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Politics, Poverty and the Planet
By Toby Shelley
Zed Books LtdCopyright © 2005 Toby Shelley
All rights reserved.
Insatiable demand and the quest for supply
Oil and natural gas are largely exports of the developing world, processed and consumed in the industrialised world. This they share with a host of commodities — metals from iron ore to the platinum group, minerals such as phosphate or titanium dioxide, as well as cotton, rubber, coffee and cocoa. Of the top ten oil consumers in 2002, six were members of the Organisation of Economic Cooperation and Development; so were seven of the top importers. By contrast, only two of the top ten exporters (but five of the top ten producers) were members of the industrialised countries' club.
Yet where the dependence of producer countries on most commodities has either been limited or has declined, the dependence of major developing-country oil exporters on that one resource remains extraordinarily high. Where natural gas is associated with oil, coming from the same geological conditions, its rapid development as a fuel of choice will replicate this situation.
So, for Saudi Arabia, oil accounted for over 99 per cent of export income in 1977 and 94 per cent in 2002, even after decades of talk about and investment in economic diversification. For Nigeria, once a major source of tropical commodities, oil accounted for over 93 per cent of export value in 1977 and 99 per cent in 2002. In Venezuela, which adopted the Mexican policy of 'sowing the oil' to expand away from total reliance on oil exports, there was some lessening, from around 95 per cent in 1977 to 75 per cent in 2002.
Algeria, where governments have long known the ratio of reserves to population to be more severe than for the Arab countries of the Gulf, and where oil was viewed through the 1960s and 1970s as the tool with which a Japan of the Maghreb would be built, oil's share of export value fell from 95 per cent in 1977 to under 70 per cent in 2002. However, in the intervening years Algeria had become a major exporter of natural gas, reinforcing its dependence on hydrocarbons. Qatar and Iran are two more major oil producers where natural gas (in its liquefied form) is set to emphasise the role of provider of energy for other economies. Indonesia, one of the countries most successful in managing its oil revenues during the price booms of the 1970s, is, ironically, the current member of the Organisation of Petroleum Exporting Countries by far and away the least dependent on oil. There oil now accounts for just 15 per cent of export value as reserves deplete.
For all of the international concern over global warming, the recurrent and geopolitically driven scares in the major consumer countries over security of supply, and the promises of new technology, the demand that created oil-based economies is projected to grow. And although oil and natural gas are indeed finite resources, there is no looming shortage of either. Indeed, while oil and gas will be sourced from an increasing number of countries, likely leading them into traps their predecessors fell into, the next two or three decades will only emphasise the dependence of the industrialised world on those former colonies, dependencies and mandate territories that sit on top of the bulk of the world's oil and natural gas. That said, with the rise of China as a manufacturing giant and India as an economic power, the profile of consumption will change. The trade in oil and natural gas will become more extensive and more complex.
Demand for oil in 2000 was some 75 million barrels a day, compared with less than 47 million in 1970 and 66 million in 1990. The reference case presented by the International Energy Agency (of which more later) posits a rise to 120 million barrels a day by 2030. Another leading source of data, the US government's Energy Information Administration, confirms the trend. Its study of US energy to 2025 assumes world oil demand of over 123 million barrels a day by the end of the period. Demand for natural gas is seen by the IEA as rising from some 2.5 trillion cubic metres to over 5 trillion by 2030. These two growth patterns can be combined by converting barrels a day and cubic metres a year into the common measure of tonnes of oil equivalent. Using that yardstick, the IEA calculates annual oil and natural gas consumption in 1971 to have been something under 3.35 billion tonnes of oil equivalent, rising to 5.69 billion in 2000 and projected to rise to not far short of 10 billion by 2030. The combined share of oil and gas in total energy supply was 69 per cent in 1971 and 62 per cent in 2000 (after the growth of nuclear and, to a much lesser extent, non-hydro renewable power). According to the reference case presented, by 2030, the proportion will be 66 per cent. (These figures exclude use of biomass fuels such as wood in non-OECD countries.) So much for alternative sources of energy, to date.
Industrialised countries of the OECD currently account for over 60 per cent of world oil demand and 55 per cent of natural gas demand. The IEA reference case sees that dropping to 50 per cent and 48.5 per cent by 2030. OECD demand growth will average 0.8 per cent a year to 2030. For natural gas it will be over 2 per cent.
