Sunday, August 20, 2006

Oil Industry Having Technical Problems

Regardless of whether one buys into Peak Oil or not, one of the best places to understand what's happening in the oil industry is The Oil Drum. Clearly, we're in some sort of oil crunch. Whether it's temporary or the beginning of what's called Peak Oil, we see the results at the gas pumps every time we fill up a car.

There are two problems. The first problem is that demand has shot up in the last ten years largely because of the booming economies in Asia. The second problem is not as easy to understand but it simply boils down to what appears is an inability of oil companies around the world to keep up with demand.

The war in Iraq led to a loss in supply for most of the last three and a half years. Domestic problems in Nigeria have also led to a decrease. A year ago, Hurricane Katrina knocked out a significant supply of America's offshore oil. We now hear from British Petroleum that we're losing several hundred thousand barrels of oil from Alaska. In the past, when these sort of things happened, there were other sources to turn to. But the rest of the oil producers are having problems making up the difference. Here's a story by Alex Lawler from Reuters (via The Oil Drum):
The world's top oil firms are struggling to expand oil and gas output, hit by a tight market for drilling rigs and rising costs, hampering development of new supply at a time of record prices.

Production is falling at many companies even as capital spending rises. Crude oil has more than tripled since early 2002 to $70 a barrel, driven by worries about supplies and growing world demand.

(snip)

Oil and gas output at eight major European oil firms dropped a collective 530,000 barrels of oil equivalent a day in the second quarter, Deutsche estimates. That is equal to half of daily oil demand in The Netherlands.

(snip)

Soaring costs due to high demand for oilfield services is prompting firms to consider mothballing some investments to avoid hitting returns.

Shell said in May it might postpone some deepwater projects because of rising costs. The cost of hiring a rig has more than doubled in the past two years, according to BP.

Rigs are only part of the picture. Costs of materials like steel for pipelines and equipment such as pumps and valves been rising too, analysts say.

(snip)

...any tightness in the rig market is unlikely to last as more are built, analysts say.

"There is a scenario whereby rig capacity is a lot more comfortable by the end of 2007, because there are rigs being constructed," said Jason Kenney of ING.

So, according to the Reuters article, there is a rig shortage that was partly a product of the Asian financial troubles in 1997 when oil demand and thus oil production dropped and some oil services companies simply went under. Around the same time, there also developed a skilled manpower shortage. There are two lessons here. First, the world really is becoming interconnected where an event in one place can cause a series of events in other places; this means the world economy as a whole may need to find some way of minimizing the repercussions and also maintaining some degree of redundancy so skills and equipment don't disappear. The second lesson is that classic market forces may not respond quickly enough anymore to smooth out some of the huge disruptions caused by such things as local wars, recessions, hurricanes, oil production shortfalls or even lack of knowledge of how much oil or even total energy is out there available for our nation and for the world.

But there's potentially a third lesson. As newly discovered oil fields get smaller and smaller and harder to reach, and as older fields require more and more oil pumps to maintain production, we may have increasing trouble maintaining what we have known as the oil economy; we may find at some point, sooner than later, that the number of new oil rigs being built never quite reaches that 'comfortable' level mentioned in the Reuter's article.

The time to develop other sources of energy is now. This may require some redundancy, or even an excess of energy capacity, particularly when it comes to renewable energy sources such as wind and solar. The excess can even be put to use for such long term but interruptable projects as carbon sequestration, environmental cleanup, desalination or restoring a nation's water table, particularly in arid areas. Just something to think about.

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