Download Report on the Risks and Impacts of a Potential - Post

Report on the risks and
impacts of a potential future
decline in oil production
1 June 2009
Who and what is this report for?
•
There is a vocal group of analysts/scientists who believe that the peak in global oil
production is going to happen “soon” – though views range on whether this means
the peak is imminent or will occur in a few years.
•
The attached report summarizes the main outputs of an internal project undertaken in
2007 by then BERR officials on the issues surrounding peak oil.
3
Content
Content
1.
Executive Summary
2.
What is peak oil and what do others say?
3.
Oil in the UK Economy
4.
Alternative Technologies
5.
Scenarios of peak oil and their impacts
6.
Conclusions
7.
Bibliography
4
Why did we engage in a peak oil project?
Why does peak oil concern us?
Our current view is that a permanent decline in global oil production – i.e. peak oil – is unlikely to take place before 2020. However,
if it were to happen, the consequences for economic prosperity and security are likely to be serious, with:
• Impacts on UK security of oil supply
• Impacts on the prices for other fossil fuels such as gas and coal
• Disruption of the UK economy especially the transport sector
• Long term macroeconomic impacts (GDP, inflation etc) and impact on prices of other goods
• Possible impacts on our climate change goals
• Possible geopolitical implications
The lead-times for Governments and economic systems to adjust to peak oil could be several years or even decades – with a
potentially painful transition time. Therefore, it is prudent to more thoroughly explore the issues surrounding peak oil in the context
of longer-term risk management.
What were our objectives?
What methodology was used?
• To understand the facts and uncertainties surrounding
the peak oil debate
• To improve government communication on the subject
• To provide high level policy recommendations to
address peak oil’s impacts on the UK
• To show which of our key policies already address
issues surrounding peak oil
• Literature review of existing evidence
• Interview programme with key stakeholders and experts
• Scenarios workshop(s) mapping out possible paths and patterns
for supply & demand growth
• Implications workshop(s) debating the impact of peak oil on price,
demand, supply, technology development, GDP, security, etc.
• Policy option workshop(s) and steering group meetings
When was the project undertaken?
The project was started in May 2007 and ran until November 2007. In order to disseminate outcomes of the project more widely
this report, based on the earlier work, was prepared.
What happened since the end of the project?
The 2008 World Energy Outlook warned of investment shortfalls and rising depletion rates of existing fields. The current recession
raises questions on how the recession will impact on investment in the oil industry and the likeliness of a future supply crunch.
5
What were the key conclusions of the project?
Domestic policies that increase our resilience to peak oil…
• Investment in alternative technologies and renewable fuels for transport (i.e. biofuels and electric vehicles) and heating (through among
others the Renewable Energy Strategy, the Heat and Energy Saving Strategy and support for research into new technologies)
• Pursuit and legislation on higher energy efficiency standards (for example new car CO2 standards in the transport sector)
• Regular monitoring and reporting on energy supply, demand, price and other market developments
• Maximise production from maturing provinces, especially UKCS
Conclusions on peak oil…
• It is not possible to predict with any accuracy exactly when or why oil production will peak;
• While reserves are plentiful existing fields are maturing and the rate of investment in new production is being slowed down (by bottlenecks,
the credit crunch and geo-politics). Alternative technologies to oil in transport will take a long time to develop and deploy at large scale.
• The implications of tight oil markets and a decline in total production would be higher and more volatile prices
• The UK economy would be initially relatively robust to higher prices; overall, the UK is relatively more immune than most other countries.
• However, if peak oil happened before 2015, this would have significant negative economic consequences for some of the main importers of
UK goods and services resulting in a negative impact on the UK economy in the longer term.
However…
Policies relating to oil consumption in the transport sector, particularly road and air travel, should continue to be monitored closely, as this
sector would probably be most exposed to rising and volatile prices in the event of peak oil.
Security and diversity of supply are even more important in the transport sector, as oil cannot be substituted in the short term (or even the
medium-long run) without significant investment, large technological improvements and/or alternative fuels.
Economically viable and readily available alternative and renewable technologies are an essential policy area if we are to increase the
resilience and flexibility of UK businesses and consumers to high and volatile oil prices.
The UK’s move to a low carbon economy and climate change policies are consistent with these conclusions.
6
Content
1.
Executive Summary
2.
What is peak oil and what do others say?
3.
Oil in the UK Economy
4.
Alternative Technologies
5.
Scenarios of peak oil and their impacts
6.
Conclusions
7.
Bibliography
7
Defining the Debate
‘Peak Oil’ refers to oil production reaching an all-time high and the subsequent decline in production volumes.
Thus, after the ‘peak’, the rate of total world oil production volumes cannot increase but will decline. 1
Be aware: Peak oil generally refers to conventional sources of oil peaking and does not include unconventional
resources such as natural gas liquids (NGLs), oil sands, or oil shales.2
Key Factors to determine Peak Oil …
Remaining Reserves3
Key Questions surrounding Peak-Oil …
How much economically extractable oil remains?
3) Rate of decline?
Peak
Production in mm
barrels per day
1) Level?
80
60
When/whether additional production capacity will
be brought online? What is the impact of prices
on investment?
Technology
40
20
2) When ?
How will our ability to extract and substitute for
oil change in future?
Geopolitics
1990
1995
2000 2005
‘Controversial arguments’…
“There is little oil left to be discovered…”
“OPEC countries have overstated their reserves…”
“The world has already produced half of its original
endowment of Ultimately Recoverable Reserves (URR)”
1
Investment
Will some countries prevent access to reserves?
Demand
How will demand develop, particularly in
developing economies, and how price elastic will
global demand be?
Peak Oil?
Hirsch, Bezdek, Wendling 2005
2 This report is only interested in a supply-constrained peak, not a peak in demand.
3 Typically the debate concerns how much of the earth’s original endowment of economically extractable oil has not (yet) been produced.
Agree to Disagree
8
Opinions on if and when there will be a supply-constrained peak vary widely. Views on
conventional sources peaking range from imminently to within the next 10-15 years…
Hubbert peak theory
…and the role of prices and
technology
•The Hubbert curve projects the rate of
oil production over time. Based on the
observation that oil is a finite resource,
•Hubbert hypothesised that the
production curve mirrored the discovery
curve and thus predicts that discoveries
will follow a roughly bell shaped curve
(a Hubbert curve), expanding quickly at
first to reach a peak, and then trailing
off as the quantity of remaining
undiscovered reserves declines.
•According to this model, the rate of oil
production is determined by the rate of
new oil well discovery. The relative
steepness of the projected rate of
decline of the production curve is the
main cause for concern about the
economic and social impact of peak oil.
This is because a steep drop in the
production curve implies that global oil
production will decline so rapidly that
the world will not have enough time to
develop sources of energy to replace
the energy currently gained from oil.
•A number of authors, notably those
with a background in geology, use this
methodology.
IEA*
Some estimates of the timing of
conventional peak oil from the literature
Shell*
CERA
Word Energy Council
Laherre
Campbell
Goodstein
Deffeyes
Skrebowski*
Bakhitari
Simmons
Hubbert
2005
2007
2009
2010
2015
2020
2025
2030
Source: Peaking of World oil Production: Impacts Mitigation & Risk management (Hirsch, Bezdek, Wendling 2005)
DECC itself has not attempted to predict the timing of peak oil. *updated
In 1956 Hubbert closely predicted the peak of production in the United States in the
1970s. However, US production in 2005 (in the Lower 48 states) was 66 percent
higher than Hubbert had projected. Also, Hubbert’s US estimate was based on very
reliable resource estimates and assumed an economically rational exploitation.
