Soaring fuel prices, rumours of winter power cuts, panic over the gas
supply from Russia, abrupt changes to forecasts of crude output... Is something
sinister going on? Yes, says former oil man Jeremy Leggett, and it's time to
face the fact that the supplies we so depend on are going to run out
A spectre is haunting Europe - the spectre of an acute, civilisation-changing
energy crisis. The latest wobble over disruptions to gas supplies from Russia
is merely the latest in a series of reminders of how dependent our economies
are on growing supplies of oil and gas. On Wednesday, Gazprom's deputy chairman
was in London reassuring Britain that there would be no risk of disruption to
British gas supplies in the fall-out from the ongoing spat between Russia and
Ukraine over pricing. The very next day, temperatures in Moscow broke a 50-year
record, plunging to minus 30C. Gas normally exported was diverted to the home
front. Supplies to the West fell.
In December, Sir Digby Jones, director-general of the CBI, warned that any
shortfall in gas could cause disaster for British industry. The problem, he
said, was the likelihood - as forecast by the Met Office - of a particularly
cold British winter. This would mean more gas burning in homes and power plants
than our liberalised energy market - or its infrastructure - might be able to
supply. There aren't enough pipelines from the continent to carry the imported
gas that we need now that our North Sea production is dropping. Tankers that
are supposed to be bringing liquefied natural gas (LNG) to the UK are instead
following market forces and going to the US, where gas prices have rocketed
even higher than they have here. Meanwhile, not enough gas has been stockpiled,
because market forces don't favour that kind of thing in relatively warm years.
We shouldn't panic, insisted energy minister Malcolm Wicks, because British
Gas is being very grown up about it, and anyway all this will be sorted out
by 2007 when a new pipeline and more LNG plants come on stream. Sceptics pointed
out that our gas reserves were down to 11 days, compared with an average of
55 on the Continent. That was before the concerns about Russian supplies. If
the thermometers fall in the UK it is still quite possible that UK firms may
have to stop using gas for one day a week, or even that the suppliers will also
have to introduce rolling power cuts by postcode.
Meanwhile, domestic gas bills, which rose by more than a third last year, are
expected to rise even higher in the next few months. For many people, such fluctuations
have lethal implications. Last winter, there were some 35,000 "excess winter
deaths" in the UK, most of them attributable to old people not being able
to keep warm enough; and last winter was a relatively mild one.
All this concerns gas, of which there are undoubtedly huge proved reserves
left in the ground (even if half of them are in Russia and Iran). Consider oil.
The geopolitical risks are the same. Only last week Iran threatened to retaliate
by cutting oil supplies if Europe continued to meddle in what it sees as its
right to develop a nuclear programme. Where oil differs from gas is that a debate
is fast emerging about whether we have enough reserves to meet needs in the
short term - even if geopolitics don't kick in and the current infrastructure
keeps working as it should. At the annual summit of the Organisation of the
Petroleum Exporting Countries (Opec) in December, Kuwait told the world that,
without urgent outside help, it could not continue to pump oil at its customary
rate. The Kuwaiti oil minister invited Western oil companies back into his country
to see if they could do better. The very next day the US government quietly
slashed 11 million barrels a day (that's equivalent to the entire daily output
of Saudi Arabia) from its forecast of oil production levels for 2025.
To most people who noticed them, such announcements will have seemed remote
and academic. In fact, as I shall attempt to explain, they represent the tip
of a very big iceberg indeed: one that holds the potential to sink the global
We have allowed oil to become vital to virtually everything we do.
Ninety per cent of all our transportation, whether by land, air or sea, is fuelled
by oil. Ninety-five per cent of all goods in shops involve the use of oil. Ninety-five
per cent of all our food products require oil use. Just to farm a single cow
and deliver it to market requires six barrels of oil, enough to drive a car
from New York to Los Angeles. The world consumes more than 80 million barrels
of oil a day, 29 billion barrels a year, at the time of writing. This figure
is rising fast, as it has done for decades. The almost universal expectation
is that it will keep doing so for years to come. The US government assumes that
global demand will grow to around 120 million barrels a day, 43 billion barrels
a year, by 2025. Few question the feasibility of this requirement, or the oil
industry's ability to meet it.
They should, because the oil industry won't come close to producing
120 million barrels a day; nor, for reasons that I will discuss later, is there
any prospect of the shortfall being taken up by gas. In other words, the most
basic of the foundations of our assumptions of future economic wellbeing is
rotten. Our society is in a state of collective denial that has no precedent
in history, in terms of its scale and implications.
Of the current global demand for oil, America consumes a quarter. Because domestic
oil production has been falling steadily for 35 years, with demand rising equally
steadily, America's relative share is set to grow, and with it her imports of
oil. Of America's current daily consumption of 20 million barrels, 5 million
are imported from the Middle East, where almost two-thirds of the world's oil
reserves lie in a region of especially intense and long-lived conflicts. Every
day, 15 million barrels pass in tankers through the narrow Straits of Hormuz,
in the troubled waters between Saudi Arabia and Iran. The US government could
wipe out the need for all their 5 million barrels, and staunch the flow of much
blood in the process, by requiring its domestic automobile industry to increase
the fuel efficiency of autos and light trucks by a mere 2.7 miles per gallon.
But instead it allows General Motors and the rest to build ever more oil-profligate
vehicles. Some sports utility vehicles (SUVs) average just four miles per gallon.
The SUV market share in the US was 2 per cent in 1975. By 2003 it was 24 per
cent. In consequence, average US vehicle fuel efficiency fell between 1987 and
2001, from 26.2 to 24.4 miles per gallon. This at a time when other countries
were producing cars capable of up to 60 miles per gallon.
Most US presidents since the Second World War have ordered military
action of some sort in the Middle East. American leaders may prefer to dress
their military entanglements east of Suez in the rhetoric of democracy-building,
but the long-running strategic theme is obvious. It was stated most clearly,
paradoxically, by the most liberal of them. In 1980 Jimmy Carter declared access
to the Persian Gulf a national interest to be protected "by any means necessary,
including military force". This the US has been doing ever since, clocking
up a bill measured in the hundreds of billions of dollars, and counting. With
such a strategy comes a disquieting descent into moral ambiguity, at least in
the minds of something approaching half the country. The nation that gave the
world such landmarks in the annals of democracy as the Marshall Plan is forced
by deepening oil dependency into a foreign-policy maze that involves arming
some despotic regimes, bombing others, and scrabbling for reasons to make the
whole construct hang together.
