Black gold finds its place in the sun

The 19th World Petroleum Congress, held in Madrid, Spain, was attended by some of the oil industry’s top players and over 4300 delegates. A reporter for IFandP was also present and here summarises the key issues of debate.

The World Petroleum Congress is held once every five years and is perhaps the largest and most prestigious gathering of oil analysts, industry representatives and executives. This year, Madrid, Spain, hosted the 19th Congress at the modern and spacious IFEMA-Feria de Madrid exhibition centre, coinciding with the country’s victory in Euro 2008 football championships, which added an extra flourish to the opening dinner. The Congress got off to a rousing start with an address by Andreas Piebalgs, the EU commissioner for energy.

He was emphatic in saying that “only international action is enough to make an adequate response to today’s energy challenge.” He called for greater transparency and better access to data, arguing that the greater barrier to investment is uncertainty. Mr Piebalgs was also adamant that without renewables and energy efficiency “there is no sustainable solution.” Worryingly, he voiced his belief that even with its current renewable energy policy, the EU is likely to be importing more oil and gas than it does today.

During his presentation, Mr Piebalgs concisely summarised the main goals of EU energy policy: a 20 per cent increase in energy efficiency and the use of renewables, by 2020 and a 20 per cent reduction in CO₂ emissions by the same year. A delegate suggested that the current trend of announcing carbon emission or renewable energy targets, where the percentage reduction or uptake is equal to the year of the deadline (minus 2000), made it difficult to accept that the targets had been agreed after a careful consideration of the scientific evidence. Mr Piebalgs responded by saying that on the contrary, the targets had been chosen after careful consideration of the science and represented the minimum reductions required by the evidence. He commented that the European Commission is trying to reduce the impact of biofuels on the price of food, partly by promoting the development of alternative technologies.

Tony Hayward, CEO of British Petroleum (BP) was up next. He began by commenting that the rising price of energy is a signal that supply is not responding to demand. He then addressed three commonly held “myths”: speculation, below-ground factors and the idea that renewables are the answer to the energy problem. Mr Hayward believes that the huge upsurge in demand from China has effectively used up any spare capacity and that this, coupled with the difficulties facing oil companies above-ground, was the primary cause of high oil prices. He pointed out that when Europe underwent the industrial revolution, it affected 200-250m people, when the USA followed, another 300-350m underwent urbanisation, but now 1-2bn people are industrialising with a huge impact on the price of all commodities.

Mr Hayward claims that the world still has 40 years of oil and 60 years of natural gas left and that therefore below-ground factors are not an issue. He also commented that although renewables are growing rapidly, it is a mistake to believe that they can be brought online fast enough to be a solution in themselves.

In his mind, the shortage of people and resources in the oil industry was a key problem to overcome, with retirement looming for a large proportion of skilled workers. Interestingly, Mr Hayward noted that as 80 per cent of the world’s oil resources are controlled by national oil companies (NOCs), but independent companies have the most advanced technology, there is a real need for new forms of contractual agreement and that there should be a move away from ownership of a field automatically meaning production.

He said that efforts should be made to increase the recovery rate from oilfields, which globally averages only 35 per cent of oil in place.

This was later given weight during a technical session in which a speaker explained that every extra one per cent of additional recovery is equivalent to around 60 gigabarrels of crude, representing two years of world production at current rates. Mr Hayward commented that taxation was at dangerously high levels, given the scale of investment required to meet demand in the future.

Carlos Perez de Bricio, chairman and CEO of Cepsa, an international exploration and production company with Spanish roots, operating in the Mediterranean, Canada, Latin America and the UK, said that the industry will have to start producing high cost oil and natural gas to meet demand in the years to come and that more should be done to attract young people to the oil industry.

Antonio Brufau, CEO of Repol YPF, remarked that within the next 50 years, developing nations will end up using around 50 per cent of the world’s energy supply and saw their rapid development as a positive shock to the world economy, but which was responsible for the high ramp up in prices, which could delay improvements in the standard of living for their populations. Mr Brufau also pointed out that currently independent oil companies are responsible for around 70 per cent of all investment in the oil industry and that further incentives are required, particularly government frameworks to encourage long-term investment. He argued that further investment in refining would lead to increased energy security. Another point Mr Brufau made was that EU is increasingly competing for energy resources and that the fragmented nature of the European market was not helping matters.

One theme that the majority of speakers touched on was the importance of carbon capture and sequestration. Mr Hayward suggested that a higher CO₂ price than that supported by the market might be needed to make CCS a reality, given that it would have to be scaled up by a factor of 20-50 times – a considerable challenge. Mr Van der Veer, chief executive of Royal Dutch Shell, said: “It is difficult to see how coal can grow as predicted without CCS.” He was supportive of pre-combustion methods and the idea that all new power plants should be built “capture-ready”, but expressed caution as the technology surrounding the field is changing rapidly.