Criticisms levelled at Hubbert’s approach:
•Discovery – Hubbert’s treatment of discoveries focuses exclusively on geological scarcity. It fails
to account for the influence of the oil price, changing technology and governments’ policies.
•Reserves – An estimate of finite recoverable reserves lies at the foundation of the theory, but
estimates have changed significantly over time and are dependent on technology (and oil price),
limiting the models predictive power.
•Production – Hubbert assumes a fixed time lag between discovery and production, but the
capacity and incentives to produce are likely to change over time and invalidate this assumption.
Also, countries such as those in the Middle East do not necessarily exploit resources based on
market principles but may decide to keep resources for the future.
9
The Main Points of Contention
“Depletion has built a chasm between the Natural Scientist, who observes nature and applies its immutable
physical laws, and the Flat-Earth Economist, who thinks that investment creates resources under ineluctable
laws of supply and demand. “ – C.J. Campbell
Counting Oil Reserves…the variety of existing measures
How Much ‘Oil’ Remains?
In the literature on peak oil, the use of different data and a lack
of standardised definitions and methodologies leads to
significant disagreement about even the basic empirical facts.
•Definitions – there is no agreement whether to include Natural
Gas Liquids (NGLs), oil sands under active development or all
proven oil sands as part of oil reserves.2
•Methodology – The amount of proof required to demonstrate a
discovery varies, as do the assumptions used to asses whether
reserves are economically recoverable.
•Reported Data – Some authors use problematic but publicly
available data, while others use confidential data sets from
industry. OPEC data has, at least in the past, been of
questionable quality. Similarly, companies may have
exaggerated finds.
leads to confusion when measuring and comparing resources
Production
Commercial
Total
petroleum
initially in
place
Discovered
petroleum
initially in
place
Subcommercial
Proved
(1P)
Proved+
probable
(2P)
Proved+
probable+
possible
(3P)
Contingent Resources
Low
Best
High
estimate
estimate
estimate
Unrecoverable
Prospective Resources
Undiscovered
petroleum initially in
place
Low
estimate
Best
estimate
High
estimate
Unrecoverable
Source: IEA World Energy Outlook 2008
2
The Future of Technology
Discovery Rates
There is little systematic treatment of the role of technological
improvement in the literature. However, where it is mentioned,
viewpoints differ. Proponents of an earlier peak suggest that
technology may lower production costs and hasten production,
but doesn’t actually add to reserves. Others note that technology
has allowed for the expanding definition of ‘oil’ and allowed
access to previously unrecoverable reserves.
Many proponents of a near-term peak in oil production note
that, in recent years, production has exceeded new
discoveries. They take this decline in discoveries to indicate,
in line with Hubbert’s peak theory, an impending peak in
production. On the other hand, the IEA has stated that the
reduction in oil discoveries is largely the result of reduced
exploration activity, given ample existing proven reserves.
Although unconventional oil has traditionally been excluded, it is not clear that it makes sense to do so when considering the impact/risks associated with peak oil.
Known Knowns & Known Unknowns
– Remaining Reserves
10
Proven Reserves
Ultimately recoverable resources (URR)
Estimates vary, often as a result of differing definitions, but
at 1.2-1.3 trillion barrels, remaining proven reserves are
equal to over 40 years of production at current rates.
Comparing proven reserves against estimated URR provides an
indication of when peak oil is likely to occur. The IEA estimates URR at
just under 3.6 trillion barrels, of which 1.1 trillion has already been
produced. The US Geological Survey 2000 states 3.0 trillion barrel.
Estimates of URR may continue to increase as knowledge grows,
technology advances and the economics of oil extraction change.
World Oil
OPEC
WEC
BP
IHS
O&GJ
1,000 1,050 1,100
Proved
Proved & Probable
Sensitivity
1,150
1,200
1,250
1,300 1,350
Billion barrels
Resource Exhaustion
Source: IEA WEO 2008
Proven reserves have continued to rise, but mainly due to
the large revisions made by OPEC members in the ’80s.
Some authors question the reliability of these revisions.
1,400
Asia/Pacific
North America
Latin America
Africa
Europe and Eurasia
Middle East
1,200
1,000
Billion barrels
800
600
400
200
0
1980
1990
A number of sources, however, note that the timing of peak oil is
relatively insensitive to the URR estimate used. Adding 900bn barrels to
the above USGS estimate only delays the peak by 10 years in scenarios
published by the US Energy Information Administration.*
2000
2007
Source: IEA WEO 2008
* Long-Term World Oil Supply Scenarios (Wood, Long, Morehouse 2004)
Concern about resource exhaustion lies at the heart of the peak oil
debate. The extent of ultimately recoverable resources is contentious, as
is their effect on the level of production. The traditional peak oil argument
suggests that the discovery rate falls as remaining reserves are depleted,
and that production mirrors discoveries. However, this simple model is
complicated by the ‘expanding’ definition of oil, changing exploration
efforts, shifting decline rates, geopolitical constraints and the level of
productive investment.
Incentives to overstate reserves or discoveries?
OPEC data on reserves rarely changed despite ongoing production and
exploration and no objective review of reserves has been possible. Also,
there may be periodic incentives for OPEC members to overstate
reserves in order to increase OPEC production quotas. International Oil
Companies may have an incentive to overstate assets to boost share
prices but to underestimate resources to negotiate better exploration
conditions
11
Known Knowns & Known Unknowns
– Investment
Investment
• Arguably, peak oil is less about a lack of oil than a lack of investment. The
IEA’s WEO 2008 has noted that around $5 trillion (2007 $) of upstream oil
investment is needed between 2007-2030. An annual $350 billion (2007 $) on
average in both upstream oil and gas investment.
• Global oil and gas exploration and production (E&P) expenditure was
estimated at $454bn in 2008, according to Barclays Capital.
• The IEA thinks that a major shift in investment is needed and much more
capital needs to go to resource-rich regions, notably the Middle East, where
unit costs are the lowest, but political barriers remain.
• Resource nationalism is making access increasingly problematic. Most
reserves are controlled by National Oil Companies, limiting access to
International Oil Companies that are often better at extracting the resources.
• Decline rates are key to determining how much investment is required to
maintain production levels. The IEA estimates that the production-weighted
average decline rate worldwide is projected to rise from 6.7% in 2007 to 8.6%
in 2030. Using these estimates, even if oil demand was to remain flat to 2030,
43 mb/d of gross capacity – roughly four times the capacity of Saudi Arabia –
would be needed to offset decline from existing oilfields. However,
technological progress on EOR techniques means that future decline rates are
also subject to considerable uncertainty.
• Upstream projects currently under construction and planned will add in total
around 28mb/d of new peak oil-production capacity in the period to 2015, on
the assumption that their completion is not delayed or cancelled.
Accessibility of Proven Oil Reserves
Saudi Arabia
Canada
Iran
Iraq
Kuwait
UAE
Venezuela
Russia
Libya
Nigeria
Kazakhstan
United States
China
Qatar
Algeria
Brazil
Mexico
Angola
Azerbaijan
Norway
Inaccessible
Restricted
Accessible
0
50
100
150
200
250
300
Billion Barrels
Cumulative Upstream Investment Needed 2007-2030
OECD Pacific
Oil – conventional
Oil – non-conventional
OECD Europe
Latin America
Asia
Middle East
Investment in the recession
Low prices and financial constraints may hinder investment if national and
international oil companies decide to put new investments on hold, spend less
money on future investments, delay investments that are already underway or
invest less in maintenance at maturing fields. A lack of investment could
accelerate for example decline rates at maturing fields .