America is not alone in her addiction and her dilemmas. The motorways of Europe
now extend from Clydeside to Calabria, Lisbon to Lithuania. Agricultural produce
that could have been grown for local consumption rides along these arteries
the length and breadth of the European Union. The Chinese attempt to emulate
this model even as they enforce production downtime in factories because of
diesel shortages and despair that their vast national acreage seems to play
host to so little oil.
There is a similar picture with gas. The scale of the addiction - and of the
resource - is smaller. But the patterns are the same: growing demand for a finite
resource, most of which has to be imported from the Middle East and the former
Soviet Union. Even a temporary blip in supply, such as occurred in Europe this
week, is enough to create something close to panic among governments. But it
is oil that keeps our civilisation functioning.
This half-century of deepening oil dependency would be difficult to understand
even if oil were known to be in endless supply. But what makes the depth of
the current global addiction especially bewildering is that, for the entire
time we have been sliding into the trap, we have known that oil is in fact in
limited supply. At current rates of use, the global tank is going to run too
low to fuel the growing demand sooner rather than later this century. This is
not a controversial statement. It is just a question of when.
Oil is a finite resource, and there will come a day, inevitably, when we reach
the highest amount of oil that can ever be pumped. Beyond that day - which we
can think of as the topping point, or "peak oil" as it is often called
- will lie a progressive overall decline in production. Putting the same question
a different way, then, at the current prodigious global demand levels, where
does oil's topping point lie?
This is a question, I contend, that will come to dominate the affairs of nations
before this first decade of the new century is out.
Already, a battle is raging, largely behind the scenes, about when we reach
the topping point, and what will happen when we do. In one camp, those I shall
call the "late toppers", are the people who tell us that 2 trillion
barrels of oil or more remain to be exploited in oil reserves and reasonably
expectable future discoveries. This camp includes almost all oil companies,
governments and their agencies, most financial analysts, and most business journalists.
As you might expect, given this line-up, the late toppers hold the ascendancy
in the argument as things stand.
In the other camp are a group of dissident experts, whom I shall call the "early
toppers". They are mostly people who - like me - have worked in the heart
of the oil industry, the majority of them geologists, many of them members of
an umbrella organisation called the Association for the Study of Peak Oil (ASPO).
They are joined by a small but growing number of analysts and journalists. The
early toppers reckon that 1 trillion barrels of oil, or less, are left.
In a society that has allowed its economies to become geared almost inextricably
to growing supplies of cheap oil, the difference between 1 and 2 trillion barrels
is seismic. It is roughly the difference between a full Lake Geneva and a half-full
one, were that lake full of oil and not water. If 2 trillion barrels of oil
or more indeed remain, the topping point lies far away in the 2030s. The "growing"
and "cheap" parts of the oil-supply equation are feasible until then,
at least in principle, and we have enough time to bring in the alternatives
to oil. If only 1 trillion barrels remain, however, the topping point will arrive
some time soon, and certainly before this decade is out. The "growing"
and "cheap" parts of the oil-supply equation become impossible, and
there probably isn't even enough time to make a sustainable transition to alternatives.
Should the early toppers be right, recent history provides clear signposts
to what would happen. There have been five price peaks since 1965, all of them
followed by economic recessions of varying severity: after the 1973 Yom Kippur
War; in 1979-80 after the Iranian revolution and the outbreak of the Iran-Iraq
war; in 1990, with the first Gulf War; in 1997, with the Asian financial crisis;
and in 2000, with the dot.com collapse. The most intense peaks were the first
two. In 1973, the oil price more than doubled, reaching around $35 per barrel
in modern value. The cause was an embargo by Opec, led by Saudi Arabia, and
triggered through overt American support for Israel at the time of the Yom Kippur
War. World oil supplies fell only 9 per cent, and the crisis lasted only for
a few months, but the effect was simple and memorable for those who lived through
it: widespread panic.
The embargo was short-lived, largely because the Saudis feared that if they
kept it up they would create a global depression that would cripple Western
economies, and hence their own. As it was, the short embargo created an economic
recession. I spent much of it doing my homework by candlelight. I didn't see
much of my father. He was queuing for petrol.
The second, and worst, oil shock was triggered by the toppling of the Shah
of Iran in 1979, and prolonged by the outbreak of the Iran-Iraq War in 1980.
The first shock did not push prices as high as those at the time of writing,
but the second shock pushed them to more than $80 a barrel in today's terms.
Again panic reigned, even though the interruption to global supplies was only
four per cent.
The crisis ended in 1981 when the price fell for three main reasons. First,
the Saudis opened their taps. With their huge reserves, mostly discovered in
the 1940s and 1950s, they were able to act as a "swing producer",
increasing the flow to bring prices down just as they had decreased it in 1973
to push prices up. Second, new oil came onstream from giant oilfields in more
stable regions of the globe, including the North Sea. Third, large amounts of
oil were released from government and corporate stockpiles.
These three reasons are high on the list of why we should worry today, because
in the face of another shock things could not be resolved in a similar way.
First, there are grounds to worry that the Saudis are pumping at or near their
peak, no longer able to act as a swing producer. Second, the early toppers fear
that there are no more giant oilfields left to find, much less wholly new oil
provinces like the North Sea. Third, there is not much oil in storage, relative
to current demand. The modern world works on the principle of just-in-time delivery
(another factor in the short-term crisis facing Britain this winter). Our economies,
overall, are more efficient in their use of oil than in the 1970s - a point
much emphasised by late toppers - but the sheer weight of demand is much higher
today, and it is still growing without an end in sight, or even strong governmental
or corporate leadership demands that there should be one.
The cost of extracting a barrel of oil from the ground doesn't change much.
A good rule of thumb might be $5 a barrel today, though obviously there are
variations between oilfields in different geographic and political settings.
What influences the price of oil most is confidence in supply and demand among
oil traders. Oil prices are already at their second highest levels ever, in
real terms, at the time of writing. Some pundits now profess that they will
soon reach their highest ever levels, in modern value. This situation has arisen
for many reasons - but these do not include the fear that the oil-production
topping point is near. Early-topper arguments are not on the radar screens of
the oil traders and analysts, as things stand. Should that happen, and should
the mood of the packs on the trading floors flip to the view that we live no
longer in a world of growing supplies of oil, but rather shrinking ones, the
price will soar north of $100 a barrel very quickly.