As a country the United States is far and away the biggest consumer of oil. In 2001, the US consumed 19.8 million barrels a day. Government calculations see that increasing to between 26.9 and 31.8 million barrels a day in 2025, depending on price and rate of economic growth. Given the size of the US in territorial, economic and demographic terms, it makes sense to compare its demand to that of the European Union and Pacific members of the OECD (Japan, Korea, Australia and New Zealand) rather than individual countries. The IEA put current EU members' oil consumption at 12.3 million barrels a day in 2000, rising to 13.9 million in 2030. For Pacific members of the OECD consumption in 2000 was 8.5 million barrels a day, rising to an assumed 10.5 million in 2030. US demand growth rates, according to these figures, remain higher than for the EU and OECD Pacific. The story is broadly the same for natural gas.
Consumption on this scale requires massive and increasing imports. The dependence of OECD economies on imports is growing, not only because of rising demand but also because of the depletion of domestic reserves in the traditional US onshore oil-producing states and the UK sector of the North Sea. Even by the early 1970s, the US had lost the ability to act as a 'swing producer' — one that can increase or decrease production in order to fill the requisite supply shortage. Net imports of 318,000 barrels a day in 1949 had multiplied tenfold by 1970, topped 7 million in 1976 and exceeded 10 million barrels a day — some one-eighth of world production — in 2000 — 2002. The UK North Sea, which came on stream in the mid-1970s, is now being abandoned slowly but surely by the big companies, and a decade after the 'dash for gas' the UK has been transformed from a natural gas exporter to a country with a deficit that could endanger power supplies in the case of an exceptionally cold winter.
US dependence on oil imports was around 20 per cent in the 1960s. Under the five scenarios used by government, by 2025 it would be between 64.5 and 70 per cent, with the actual volume of imports ranging from 17.8 to 22.2 million barrels a day. Japan and South Korea rank two and four in the list of major importers. Neither is a substantial oil producer, and the OECD Pacific set to which they belong already imports some 90 per cent of its oil. That will edge even higher in coming years. OECD Europe, which includes four of the top ten importers — Germany, France, Italy and Spain — will see dependence grow from some 50 per cent now to over 80 per cent in 2030, according to the IEA reference case.
The same study projects OECD North America's dependence on imports of natural gas rising to 26 per cent in 2030 from just 1 per cent in 2000. In 2003 there were five liquefied natural gas import terminals in the US; industry estimates put the number of newbuilds proposed at thirty. For OECD Europe import dependence is seen as growing to 69 per cent from 36 per cent, while for OECD Pacific it declines to 50 per cent from a current 67 per cent.
The consumption and importing of oil and natural gas has been dominated by the rich industrialised countries of the North and this remains the case overall. However, a major new player burst onto the stage when China became a net oil importer in the mid-1990s. Since then, the manufacturing boom there has powered demand for oil and gas. By 2002 China shared with Japan the number two slot in the rankings of top oil consumers at 5.3 million barrels a day and was the fifth biggest importer at 1.9 million barrels a day. In July 2003, Chinese demand hit a record level of 5.59 million barrels a day, a staggering rise of over 19 per cent year-on-year, while the country's demand growth outstripped that of the US for the previous three years and total demand, set to outstrip Japan in 2003, was projected at 10.9 million barrels a day by 2025. Dependence on imports is projected to rise from under 40 per cent now to 80 per cent in coming decades, ensuring that China will be increasingly important on the international oil markets. Natural gas usage in China is currently low and even by 2030 is projected by the IEA to be 162 billion cubic metres a year, of which around 30 per cent would be imported.
India is also already an important consumer and importer of oil, accounting for 2.1 million barrels a day in 2002, of which 1.4 million barrels a day were imported. An annual growth rate of 3.3 per cent, taking 2030 consumption to 5.6 million barrels a day under the IEA reference case, would make India too a major market player.
Production now and for the future
In 2002, the world's top ten oil producers included just three members of OPEC while five were members of the OECD — the US, Mexico, Norway, Canada and Britain. The top producer, at over 9 million barrels a day, was the US. OPEC linchpin Saudi Arabia held second place with some 8.5 million barrels a day of production. The other OPEC members were Iran and Venezuela, either side of 3 million barrels a day. At first glance this seems counter-intuitive and even a contradiction of the statement that oil and natural gas flow primarily from developing countries to industrialised countries. But the oil export rankings show the underlying picture. There, seven of the top ten are OPEC members (Saudi Arabia, Venezuela, Iran, the United Arab Emirates, Nigeria, Kuwait and Iraq), the other three being Russia, Norway and Mexico. The same is true of natural gas, where statistics show the US to be the second largest producer at 548 billion cubic metres a year, behind the Russian Federation at 555 billion. Canada and the UK, too, are major producers, well ahead of anywhere in the Middle East and even of natural-gas-rich Algeria. However, the US has a natural gas deficit, which is currently plugged by pipeline imports from Canada but will be increasingly filled by liquefied natural gas (LNG) imports from developing countries in the Atlantic Basin. BG Group, the UK natural-gas producer, expects trading in the Atlantic Basin to see 24 per cent faster growth than the rest of the world after 2010 as West Africa, Egypt, Trinidad and Algeria boost exports to an increasingly gas-deficient US and Western Europe. It sees US demand for LNG growing by 28 per cent in 2003–08, against global LNG demand growth of 10 per cent. The IEA's trade flow projections for 2030 tell a similar story.