However, the recession also decreases recently increased costs of investments.
Africa
E. Europe/Eurasia
OECD North America
0
Source: IEA WEO 2008
500
1,000
Billion dollars (2007)
12
Known Knowns & Known Unknowns
– Technology
Technological innovation has the potential to dramatically expand
potential ‘oil’ production and reserves, allowing for both improved
recovery rates of conventional sources and an expanding
definition of oil. Also, new technologies for producing oil could to
some extent ease our dependence on conventional crude oil
extraction.
Enhanced Oil Recovery (EOR) – A variety of sophisticated
techniques to raise field recovery rates above those achieved
through simple gas or water injection (secondary recovery)
Deepwater & Ultra Deepwater – Extraction techniques that
provide access to deep sea fields
Heavy Oil & Oil Sands – Viscous, dense bitumen sometimes
mixed with sand and clay
Oil Shales – Rocks containing a large proportion of solid organic
compounds that can be converted into oil
Gas-to-Liquids – Conversion of natural gas into liquid fuels (i.e.
diesel)
Coal-to-Liquids – Conversion of coal into liquid fuels (i.e diesel)
Of these, EOR and heavy oil will probably make the largest nearterm contributions, owing in part to the relatively low production
costs involved. EOR accounted for 2.5mb/d of production in 2007
and a further 6.4mb/d of supply is expected to be added by 2030.
Meanwhile, oil sands and extra-heavy oil may ultimately add
between 1 and 2 trillion barrels to economically recoverable
reserves, albeit at a significant environmental cost.
The extent of potential additions to recoverable resources and
historic technology advancements are shown on the right.
Technology advancements in deep sea recovery
0m
250 m
500 m
750 m
1000 m
1250 m
1500 m
1750 m
2000 m
2250 m
.
.
.
1988
1993
…1997…
1999 2003
2010?
Source: IEA 2008
Potential Additional Recoverable Oil Resources Using CO2-EOR
Billion barrels
Technology
140
High of range
120
Low of range
100
80
60
40
20
0
Middle East North Former Latin
Africa Asia/Pacific Europe
America Soviet America
Union
Source: IEA WEO 2008
13
Conclusions from the literature review
Prices – Long-Term Oil-Supply Cost Curve
Conclusions
•Apples & Oranges – Given the confusion over terms, authors
often ‘debate’ fundamentally different questions.
•Prices – Proponents of an early peak play down, or overlook
entirely, the role of higher oil prices in stimulating exploration,
investment, technological development and changes in consumer
behaviour. Especially very few of the authors acknowledge the
feedback from prices into demand.
•Market Constraints – Proponents of a late peak often fail to
account for significant rigidities, which slow the market’s ability to
respond, and ignore the risks posed by insufficient investment.
•Confidentiality – Often arguments are based on confidential
information so it is impossible to verify the conclusions
•Uncertainties – Exist around the amount of global reserves,
production capabilities, human resources and demand behaviour.
•Impacts – Surprisingly, many papers do not mention the impact
of peak oil on prices and price volatility and also do not calculate
the full costs to the world/economy in terms of GDP, inflation etc.
Only recently papers have looked on the differential effects that
peaking may have on developed and developing countries.
•Mitigation - There is very little in the literature on the “so what?”
and the potential for mitigation of the effects of peak oil. Only
Hirsch 2005 calculates that initiating a mitigation crash program
20 years before peaking appears to offer the possibility of
avoiding a world liquid fuels shortfall during his forecast period
Unconventional sources could add
new oil supplies even if conventional
sources have peaked.
Source: IEA WEO 2008
Both supply and demand matter
Price
Demand
Efficiency
GDP growth
Supply
Exploration
and extension
Depletion
Technology
and cost
reduction
Source: BP 2007
Volume
14
Content
1.
Executive Summary
2.
What is peak oil and what do others say?
3.
Oil in the UK Economy
4.
Alternative Technologies
5.
Scenarios of peak oil and their impacts
6.
Conclusions
7.
Bibliography
Annex A: Global System Model (available on request)
Annex B: Literature Review (available on request)
The Impacts of Peak Oil
… how demand may respond to peak oil ...
How will GDP respond to price increases?
In 2004 research by the IEA estimated that, as a rule of thumb, a sustained $10 per barrel increase in international crude oil prices would cut
average real GDP by around 0.3% in the OECD and by about 0.5% in non-OECD countries as a whole. Overall world GDP would thus be
reduced by about 0.4% (based on a baseline price of $25). Most of this effect would be felt within one to two years, with GDP returning broadly
to its baseline growth rate thereafter. The adverse effect may be four times worse on very poor developing countries (WEO 2006).
A 2005 analysis by the International Monetary Fund (IMF) quantifies the macroeconomic effects of a spike in oil prices on the global economy.
An increase of about $37 in the year 2005 compared with the base case ($43) – falling back to the base case level by 2009 – showed that
GDP growth in the industrialised countries was projected to fall by 0.6 percentage points in the first year and inflation to be one percentage
point higher. If the price increase was perceived to persist, the GDP and inflation effects were much more pronounced, with GDP falling by as
much as 1% in the industrialised countries. (WEO 2006)
Work by Oxford Economics for the London Energy Meeting (December 2008) showed that a price rise from on average $80 to $100 in 2008
may have reduced global GDP growth by 0.3% (US$ 150bn)
Earlier disruptions have been shown to have the following impacts on prices:
Disruption
Price Impact
duration
(months) (max % increase)*
Gross supply loss
in mb/d and % of
world oil demand
Arab-Israeli war (Oct. '73)
6
237%
4.3mb/d
7.1%
Iranian Revolution (Nov. '79)
4
65-140%
5.6mb/d
8.5%
Outbreak of Iran-Iraq war (Oct '80)
6
20%
4.1mb/d
6.2%
Iraqi invasion of Kuwait (Aug. '90)
12
42-140%
6.5mb/d
6.5%
OPEC production cutbacks (Apr. '99)
1
70-80%
3.3mb/d
4.5%
Iraqi export suspension 1 (Nov. '99)
1
20%
1.1mb/d
1.5%
Venezuela strike (Dec '02)
4
30%
2.6mb/d
3.4%
Iraqi conflict (March '03)
10
20-30%
2.3mb/d
2.9%
Hurricane Katrina (Sep. '05)
1
10%
1.5mb/d
1.9%
*Source
WEO 2005 and own estimates. For price
impacts we used month on month data pre 1981
and daily data thereafter. However these
estimates are very approximate as they do not
take into account other impacts on prices and the
influence of expectations/risk premiums on price
impacts. The WEO 06 also caveats that these
estimates assume that all other economic factors
remain unchanged. In practice, changes in other
factors may outweigh the impact of higher oil
prices, limiting or increasing GDP losses.
The Impacts of Peak Oil
… peak oil’s effects on the economy would not be limited to higher oil prices – there
could be a number of other potentially significant impacts on the economy …
In exploring the potential impact of peak-oil on the UK we need to consider both the direct and indirect impact on the UK economy
resulting from changes in oil prices and supply pressures as well as the short term versus the long term impacts.
The short term versus the long term impacts are outlined below. If we consider the direct and indirect
impacts, the direct impacts are more likely to be channelled through economic variables such as
inflation, output, current account of balance of payments and tax revenues, whereas the indirect
impact will arise as a result of economic and political reactions of other countries’ to changes in the
Price rise
oil price and supply pressures.
