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Oil crunch threat worsens as field declines accelerate – IEA

FALLING production rates at operational oilfields will prove a much greater threat to energy security than demand growth over the next two decades, claims the International Energy Agency (IEA). Its latest World Energy Outlook (WEO) also says a new international agreement must be reached at the climate-change talks in Copenhagen next year (see p6), to replace the Kyoto Protocol when it expires in 2012, if the world is to avert environmental catastrophe. But both problems are becoming more difficult to tackle, as governments focus on dealing with the recession.

"Trends in energy supply and consumption are patently unsustainable – environmentally, economically and socially. They can and must be altered," IEA executive director Nobuo Tanaka said at the WEO launch last month. "While the global financial conditions facing us are nothing short of critical, it is vital that we keep our eyes on the medium- and longer-term target of a more secure, sustainable energy future for all."

WEO 2008 includes a field-by-field study of historical oil production trends covering 800 fields that indicates average production decline rates of 6.7% a year today will accelerate to 8.6% by 2030. Fatih Birol, the agency's chief economist and lead author of the WEO, tells Petroleum Economist that in practice this would require the discovery of four new Saudi Arabias in the next 22 years. "Even if demand between now and 2030 were to be flat – in other words, no growth – we would have to increase production by 45m barrels a day (b/d) just to compensate for the decline in existing fields." Taking account of the expected growth rate in oil demand over the same period increases the gap to 64m b/d by 2030 – six times Saudi Arabia's capacity.

"The main worry that we have on the supply side," says Birol, "is whether sufficient investment will be made in a timely manner." Much of that will have to come from national oil companies, which the IEA expects to account for more than 80% of the growth in oil and gas supply "with implications for the functioning of oil and gas markets".

The financial crisis, he says, is leading to project cancellations and postponements, aggravating the IEA's concerns. "When demand picks up in a few years time, we could well be caught unprepared, which could mean very high prices." Birol adds that, with the cost of producing a marginal barrel of oil rising significantly over the past 18 months, to around $80 a barrel, higher prices than those prevailing today will be needed for the necessary investment to take place.

In the IEA's reference case, which takes account only of policies enacted by mid-2008, it projects that world primary energy demand will grow by an average of 1.6% a year between 2006 and 2030 – a 45% increase. This is slower than projected last year because of the effects of economic slow-down, higher projected energy prices, and the implementation of new policies. World oil demand is projected to grow from 85m b/d now to 106m b/d by 2030, with all the growth taking place in non-OECD nations, primarily China (43%), India (20%) and the Middle East (also 20%).

But new policies will be needed to address pressing environmental problems, Birol says: "In the absence of a Copenhagen agreement, the policies of governments will lead to a 6°C increase in the world's temperature." The IEA's proposed policy framework is based on two possible courses of action: one aims to stabilise greenhouse-gas emissions in the atmosphere at 550 parts per million (ppm), which would imply a temperature rise of 3°C; the other, more ambitious target is to reduce emissions to 450 ppm, implying a rise of 2°C – a level that has achieved a degree of international consensus as an acceptable upper limit.

"It's much easier to achieve the 3°C option," says Birol. "We can do it mostly using existing technologies, such as efficiency, renewables and nuclear. This would cost 0.25% of GDP on an annual basis. For the more ambitious target of 450 ppm, we would need significant new technologies, such as carbon capture and storage (CCS – see p28). This would mean we would have to make new investments equal to 0.6% of GDP."

As a basis for agreement in Copenhagen, the IEA has proposed a hybrid policy approach consisting of three elements: cap-and-trade schemes; international sectoral policies; and voluntary national policies, an option aimed particularly at poor developing countries. One of the agency's main aims was to create a framework that will encourage non-OECD countries to become involved in climate-change mitigation efforts.

"Without the non-OECD countries we cannot do anything," says Birol. "Even if OECD economies were to crash tomorrow and even if their carbon dioxide emissions were to be zero for 25 years, if the non-OECD countries continued their policies we could not reach the 450 ppm level by 2030."

On the feasibility of CCS technology becoming commercially available in time, Birol claims: "It would be naïve to say that CCS can be taken for granted by 2020. We need to make significant efforts to bring the cost down and to find solutions to problems such as the legal frameworks, the issue of leakage and so on. It's not just the cost. Power plants with CCS must be built in China and India, countries that, in general, are looking for the least-cost option."

But he adds that US president-elect Barack Obama's commitments to renewables, energy efficiency, new technology and to the US taking a more central role in climate talks is "a reason to be optimistic"

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