An investor friend of mine has already concluded that this scenario is inevitable.
He has switched his investment portfolio to anticipate the moment of "market
realisation". This peak panic point, as he calls it, will not be limited
to oil traders. The worlds of economics and business routinely assume a future
in which oil is in growing and cheap supply.
Economists tend to assume that their "price mechanism" will apply.
Higher prices will lead to more attractive conditions for exploration. This
will lead to more oil being found, and the inevitable discoveries will bring
the price down until the next cycle. Massive corporations write five-year plans
based on assumed access to cheap oil and gas. Think, for example, how important
such access must be to a chemical company dealing in plastics derived from oil.
Or a food-processing company reliant on oil for every stage of food transportation,
including of perishable final products, plus almost all the bottling and packaging
and many of the preservatives and additives.
But suppose the economists and corporate planners are wrong? Imagine the collapse
of confidence when a critical mass of financial analysts, across the full breadth
of sectors in a stock exchange, conclude that they are wrong?
If the topping point is indeed imminent, economic depression looms as a real
prospect. The Saudis were right to be scared of this possibility in the 1970s.
In the Great Depression of the 1930s, triggered in 1929 by the worst-ever stock-market
crash, economic hardship was horrific. World trade fell by a breathtaking 62
per cent between 1929 and 1932. The widespread unemployment and social unrest
bred Fascism in many countries, in some nations on a scale that would change
the course of history. As for the stock markets, it took them 50 years to regain
their pre-collapse value in real terms.
There are so many things to worry about in the fall-out from a premature peak
in oil production. Here is one that gives me particular nightmares. When I and
some of the oil-supply whistleblowers addressed a conference on oil depletion
in the formerly oil-rich nation known as Scotland last year, five leaders of
the British National Party sat in the audience. They said nothing. They just
listened, and learnt, and no doubt reflected that the far right does well in
The stakes are high with energy policy. Higher than most people dream of when
they flip a light switch.
The question of how much oil is left actually breaks down into three sub-questions.
First, the existing-reserves question: how much oil is there in discovered oilfields,
mapped out, proved and ready to be exploited? Second, the reserves-addition
question: how much oil remains to be added via new discoveries, enhanced recovery
techniques and so called unconventional oil? Finally, the speed-to-market question:
how fast can the oil, once found, be delivered to fuel tanks?
One also needs to consider these questions both in relation not only to conventional
oil - that is, liquid that sits underground in a reservoir under pressure -
but also unconventional oil (which consists of sands and shales containing solidified
oil or solid tar or bitumen deposits; is mostly found in Canada, the United
States and Venezuela; and carries considerable environmental extraction costs).
The same applies, strictly speaking, to deep water oil (much-hyped by Exxon
a few years ago but already widely thought to have peaked) and gas, whose patterns
of availability tend to mirror those of oil, and which already faces its own
problems of increasing consumption (gas demand is expected to double by 2030,
reaching 4.3 billion tonnes of oil equivalent a year, of which over 40 per cent
will be used for power generation).
I find it hard to feel optimistic about any of the answers.
I say this as someone who, for most of the 1980s, was a creature of Big Oil.
I taught petroleum engineers and geologists at the grandiose-sounding but in
fact quite tatty Royal School of Mines, part of Imperial College of Science
and Technology in London. My researches on the history of the planet included
such issues as the source of oil, and was funded by BP and Shell, among others.
I also consulted for oil companies. In those days, I was psychologically insulated
in a quest for the respect of my peer group, and highly selective as a consequence
with the information I allowed on to my radar screen. The build-up of greenhouse
gases (a separate but scarcely less urgent reason for worrying about our dependence
on oil) registered nowhere on my list of concerns. I had concerns about oil
depletion, but only in the sense that this cloaked my quest to find more with
a certain nobility, at least in my own eyes.
But one thing that was clear to me even then was that most of the planet has
not a drop of drillable oil. Almost everywhere geologists have looked - which
means everywhere by now, at least at some level of exploration - there is no
oil because one or more of the key geological requirements is missing. Even
when all the boxes can be ticked, you can end up finding no oil. Only one well
drilled in every 10 finds oil. Only one in a hundred finds an important oilfield.
And the more wells that are drilled in a province or country, the smaller the
oilfields generally tend to become.
In my book, Half Gone, I examine in detail the prospects of future viability
for each of the major sources described above. But one of the most important
arguments against over-confidence in future reserves can be summarised simply.
Think of all that expertise that had been built up since the first oil was
drilled in 1859. Think of all the trillions of dollars in oil revenues stacked
up in the 20th century, and all the hundreds of billions spent on exploration
and the hi-tech toys of exploration in the half-century since the biggest Saudi
and Kuwait fields were discovered. Think of the sophistication of the seismic
reflection profiling offshore. Consider the all-important oil source rocks,
and how relatively limited they are in distribution. As BP's former reserves
co-ordinator, Francis Harper, told the Energy Institute in November 2004: "We
know how many world class source-rocks there are, and where they are."
Wouldn't it be reasonable to think that with modern technology at least one
more field of more than 80 billion barrels might have been found somewhere,
in all the places the companies have looked these last 50 years?
The third-biggest oilfield in the world is Samotlor, discovered in 1961, with
20 billion barrels. The fourth-biggest is Safaniya, discovered in 1951, at which
time it also supposedly contained 20 billion barrels. The fifth-biggest is Lagunillas,
discovered in 1926, containing 14 billion barrels. Only around 50 super-giant
oilfields have ever been found, and the most recent, in 2000, was the first
in 25 years: the problematically acidic 9-12 billion barrel Kashagan field in
Let us reduce our scale of scrutiny from the super-giant to the merely giant.
Half the world's oil lies in its 100 largest fields, and all of these hold 2
billion barrels or more, and almost all of them were discovered more than a
quarter of a century ago. Consider the recent record of discoveries of giant
oil- and gas-fields of over 500 million barrels of oil or oil equivalent. Half
a billion barrels - the definition of a "giant" field - sounds a lot.
But since the world is eating up more than 80 million barrels of oil a day at
the moment, it is in fact less than a week's global supply. In 2000 there were
16 discoveries of 500 million barrels of oil equivalent or bigger. In 2001 there
were nine. In 2002 there were just two. In 2003 there were none.