Short term
impacts
Longer-term
impacts
Otherimpacts
Immediate impacts
•
Transfer of income from importing to exporting countries
•
Deterioration in balance of payments for net oil importers
Short- & medium-term impacts
•
Higher Inflation
•
Increased input costs (transport, industry)
•
Reduced non-oil demand (because of higher prices for goods)
•
Potentially reduced oil demand and consumption
•
Lower investment in net oil-importing countries
•
Upward pressure on wages
•
Higher unemployment
•
Consumer and business confidence falls
•
Downward pressure on GDP
•
Tax revenues fall
•
Falling exports due to economic impacts in our main export markets
Other possible impacts
•
Social unrest
•
Resource nationalism
•
Increased geopolitical competition for resources/supplies possibly leading to an
increase in long-term supply contracts
•
Greater emphasis of security of supply over climate change objectives
17
Oil in the UK Economy
… Generally, the more dependent an economy is on oil, the less resilient it would
be to deal with the impact of rising and highly volatile oil prices due to peak oil.
Energy ratio in OECD countries
Indicators we need to look at to estimate ‘oil dependency’:
Oil Import Dependency
Import dependency is defined as the ratio of oil imports to total
consumption. Although oil is traded and priced in a global market,
countries such as the UK that are an oil exporter as well as an oil
importer will, in the event that international supply is disrupted, have
relatively robust access to physical supplies. As the UK becomes
increasingly reliant on imports of oil for its consumption, disruption of
physical supplies can have significant effects on the economy.
Oil and Energy Intensity
Energy intensity is defined as energy consumption per unit of output.
The extent to which economic activity (GDP) is directly reliant on oil and
energy consumption provides an indication of both the economy’s
vulnerability to peak oil and the scope for efficiency measures to
improve resilience. Low energy ratios, defined as the ratio of overall
primary energy consumption to GDP, are also very important to define
how hard increases in energy prices will hit economic activity.
Oil Consumption Patterns
Patterns of consumption determine which sectors of the economy are
likely to be hardest hit in the event of peak oil because it determines the
economies’ ability to substitute away from oil consumption.
Consumption patterns determine the extent to which substitutes for oil
consumption can be found and the so called ‘elasticity of demand’ – the
ease to substitute demand if price rises.
Energy consumption
(1000 t of oil equivalent) per
bn $US (2000 prices)
Source: UK Energy Sector Indicators 2008, IEA
Energy use by sector in the UK
UK consumption patterns
Transport
Domestic
Energy Ratio
Industrial
Source: UK Energy Sector Indicators 2008
Service
18
Oil in the UK Economy
…how does the UK perform in terms of the indicators?
Oil Import Dependency
Oil and Energy Intensity
Oil Consumption Patterns
• Overall, the UK currently produces about the
same amount of oil as it consumes, such that
the net import balance is still quite small.
• However, oil production from the UK
continental shelf peaked in 1999 and is now
in terminal decline. As domestic production
falls, and demand continues to rise gradually,
the UK’s import dependency will increase
significantly over the next 10 years.
• By 2025, net imports will likely make up more
than 60% of domestic demand, compared to
around 8% today.
• The speed at which the UK’s dependence
increases is a function of both the level of
investment in UK oil production and future
developments in the UK’s demand for oil.
• The UK is the least oil-intensive G7
country. Among OECD nations, it also
has one of the lowest ‘energy ratios’,
defined as the ratio of primary energy
consumption to GDP.
• This is due, among other things, to the
UK’s high population density, high fuel
taxes and relatively mild climate.
• The UK economy has become less
dependent on energy over the years,
with the energy ratio having fallen
steadily at about 2% per year since
1970. By contrast, energy intensity in
the transport sector has remained fairly
flat over the last 30 years and is
currently just 2% lower than in 1970.
• OECD oil-intensity is forecast to
continue to decline, as OECD oil
demand contracts.
• Total UK demand for primary oil was around
81m tonnes in 2007.
• In 2007, 70% of the UK’s demand for
petroleum products went towards transport
fuel, compared with just 41% in 1980. One of
the most significant changes in consumption
in recent years has been the switch from fuel
oil to natural gas for electricity generation.
• According to the IEA, between 2006-2030
OECD oil demand is expected to contract in
all sectors other than transport, where it
remains essentially flat. The largest falls are
in residential and industrial demand.
• In the event of peak oil, the ability to
substitute away from oil consumption will be
crucial to the economy’s resilience. However,
few viable alternative energy sources exist for
road and air transport and demand remains
fairly unresponsive to rising prices.
UK Net Oil Imports as a Share of Demand
80%
40%
UK Petroleum Products Demand by Use (2007)
Barrels Consumed per $1000 GDP
Other energy
uses
16%
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
0%
1998
Canada
United States
Japan
Italy
-40%
Non-energy uses
10%
Germany
France
-80%
United Kingdom
0
0.1
0.2
0.3
0.4
0.5
Sources: DECC
Sources: DECC calculations, IEA Oil Information 2008,
IMF WEO Database 2008
0.6
Fuel oils
4%
Sources: DUKES 2008
Transport fuels
70%
19
Content
1.
Executive Summary
2.
What is peak oil and what do others say?
3.
Oil in the UK Economy
4.
Alternative Technologies
5.
Scenarios of peak oil and their impacts
6.
Conclusions
7.
Bibliography
Annex A: Global System Model (available on request)
Annex B: Literature Review (available on request)
20
Alternatives to using oil
As the transport sector is the largest user of oil products alternative technologies could
change our use of oil in this sector…
In the UK, road transport relies almost exclusively on oil for energy*
Transport
Transport is by far the biggest consumer of oil in the UK
economy accounting for around 70% of the total oil
consumption. Within transport the main user of oil is the
road sector followed by the air sector. Currently there are
few widely available alternatives for using oil products in
transport and thus, while the UK is less dependent on oil
for its economy than many other countries, the majority of
the oil that it does consume is not easily substitutable in
the short term.
UK Petroleum Products
Consumption by Industry (2007)
Non-energy
use
11%
Industry
9%
If consumers can find ways to substitute away
from oil products and demand can be made
more responsive to price signals, then the
economic impact of falling oil production could
be reduced.
Overall, many of the policies currently being
pursued in order to reduce the UK’s CO2
emissions from transport, are likely to reduce
oil consumption and thus to improve the UK’s
resilience against any “peak oil” scenario.
National
navigation
3%
Air
24%
Other
6%
Rail
1%
Policies
The high penetration of conventional fossil
fuels in the transport sector can be reduced
through various means. The changes currently
envisaged for the transport sector include
substitution of fossil fuels by cleaner fuels (i.e.
biofuels, hydrogen, electricity), improvement in
the efficiency of current technologies as well
as policies to encourage smarter transport
choices (incl. use of public transport).
UK Petroleum Products
Consumption by Transport (2007)
Transport
74%
Road
72%
*Sources: DUKES 2008
Fuel demand in the transport
sector is determined by:
Examples of policies in place to reduce
fuel/transport demand:
Quantitative factors –
number of vehicles and/or
substitutability of fossil fuels
• Renewable Transport Fuel Obligation (RTFO)
• Support for research in alternative transport
technologies
• Incentives for Electric Vehicles uptake
• Tax incentives for biofuels (to 2010)
Technological efficiencies
efficiency improvements
• EU CO2 emissions targets for cars
• Vehicle Exercise Duty (VED) incentives for fuel
efficient cars
Consumption factors
smarter choices
• Increased investment in public transport
• Campaigns to reduce low value journeys
• Attempts to lower motorway speeds
Alternative Road Technologies –
21
This summarises the findings from a brief review of literature on the key technologies to
displace oil consumption in the transport sector.
