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THINK-ISRAEL |
Big energy myths can still do harm after they were proved false. As we know, Israel has world class reserves of natural gas with likely or probable oil condensate supply becoming available from the same huge hydrocarbon reserves in the Mediterranean. Onshore hydrocarbon reserves may also be large. Egypt has large offshore gas resources, like Cyprus and Palestine. A little further afield, new gas discoveries in Azerbaijani waters of the Caspian are massive, also. Outside Europe, west Asia and the MENA region, oil and particularly stranded gas discoveries since 2007-2009 in east Africa, the west and east Atlantic, NW Australia and elsewhere are massive. This of course excludes onshore shale gas and shale oil resource discoveries and either current or near term start-up of production, on almost every continent of the planet.
The belief that energy security issues and the Peak Oil/Peak Gas decline of oil and gas resources and production capacity makes the Middle East a "permanet crisis region" is being beaten by simple facts. The new global energy reality is vastly different from the apparent reality of even 5 years ago.
Big oil and big energy corporations and entities have not been prepared for this turnaround in the global energy outlook. Exxon Mobil CEO Rex Tillerson claims he has always applied the Boy Scout dictum "Be Prepared" and critics of Tillerson like poking fun at his Boy Scout background and way of doing things, which served him well until recently. As head of Exxon's highly lucrative exploration and production (E&P) – upstream – operations in the Texas-Oklahoma Belt in the 1990s he never put a foot wrong, nor when he moved for a short while to head E&P at Exxon Neftegas in Russia.
Even as recently as early 2012, Exxon (but already not its gas subsidiary XTO Energy) was still hailed by analysts as an "outperformer" of peer group DJIA companies. Things still look relatively good for Exxon stock, for some analysts, but current earnings and the outlook are a long way from incandescent: Exxon's earnings numbers now closely resemble BP for the most recent Quarter; 7.1% down for Exxon and 7.9% down for BP. Analysts attributed the fall in Q2 2012 earnings for Exxon Mobil, BP, Royal Dutch Shell, ENI and other "historic majors" to falling oil prices, and a free-fall in gas prices.
For gas producers in the US the situation is dire. As the NY Times reported 27 July 2012: "Natural gas prices in the United States have....plummeted by more than 50 percent over the last year. That has particularly hurt Exxon Mobil, which bought the gas driller XTO three years ago for $41 billion to expand its domestic gas production.... Exxon Mobil responded by slowing its E&P plans".
For British Petroleum which is still sweating from its Gulf of Mexico blowout, things are of course more openly changing, but the tide is moving just as fast as it is for Exxon and other "historic oil majors". Their main problem is simple: they can't adjust to reality.
The recent CEO and longtime E&P boss of BP who always claimed he was prepared for changing fundamentals, Tony Hayward, had this to say at the 2009 edition of the 'Oil and Money Conference': "I do think the market is driven by the fundamentals of supply and demand...Between 2004 and 2008, the growth in (oil) demand meant almost all of the world's spare capacity had been consumed. As we came into 2008, spare capacity was probably somewhere just a bit above a million barrels a day...Declining production from existing fields, coupled with new demand, mean we'll have to find ways of bringing on-stream nearly 50 million barrels a day of new capacity between now and 2030...".
He then added exactly what Rex Tillerson or any "historic oil major" CEO will say, or would say at least until very recently, at the same cue: "The problem in meeting that goal isn't geological. It's political. We have the natural, human and financial resources...We need secure and reliable access to those resources. If the conditions are right, industry will invest."
Being generous we can say these were at least semi-real problems 5 years ago if not 3 years ago, but adding to and replacing these fake problems, the new and real problem is economic. In particular how much E&P spending is needed to maintain output through covering depletion losses and raising output to meet expected or hoped-for growth of global oil demand. E&P is getting mighty expensive, but Tillerson and Hayward (who has far from quit the oil business) are exposed to a real mega problem: according to the IEA, world total energy consumption in 2011 grew by an almost infinitely small 0.15 percent. 2012 may be even worse, for big energy. Conversely, conventional and unconventional gas and oil resources discoveries outside the Middle East and North Africa have been, and go on being massive.