On the basis of this kind of evidence, is the industry going to meet the steady
increase in demand with new discoveries? Francis Harper, for one, doesn't seem
to think so. "Worldwide, the frequency of finding giant oil provinces and
super-giant oilfields has been declining for decades and will not be reversed,"
he told an agog audience at a November 2004 London conference on oil depletion
held in the Energy Institute. "We've looked around the world many times.
I'd say there is no North Sea out there. There certainly isn't a Saudi Arabia."
In January 2004, the early toppers' case suddenly looked a good deal more worryingly
feasible to those who have tended to take the late toppers at face value. Shell's
then chairman, Sir Philip Watts, told investors that the company had overestimated
its reserves by more than 20 per cent. By March, internal e-mails had been requisitioned
by lawyers and these made it clear that the chairman and his head of exploration
had known about this problem for some time, and had deliberately lied about
it. Both men departed the scene.
Shell's corporate scandal is dramatic enough. But there is a clear risk that
it is only the tip of an iceberg. Today, many people in the oil industry appear
to be under pressure when it comes to supplies of oil. "There is something
strange going on in this industry," Shell's replacement boss, CEO Jeroen
van der Veer, told the press in November 2004. He suspects that other companies
have the same problems he inherited. The Economist drew the following conclusion:
"Industry analysts and investors are quietly saying that Mr van der Veer
may be right, and another big reserves scandal may be brewing somewhere."
Against this unpromising start, how much oil do we think the oil companies
have found to date? Call BP for a bit of help with the answer and you'll be
sent their annual BP Statistical Review of World Energy. In it, you'll see lists
of data for national proven oil reserves. Add these up to a global total of
oil reserves year by year, and you'll see the total creep reassuringly upwards
over time. The chart on page seven shows those figures, from successive annual
reviews split into the Middle East and the rest of the world. Global reserves
rise from just over 600 billion barrels in 1970 to almost double that today:
1,147 billion barrels at the last count, up to and including 2003.
So what's the problem? The first hint that something might be amiss comes,
as is so often the case in life, in the small print. Squinting through a lens
if you have anything but perfect eyesight, you will find that the data in BP's
own report are not BP's at all. The estimates have been compiled using "a
variety of primary official sources, third-party data from the Opec Secretariat",
and a few other places completely removed from BP's headquarters in St James's
Square with all its accumulated research and knowledge. Think how many libraries
of understanding BP must have gathered in over a century of aggressive oil exploration
and production all over the world. And yet all they offer us as a guide to our
own understanding of how much "proved" oil reserves there are left
on the planet is a compilation of other people's data. And much of that itself
After this revelation comes another. The small print continues: "The reserves
figures shown do not necessarily meet the United States Securities and Exchange
Commission definitions and guidelines for determining proved reserves, nor necessarily
represent BP's view of proved reserves by country."
They don't even believe the figures they are publishing! Referee! This is a
publication used as an energy bible by researchers the world over. Students
quote it as whole truth in undergraduate essays. Journalists quote it as gospel
in legions of articles. They don't insert caveats like this. Neither have they
seen such caveats in earlier reports.
You might end up with a few questions for the authors of the BP Review at this
point. But then, at the end of the document, we read the following: "BP
regrets it is unable to deal with enquiries about the data in the Statistical
Review of World Energy."
So what is BP's real view of "proved" reserves? Could it go something
Looking closer at the chart and zooming in, you'll see that the figures show
that global reserves of oil went up particularly quickly between 1985 and 1990
(a big black oily arrow indicates the point). There must have been some big
new oilfields discovered then, right? Wrong. The actual new discoveries in that
period were less than 10 billion barrels. But the Middle East nations hiked
their "proved" reserves from already discovered oilfields by fully
300 billion barrels collectively in that period, professing one after another
that their national calculations had all somehow hitherto been too conservative.
Three hundred billion barrels is a lot of oil. It is more than a decade of demand
at current levels.
Here's how it happened. In the 1950s, the nations with oil organised themselves
into the cartel known as Opec. Opec's main aim was and is to try and control
the price of oil. They don't want it too low. That would cut their income. Neither
do they want it too high. That might get the addicts thinking of maybe going
elsewhere. They want it just right, perhaps around $30 per barrel in today's
money. To do this they can't produce too much, because that would flood the
market, causing the price to drop. They have to produce exactly the right amount
collectively, and that means quotas. After much bickering in the early days,
the Opec oil ministers decided in 1982 to allocate a quota to each country in
the cartel according to the size of its reserves.
But in 1985, they began to - how shall I put it? - massage the data. Kuwait
was the first to give in to temptation. They found that their reserves had gone
up overnight from 64 to 90 billion barrels. In 1988, Abu Dhabi, Dubai, Iran
and Iraq all played the same card. Abu Dhabi had been so needlessly conservative
that their reserves went up from 31 to 92 billion barrels. They surely must
have employed some incompetent geologists. How could they have overlooked 60
billion barrels? Finally, in 1990, Saudi Arabia decided it too had been conservative,
hiking its total from 170 to 258 billion barrels.
You can also see in BP's data that the Middle East's reserves have been almost
constant in size since then. What you don't see in the figure - but do see in
the data - is that this is apparently the case not just for the sum of the reserves
of the Middle Eastern oil producers but also for the figures of reserves for
the individual nations.
Consider the enormity of this coincidence. It means that the billions of barrels
found in new discoveries each year would have to match exactly the billions
of barrels produced each year in each of the Middle Eastern OPEC nations, and
do so consistently every year for more than a decade.
BP's Statistical Review of Everyone's World Energy Statistics Except Their
Own invites us to believe all this without comment from them or recourse to
questions by us. We are left to look at the total figure they cite for "proved"
reserves, 1.1 trillion barrels, and think to ourselves ... "Er, really?"
The early toppers have a different view. Being in most cases old hands from
the oil industry, they know a thing or two about the games that go on in their
industry. They estimate the total of proved reserves to be 780 billion barrels,
some 300 billion barrels short of "BP's" figures. This is less than
the world has produced since the first oil was struck over a century ago: 920
billion barrels by the end of 2003 (a figure about which there is somewhat less
Let us take some opinions that ought to be difficult to discount, one from the
top of the oil tree in the US and two from the Middle East. The Houston-based
energy investment banker Matthew Simmons has been one of George W Bush's energy
advisers. He has studied reports by Saudi engineers showing that pressure is dropping
in Saudi oilfields. The four biggest fields (Ghawar, Safaniyah, Hanifa, and Khafji)
are all more than 50 years old, having produced almost all Saudi oil in the past
half-century. These days, Simmons says, they have to be kept flowing largely by
injection of water. This is of explosive significance, he argues. "We could
be on the verge of seeing a collapse of 30 or 40 per cent of their production
in the imminent future. And imminent means some time in the next three to five
years - but it could even be tomorrow."