Alternative
Current situation
Problems/Issues
Timescales and prospects
Hybrid
Motor
A number of hybrids cars are already
publicly available. In 2008 US hybrid
vehicles were about 2.4% of new vehicle
sales. There were about 16,000 non plugin electric hybrids in the UK.1
Currently batteries
constrain potential
mileage. Efficiency not
far superior to advanced
diesel vehicles.
Improvements in battery capacity and cost reduction
may make hybrids a viable alternative. Realistic
medium term impact, with producer backing.
According to the King Review2, hybrid technologies
are likely to be “commonplace” by 2030.
Electric
Vehicles
(EV)
In 2008 there were about 6000 electric
cars and light electric vehicles in the UK .
EVs could potentially reduce oil
consumption and carbon emissions (if
electricity generation becomes greener).
Recharging
infrastructure currently
not set up. Battery
constraints limit the
potential mileage. High
production costs.
Significant cost reductions and development in
batteries needed before this technology can become
mainstream, likely to reduce oil consumption only in
the medium to long term. Mass production and
volume availability of EVs is unlikely to occur before
2014 at the earliest*.
Biofuels
1st Generation biofuels are commercially
available, but increased use is currently
constrained due to sustainability issues.
2nd Generation biofuels are likely to
become commercially available in the
middle of the next decade.
Current biofuels are land
intensive, with potential
impacts on food prices.
Their impact on carbon
emissions is uncertain
and may vary.
Provide a realistic short/medium term alternative to
fossil fuels as they can be combined with petrol and
diesel; 100% biofuels use would require large scale
modifications to the vehicle fleet to be viable.
Prospects depend upon the specific biofuel but likely
biofuels will only be a bridge technology.
Hydrogen
Fuel Cell
Technology (hydrogen fuel cell car) has
already been successfully demonstrated
but commercial deployment would need
large investments. Emissions can be
zero, with no need for fossil fuels but
hydrogen production is currently very
CO2/energy intensive.
Need for cost reductions
in production. Hydrogen
storage and refuelling
infrastructure, currently
insufficient for mass use.
Could potentially replace fossil fuels as a source of
transport energy, however technological challenges
need to be overcome. Could drastically reduce
transport oil dependence in the long run.
1
Sources: http://www.greencarcongress.com and http://www.afdc.energy.gov/afdc/data/vehicles.html, and http://www.berr.gov.uk/files/file48653.pdf
King Review of Low-Carbon Cars, 2007. http://www.hm-treasury.gov.uk/king
2 The
In what timeframe is it most likely that alternatives reach maturity and will be widely deployed?
today
Biofuels
1st Generation
2010
Hybrid Motor
Fuel
Efficiency
2015
Biofuels 2nd Generation
2020
Electric vehicles
Hydrogen
2030
Other Transport Alternatives–
22
What could they contribute to a reduction in oil consumption? What do we conclude?
Aviation
Aviation previously has a good record for delivering improvement in efficiency in the last 40 years. New craft are expected to be 20% more
efficient than the current fleet. Hydrogen fuel cells have the greatest potential to be used in aviation, however hydrogen aircraft would require
new engines and structures and are likely to be several decades from market. Biofuels use limited.
Rail
Increasing the amount of rail network powered by overhead electric cables has high infrastructure costs and uncertain lifecycle carbon
reductions. Could potentially reduce fossil fuel dependency if electricity generation is ‘green’. Biodiesel has been considered, however costs
and impact on carbon emissions uncertain. Hydrogen fuel cells are a longer term alternative but time frame and costs are uncertain.
Shipping
Biodiesel is a potential alternative, close to market but cost and corrosive nature is prohibitive. Hydrogen fuel cell again a longer term
alternative however several technological challenges to be overcome.
Energy Efficiency
Incremental improvements in the Internal Combustion Engine of vehicles can be available in 5 – 10 years if the demand and supply side
barriers have been resolved. The higher costs of these vehicles can be paid back through the improvements in fuel economy they offer to
consumers.
Conclusion on Transport Technologies
•Some hybrid technologies are currently commercially available. Blended biofuels currently offer some advantages and are likely
to occupy an increasing share of the transport fuels market. However, the ancillary impacts of biofuels, i.e. the impacts on land
use and biodiversity may slow down their wider use.
•Infrastructure; suitable infrastructure needs to be developed for either electric vehicles or hydrogen fuel cells to be widely used.
Public/private investment to provide the infrastructure for these technologies could increase the speed with which they are
brought to market and increase the incentive for firms to invest in their development.
•Alternative fuels are available, however few are yet commercially viable and there are still concerns around
sustainability and wider deployment. Mass deployment of alternative fuels will take time and it will take time before it
will have a significant impact upon fossil fuel consumption in the transport sector. Government may have a role to play
in increasing the speed with which these alternatives are brought to market.
23
Content
1.
Executive Summary
2.
What is peak oil and what do others say?
3.
Oil in the UK Economy
4.
Alternative Technologies
5.
Scenarios of peak oil and their impacts
6.
Conclusions
7.
Bibliography
Scenarios of Peak Oil
24
… to create the following scenarios about the timing of peak oil we used different
assumptions about reserves, investment and demand. We also considered the possible
implications of a ‘Very Early Peak’- Scenario though we could ourselves not rationalise
the underlying assumptions.
The aim of these scenarios was not to try to predict when peak oil is going to occur, but to provide a framework to look at the
possible implications of peak oil on the economy. Given that it is impossible to predict exactly when 'peak oil' might happen,
four scenarios on the timing of peak oil were developed to provide a framework to look at the possible implications of peak
oil on the UK economy. The scenarios were developed around the interaction between the three likely drivers of peak oil:
resources, investment and demand.
The scenarios are therefore for illustrative purposes only! They allow us to consider the implications of our energy
policy, and do not reflect our view of when the actual peak of oil production will occur.
Scenarios
Demand
Investment
Recoverable Resources
Very Early Peak¹
(before 2010)
Estimates from ASPO¹
Estimates from ASPO
Estimates from ASPO
Early²
(btw 2010-2015)
High demand over the next ten
years above the IEA High Growth
Scenario
Investments in key supplier countries
is deferred, and technical issues delay
investment more generally
Low estimate of
recoverable reserves
(close to low level USGS³)
Medium
(mid 2020s)
Medium to high demand; similar
as in IEA reference scenario up to
2020, slightly higher thereafter
High level of investment though
constraints in investment emerge
around mid 2020s
Central estimate based on
USGS
Late
(late 2030s)
Medium demand in the short term,
and low demand from 2015,
based on IEA alternative policy
scenario
Medium level of investment;
particularly after 2015 due to
moderate prices but also shift to low
carbon technology
Central to High estimate
based on USGS
¹ Source for the assumptions of demand, investment and reserves underlying this scenarios is almost exclusively the Association for the Study of Peak Oil (ASPO)
² IEA scenarios refer to WEO 2007
³ USGS US Geological Survey
25
Very Early Peak* Scenario
This scenario is included to show the more extreme of all of possible (even though not
thought likely) scenario, which has been considered and put forward by a few experts
What the impacts mean and what they do not mean…
Most ‘impacts’ presented in the following were in their majority informed by reviews of the economic literature on the impact of high oil prices,
the literature on the prospects of alternative technologies, our understanding of energy markets and the descriptive global oil market system
model developed for the project. A quantitative model looking at the interactions between the various economic variables would be required for
a better understanding of the impacts. In the absence of such a model we have examined the conclusions made by other studies to assess the
possible impact of the estimated oil prices on the UK economy. This work was done before the 2008 oil price hike and the credit crunch.
Below we focus on the circumstances leading up to ‘the peak’ … implications for the UK are shown on the next slide.
