Innovation seen critical to future energy supply

Escalating world oil demand and declining production rates will push the world toward unconventional forms of energy, including synthetic hydrocarbons, said speakers at an annual oil and gas conference hosted by Deloitte & Touche LLP, the US arm of Deloitte Touche Tohmatsu.

"It's already too late to modify the energy mix for 2020," said Pierre-René Bauquis, a retired petroleum engineer and an associate professor at the Institut Français du Pétrole near Paris. "Not only are we going to face a world oil peak, we are going to face a world gas peak 20 years later."

Matt Simmons, CEO of the Houston investment bank Simmons & Co. International, noted that, "Peaking is at hand, whether that's 5 years from now or in the past tenseU. There is no clear ceiling for when oil is too expensive."

Sarah Emerson, petroleum director for Wakefield, Mass.-based Energy Security Analysis Inc., stopped short of predicting the decline of world oil supplies.

"I'm not willing to bet against technology yet. We can't ignore the potential for change. This is a very dynamic industry," Emerson said. "Oil supply rests on the potential for change," including both technologic innovations and regulatory changes in taxes and international investment law.

Energy sources

Bauquis sees limitations for existing forms of renewable energy, and he rejects fuel cells as a viable option to power vehicles worldwide.

"Synthetics plus electricity is more likely," Bauquis said, adding he also sees "an inescapable shift toward nuclear energy." He believes that the world's energy supply mix could change by 2050.

"The oil price shocks in the 1970s had beneficial effects. It made us more efficient," Bauquis said. He believes global oil production will peak at 100 million b/d around 2020 and decline to 25 million b/d by 2100 (OGJ, July 28, 2003, p. 20).

Simmons called for the removal of all limits on access to land for exploration, maximum use of all conventional energy, and enhanced research to provide a better understanding of unconventional energy.

"A form of energy that does not presently exist," could prove the ultimate answer, Simmons said. He suggested sun energy, magma energy, and energy embedded in water as three possibilities.

"I think we're seeing the oil markets headed toward a literal brick wall," Simmons said. "We're basically about to see demand surge above supply if we have a normal winter in the Northern Hemisphere. If we don't have a mild winter, then, 'Houston, we have a problem.'"

Emerson rejected the notion that the world has reached the end of cheap oil, saying, "We're just not there yet."

Emerson forecast oil futures prices on the New York Mercantile Exchange of $35-45/bbl in 1-2 years. She does not expect oil prices to climb much above $50/bbl during the next 5 years.

Bauquis and Simmons both refused to make price forecasts. Bauquis said, "We are going to have a very fragile equilibrium." A repeat of recent market fundamentals could prompt another jump in oil prices, he said.

Simmons said that a cold winter could change prices significantly. He expects "extremely volatile prices."

Markets

Simmons called for refiners and suppliers to enter into long-term contacts and noted that futures markets encourage speculators who make money on price swings.

Regardless of the pricing structure, he said, oil prices will remain high because world oil production is peaking and because companies have few good drilling prospects.

"We've run out of good projects. Everybody is trying to be conservative," Simmons said. "This is not a money issue. This is a risk issue. If these companies had fantastic projects, they'd be out there."

Emerson said futures markets are important as value indicators. A solution is more apt to come from public policy designed to curb rising oil demand than from pricing reforms, she said.

"Regarding speculators, we should not see them as the enemy," Emerson said. Acknowledging that speculators can play a profound role from time to time, she said recent oil price hikes stemmed from several structural factors.

Oil prices jumped from $30/bbl in July to $50/bbl in October on NYMEX. Factors contributing to rising prices included hurricanes, attacks on Iraq's pipelines, strikes in Norway, and concerns about OAO Yukos and its tax battles with the Russian government, she said.