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Shifting demand suggests a future of endless oil

Consumer demand, technology, and global politics are shifting in a way that could spell a future of oil abundance, not of catastrophic dearth.
Image: Workers service a gauge at south Rumaila oil field, south of Basra
Workers service a gauge at south Rumaila oil field, south of Basra, 260 miles southeast of Baghdad, Iraq. The country could be a wild card in the international oil trade and has been signing many deals.Reuters
/ Source: Business Week

Not many people think of the Netherlands as oil country, but a billion-barrel field lies under a nine-mile strip of grazing land along the Dutch-German border. When oil prices cratered in the 1990s, Royal Dutch Shell and ExxonMobil shut the Schoonebeek field down. Company executives reckoned that its thick, hard-to-extract crude wasn't worth the trouble, even though only about 25 percent of Schoonebeek's oil had been produced. The main evidence of the town's petroleum past was an old-fashioned bobbing oil pump, known as a nodding donkey, which still stands in a parking lot near a bakery.

Now higher prices and technological advances are spurring a new joint venture of Shell, Exxon, and the Dutch government to pump Schoonebeek's reserves once more. New wells drilled horizontally are coming in contact with more of the oil. Steam injected into the rock loosens up its molasses-like crude so it can be brought to the surface more easily. Shell won't say what price it needs to make such efforts profitable, but experts estimate $40 to $50 per barrel will do. At a current price of $80, the field is a clear winner. "We wouldn't do this if the price was really low," says Michael Lander, the Shell executive running the project. The venture is expected to produce 120 million barrels from the reopened western section of Schoonebeek over 20 years. If another section of the field is developed, the recovery rate — the share of oil that gets pumped out — would approach 50 percent. The industry average is 30 percent to 35 percent.

Pressure to innovate
Schoonebeek will not flood the world with crude. But its success presents a stiff challenge to those who argue that oil production is in irreversible decline. Consumer demand, technology, and global politics are shifting in a way that could spell a future of oil abundance, not of catastrophic dearth. As Leonardo Maugeri, a senior executive at Italian oil major ENI, puts it: "There will be enough oil for at least 100 years."

Many analysts and industry executives have little doubt that there's plenty of oil in the ground. "Only about 32 percent of the oil [in reserves] is produced," says Val Brock, Shell's head of business development for enhanced oil recovery. Shell estimates 300 billion barrels and maybe more might be squeezed out of existing fields, much of it once thought beyond retrieval. Peter Jackson, IHS Cambridge Energy Research Associates' London-based senior director for oil industry activity, has reviewed data from the world's biggest fields. His conclusion: 60 percent of their reserves remain available.

Around the globe countries are drilling for it, distributing it, trading it and looking for ways to run their economies with replacements for it.

The fact that there's still oil for the taking is driving Shell and other majors to come up with new technologies, which are expensive to develop but worth it when crude is riding high. While the price has fallen considerably from the peak of $147 per barrel in 2008, it is still far above what many oilmen expected a few years ago. "You will see companies going into the deep water, going into the arctic, using the best technology," says Maugeri, who sees the oil industry as a dynamic system that responds rapidly to changes in the economic and political environment.

Even if the new technologies add just a few percentage points to the recovery rate, such gains add years to global supply and boost the industry's profits. So the technology of coaxing oil out of the ground is constantly improving. Heating up heavy oil, as at Schoonebeek, is one new trick. Companies can add heavy polymers to the water they blast into a production site to push more oil out; the polymers add weight to the water and increase the pressure on deposits. (Shell is trying such technology on the Marmul field in Oman.) Another tactic is to inject soap into the ground to break the surface tension that makes leftover oil cling to the rock.

Simple methods can help mature oil fields produce more and even uncover bigger reserves than imagined. A study of fields in Indonesia by IHS CERA found that it wasn't uncommon for them to produce more than double initial estimates. Petroleum engineers help the fields live longer just by drilling new wells or installing better pumps. "As a field ages, the operators learn more ... that allows them to tweak their operations," explains Leta K. Smith, a Houston-based analyst for IHS CERA.

Sharp falls in production can be arrested. Output at Samotlor, Russia's largest field, was plummeting in the late 1990s. The field's owner, TNK-BP, formed in 2003, has since managed to boost production by a third. Adjusting the placement of the pumps in the wells yielded big gains, while three-dimensional seismic technology gave a better glimpse of the oil-bearing structures under the ground.

Iraq's wild card
Pumping the oil that's already discovered isn't the whole story. Explorers, sometimes financed by hedge funds and private equity firms, are finding troves in the deep water off Brazil, West Africa, and even the U.S. At the same time, old and new oil powers — Russia, Brazil, Angola, Nigeria, and Kazakhstan — are ramping up their capacity with the aid of Total, ExxonMobil, BP, and other majors. These projects could eventually add 5 million barrels to global daily output.

The most surprising action is unfolding in Iraq, which has just cut deals with ExxonMobil, BP, and Shell as well as with Chinese and Russian companies. If all these ventures meet their targets, Iraq could produce as much as 12 million barrels a day, putting it in the super league with Saudi Arabia and Russia. Given the political and logistical obstacles Iraq faces, that seems unrealistic anytime soon. But 6 million barrels a day seems attainable within 10 to 15 years. That level would turn Iraq into OPEC's No. 2 producer after Saudi Arabia.

Moderating global demand can also stretch the supply of crude. After the oil shocks of the 1970s, efficiency gains and a switch by factories to natural gas prompted a nearly 10 percent drop in global oil consumption in the early 1980s.

The price spike of 2008 may lead to similar results. Lester Brown, president of the Earth Policy Institute in Washington, an environmental group, notes that the U.S. car fleet shrank by 4 million in 2009, thanks to scrapping and reduced sales. He expects that shrinkage to continue, reducing the U.S. fleet by 25 million cars by 2020. He also sees a cultural change occurring in which more people, especially the young, don't see owning a car as a necessity. "We are now looking at something new, a shift in the way people think about automobiles," he says. "That means less oil use."

Around the globe countries are drilling for it, distributing it, trading it and looking for ways to run their economies with replacements for it.

U.S. oil consumption dropped by 9 percent over the last two years. The recession certainly hurt demand, but many analysts think oil use in the West has peaked and will not rebound to previous levels. The Energy Dept. sees the consumption of oil-based fuel in the U.S. flattening out in the coming decades. "Are people going to use energy differently in the next [growth] phase?" asks Goran Trapp, head of global oil trading at Morgan Stanley in London. "If so, the people forecasting [strong] demand increases are going to be surprised."

China is one key to answering Trapp's question. Even as the mainland devours oil and coal, the government is pursuing a green agenda. China has the world's top solar panel industry, a power plant in Beijing is one of the world's most efficient, and auto emission standards there are now tougher than those in the U.S. China's official policy mandates that alternate sources support 15 percent of the country's energy needs by 2020, up from 9 percent now. So China's petroleum consumption will keep increasing, but perhaps at not so steep a rate as expected. A nasty oil shock is always possible. But the case for bountiful oil is strong.