Assumptions
Supply and demand
Decline rates
Recoverable resources
Very Early Peak*
(before 2010)
Rapid economic and oil demand growth
above 2.2% p.a.
FSU and OPEC countries will experience
only a marginal increase in production up
to 2010, with production falling thereafter.
Estimates from ASPO
-at the lower end of a
range of 1.65 to 2.2 trillion
barrels URR
Global conventional production does
not increase beyond current levels.
Demand destruction in some sectors is
offset by growing demand for oil in the
transport sector as oil consumed in
transport is not easily substitutable.
How does that
relate to what
we see today or
what other
experts say?
WEO 2008 expects oil demand growth of
1.2% in its reference scenario.
The WEO Reference Scenario estimates
that worldwide production of conventional
crude oil increases modestly from 70.2
to 75.2mb/d between 2007 to 2030.
Future crude supply figures necessary to
reach the ‘very early peak’ scenario are
considerably lower than those estimated
by both the IEA and the US EIA.
The rate of decline following the peak in this
scenario is particularly rapid in OECD and
developing (non-OPEC) countries
- above 5% decline per year in the OECD
- 1-2% for OPEC, and
- around 3% for FSU countries
The World Energy Outlook (WEO) 2007
estimated that the average field declines by
3.7% post-peak. This increased to 6.7%
(possibly 10% by 2030) in WEO 2008.
Total output at existing oilfields may drop by
19mb/d by 2015, but upstream construction
planned will add in total around 28mb/d of
new peak oil capacity in the period to 2015,
if completion is not delayed. This indicates
that there will be additional production and
supply increases to 2015.
(based on Campbell (1996)
and MacKenzie (1998))
The IEA estimates that
remaining resources
amounted to approximately
2.4 trillion barrels at end2007 (of a total of 3.6
trillion URR)
* This report does not try to rationalise the circumstances that lead us to the peak under this scenario, the scenario is based on assumption from ASPO.
Impacts of a ‘Very Early Peak’ globally & on the UK
26
.. this scenario is likely to have serious consequences for the UK economy …consumer’s
demand for oil will decline substantially but not diminish entirely - in the short term it will be
difficult to shift to alternatives, especially in transport..
In assessing the impact, assumptions about the market behaviour were made, both on the supply side (producers) and the demand side
(consumers). We assume that both producers and consumers are aware of the permanent oil supply constraint and as a result, there is a
behavioural change in both production and consumption of oil.
Supply
Post the peak, the oil market’s vulnerability to shocks and
supply problems will be increased due to a lack of spare
capacity.
Demand
The fall in oil demand due to high oil prices is more than
offset by growing demand for oil in the transport sector.
Supply demand gap
There may be a ‘gap’ of 0.5mbd by 2010, around 30mbd in
2020 and around 60mbd in 2030, which would need to filled
by alternative fuels (and/or a reduction in oil demand).
Price
Increased price volatility and higher forward and spot prices.
.
High
level estimates suggest prices could increase around
160% within 10 years. Prices may need to reach $155/bbl Brent
(in 2006 prices) by 2015 (compared to $71 in the baseline) to
reduce demand enough to balance with the available production
(this is sensitive to assumptions on price elasticity and the
extent of behavioural change).
Inflation
The overall effect on inflation may be between an additional 0.4%
and 0.8%* inflation. However, these figures do not consider the
knock-on effects of higher oil prices driving up the prices of other
fuels, magnifying the overall macroeconomic impact.
*The Impact of High Oil Prices on the UK economy: A Slippery Slope?,
02 November 2004. Roger Bootle.
Alternative technologies
Very limited potential for alternative technologies within short term
(5yrs). Biofuels use is likely to increase but may have knock-on effects
for food production. Energy conservation measures will be quickest
and most cost effective to introduce, however the scale of such
measures would depend on sector and price.
GDP growth
Given that UK is one of the less oil intensive economies and also an
oil producing country, the impact is likely to be less severe than
elsewhere, but still substantial. GDP growth may be affected and stay
below trend growth for a number of years. There may also be adverse
impacts on employment through wage pressures and reduced
consumer and business confidence. Impacts are likely to be more
significant in emerging Asian economies such as China and India.
This is because those oil-importing developing countries use more
than twice as much oil to produce a unit of output and may also be
less able to weather the financial turmoil brought by higher oil-import
costs. The scenario analysis suggest that in 2010, average real GDP
could be around 0.9% lower in OECD countries relative to the
underlying baseline growth and even more thereafter (based on the
WEO 2006 rule of thumb, slide 15).
Geopolitical
With price rises likely to be greater than growth in GDP, oil will
become unaffordable for some sections of oil consumers. This will
have socio-economic impacts especially in emerging and developing
economies, and may even lead to social unrest. Energy deals may
become more common and some countries may be tempted to
achieve political objectives by utilising their oil leverage.
27
Scenario 2 – Early peak (between 2010 and 2015)
Scenarios
Demand
Investment
Recoverable
Resources
Early
(btw 20102015)
Rapid economic and demand growth
particularly from developing countries.
Global demand growing by 2.2.%
during 2007-2015.
Deferment of investment - for political reasons or
technical constraints there is little or no increase in
capacity beyond 2012. Investment is deferred in
OPEC and FSU, and it becomes increasingly
difficult to find or access new reserves. OPEC
production stagnates after 2020 and FSU
production from since 2015.
Low estimate of
recoverable reserves
(close to low level from
US Geological Survey)
and access constraints
due to political and
geological constraints
How does
that relate to
what we see
today or what
other experts
say?
The WEO 2008 assumed 1.2% in its
reference scenario. The current
recession has led to oil demand falling in
2008 and potentially also in 2009. Thus,
it is very likely that demand growth will
be below 1.2% in the short term.
Currently IEA estimates that annual expansion of
1.5-2.5mb/d to 2010, falling to under 1.0mb/d in
2013.
USGS 2000
Low: 2269bn bbl
Medium: 3021bn bbl
OPEC strategy is increase revenue in short term by keeping prices
high and limiting investment,
and
Demand elasticity stays low and thus high demand for oil guarantees
high (and easy) revenues for producers in the short term,
and
Producer governments will limit International Oil Companies’ access to
oil reserves to ensure national and political control on resources,
or
National Oil Companies lack expertise to develop mature fields and
discover and bring new fields to market
(based on revised USGS
and others)
Supply/demand balance to 2040 in this scenario
160
Gap
Non-conventional
Conventional
140
120
Million barrels of oil a day
Apart from the assumptions about demand and resources,
this scenario is highly dependant on decisions about
investment. Thus, one (or more) of the following needs to
hold if the investment scenario is realistic:
WEO 2008: 3577bn bbl
100
80
60
40
20
0
2000
2005
2010
2015
2020
2025
2030
2035
2040
Source: DECC
Early Peak – Impact globally and on the UK
28
… this scenario is also likely to have serous consequences for the UK economy – it may
result in an increase in geopolitical tensions but investment in low carbon technology
prior to the peak reduces overall risks compared to the very early scenario…
Supply
Some additional conventional capacity may start to come on
stream as a result of non-OPEC investment prior to impact,
reducing pressure on supply. However, post peak, there is no
spare production capacity and thus markets are vulnerable to
supply or demand-side shocks.
Demand
The continued high growth in oil demand maintains pressure
on the oil price. However, pressures are lower relative to the
very early scenario as the demand gap is comparatively less
significant.
Supply demand gap
The demand gap in 2013 amounts to 0.7 mbd reaching 9.3 mbd
by 2020. This gap could be filled through demand reduction, nonconventional oil, other fuels or new technology.