The Saudis dismiss this, claiming that they have slightly more than the 258
billion barrels of "proved" reserves they claimed they had in 1970,
with lots more yet to be found, and that they can lift the current extraction
rate of around 9.5 million barrels a day to more than 10 with little difficulty.
As Nansen Saleri, Manager of Reservoir Management at Saudi Aramco, puts it:
"... we have lots of oil, not only for our grandchildren but for the grandchildren
of our grandchildren."
Saudi Aramco has the largest reserves of all the oil companies in the world:
20 times the size of ExxonMobil's, if they indeed have 260 billion barrels.
They also have the lowest discovery and development costs, some 50 cents per
barrel, or 10 per cent of what the private companies pay in Russia or the Gulf
of Mexico. And, being state-run, without much need for debt, they are under
no pressure to divulge much to the financial markets.
Lately, in the face of concerns about their ability to ramp up production,
they have been marginally more open. They say they can maintain spare capacity
of 1.5 to 2 million barrels per day and would be content with a fair price of
$32-$34 a barrel. Aramco's geologists have insisted they can hike output to
15 million barrels a day (adding more than 5 million to the 9.5 million reported
today); 5 million of which come from the giant Ghawar field alone. Contractors
report that drilling activity is increasing, as it needs to, given the age of
But consider what A M Samsam Bakhtiari of the National Iranian Oil Company
(NIOC) has told the Oil & Gas Journal about the existing-reserves question:
"I know from experience how 'reserves' are estimated in major Middle Eastern
and Opec countries, and the methods used are usually far from scientific, as
the basic knowledge for such a complex exercise is not to hand." Bakhtiari
is withering about Saudi Arabia's reserves hike of 90 billion barrels in 1990.
But he is not too keen on his own national figures either. The BP Statistical
Review cited 92 billion barrels of "proved" oil reserves at the end
of 1993, but Bakhtiari preferred the estimate of a retired NIOC expert, Dr Ali
Muhammed Saidi, who could add the proved reserves up to only 37 billion barrels.
Dr Mamdouh Salameh, a consultant on oil to the World Bank, agrees there is
a 300-billion-barrel exaggeration in Opec's reserves. More recently, a former
director of Aramco has said that Saudi Arabia's proved developed reserves stand
at 130 billion barrels. An anonymous informer talking to Dr Colin Campbell of
the Association for the Study of Peak Oil goes further. His conclusion is that
Saudi Arabia would have gone over its peak of production in the last quarter
of 2004. This person speaks with front-line inside knowledge. "Saudi has
at various times put 19 fields into production," he says. "Of these,
eight are 'stars', being highly productive fields that produce around 90 per
cent of the country's production. All the others are 'dogs' that have never
worked well and probably never will. Recovery rates of up to 50 per cent may
be appropriate for the 'stars'. For the 'dogs', 10, 15 or 20 per cent would
be more appropriate. Make this adjustment and Saudi has depleted more than 50
per cent of its realistically recoverable reserves."
In February 2005, Matthew Simmons speculated that the Saudis may have damaged
their giant oilfields by over-producing them in the past: a geological phenomenon
known as "rate sensitivity". In oilfields where the oil is pumped
too hard, the structure of the oil reservoir can be impaired. In bad cases,
most of a field's oil can be left stranded below ground, essentially unextractable.
"If Saudi Arabia has damaged its fields, accidentally or not," Simmons
said, "then we may already have passed peak oil."
Is there any chance that the early topping point of oil production is somehow
wrong, all just a bad dream? I am sorry to say that I think not. It is important
to realise that the early toppers are not advocates or agitators by choice.
They tend to have high residual affection for the industry they have spent their
lives in. Colin Campbell, for example, the founder of the Association for the
Study of Peak Oil (ASPO), worked for 40 years in the oil industry before retiring
to western Ireland. Chris Skrebowski, the editor of Petroleum Review, a leading
trade journal of the oil industry, spent nearly a decade arguing against Campbell
before conceding that he was right. "In 1995 it all seemed pretty fantastic,"
says Skrebowski. "I tried hard to prove him wrong. I have failed for nine
years. I am now with him. In fact, I think he's a bit of an optimist."
Other early-toppers include Richard Hardman, former chief executive of Amerada
Hess; Roger Bentley, formerly of Imperial Oil in Canada; and Roger Booth, who
spent his professional life at Shell, and who now believes that, when the peak
does hit: "A crash of 1929 proportions is not improbable."
Chris Skrebowski believes that, from as early as 2007, the volumes of new oil
production are likely to fall short of the combined need to replace lost capacity
from depleting older fields and to satisfy continued growth in demand. In fact,
given the time frames with which offshore oilfields are developed and depleted,
it seems certain that there will be nowhere near enough oil to meet the combined
forces of depletion and demand between 2008 and 2012. If there were, it would
be from projects we would know about today (oil companies liking as they do
to boast to their shareholders about every sizeable discovery). Given the inevitable
time-lag from discovery to production, there is now no way to plug that gap.
There is worse: people in the oil industry must know this. They should be alerting
governments and consumers to the inevitability of an energy crunch, and they
In July 2004, Campbell and Skrebowski tried to carry their warning jointly
to the UK parliament. In the Thatcher Room they delivered a seminar to a pitifully
thin audience, including only three MPs and a handful of researchers. I sat
there listening to it with as surreal a feeling as I have ever experienced in
all my years working on energy. Over the course of a decade at and around the
climate negotiations, I have rarely been able to claim that the global warming
problem is not reaching the ears it needs to. The same can manifestly not be
said about the oil-depletion problem. This is the starting point for any analysis
of how serious the problem is. How can evidence so compelling go almost unheard
in one of the world's centres of government, even with a suspiciously high oil
price at the time and so much obvious oil-related trouble brewing in the Middle
Having built their cases, the two spelt out the consequences of the early topping
point. "The perception of looming decline may be worse than the decline
itself," Campbell said. "There will be panic. The market overreacts
to even small imbalances. Prices are set to soar in the absence of spare capacity
until demand is cut by recessions. We will enter a volatile epoch of price shocks
and recessions in increasingly vicious circles. A stock-market crash is inevitable."
