Sunday July 26, 1998

Forget the Caspian bonanza. Peter Beaumont and John Hooper in Rome report on claims that producers misled everybody

The world faces a devastating oil crisis in the early years of the new millennium, according to a new assessment of conventional oil reserves.

Global production will peak as early as 2002, then decline over the next 70 years, says the analysis. As oil stocks decline, prices will rise steeply making the oil crises of 1973 and 1979 look 'minor and transitory' by comparison. The warnings of environmentalists in the Seventies appear now to have been prescient.

The fears, which emerged as oil prices hit a 25-year low, contradict the conventional industry view of continuing low prices for the forseeable future, suppressed by increasing reserves of oil and the development of new areas such as the Caspian Sea.

At the centre of the argument are claims that oil-producing countries and companies have deliberately overestimated their oil reserves for political and economic reasons, and major new finds are increasingly unlikely.

Fears that the world is rapidly approaching peak oil production - and inevitable depletion - have galvanised the G8 group of leading industrial nations into taking action. At the recent Moscow summit, Ministers were warned that prices would increase sharply and that 'many multi-billion dollar projects' would be required to meet the energy gap.

The concept of oil shortages remains contentious because of the many cries of 'wolf' by oil economists after the oil crises of the Seventies that all available stocks would be burnt up by the end of the twentieth century. This time, however, the warnings are being sounded by a small group of international petroleum geologists who have built new mathematical models to predict peak production and ensuing decline. Their model is based on a formula devised in the Fifties by geologist M. King Hubbert and used with extreme accuracy throughout the oil industry to predict peak yield in individual fields. Now applied on a global scale, the model shows oil production as a bell curve with the apex at the point when half of the available oil has been used up. Suddenly the glass that the world had considered to be almost full has been revealed to be half empty.

Researchers have also used an offshoot of chaos theory to plot probable distributions of as yet undiscovered oil and suggest that the majority of the world's oil has already been discovered.

The leading proponents of the new theory are Dr Colin Campbell and Dr Jean Laherrere, who have both been employed in the oil industry for 40 years and are currently working with Petroconsultants, owner of one of the most authoritative databases on oil production and reserves, in Geneva.

Unlike those who predicted global oil exhaustion in the wake of the last oil crises, Campbell, author of The Coming Oil Crisis, insists that it is not the point at which the world runs out of oil that is crucial, but the halfway point when production begins to taper off and demand forces prices up.

"The impression that the oil companies give is that oil will just keep on coming," Campbell said. "The reason that they want to do this is simple. They operate in a global market and they have to protect their shares. Unfortunately it is simply not true. There is a finite amount of oil."

Campbell and Laherrere say the key issue in recent years has been the false impression that oil reserves have been 'growing' as companies have revised up their estimates.

In a paper written for the journal Scientific American earlier this year, Campbell and Laherrere reported that their research into reserve estimates which had been published by the oil industry had identified widespread systemic errors, not least the widely used practice of including the highest possible estimates for reserves.

According to most accounts, world oil reserves have marched steadily upwards over the past 20 years. Extending that trend into the future, one could easily conclude, as the US Energy Information Administration has, that oil production will continue to rise unhindered for decades to come, increasing almost two-thirds by 2020.

"Such growth is an illusion. About 80 per cent of the oil produced today flows from fields that were found before 1973, and the great majority of them are declining."

Campbell and Laherrere are not alone in predicting peak production early in the next millennium. Separate analysis - carried out by Dr Craig Bond Hatfield at the University of Toledo, Ohio, and Dr John Edwards, of the University of Ohio, using official US Geological Survey Figures - says conventional oil production will peak early in the next century even with the most optimistic estimates.

Hatfield - who has been studying oil depletion for 18 years - warns that unless governments begin investing heavily in alternative energy sources the oil shortages of the 1970s, which caused rampant inflation and damaged economic growth, will be 'minor events compared with what is going to happen'.

'The world is only just now waking up to what is going on. The problem is that we are working in a field made controversial by the wildly incorrect forecasts made after the last oil shortages which said that oil would be used up by the end of this century.

"These were not made by petroleum geologists and they have damaged our case. I can only hope over the next decade that we are able to develop viable alternatives to the oil-based economy. But we need to get going now. We will not manage overnight and it requires time and a gigantic investment. What I fear is that we are running out of time."

According to Hatfield's research - which mirrors that of Campbell and Laherrere - most of the reported 'growth' in oil reserves in the past 10 years has been from revised estimates. In a paper submitted to the journal Nature last year, he wrote that in 1988 and 1989 Venezuela, Iran, Iraq, the United Arab Emirates and Saudi Arabia - all members of the Organisation of Petroleum Exporting Countries - reported upward revisions of 277 billion barrels of oil, accounting for almost the total growth in global oil reserves between 1987 and 1990.

Included in this upward revision was the boosting of Opec's estimated Gulf States reserves - pushed artificially upwards to allow them to increase their share of oil production under the quota system.

Some oil executives are also convinced of the dangers ahead, including Franco Bernabe, chief executive of the Italian oil company Eni SpA. On a visit to London last year, Bernabe, a former economics professor, warned that despite the much reported improvements in horizontal drilling technology to increase yield from existing fields the world was being 'complacent' about the availabilty of cheap oil.

"My forecast is that between 2000 and 2005 the world will be reaching peak production from our known fields," Bernabe said. "After that output will decline.' But demand, he added, would continue to rise inexorably.

It is a view reinforced by the former chairman of Opec, Alirio Parra, Venezuela's Oil Minister from 1992-94. "I have no doubt prices are going to have to go up," he said. "At $10-15 a barrel, a lot of exploration is not worth while. The question is whether more cost-effective technologies can be developed to go into a new and prolific round of discoveries at these prices. To my mind, that is not certain.

"At the same time, though, I am reluctant to be a prophet of doom. All the time, the finding of oil is getting more technically challenging and - unless new techniques are developed - it will get more expensive. But the caveat is all-important. Oil is finite, yet man's inventiveness seems to have no end. They are doing things now that we would not have dreamt of 10 years ago."

Venezuela offers a supreme example of the way that oil reserves are proportionate to man's ability to release them from the earth at an economic cost. There are known to be 700bn barrels of extra-heavy non-conventional crude in the Orinoco basin - an amount equivalent to the reserves of Saudi Arabia.

At current prices, they cannot be extracted profitably. But that has not stopped Conoco, Mobil and other oil firms signing deals with the government in Caracas allowing them to try. Their calculation is, like that of most oil companies, a long-term one: either advances in technology will slash the cost of getting at these extra-heavy crudes or prices will soar before they do.
 
© Copyright Guardian Media Group plc.1998