Price
The increase in supply from non-conventional sources and
demand side impacts, slightly reduce upward pressure on
prices. The scenario results in prices reaching $98 (in 2006
prices) by 2015 and $124 (in 2006) by 2020 (baseline $71 and
$76 respectively). This is sensitive to assumptions on price
elasticity and the extent of behavioural change.
Inflation
The overall effect on inflation may be between an additional 0.4%
and 0.8%* inflation. However, these figures do not consider the
knock-on effects of higher oil prices driving up the prices of other
fuels, magnifying the overall macroeconomic impact.
Alternative technologies
The scope for substitution is still limited by the availability of the
technology and infrastructure to support it but the additional 5 years
investment into alternative technology development increases the
potential volume of substitution compared to the Very Early Peak.
As technologies are more mature at the time of the impact the potential
impact from switching is likely to be greater and seen sooner. Energy
conservation measures impact likely to be less as some ‘easy’, quick
wins have already been implemented, The potential for biofuel
substitution for oil demand will be greater and less harmful than in the
very early scenario.
GDP growth
Given that UK is one of the less oil intensive economies in OECD and
is an oil producing country, the impact is likely to be less, but
substantial. GDP growth could be affected for a number of years but
relatively less than under the very early peak scenario. Impact on
countries with high oil intensities will be greater, as those use more oil
to produce a unit of output. Thus they will face larger impacts on
income through secondary effects of oil price rises on the price of
domestic products. In 2015, average real GDP growth could be
around 0.8% lower in OECD countries relative to the underlying
baseline growth. (based on the WEO 2006 rule of thumb).
Geopolitical
Consuming countries will become nervous about future supplies
resulting in an increase in the number of deals from developing
countries to buy long-term contracts or assets, but also greater
emphasis on policies to reduce oil demand.
*The Impact of High Oil Prices on the UK economy: A Slippery Slope?, 02 November 2004. Roger Bootle.
29
Putting in perspective… Very Early versus Early Peak
Impacts on GDP
Based on the IEA assumption that a
price increase of $10/bbl may lead
to a real GDP decrease of about
0.3% in OECD countries we
calculated the estimated long term
(sustained impact) of our scenarios.
GDP reductions are likely to be
higher in non OECD countries.
Estimated long-term (sustained)
impact of Very Early Peak scenario
Estimated long-term (sustained)
impact of Early Peak scenario
Average price increase
over 2008 - 2018
Loss of OECD
GDP
Average price increase
over 20013-2020
Loss of OECD
GDP
$61
- 1.83%
$33
-0.99%
GDP per capita/oil price (real 2006 prices)
2,000.0
1,800.0
What do those price rises mean for the UK?
Barrels of oil per capita
1,600.0
To put the price figures into context, this graph looks at the
relative affordability of the oil prices in the Very Early Peak
Scenario by calculating the number of barrels of oil that can
be purchased per capita in different years. In terms of the
GDP forecast, given the uncertainties of our GDP
calculations, we have used Treasury’s forecast up to 2010
and the assumptions in the Energy White Paper after 2010.
Estimates based
on estimated
oil price
in
based
oil pricesPeak
in this
VeryonEarly
scenario
Scenario
1,400.0
1,200.0
1,000.0
800.0
600.0
400.0
200.0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
-
Year
Impacts of Peak Oil on Emissions and Climate Change
In the Very Early Peak Scenario it is possible that security of supply concerns will take precedence over climate change action and as a result
low carbon technology investment may become less of a priority, unless it provides the quickest way to address energy security concerns. This
increases the risk of higher emissions globally. In the Early Peak scenario, investment in low carbon technology prior to the impact of peak oil
will reduce the risk that short energy security concerns may compromise long term environmental concerns. Overall, many current UK policies
aiming to reduce the UK’s CO2 emissions from transport are likely to also encourage the development and deployment of technologies that
provide an alternative to petrol and diesel. As such, they are likely to improve the UK’s resilience against a “peak oil” scenario.
30
Medium Term Peak
…despite a relatively constant rate of investment and discoveries of new fields and reserves
growth, increase in production is not fast enough to keep up with demand around 2025-2030
…
Scenarios
Supply and demand
Decline rates
Recoverable
resources
Medium
(mid 2020s)
Medium to high demand;
High level of investment
(as in IEA WEO 07 reference scenario up
to 2020, slightly higher thereafter)
(similar to WEO 07); though constraints in
investment emerge around mid 2020s)
Central estimate based
on USGS
Narrative
Despite a relatively constant rate of investment and
discoveries of new fields, increases in production
are not fast enough to keep up with demand around
2025-2030. Following the peak the rate of decline
could be relatively quick.
Supply/demand balance to 2040 in Medium Scenario
140
Gap
Non-conventional
Conventional
Mbd
•There is a steady growth in demand both from developed
120
and developing countries coupled with an increase in capacity
100
over the next fifteen years.
•However, capacity additions fail to match demand around
80
2025. By this time however developments in both nonconventional and alternative fuels ensure a smoother
60
transition to a post-crude energy system.
40
•Whilst oil demand remains high, the growth rate in demand is
slower post 2015 due to the combined effect of climate
20
change policies and high energy prices.
•High demand in the short and medium term drives
0
considerable investment in new exploration and production.
2000 2006 2010 2015 2020 2025 2030 2035 2040
•OECD crude production (which already peaked at the
Source: DECC
beginning of the century) continues to fall;
•Production from FSU countries increases by around a third over the next ten years, but then plateaus at around 15mbd;
•OPEC slowly invests in new production and capacity, but under-investment in exploration from some producers and a certain degree of
inefficiencies in field development leads to a reduction in reserve expansion capacity and to a peak in crude production around 2025.
•Due to tightness in the market, some spikes in prices above are possible following rapid shocks. Prices increase sufficiently to incentivise
new discoveries and the development of non-conventional and alternative technologies.
Late Peak Scenario
31
…global peak for conventional oil happens in mid to late 2030s as demand peaks
rather than supply hitting a constraint…
Scenarios
Demand
Investment
Recoverable Resources
Late
(late 2030s)
Medium demand in the short term,
though low demand from 2015,
based on IEA alternative policy
scenario
Medium level of investment;
particularly after 2015 due to
moderate prices and shift to low
carbon technology
Up to high estimate based
on USGS
•The lower demand growth is a reflection of both lower
economic growth, but also lower demand for oil due to
climate change policies.
•However, in the short term, a relatively high demand and a
more benign investment environment spurs high investment
in exploration and development during the early 2010s.
Investment in OECD reserves are maximised though
production continues to decline.
•There is also continued investment in OPEC reserves, as
geopolitical tensions are reduced and OPEC countries
continue to invest.
•The key climate change measure is therefore around
demand reduction and some fuel switching, thus
moderating final demand for oil. Therefore, supply
continues to adequately meet demand.
•Prices therefore stay in the range around the IEA WEO
2007 estimate ($60/bbl).
Supply/demand balance to 2040
160
140
Million barrels a day
Narrative
Gap
Non-conventional
Conventional
120
100
80
60
40
20
0
2000 2005 2010 2015 2020 2025 2030 2035 2040
Source: DECC
•By early 2030s prices begin to increase because having moderate prices over a long period has led to a fall in investment in exploration and
therefore spare capacity starts falling. This coupled with the impetus from climate change policies acts to reduce demand even further.
•Shifts in technology occur gradually between 2020 and 2040, mainly in response to government incentives and lowering costs of new
technologies rather than in response to high oil prices.
Therefore, the global peak happens in mid to late 2030s due to a peak in demand – rather than supply hitting a constraint.
32
Content
1.
Executive Summary
2.