"If the economic recovery continues," Skrebowski added, "supply
will get very tight from 2008 or 2009. Prices will soar. There is very little
time and lots of heads are in the sand."
In 1956, a Shell geologist called M King Hubbert famously calculated that oil
production in the "lower 48" states of America would peak in 1971.
Almost nobody believed him. Shell censored the written version of Hubbert's
address to the American Petroleum Institute, changing the wording of his conclusion
to read that "the culmination should occur within the next few decades".
The US Geological Survey, in particular, did everything it could to hike the
estimates of ultimately recoverable American oil to a level that would make
the problem go away. The US had 590 billion barrels of recoverable oil, the
survey said, in 1961, meaning that the industry had 30 years of growth to look
The years went by and the "lower 48" did indeed hit their topping
point. It came a year ahead of estimate, in 1970, at 3.5 billion barrels. Since
then, production has sunk down the second half of the curve at a steady rate.
Many billions of dollars have been spent on ever more sophisticated exploration,
including in areas where nobody imagined oil would be found at the peak of discovery
in the 1930s, such as the deep water in the Gulf of Mexico. A frenzy of new
domestic exploration began after the first Arab embargo in 1973 and the realisation
that domestic production could be ramped up no more. Every enhanced production
technique invented has been tried and tested in American oilfields. But it has
all made no difference to the remarkable symmetry of the up-and-down curve that
expressed Hubbert's thinking. The US is just short of halfway down the second
half of the curve now. In other words, it has used up some three-quarters of
its original endowment of recoverable oil. Given its almost total lack of attention
to the efficiency with which oil is burned, the US becomes more dependent on
foreign oil imports by the day.
The US Secretary of the Interior at the time, Stewart Udall, later apologised
for having helped lull Americans into a "dangerous overconfidence"
by accepting the advice of the US Geological Survey so unquestioningly. A long-serving
US Geological Survey director who had led the campaign against Hubbert, V E
McKelvey, was forced to resign in 1977.
We need to remember this sequence of events, and the windows it gives us into
individual and collective behaviour, when we come to consider the global oil
The American pattern of historical oil discovery and production is only a loose
guide to what is going on in the rest of the world. In the US, oil, once found,
was pumped without much substantive effort at constraint. The curves for discovery
and production are going to look different where conservative nationalised companies
are doing the looking, or where - as in the case of Saudi Arabia - there has
been so much oil that the taps can be turned up and down for long periods so
as to moderate supply and thus influence price. Countries that have onshore
and offshore oil can have two curves, because the technology for offshore oil
exploitation was developed much later than that for onshore. Curves will also
be disrupted by wars, big political events, even accidents. None the less, country
after country follows a crude bell curve - like Hubbert's curve - in both discovery
and production. Today, more than 60 out of the 65 countries possessing oil have
passed their discovery topping points and 49 of them have passed their production
topping points. The US has a particularly long gap between the two: 40 years
(1930 to 1970). The UK has one of the shortest: 25 years (1974 to 1999). This
is because the first discoveries were made much later in the UK, when technology
for both exploration and production were more advanced. Growing supplies of
British oil didn't last long, though. Britain is now a net oil importer just
like the US.
Nor is there any comfort to be derived from gas. Gasfields deplete very differently
from oilfields, gas being much more mobile than oil. It is normal for a gasfield
to yield 70-80 per cent of its gas over its production lifetime, whereas an
oilfield will typically yield only 35-40 per cent of its oil. Drillers normally
set gas production far below the natural production capacity so as to give a
long production plateau. But the danger in this is that the end of the production
plateau comes abruptly, and without market signals.
Colin Campbell, a prominent early topper, estimates that the original global
endowment of conventional gas was around 10,000 trillion cubic feet (equivalent
to 1.8 trillion barrels of oil), of which about a quarter has been produced
to date. He expects a global plateau in production of around 130 trillion cubic
feet per year during the period 2015 to 2040, with production falling over a
cliff beyond that. Jean Laherrère forecasts 12,000 trillion cubic feet
for all gas including unconventional sources (2 trillion barrels of oil equivalent).
He puts the peak of gas depletion in 2030, at 130 trillion cubic feet per year.
But the exact figures need not concern us. What matters is that gas has all
the same problems of dependence on overseas supplies as oil, and more besides.
Meanwhile, the five essential facts about global oil discovery can be summarised
1. The biggest oilfields in the world were discovered more than half a century
ago, either side of the Second World War.
The big discoveries on the Arabian Peninsula opened with the discovery of the
Greater Burgan field in Kuwait in 1938. At that time, it supposedly held 87
billion barrels. The slightly bigger Saudi Arabian Ghawar field, supposedly
holding 87.5 billion barrels before extraction started, followed in 1948. These
fields, the two biggest in the world, are so big that they dominate the global
figures in their years of discovery.
2. The peak of oil discovery was as long ago as 1965.
How many people appreciate this? I invite you to do a bit of personal market
research. Line up ten of your better-educated friends. Preface your question
to them with a few reminders about how many millions of dollars the oil companies
make in daily profit, tell them, if you can, an anecdote or two about the technical
wizardry they use, and ask them to imagine how many billions of dollars they
must have spent on exploration over the years - both of the companies' own money
and of the massive tax-deduction subsidies available to them. Then ask: in what
year would you guess the most oil was ever discovered?
3. There were a few more big discovery years in the 1970s, but there have been
none since then.
The biggest irregularity on the downside of the global discovery curve involved
the discovery of oil in Alaska's giant Prudhoe Bay field, and the North Sea,
in the late 1970s. I was a geology student then. I remember the thrill as the
giant fields were discovered one after the other. They all had such serious-sounding
names. Forties, Brent, Piper. I look back on those days now and I see something
of the primeval attractions of the hunt in it. As a junior trainee hunter, I
used to listen to the tales of the senior hunters, and how they had found their
quarry, quite atremble with admiration. However, what I and the other hunters
didn't know was that the days of giant discoveries were more or less over.
4. The last year in which we discovered more oil than we consumed was a quarter
of a century ago.