He hoped that the US would soon adopt a cap-and-trade system, and commented that the CDM and the possibility of enhanced oil recovery, should help to promote CCS in China and the Middle East, respectively. In addition, Mr Van der Veer called for an international CCS system “which produces fully convertible carbon credits” as well as a global energy fund to provide finance for new projects. Renewables and nuclear power should be part of every country’s energy portfolio, Mr Brufau commented.

When asked as to whether any of the speakers foresee any physical shortages, Mr Hayward didn’t see that happening and that the high oil prices are already causing a 5-10 per cent decline in oil demand in OECD countries. Mr Van der Veer added that peak oil was a good concept but is predominantly about the “easy oil”.

When the question was raised as to whether the current phenomenon of share buybacks was adversely affecting research and development, Mr Van der Veer said that the two are completely different issues and that other constraints meant that it is impossible for Shell to ramp up R&D any faster than it is currently doing. He also explained that as far as Shell is concerned, share buybacks are about creating value for shareholders and creating a stronger balance sheet.

On the subject of NOC/IOC co-operation Mr Brufau said that it is essential, while Mr Van der Veer believed that the role of IOCS is to be one step ahead in technology, giving integrated project management as an example.

At a press conference later that day, Mr Van der Veer said that the LNG industry has completely changed. Rather than having to wait until you have all your customers sealed up, now if you produce LNG you have ample possibilities to sell, he elaborated. While discussing the outlook for Russia, he disclosed that Shell has been shortlisted for development of the Yamal gasfield. Shell’s CEO also made the point that such is the size of the Yamal field that it is incorrect to think of it as a single conventional gasfield. On the subject of Iraq, he said that there had been substantial progress in the past few months and that a contract could be signed within weeks or months, declaring his preference for the former. However, he pointed out that legal and fiscal terms had yet to be agreed.
The plenary session on the second day of the conference addressed the topic of “deliverability challenges security of supply and demand perspectives.”

During the session, Mr Chengyu Fu, president of China National Offshore Oil Corporation (CNOOC), said: “When Saudi Arabia announced an extra 200,000bpd of oil production, the oil price didn’t stop. This might lead us to believe that the increase in price has nothing to do with fundamentals. However, we need to ask what is behind the speculators. I believe it is severe concerns about supply and demand, now and in the future.” He went on to point out that currently, the OECD is still using 17bbl per capita per year, while non-OECD countries are using only 2.5bbl. Until recently India and China were both using around 1bbl/year/person, but now this figure is closer to 5bbl. After listing the range of factors such as geopolitics, which influence the oil price, Mr Fu said that concerns about demand and supply are warranted but added “I believe there is enough for sustainable growth for the next 30 years.”

No easy oil?

Christophe de Margerie, CEO of Total, explained that it was important to understand that oil is not as easy to get hold of as it used to be. As an example, he pointed to the Russian continental shelf as an important area for development in the future and commented that joint ventures and the exchange of assets are key to spreading the risk associated with developing new fields. He believes that more cooperation is needed within the industry.

Somewhat controversially he stated that in Total’s view, oil production will reach a plateau of 95mbpd by 2020, partially due to the fact that a large proportion of new capacity will be swallowed by decline rates of 5-6 per cent. Mr de Margerie predicted that over 50mbpd of new capacity will come online between 2005 and 2015 and suggested that the natural gas industry is likely to face the same challenges experienced by oil producers in a few decades time. Production growth is primarily led by advances in technology and megaprojects, Mr de Margerie explained. He defined project management as the ability to take technical and financial risks and drew attention to the twin constraints of expertise and equipment in a booming market for projects.

The average cost of developing a 200,000bpd project was around US$7-8bn, which partially explains the high cost of oil as US$80/bbl is required to break even according to Mr de Margerie. Also on the subject of price, he commented that meeting the challenge is not just the task of oil producers, it is also “the responsibility of consuming nations to say how much they will need.”

This theme was picked up by Dr Chakib Khelil, president of OPEC and the Algerian minister of energy and mines. He explained that OPEC is responding to supply concerns by embarking on significant capacity expansions and upstream investment, with over 120 projects in development, at a cumulative cost of US$150bn. Dr Khelil said that the cartel plans to increase capacity by 4mbpd by 2012. At the same time, US$60bn has been earmarked for downstream investment, with the aim of removing the current bottlenecks facing the industry. He predicted that OPEC’s contribution to world oil production is likely to increase in time, eventually rising above 50 per cent.

