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The Sunday Telegraph: 'We've got 2 trillion barrels of the stuff left'

'We've got 2 trillion barrels of the stuff left'(Filed: 30/04/2006)

Sylvia Pfeifer finds that the doomsayers who have been predicting that we'll soon be running out of oil are far too pessimistic

When Jeroen van der Veer, the chief executive of Royal Dutch Shell, unveils a strategy update this Thursday, investors will want to know one thing: is Shell finding more oil?

With oil at $73 a barrel, nobody can pump the stuff fast enough. But in order to keep pumping it, oil companies also need to find new reserves. Unfortunately, most western oil majors aren't getting any better at finding oil, let alone at building their reserves. The last discovery of more than 5bn barrels was the Kashagan field in Kazakhstan in 2000.

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According to analysts at Sanford Bernstein, western oil companies had an average reserve-replacement ratio of 129 per cent over the past five years – in other words, they found 29 per cent more oil and gas than they pumped. Last year, however, that ratio fell to 114 per cent and that includes reserves acquired through acquisitions.

The news this week from Shell on production is not expected to be any rosier. Analysts expect van der Veer to announce that Shell will come in at the lower end of its targeted production for this year of between 3.5m and 3.8m barrels of oil equivalent per day.

It is numbers like these that have re-ignited fears that the world's oil production will soon peak – or even has peaked already. Current concerns over the security of supply, aggravated by political tensions in Iran and Nigeria, coupled with ever-increasing demand just add to concerns.

Predictions of imminent disaster have been around for years. Princeton geologist Ken Deffeyes warned in 2001 of “war, famine, pestilence and death” as a result of oil production peaking. Last year he predicted that the peak of global oil production would occur last Thanksgiving.

Thanksgiving came and went, but Deffeyes is not alone. Last year Matthew Simmons claimed in his book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, that the Saudis are too optimistic about the size of their oil reserves.

But are we really starting to run out of oil? “I don't believe the world is running out of energy,” van der Veer said in Houston earlier this year.

But it is not just the chief executives of oil majors who believe there is still enough oil left.

“Running out of oil is a very black and white concept,” says Peter Jackson of ambridge Energy Research Associates, a consultancy. “The idea that suddenly worldwide production is going to start plummeting is not going to happen.”

Jackson says that his analysis of the outlook for supply until 2020 shows that “there is no peak or even dramatic slowing down of oil production”.

According to van der Veer, oil companies must do three things to address the challenge: make the most of fossil resources, develop alternative forms of energy and improve energy efficiency.

The biggest impact so far has come from oil companies increasing the amount of oil they recover from existing reservoirs. On average, oil companies now recover little more than a third from their reservoirs. New technology holds the key.

According to Jackson, technological advances have already boosted recovery rates in the Norwegian sector of the North Sea from between 30 per cent and 35 per cent in the 1980s to between 60 and 65 per cent. He says that the “peakists” discount the additional amount of oil from such field upgrades.

“'We estimate that there are at least 3 trillion barrels of conventional global reserves and resources, of which we have produced 1 trillion barrels. This estimate does not include unconventional oils such as oil from Canada's oil sands and oil shales in the USA and Australia,” he says.

Bjorn Lomborg, author of The Skeptical Environmentalist, says that the world is seriously underestimating “our ability to alter our parameters”. He points out that if you look at all the shale oil that's available, there is enough to last between 80 and 90 years – double previous predictions of between 40 and 45 years.

“The whole point is that we find other alternatives that are better and cheaper,” he says.

New technology will also enable oil companies to explore in more remote and difficult places. Recent figures from the International Energy Agency estimate that about half of the undiscovered conventional oil resources outside the Middle East are to be found in deep water or in the Arctic.

One perennial problem is, of course, the fact that much of the world's remaining oil reserves are not owned by private companies but by government-owned enterprises.

That means that the oil may not be produced with all the efficiency associated with private companies. Nevertheless, western oil companies are still striking lucrative deals with their government-owned counterparts.

Speaking to The Sunday Telegraph earlier this month, Lord Browne, the chief executive of BP, said that oil-rich states are still interested in doing deals with private companies. He cited BP's talks with Libya as an example.

In the very long term – if the oil peak were to come after 2020 or 2030, as for example the International Energy Agency predicts – then the increasing amount of alternative fuels such as bio-fuels, solar and wind power, should ease the transition to a life using less oil. But life after oil is some time away yet.

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