So, consumption of oil and natural gas is set to continue its growth, and the import dependence of long-established and more recent major consumers will deepen. Who can meet the new demand? The answer depends on two factors: proven reserves and investment. Both are variables.
The rate of replacement of reserves is a key indicator of the performance of an oil company. The share price of Shell dived and senior executives lost their jobs when the group had to downgrade its reserve estimates in early 2004. Reserve replacement indicates the company's future production profile. For a country or a region, it determines the lifetime of the income stream from hydrocarbons and the degree of investor interest. In 2003, some 27 per cent of oil produced was from fields that were in decline and some 1 million barrels a day of new production were needed in order to replace depleted reserves. The forecast was for some eighteen large-scale projects producing up to 3 million barrels a day to come on stream in 2005 as recently found reserves were exploited, on top of 2 million barrels a day in 2004.
OPEC's definition of proven reserves runs to twenty lines, but the crucial part reads:
Proven reserves: an estimated quantity of all hydrocarbons statistically defined as crude oil or natural gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
To tease that out a bit, it is plain that if no exploration work has been done somewhere, no reserves will have been found, let alone proven. So Mauritania, for example, went through the 1990s with no proven reserves yet will become an oil-producing country in 2005–06 because oil companies discovered previously unfound oil and gas reservoirs.
The decision to explore in deep water and then to develop finds is driven by technical and market-related factors. Deep-water exploration and production techniques pioneered in the North Sea and the Gulf of Mexico have now become generalised and less prohibitively expensive, so consortia of small and medium-sized companies are able to undertake projects like those offshore Mauritania. The global forecast is for some $56 billion to be spent on deep-water oil projects between 2003 and 2008, with output rising from 2.4 million barrels a day in 2002 to over 8 million barrels a day well before 2020, due to 'gamechanger' technological developments. But whether it is worthwhile exploring or producing depends on the cost of finding and producing each barrel of oil or cubic metre of natural gas, compared to prevailing and forecast prices at which they can be sold. The oil industry's confidence in the production-cost to sale-price ratio is reflected in the utilisation of drilling rigs, and there are industry indexes that record this. Definitions of proven reserves change, then, according to commercial and technical factors. And some of those are driven by political considerations — whether consumer countries are willing to buy from certain producers. In the 1960s the US persuaded NATO members to eschew long-term or large-scale oil-purchase deals with the Soviet Union. Since the collapse of the Soviet Union, Russian oil and gas reserves have become the Holy Grail of Western oil companies; major Russian oil corporations have developed; enormous funds are being poured into multiphase projects, notably that at Sakhalin in the Russian Far East. Far from discouraging imports of Russian oil, Washington has encouraged them, while Western Europe clamours for Russian natural gas. The proven oil reserves of the former Soviet Union were upgraded by 19 per cent between 2001 and 2002.
In the ten years 1993–2002, proven oil reserves of the Middle East rose some 5 per cent to 699 billion barrels, those of Africa rose over 45 per cent to some 94 billion, and those of the former Soviet Union increased over 35 per cent to some 78 billion. Latin America's proven reserves ended the decade at 111 billion barrels, a slide of around 15 per cent. On these figures, the Middle East accounts for some 65 per cent of global proven oil reserves. Middle East members of OPEC account for over 55 per cent. Meanwhile, the shares of North America, Asia-Pacific and Western Europe have been falling. In the UK North Sea there is an ongoing process of withdrawal by the oil giants Shell and BP as remaining reserves become too management-intensive for corporations looking to exploit far bigger fields. This process has spawned a generation of small, independent oil companies, known as 'scavengers', who buy up assets from the majors and produce from them more cheaply. The process is expected to be repeated in Norway.
The Middle East's centrality as a repository of natural gas is not quite as striking, accounting for 40 per cent of the world total in 2002, but it is again the dominant region, with the former Soviet Union taking second place with 32 per cent and Asia-Pacific and Africa coming in with well under 10 per cent each. Between them, Western Europe and North America account for another 8 per cent or so.
Excerpted from Oil by Toby Shelley. Copyright © 2005 Toby Shelley. Excerpted by permission of Zed Books Ltd.
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