What is peak oil and what do others say?
3.
Oil in the UK Economy
4.
Alternative Technologies
5.
Scenarios of peak oil and their impacts
6.
Conclusions
7.
Bibliography
Annex A: Global System Model (available on request)
Annex B: Literature Review (available on request)
33
Peak oil – what do we already do?
Category of action
Examples of action
Try to reduce probability of
‘adverse’ scenarios
•
•
•
•
•
•
•
Reduce impact of any peakoil scenarios
• Invest in alternative technologies and fuels for transport and heating (plug-ins, renewables)
through UK research
• Pursue renewable energy strategy including a renewable transport target
• Heat and Energy Saving Strategy
• Impose energy efficiency standards (e.g. new car CO2, zero carbon homes)
• Pursue ambitious global agreement on climate change
• Comply with emergency stocking and ensure emergency arrangements in case of need for
physical rationing are effective and well-rehearsed
• Consider role and feasibility of ‘strategic reserves’ (in addition to existing IEA/EU
arrangements)
Monitor market
developments to identify
‘adverse’ scenarios early
• Regularly monitor and report on supply, demand, price and other market developments
• Improve transparency in oil markets through data initiatives such as JODI and IEF investment
database
Put pressure and/or encourage resource rich countries to invest in production
Work to remove barriers to investment in oil production
Maximise economic production from maturing provinces, especially UKCS
Promote competitive and functioning markets
Promote and/or put pressure on high-growth countries to improve efficiency
Promote alternative energies in resource rich countries
Pursue consumer-producer dialogue in order to prevent resource nationalism
Legend: Already part of UK policy; Potential area to investigate further;
34
Conclusion and policy recommendations
Conclusions…
•Our review and analysis of oil market fundamentals and the peak oil literature shows that it is not possible to predict with any accuracy
when or why oil production will peak;
•While global reserves are plentiful, it is clear that existing fields are maturing, the rate of investment in new and existing production is being
slowed down by bottlenecks, the economic downturn and financial crisis and that alternative technologies to oil will take a long time to
develop and deploy at scale;
•The implications of tight oil markets as a result of peak oil, lags in investment or fast demand growth, would be higher and volatile oil
prices, to which the UK and its citizens are relatively more immune than those in most other countries, mainly because of its relative low oil
and energy intensity.
•The UK economy would be initially relatively robust to higher prices; however, if peak oil happens before 2015 there would be negative
economic consequences for some of the main importers of UK goods and services resulting in a negative impact on the UK economy in the
longer term. If the peak happens later, it would be possible to mitigate the impact through greater end-use efficiency and the production of
sufficient quantities alternative liquid fuels.
•The possible risk of high and volatile prices provides a further rationale for pressing forward with policies that reduce our CO2 emissions in
the transport sector and, in so doing, generate alternatives to traditional oil-fuelled modes of transport. However, while alternative
technologies could be pulled through by the combination of economics and government policies, the lead-times for any real impact on oil
demand are long. Globally, in response to a peak, some countries may adopt short-term, partial solutions such as more coal consumption and
high carbon oil production that could result in an increase in global emissions.
•Given the uncertainties around the timing of peak oil and its implications for the UK, there are no obvious additional policies the UK
government should pursue to minimise the likelihood of a 'peak oil' scenario and to be prepared to mitigate its impacts in addition to
those already in place.
•While there may be policies that the UK government could put in place, in addition to those above, in order to make the UK economy more
robust and resilient to peak oil, it is unlikely that the UK Government can unilaterally influence the global consequences of any peak.
However…
•Policies relating to oil consumption in the transport sector, particularly road and air travel, should continue to be monitored closely, as this
sector will probably be most exposed to rising and volatile prices in the event of peak oil.
•Security and diversity of supply are even more important in the transport sector, as oil cannot be substituted in the short term (or even the
medium-long run) without significant investment, large technological improvements and/or alternative fuels.
•Economically viable and readily available alternative and renewable technologies are an essential policy area if we are to increase the
resilience and flexibility of UK businesses and consumers to high and volatile oil prices.
•The UK’s move to a low carbon economy and climate change policies are consistent with these conclusions.
35
*The Oil Crunch: Securing the UK’s Energy Future (ITPOES 2008)
120
Production of conventional
crude relatively flat from
2020 onwards.
100
NGLs
80
Non conventionals
Oil yet to be
developed or found
60
40
Oil from currently
producing fields
20
Source: IEA WEO 2008
0
1990
2000
2010
2020
2030
Need for alternative fuels and non
conventionals in ‘peak’ scenarios
70
Million barrels of oil equivalent a day
Although the World Energy Outlook published in November 2008
states that, “[the] world is far from running short of oil” (based on its
extensive analysis of oil reserves, demand trends and field decline
rates) it also recognizes that “the immediate risk to supply is not one
of a lack of global resources, but rather a lack of investment where it
is needed”.
The WEO 2008 has also highlighted that existing oil fields are
depleting faster than previously thought and that even if oil demand
was to remain flat to 2030, 45 mb/d of gross capacity – roughly four
times the capacity of Saudi Arabia – would be needed just to offset
decline from existing oilfields.
As can be seen on the right – the WEO suggests that we need to
develop a substantial number of new fields and also unconventional
sources and NGLs. Our scenario analysis pointed in a similar
direction. Shell, recently said their ‘outlooks indicate that the
maximum production of easily accessible oil could come as early as
the coming decade. And maintaining a production plateau for all oil
and natural gas will become a serious challenge in the 2020s’.*
Clearly the current credit crises and global recession has slowed
down demand for oil products in the short term. Global oil demand
forecasts now suggest that we face two consecutive years of
demand decline (2008/2009), which has not occurred since
1982/1983. We thus expect prices to remain subdued throughout
2009. This will alleviate any pressures from the ‘demand side’ for the
short term but it is unclear when and how fast global oil demand will
pick up after this global recession.
Constraints on credit as well as subdued prices for crude oil may
have an impact on investment in new oil production, investment in
existing fields (such as EOR) and possibly also on technological
development in the oil and alternative technologies sector. Delays in
investment or failure to invest in maintenance or efficiency of existing
fields may accelerate the rate of decline and/or the future supply of
crude oil. Failure to develop new technologies may also increase
supply side pressures.
Thus, although we believe that we will not face a ‘resource’ peak –
there may be a risk of a supply crunch (not peak).
mb/d
… what has happened since?
Non-conventional
60
Alternatives Early
50
Alternatives Medium
40
Alternatives Late
30
20
10
0
2000
-10
2005
2010
2015
2020
2025
2030
2035
2040
Source: DECC
… what does that mean for our move to a low carbon economy?
Transport Sector
•
•
In most plausible future scenarios the global economy will continue to rely on oil as its primary energy
source in the transport sector, as there are few alternatives in the medium-term
With the potential risk of a supply crunch and rising oil prices, the move to a low carbon and thus less
oil intensive transport sector will take time but needs to be pursued
Generally
•
•
•
•
The UK Government is showing leadership in the fight against climate change, through its carbon
budgets, leadership in the negotiations for a new deal in Copenhagen and its commitment to cap-andtrade
Under a robust future carbon price, there may be an increased economic cost associated with a high
carbon economy and companies may benefit in engaging early with the move to less-carbon intensive
technologies (first mover advantage)
So, whilst we are committed to delivering the required investment in both conventional and new
sources of oil in order to maintain sufficient supply to meet existing and future demand, it is important
that as Government we help manage the transition to and opportunities of a low carbon economy
Although the report concludes that Government does not need additional policies, HMG needs to
continuously pursue its policies towards achieving a low carbon economy
37
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