Analyst: High oil prices spur need for energy diversity

Hubbert Revisited

In the face of rising oil prices, it is "essential" for national governments to develop more-diverse energy resources, said the managing director of a prominent British consulting firm.

"The changing situation in energy supplies has major implications for governments worldwide," said John Westwood, Douglas-Westwood Ltd., Canterbury, in his opening address at the East of England Energy Group conference July 15 in Norwich, England. "The present reliance on oil must be reduced; natural gas and renewables will have to be used to fill the forthcoming energy gap; a massive energy conservation drive is needed; and it is becoming increasingly likely that nuclear energy will have to be resurrected," he said.

"Oil demand from the developing economies has more than doubled over the past decade, and supply restrictions are now evident," Westwood said. "Analysis for the World Oil Supply Report [published by Douglas-Westwood] shows that it is increasingly likely that oil supplies will peak, possibly within a decade, and governments must acknowledge this scenario, as the economic consequences are considerable."

New reserves needed

"Over the past few years, the world's oil majors were focused on gaining reserves by 'exploration on Wall Street' rather than exploration offshore with the result that depleting reserves are not being replaced," said Westwood. "There is now a need to greatly increase exploration spending to boost reserves and future production prospects."

With recent high prices for both crude and natural gas, he said, "Oil company profits have soared while contractors' profits have fallen. Both this and the reserve-addition situation are fundamentally unsustainable." Meanwhile, spending is on the decline in mature shallow-water areas of the world. "The UK is a case in point, soon to be joined by Norway," Westwood said.

Global spending for offshore operations and field development is expected to grow overall. "But this will be particularly focused on deep water, with an increasing spend on subsea production and floating production," said Westwood.

Demand for natural gas is growing faster than that for oil, "and depletion of reserves in countries such as the UK and the US means that activity is focused on long-distance subsea pipelines. This coupled with the increasing activity in deep water means that the top-of-the-market pipeline installation vessels will be in high demand," Westwood said.

However, he said, "Much gas is economically stranded, and at present liquefaction offers the only real solution. Investment in LNG plants, LNG tankers, and import terminals is set to boom." Analysis indicates "a 40% growth in spend[ing] over the next few years to exceed $10 billion/annum," he said.

Renewables

"Renewable energy has prospects for strong growth, particularly wind power," said Westwood. "In the UK alone, some 118 Mw has been commissioned in the first half of 2004 and a further 200 Mw are planned. Over the next 5 years, it is estimated that some $80 billion will be spent on wind power installations worldwide."

Offshore wind power projects are particularly promising, with the prospect of spending nearly $10 billion over the next 5 years. "The immediate growth market is the UK, with 499 turbines forecast to be installed offshore, [and] Germany with 558," said Westwood. "Wave and tidal power is an embryonic industry but with good long-term prospects. The World Wave & Tidal Database is forecasting the cost of annual installation to reach $150 million by 2006. Here, the UK is market leader." Large-scale biomass is another promising area, with recent studies indicating that spending will increase to $2 billion by 2010 from $1.3 billion in 2004, he said.

UK needs

Meanwhile, Westwood said, "The UK needs a clear and long-term strategy for addressing the major changes that will happen in the energy sector in future years." That should include:

• Full exploitation of remaining oil and gas reserves. "The UK has been successful in attracting in new small oil and gas companies to develop some of the many tiny fields that remain and to take over the mature assets of the departing oil majors. It is essential that recent successes are built upon," Westwood said.
• Adding renewable resources. "This requires a very long-term view. Developers must have the assurance that government support for this sector plans will continue," said Westwood. "Secondly, there needs to be a major drive to develop the supply chain; otherwise, the necessary hardware will be imported, with little benefit to UK industry."
• Increased conservation of energy. "Major incentives are required to change the UK into a low energy-input economy before this is forced, with great economic damage, by major energy price rises," he said.
• Winning export markets for the UK's offshore industry. "As the major business opportunities are increasingly in foreign markets, a much more integrated approach is needed," Westwood said. "The present fragmentation of effort between national and local agencies is not appropriate. In 1980, the UK North Sea accounted for some 30% of the world offshore market. By 2000, it was 13%, and by 2008, we forecast it will be down to 7%. Increasing export business is vital."