Since then, despite all those generations of eager brainwashed geology students,
we have been burning progressively more, and finding progressively less. This
is another one to try out on the 10 educated friends.
5. Since then there has been an overall decline.
A small rise in discoveries in the 1990s that must have looked promising at
the time has dropped in the opening years of the new century. Does this sound
like a world without a looming oil depletion problem, as portrayed by BP's CEO
Lord Browne - who in March last year insisted "There is no physical shortage.
The resources are there"? Are people are being lulled into a sense of false
security about oil supply based on his speeches, and publications like the BP
Statistical Review of World Energy? Or are we simply failing to pay sufficient
attention to alarm signals such as last month's little-noticed announcement
by the US government's Energy Information Administration, in which forecasts
of Opec production between now and 2025 were slashed by 11 million barrels a
Let us suppose for a moment that the late toppers are correct. The topping
point, as defined by reserves available in principle, is off in the 2020s or
2030s, and we can look forward to growing supplies of relatively cheap oil for
a decade or more. There is another aspect of the problem: whether or not the
production capacity is sufficient.
Oil-industry analyst Michael Smith, who took his PhD in geology just after
me - sitting in the same chair as I did in the research lab - is an expert in
this subject. He has spent most of his vocational life as an oil-industry geologist
working around the world, particularly in the Middle East. "Reserves are
largely irrelevant to the peak," he says. "Production capacity is
the important thing - how quickly you can get it out. It is an engineering problem,
not a geological problem."
Of the 11 countries in the Middle East, only five are significant oil producers:
Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates, known sometimes
as the Middle East Five. They produce around 20 million barrels a day today,
a quarter of the global total. If global demand rises at the average rate of
the past 30 years, 1.5 per cent per year, these five countries will have to
meet around two-thirds of the demand, Smith calculates.
Let us assume they can do what they say they can, no more, no less. Where does
that leave us? Saudi Arabia says it can lift production from 9.5 million barrels
per day today to 12 million by 2016 and 15 million beyond that. This despite
50 per cent of the oil coming from the Ghawar field, where a water cut is already
reported. Smith sums all the reported capacities in the Middle East Five and
finds that if the rate of demand growth continues at 1.5 per cent they will
fail to meet global demand by as soon as 2011. If it rises to 2.5 per cent the
demand gap appears in 2008. If it is 3.5 per cent - the rates in China and the
US of late - the gap is already here.
"What's more," Smith adds, referring back wryly to the starting assumption,
"I do not truly believe the claims of the Middle East Five. In fact, although
I don't believe Saudi and Iranian claims in particular, I think their politicians
do believe them. I don't think there is a conspiracy, more a division of labour
such that no one knows the whole story, each part of which has wide error bars.
The summed result is inevitably the most positive conclusion which goes to the
politicians. I've seen this in all the oil companies I have worked for."
At the November 2004 conference on oil depletion at the Energy Institute, Michael
Smith showed a slide at the end of his presentation that gave a pictorial summary
of his views. It showed a group of firemen posing for the camera outside a burning
The investment bank Goldman Sachs drew attention to the problem of access to
oil on a global scale in a much-quoted 2004 report. "The industry is not
running out of oil - reserves are large and continue to grow," it asserts
- though failing to offer evidence of this analysis. "What the industry
is running out of is the ability to access this oil." Two decades of chronic
underinvestment in the 1980s and 1990s are responsible. During this time the
industry was feasting on reserves discovered in the 1960s and earlier with infrastructure
capitalised in the 1970s, after the first oil shock. Global oil demand is now
closing fast on tanker capacity and refining capacity. The peak year for tanker
capacity was way back in 1981. So, too, was the peak for refinery capacity.
Global rig counts also peaked that year.
So, how much new investment is needed to fix the shortfall? Over the next 10
years, assuming oil demand increases as commonly projected, fully $2.4trillion
will need to be spent, according to Goldman Sachs. This is nearly triple the
level of capital investment by the oil industry in the 1990s. And if it isn't
spent? "If the core infrastructure does not improve, energy crises are
likely to become progressively more frequent, more severe and more disruptive
of economic activity," the investment bank concludes.
Stated simply, it seems that even if an early topping point doesn't hit us,
the results of two decades of negligence in investment in infrastructure and
exploration will. You need to read between the lines of the Goldman Sachs report
to smell the level of anguish about this. Even where substantial money has been
invested, a further list of serious unresolved problems can often be quickly
summoned up. Oil in the Caspian is central to every scenario that envisages
oil supply meeting demand off into the 2020s. The oil industry has long regarded
the Baku-Ceyhan pipeline from Azerbaijan to Turkey as essential if it is to
get Caspian oil out to market without the need to go through Chechnya and Russia.
By the time this pipeline begins to shift oil as planned in 2005, it will have
cost $4bn, almost three-quarters of that in the form of bank loans. The problems
for this pipeline begin with reports of its construction standard. Four whistleblowers
recently told a UK national newspaper that the pipeline was failing all international
construction standards, including installation of inadequately welded pipe before
it had even been inspected. It passes through a major earthquake zone. Turkey
has had 17 major shocks in the past 80 years, and the pipeline is supposed to
last for 40 years.
At the time the pipeline was conceived, industry reports talked of several
hundreds of billions of barrels in the Caspian region. Now estimates of around
50 billion barrels, about the same as the North Sea, are more common. After
the discovery of the last of the super-giants, the Kashagan field in 1990, there
was a burst of predictable interest in Kazakhstan. But now, in terrain where
individual wells cost $1bn to drill, in conditions where only foreign companies
have the know-how and technology to drill, the Kazakh government has introduced
new legislation that makes investment unattractive. As an ExxonMobil executive
told Petroleum Review, "...the jury is still out on whether all these obstacles
will delay Kazakhstan's production".
This example of a real-world current problem for the oil industry raises the
subject of the interplay between the early topping point and oil geopolitics.
As the world's No 1 consumer, the United States will have much to say about
how the crisis - whether of early depletion or inadequate infrastructure and
investment, or both - plays out. The geopolitics of American oil dependency
is well summarised by Michael Klare in his recent Blood and Oil. He sees four
key trends in US energy behaviour: more imports, increasingly unstable and unfriendly
suppliers, escalating risk of anti-American violence and rising competition
for diminishing supplies. Imports we have talked about above. Increasingly unfriendly
suppliers and escalating anti-American violence are linked.