However, the industry is faced with a large amount of uncertainty, Dr Khelil explained. The economic outlook, oil demand, the increasing volatility of oil prices, the possibility of a looming financial crisis and its impact on investment and demand, together with fluctuations in the value of different currencies are all working to make predictions difficult. Between US$90bn and US$140bn in investment could be needed by 2010 he claimed, with the gap between the minimum and maximum scenarios widening further ahead, with the investment required by 2020 to be between US$160bn and US$230bn.

During the question-and-answer session, Dr Khelil said that the current high oil prices were not in the interest of consumers or producers and that the prices are fixed by the market and not OPEC. Surprisingly, he added that he thought that there would be peak oil, but it “would be due to new technology and more use of coal and gas.” At a press conference later that day, Dr Khelil said: “it is difficult to believe that we will experience shortages in oil and gas distribution during the next 50 years.”

One of the most interesting things about Dr Khelil’s comments is that the points he made are difficult to reconcile with fears that OPEC oil reserves are on the decline. For the cartel to even be contemplating a massive investment programme with the aim of boosting the country’s oil production, it must be confident that it has the reserves base in place to support it.

Strong global LNG market and energy efficiency

Rex Tillerson, chairman and CEO of ExxonMobil, was next to speak, choosing to focus on the topic of LNG. He started by saying that oil and natural gas are expected to account for 60 per cent of the world’s energy supply in 2039 and that a strong global LNG market would bolster energy security. Mr Tillerson continued by highlighting the partnership between Qatar and ExxonMobil in the LNG arena and said that operations are increasingly benefiting from economies of scale. Once the partnership’s new Q-max ships are launched, its shipborne LNG capacity will increase by 80 per cent, giving ExxonMobil more capacity than any other company.

Mr Tillerson also discussed the topic of energy efficiency. Over the past 25 years, world energy efficiency has been growing at one per cent per annum, he commented. He believes that there are still great gains to be made in the transport sector, via a move towards lighter cars and the adoption of advanced technologies such as homogenous fuel ignition. He also pointed to the development of hydrogen and the move towards electric-hybrid cars. The high price of oil creates the temptation for companies to break partnerships, a temptation that should be resisted, Mr Tillerson concluded.

During the Q&A session, Dr Khelil commented that technologies such as 3D or 4D seismic geo-modelling and horizontal drilling has played a major role in increasing the size of oil reserves. He went on to say that technology has been responsible for 70 per cent of the increase in reserves seen in the past 30 years, by increasing the amount of oil that can be delivered from each field.
Mr Tillerson took exception to Total’s oil supply outlook, saying that in the current price environment, producers are clearly going to redouble their efforts to boost recovery rates and that new capacity does not automatically require new oilfields. He qualified this by saying that enhanced or increased oil recovery methods require good management of reservoir depletion to be applicable. Mr de Margerie responded by saying that Total’s target is not based on reserve limitations, but rather on “other things happening in the world”.

The role of oil subsidies

When the panel was asked to discuss the role of oil subsidies, Mr Khelil spoke first, saying that it is important to look at them in terms of purchasing power. If developing oil economies were to jump to price parity, this would mean that people in such countries would be paying US$500-3000 a year for oil. Therefore, he argued, you can’t ask such countries to pay the same price but you still need rational expenditure.

On the subject of whether oil subsidies in China were sustainable, Mr Fu replied: “I believe in any country, subsidies are not long-term policy.” He went on to say that the economy can’t support them in the long-term, but China can see a slow-down in growth, without affecting its ability to meet government targets. With regard to the major challenges facing CNOOC, he believes that the company needs to grow faster in the next five to 10 years, ideally by 7-11 per cent per annum to 2010, thus creating a need for more capital. Mr Fu said that there are tremendous reserves in offshore China, but as they are predominantly in the form of heavy oil (11-16api), it is necessary to invest in new technology and refineries, which CNOOC is currently doing.

Why biofuels?

A question from the audience lightened the mood. Mr Tillerson was asked why the US produced ethanol. He replied: “Because the corn states have 40 senators” He went on to note that Exxon has not ruled out biofuels, but at present he didn’t see much value that the corporation could add. However, Mr Tillerson claimed that Exxon is focusing its efforts on examining the potential of second-generation biofuels and is financing supporting programmes.

A thought-provoking meeting

What has been covered in this article is only a small portion of the analysis and information available at the congress, which proved to offer the very best in stimulating discussion and debate. It also provided an opportunity for companies to showcase their expertise, both in the technical sessions and in the extensive exhibition hall.

The next World Petroleum Congress will be held in 2011 in Qatar, a highly appropriate host, given its booming LNG sector, and IFandP looks forward to bringing you the most pertinent details.

For more information consider visiting the following websites:
www.19thwpc.com
www.opec.org