you have to be concerned about the availability of supply.
Q: When do you see this happening, and how would you describe this crisis?
A: It’s extremely difficult to say, because you’ve got three main variables: rising world demand, and it’s a bit hard to predict exactly how fast that is going to rise; how much oil is going to be available; and how fast substitutes for oil come to market (synthetic fuels can be made in quite a number of ways). But all of that said I don’t think this is going to happen in the next five years, and I would be surprised if the difficulties ahead had not really emerged within the next twenty.
Q: Are you referring to peak oil, are you basically saying the global oil production is going to peak within the next 20 years?
A: It may or may not. In a way it scarcely matters; what really matters is the gap between gap in production and demand. I don’t know whether there is going to be a peak in world oil production, whether it’s going to plateau and then slowly come down. It could well plateau within next 20 years and I guess I would be surprised if it hadn’t. The thing is that demand is almost certainly going to outstrip availability, for whatever reason, and that is what is going to cause us difficulties. We’re never going to run out of oil, it’s simply going to become too expensive to use as we traditionally have. And that may happen much sooner than we expect. And in a sense that has really been ASPO’s message.
Q: How serious an event do you think this event will be?
A: How serious it will be will depend on how much progress has been made in the other direction I mentioned, namely finding substitutes for fossil mineral oil. At the same time there is the question of the extent particularly the developed world has been able to curb back its demand and live within its means more economically. But as I think I’ve indicated it is going to be the developing world that is pushing this big increase and it’s going to be very hard for us to persuade them not to do the things that we did.
Q: To come back to the date of the peak or plateau that you mentioned, there are obviously a number of forecasts: ASPO says 2010; the International Energy Agency has forecast what it calls an oil ‘supply crunch’ by 2012; and Thierry Desmarest, chairman of Total, says 2020. How would you characterize those forecasts – deluded, reasonable – what would you say?
A: They’re not deluded. As I indicated there are at least three variables here. And all one can say is that different people with different experience look at those variables and balance them off slightly differently. I don’t think any of them are deluded, I think that all of them are probably honest best guesses, but that is what they are.
Q: There is also a fairly vociferous group of people who resist the idea of peak oil rather strongly, who would say either that the event will never happen at all, or if it does, not for many decades to come – are those positions so reasonable?
A: I don’t think you can say there is never going to be a peak oil or a falling off of world oil production. In every single oil province that has been discovered so far, and worked on for reasonable lengths of time, what you’ve seen is build up of production and then a progressive decline. This was first and best demonstrated by production from North America, it happened in the North Sea, and it’s happened elsewhere. Clearly we are now much more efficient at getting oil out of the ground than we were 30 or 40 years ago. And I was hearing only yesterday about an oilfield in which it was predicted that they would extract 70% of oil in place. Now that was unthinkable even a couple of decades ago. At that time very often the amount of oil left in place was around 70%. So we’re much more efficient at getting oil out of the ground. All of that is true, and we can probably go on extracting oil from the ground for a very long time, but it is going to get very expensive indeed. And once you see oil prices in excess of $100 or $150 a barrel the alternatives simply become more attractive on price grounds if on no others.
Q: Do you think that is where the price is headed?
A: In the long term it may well.
Q: To come on to those alternatives, what is it that becomes more viable at $100 a barrel?
A: Well various sources of oil become more viable at even lower prices than $100. The most traditional way of making a synthetic liquid fuel is to gasify coal and to make a liquid from that, and that is a pretty well established technology. The problem is that it is very carbon intensive. And if the production of synthetic liquid fuels from coal became a common worldwide activity, and if it were done without capturing the CO2 and putting it underground, the consequences for greenhouse gases in the atmosphere would be very serious indeed. That is one possibility. Another is the so-called gas-to-liquids technology where you take natural gas and you turn it into a synthetic liquid fuel. Qatar is the main place this is happening at the moment. It gives you a beautifully clean fuel, but the process itself is fairly energy intensive, and again has significant greenhouse gas consequences. So those if you like are the two undesirable ways forward.
Q: Do you actually think that either of those options could be developed quickly enough to replace conventional oil that could after all be declining at some 3 million daily barrels per year?
A: It depends on how fast conventional oil continues to decline. If you’re talking on a 5 year timescale the answer is probably not, if you’re talking on a 15 year timescale probably yes.
Q: You said those were the undesirable alternatives, what do you think are the desirable ones?
A: I think the main desirable alternative – and I would describe it as an interim – is biofuels. And frankly not the biofuels that are common today, which are largely produced from food products, from corn and things of that kind. I think we can look fforward to a so-called second generation of biofuels made from agricultural waste products, or byproducts as they are more properly called, such as straw.