The point here is that the US can have relationships with governments in unstable
countries if it chooses the path of oil dependency, but not easily with their
populations. Terrorism can be expected to grow with every American act interpretable
as imperialistic in the Middle East and Central Asia. The Iraq-to-Turkey pipeline
illustrates the problem perfectly. It suffered near daily attacks in 2003.
As for competition over diminishing supplies, therein lies the stuff of nightmares.
The Pentagon established a Central Command in 1983, one of five unified commands
around the world, with the clear task of protecting the global flow of petroleum.
"Slowly but surely," Michael Klare concludes, "the US military
is being converted into a global oil-protection service."
At $30 a barrel, the total bill for imported oil - now more than half the US
daily consumption and rising fast - should reach $3.5 trillion over the next
25 years, and this does not include the Pentagon's overhead. Beyond the Middle
East Five, the Bush strategy of supplier diversification will look to eight
main sources, which Klare calls the Alternative Eight: Mexico, Venezuela, Colombia,
Russia, Azerbaijan, Kazakhstan, Nigeria and Angola. These countries and their
oil operations are characterised by one or more of the following attributes:
corruption, organised crime, civil war, political turmoil short of civil war,
and ruthless dictators. The US military is being forced into deeper relationships
with such regimes, including joint military exercises.
The bottom line for Klare is this. "Any eruption of ethnic or political
violence in these areas could do more than entrap our forces there. It could
lead to a deadly confrontation between the world's military powers." Because
obviously, in a world as enduringly addicted to oil as ours is, others are going
to be looking for their own supplies. Russia and China will be among them. As
one global-security analyst recently put it: "I am afraid that over the
years we will see China become more involved in Middle East politics. And they
will want to have access to oil by cutting deals with corrupt dictatorships
in the region, and perhaps providing components of weapons of mass destruction,
ballistic missiles and other things they have been involved with, and that could
definitely put them on a collision course with the United States." Oil
dependency could yet prove to be the route to a Third World War. The stress
associated with an unforeseen early topping point surely makes that horrific
prospect more, not less, likely.
Humans are good at staying loyal to their theocracies, and a hundred years
of fossil fuel addiction has created impressive theocracies. However, as Einstein
said, you can't solve the world's problems with the same thinking that created
them. We have to think outside the box. That means giving renewable energy,
alternative fuels, energy efficiency and storage technologies the space they
need to grow explosively.
The good news is that it will be possible to replace oil, gas and coal completely
with a plentiful supply of renewable energy, and faster than most people think.
Shell employs roomfuls of clever people just to think about the future. They
are called scenario planners. In their 2001 book of scenarios, Shell's planners
mention that renewable energy holds the potential to power a future world populated
with 10 billion people, and do so with ease. The needs of the 10 billion can
be met even in the unlikely and undesirable event that all of them use energy
at levels well above the average per-capita consumption today in the EU. The
Shell futurists mention this almost in passing, in the caption of a diagram
showing the continent-by-continent potential for individual renewable-energy
technologies to contribute to such a power-rich future. Working for an oil and
gas giant as they do, it is perhaps no surprise that they fail to explore a
scenario wherein something resembling this renewable-power-rich future comes
to pass. Others are not so constrained.
When I began my time in Greenpeace, in 1989, the protestations my colleagues
and I made that renewable energy could displace fossil fuels and run the world
were ridiculed by energy experts and officialdom as naïve wishful thinking.
Now, more than a decade later, such views can be found in the heart of government,
at least in Europe. The Blair Government published a report in 2003 that concluded:
"It would be technologically and economically feasible to move to a low
carbon-emissions path, and achieve a virtually zero-carbon-energy system in
the long term, if we used energy more efficiently and developed and used low-carbon
Among the low-carbon technologies on offer, the government report placed heavy
emphasis on renewable energy and hydrogen, rather than nuclear power. Of solar
energy, the report concludes: "[It] alone could meet world energy demand
by using less than 1 per cent of land currently used for agriculture."
Tony Blair used these same words in the speech he gave launching the UK Energy
White Paper. I sat there watching him do it, 10 feet away in the front row.
I was momentarily tempted to leap to my feet and shout: "So why don't you
invest in it like the Germans and Japanese, then?" But he hasn't. Not then.
Microcosms of what could be done can be found already on the local government
scene. Take the small town of Woking. Its borough council has cut carbon-dioxide
emissions by fully 77 per cent - yes, more than three quarters - since 1990
using a hybrid-energy system involving small private electricity grids, combined
heat and power (CHP), solar photovoltaics (PV), and energy efficiency. Woking
has turned its town centre, its housing estates, and its old people's homes
into inspirational islands of energy self-sufficiency. The UK grid could go
down for ever, and these folks would have their own heating and electricity
year-round. The technologies work in perfect harmony. The CHP units generate
heating when needed in winter, and lots of electricity along with it when the
PV is not working at its best. The PV generates plenty of electricity in the
summer, when the heating isn't needed, meaning the CHP can't generate much electricity.
Because the use of private wires is so much cheaper than using the national
grid, the whole package costs fractionally less than the equivalent heating
and electricity supply would cost from the big energy suppliers.
Compare such out-of-the-box ingenuity with what nuclear has to offer. Even
if there were no environmental problems associated with it, and we could afford
the billions needed in perpetuity from the public purse to make the voodoo economics
stack up, a new fleet of stations couldn't come on-stream in the UK much before
2020. And if we and the Americans can't solve the energy crisis without resorting
to nuclear, the whole world will follow our example. Bad as the terrorist threat
is now, it would be compounded many times as a result. We would live with much
increased risk of losing whole cities to suitcase bombers.
There is a part of me that looks at the prospect of a cold snap in Britain
this winter, and of a consequent fuel-supply crisis, and thinks "Bring
it on." Maybe this is what we need to stop our sleepwalk towards catastrophe,
and to make us rethink our energy policy. Perhaps the government can be judo-thrown
into the Wokingisation of Britain now, and dissuaded from the nuclearisation
of Britain 15 years from now.
But then I think of all the grans and granddads that would die in a one-in-ten
winter, and I just feel sad. Sad, and mad with our hot-air Government.
Adapted from "Half Gone: Oil, Gas, Hot Air and the Global Energy Crisis",
by Jeremy Leggett (Portobello Books, £12.99).
To order a copy for the special price of £11.99 (inc P&P), call Independent
Books Direct on 08700 798 8897