Beyond today's geopolitical tensions, the future of oil and gas supplies to the European Union is strongly dependent on significant physical, technical and economic constraints not generally known to policymakers.
Europe is surrounded by energy-producing regions that for years have been confronted with oil and gas outputs which are either declining, or on the verge of decline. This situation has very little to do with so-called “above ground” issues. It is the consequence of a long-foreseen finitude of hydrocarbon reserves.
The starkest examples are plain for Western Europe to see. The North Sea, Europe’s only important source of fossil fuels has been standing as a textbook case of irreversible geological decline for more than a decade. In Europe’s neighbourhood also, Algeria is facing a decline of its biggest, half-century-old production fields, despite having its door open to the best in foreign oil companies. Libya passed an oil production peak in the late 2000s, much before the current conflict began.
Most importantly from a European perspective, given the lack of access to sufficient investments, Russia is on the brink of a petroleum production decline, according to the International Energy Agency (IEA). This would be potentially devastating for Europe and is not only the fruit of Russia’s current “above ground” policy, but the consequence of the inescapable depletion of many of western Siberia’s conventional oil fields, near which Russia hopes to develop the vast potential of its tight oil and shale oil resources – though it can’t for the time being.
Several oil exporting countries in Africa – including Gabon, the Republic of the Congo, Angola and Nigeria – are subject to the same hard necessity of compensating for the decline of conventional fields with new, costly and less-accessible resources.
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Meanwhile, is the impressive surge in US shale oil not about to save many Western oil companies such as Total, Shell and BP from a decade-long decline in their oil outputs? They have already seen an historic ramp-up in investment. The shale boom, however, may be a thriving tree hiding the dying forest, and for 3 reasons.
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First, the US shale oil boom is ultimately only a US story. The US is still a far bigger oil importer than a producer, meaning that approximately all US-produced oil is consumed at home. This will remain true for the foreseeable future. For now, US tight and shale oil production supplies 3 million barrels a day (Mb/d). This is huge, but nothing compared to the 90Mb/d of worldwide liquid fuel production. For now, it is certainly not a global magic bullet. The fall in the oil prices has already halted the shale oil boom in the US, and according to the US Energy Information Administration, American liquid fuel production is expected to enter a new decline toward the end of the decade. Whether the boom of the same kind could be triggered and sustained elsewhere, perhaps in Argentina, China or Russia, is still very far from guaranteed; the recent disappointment from drilling in Poland stands as warning.
The second reason is the uncertain resilience of non-conventional oil production. Even though the fall in oil prices has ended the boom, tight and shale oil producers appear more resilient than the other new and unconventional liquid fuel sources that developed quickly during the historically long 2010-2014 oil price peak. With crude prices stuck far below what was anticipated only a year ago, the development of new Canadian tar sands projects, as well as of Brazilian deep-offshore projects or of the complicated offshore projects in western Africa or the Caspian Sea, is now trapped in a full-blown crisis.
The third, and possibly decisive, reason is the “natural decline” of mature conventional oil fields. Discoveries of new oil reserves by the big western oil companies dropped severely in 2014 for the third consecutive year. The global oil industry is being forced to run on the treadmill of natural decline in many of the mature fields still supplying the largest part of the world’s oil. This exercise will become more and more difficult as time goes on. Peter Voser, former CEO of Shell, has warned that oil output from active fields is declining by 5% a year as reserves are depleted, so the world needs to find the equivalent of 4 Saudi Arabias, or 10 North Seas, every 10 years just to keep supplies level. This warning was given in 2011, when the oil prices seemed bound to stay high forever. In early 2014, most of the largest oil companies decided to reduce their capital expenditures after huge increases since the 2000s. Why such a change of course? It was because those ramp-ups had not been enough to stop the decrease in crude oil outputs of many of those companies. And this was 6 months before the oil price fell.
The potential risk from a lack of investment is made all the more clear now that oil prices have fallen, and is the reason why the IEA warns in its 2014 World Energy Outlook that “given the long lead times for upstream projects, the consequences of a shortfall in investment may not be apparent for some time. But clouds are starting to form on the long-term horizon for oil supply, holding out the possibility of stormy conditions ahead”.
According to Fatih Birol, chief economist and director of global energy economics at the IEA, sometime during the next decade – possibly earlier if oil prices remain low, starving the industry of investment – the addition of supplies from US tight and shale oil, Canadian tar sands and Brazilian deep offshore fields would not be sufficient to compensate for the decline in existing oil production. Only the Middle East’s oil reserves – mainly those in Iraq – are abundant enough to fulfil the task.
From the European geopolitical standpoint, the promise of increased dependency on Middle Eastern oil is gloomy. With Iraq looking trapped in a never-ending civil war, and China being Iraq’s main oil customer and operator, this fragile keystone of future oil supplies is beyond the West’s reach, and beyond Europe’s reach without any doubt.
IMAGE CREDIT: CC / FLICKR – Steven Straiton