The other way is to grow crops that have oily seeds, but the important thing about the crops is that they must grow on land not used for normal agricultural purposes. There are various crops now that look as if they can be used that way: the jatropha tree is one, which grows in tropical areas, grows very fast, doesn’t have big demands for water, is very hardy, and will grow in places where normal crops won’t. There is also elephant grass and miscanthus.
The third big resource and arguably the most important is the organic component of urban garbage. I know this sounds grubby and unexciting, but the organic content of urban garbage –grass cuttings, Sunday newspapers, old shoes, old tyres, you name it – the organic content of that is enormous. One calculation on this, and it’s not my calculation, but it was done by someone whom I respect, was that if you look at the organic content of US urban garbage, and if you were able to gasify and then produce liquids from all of it, you would produce enough liquid fuel to fuel the present US surface fleet of vehicles. Now that is prodigious. It’s not my estimate, but even if it’s wrong by factor of 2 or 3, it emphasizes the size of this resource.
Now the problem is that we don’t have good small scale gasification technology, because the one thing you don’t want to do with garbage or other biomass is to move it long distances, because you use more energy moving it around than you actually get out of it. So what I’m looking for is a future in which each town, maybe each community, will have its own gasifier to extract the energy from its own urban garbage. What it does with the gases will depend on local needs. Some of it will go to liquids but some of it will be used for local power generation. But our grandchildren are going to look at us in astonishment, and say you people believed you had an energy problem and you were throwing this stuff away, putting it
Q: There are a number of ideas you’ve run through – the biofuels, the garbage, the various non-conventional forms of oil – but do you think that putting all this together we can avoid the paralyzing crisis that is usually referred to as peak oil, or do we face some kind of crisis and a way of life which is very different from what we’ve know before?
A: I don’t think we need face a way of life that is very different from that which we have at present. It’s going to be different in some ways, but it needn’t be lower in quality. I don’t think that these alternatives are going to be an answer by themselves, but I think if you combine them with perhaps more economical vehicles, and vehicles that are propelled in different ways, and a general awareness of the energy which traditionally we have been throwing away, I think we can probably get away without a crisis, but it may be a bit of a squeeze.
Q: Do you think it is possible to get where we need to go without overt management of demand, some form of rationing of energy consumption?
A: You can manage demand in two ways: through price or through rationing. I would hope that we can, and would imagine that governments in the western world, in the democratic world, would be really quite reluctant to bring in rationing. I could see that coming in only as a last resort if – as you describe it – a crunch became very close.
Q: You’ve mentioned a lot of potential things that could be done, but what is your take on the international oil industry – is it doing enough to invest in post peak oil world?
A: I think it probably isn’t, and I think we are likely to say it probably never will be enough. I think that companies actually take it on board that oil is going to get harder to find, and that it is going to be more expensive to get out of the ground. But a lot of people simply like to keep their heads down and say our job is finding oil and we’ get better at it and we’ll leave less in the ground. And a lot of people have got their heads down, so far down that they’re almost in the sand.
Q: So they cannot see the wider picture?
A: I think there is a significant amount of that, but the fact remains that given the nature of our infrastructure, and that we’re totally dependent on oil for making the internal combustion engine work, it is going to be at least 30 years, 40 years before we can more to a different sort of economy. So the combination of that and the recognition that world energy demand is inexorably rising, means that they can see existing business opportunities for decades ahead. And frankly if a business can see five years ahead it’s pretty happy.
Q: So is oil constraint good or bad for the oil companies’ business?
A: I think it won’t do them any harm.
Q: But what risks does the industry run by ‘not investing enough’ to prepare for an oil constrained world?
A: I think you’ve got to be careful about what you mean by ‘enough’, and perhaps I answered a little bit loosely before. If you look at it from oil companies’ point of view, effectively what they’re doing at the moment is continuing business as usual, and sticking toes in water in a number of areas which might become important in future. But at present there is a relatively poor business case for making significantly greater investment in these new areas if we can call them that, so when I agree that they may not be investing enough, that is if you like the point of view of a citizen of the world rather than a shareholder in one of the companies.
But let’s shift tack and talk about the management of CO2, because I think there is going to be a major role for the international oil industry if it really wants to take it. We’ve talked about oil in vehicles but the other main source of CO2 and greenhouse gases is coal. Coal of course largely goes in power stations and it’s going to be used more extensively rather than less because the three countries in world which together have getting on for two thirds of world’s coal are US, India and China. And for quite different reasons those countries are going to burn that coal. US is going to burn it in order to improve its energy security, and India and China will burn it because really it’s the only indigenous fossil fuel resource they have. If they do burn that, the contribution of CO2 to the atmosphere means that anything else that we do in terms of controlling greenhouse gas emissions will be totally swamped.
So something has got to be done about managing those emissions, and this is the process known as carbon capture and storage (CCS). It’s not something I particularly like, but I think it’s inevitable given that that coal is going to be burned, and we’ve got to do something about it. Now if CCS is going to be effective, it is certainly going to be a worldwide industry of the same scale as the international oil industry today, because it involves taking the CO2 from power stations by pipelines and piping it to appropriate geological sites where it can be injected underground. And of course this is something the oil companies have experience of through secondary oil recovery for decades now. The amount of CO2 that is going to be produced is so large that this will be a massive industry, with major pipeline networks over the developed world and indeed in the developing world to look after this. If this comes about this is the true future role of some of the oil majors. What we are going to see is all of the existing businesses within the oil majors are likely to continue, but they’ll certainly change in their relative importance. So traditional exploration and production will become much less important, chemicals will probably stay very important, fuel products will stay very important and will source their fuels from many different areas, and then I think we’re going to see this new business – and it’s interesting to see which companies will embrace it first – the new business, which is managing CO2.
Q: So having let the genie out of the bottle the oil companies will be paid to put it back in again?
A: I think that’s right. I think that’s how they’ll make a living.
Q: Will there have to be a fairly decisive change in the price of oil to make all this happen?
A: I think that it can be the price of oil, but probably sooner than that I would like to see something happen to the price of carbon. Because we have a European Emissions Trading Scheme, and the first phase of that scheme was really experimental, and it has been widely criticized as being toothless and ineffective, and it did not have big sanctions initially. But I think in the early phase people were actually discovering how to run an emissions trading scheme, I think that as we move forward to the next phase I think we shall see a much tighter and a much better scheme. Now as soon as there is a price for carbon, it means that anyone within a specified range of industries who emits CO2 has to pay for or has to buy allowances, and this will make a big difference. What I would like to see is a widening of EU ETS in Europe, and welcome given to other countries or territories that might be interested in joining. This is the first real attempt on what is beginning to look like a global scale to internalize the cost of the damage which is being done to the environment. That is important. It may be that we shall need, in parallel with that, regulations which impose very severe penalties on people who emit more than specified amounts of greenhouse gases into the atmosphere, but we are going to need a combination of regulatory and fiscal arrangements to bring this change about.
Q: Which brings me onto the policymakers – are they doing enough?
A: Well I would always like them to do more. To some extent they are slaves of their electorates, they tend to – perhaps all too often – follow rather than lead. A very interesting example of where things have changed very rapidly which I have been following closely is Australia. 18 months ago there was absolutely no interest in climate change at all. The prime minister John Howard was taking a very hawkish view and aligning himself very closely to George Bush’s position. Over the following 15 months there has been an enormous change. This was provoked at least in part by the drought in eastern Australia where it was one of the most severe for I think a hundred years or more. And that more or less coincided with a lecture tour given by Al Gore, and it all seemed to click. By the end of last year you were seeing relatively frequent articles in newspapers about climate change, people wanted to talk about it. And talking to members of the Australian government the position on their agenda had changed profoundly. It was pressure from beneath that was making them change. And I think we are probably going to see that in the rest of developed world.
We had in parliament a visit from a couple of Congressional committees in the US a few months back, and certainly I came away from quite close discussions with them – both Democrats and Republicans – with the conclusion that whatever party was successful in the forthcoming elections, and whatever colour of the next President, there would be a profound change in the US approach. So I think we’ve had a few recalcitrant leaders but I think that they are gradually being forced by their electorates to change their position.
Q: But that is very much to do with climate change isn’t it? But do you still get impression when you talk to these leaders that they are resistant to idea of resource constrained world?
A: I think there is probably much less awareness of that. Leaders I think are much more concerned on the political side about people playing politics with the energy supply. And I think they have been very worried at the behaviour of President Putin and various Russian oil companies, and I think probably that is much higher on their agenda than the thought that oil may be becoming scarcer.
Q: Is that something you want to see change? How important is it that the leaders get up to speed on these issues?
A: It is very important. I think we’re in the relatively happy situation that regardless of which is your main motivation – climate change or energy supply – they both push you in the same direction. Of course if you don’t care about climate change then you just burn coal. If you do care about climate change, you have certainly to embrace biofuels and if you’re going to burn coal you have to burn it cleanly.
Q: To sum up, in your speech at ASPO in Cork next week, what will be your message to the conference, the oil industry and policy makers more widely?
A: The message in short is that we are just about to enter hot water, quite serious hot water. And the danger is that we sit there blissfully like the frog in the pan of water gently heating on the stove until – as the Irish would say – it wakes up to find itself
dead. In other words we may be sleepwalking into a problem which is actually going to be very serious and that it may be too late to do anything about it by the time we are fully aware.
Q: And we are talking about the oil supply as well as climate change in those remarks?