The IEA's politically correct line is that "Without a bold change of policy direction, the world will lock itself into an insecure, inefficient and high-carbon energy system....but the window of opportunity is closing". Despite the rhetoric, the IEA is obliged to give real world details on the real trends in energy. IEA data on 2011 and 2010 for the OECD group of countries shows their total energy demand decreased by 1.9%, including a fall of OECD electricity demand by 0.9%, a 9.2% decrease in nuclear energy supply in the OECD countries, and the fifth yearly fall of OECD oil demand in 6 years, at an 0.7% fall in 2011.
Big Energy corporations, especially in oil and gas, but also in coal, power generation and the renewables were unprepared for the mega changes coming in world energy since the 1990s, accelerating all the time. The MENA region remained what Daniel Yergin's book calls "The Prize".
A quick check of the new story of falling energy demand, prices and earnings, trimmed workforces, and plain simple bankruptcy across the energy sector is all that is needed to understand what New Normal means. These trends are no longer "short term reversals" of a supposed longterm trend of ever rising energy demand and energy prices to a background of ever-tighter supplies. Taking oil demand, the EU27 countries in 2012 "celebrate" their sixth consecutive year of oil demand decline: many countries (not only the PIIGS) are in double-digit percentage falls in national oil consumption since 2006. For the USA, the decline trend is also becoming hard to brush aside as "only due to recession": the all-time high of US oil demand was in 2007, five years ago.
The Israel focus is embedded in the favoured claim from Hayward and other Big Energy CEOs, especially in the oil patch, that the Organization of Petroleum Exporting Countries (OPEC) states and increasingly Russia — as BP knows to its cost — are for political-only reasons "denying access" to their energy resources to "western" energy companies. This power to "deny access" fundamentally depends on resource scarcity and ever rising demand for oil.
The Big Energy storyline continues with the claim that only the "western" energy majors have the technology and know-how to develop these resources for the always-growing oil and energy demand of the global market. Of course regrettably, this makes it necessary to constantly raise oil prices for the public who, being dumb, will go on consuming. Not offending the Arab oil exporters, but protecting Israel remained the long-running geopolitical game on the playstation consoles.
Supposedly, the historic majors are forced to "look elsewhere" for finding and developing new oil and gas resources — with ever rising E&P and energy diversification spending — but the task is always harder and more expensive.
In fact, the historic majors and the NOCs of the OPEC group, and the NOCs and state-linked energy entities in other major producer and consumer countries — big names including Gazprom in Russia or Sinopec in China and ONGC in India — have actively collaborated in E&P worldwide, for more than 20 years. Dozens of midsize, and hundred of small oil and gas companies from "western" and other countries have joined them. The so-called "sovereign rent and resource access question" in world oil is not the problem: to some editors it still sounds good and looks good, but it is unreal.
The Hayward-type rhetoric implies the world outside the OPEC states and a few larger NOPEC states is "drilled out" and ever-growing oil demand will soon hit a supply ceiling, with an inevitable price explosion. Oil producers, in particular, will have "no choice" but retreat to OPEC's door, especially the Organization of Arab Petroleum Exporting Countries' (OAPEC) doors and plead for resource access — but this is totally contradicted by the facts. World natural gas discoveries, since 2005 and especially since 2009, have never been so massive. Oil discoveries have also been impressive. The decline of global energy demand — which has a lot more powerful meaning than "declining growth of demand" — is at least as important as a game changer. This is New Normal.
Before 2005, we can concede, it was possible to see longterm "overdemand" with global energy demand always hitting supply ceilings. These were themselved dragged down by oil depletion, costs of E&P, political denial of access to "highly endowed" regions, technology problems, environmental problems and all the rest. World oil and gas reserves of the future were extremely concentrated in the Middle East, North Africa and a select few other regions of the planet.
Since then, this theme or meme is energy history and empty rhetoric.
One immediate and early response by big energy corporations, and a costly mistake for them, was to crowd into renewable and alternate energy business. In some cases, as for BP, its flirt with renewable energy quickly morphed into a cash burn which BP was forced to terminate for biofuels in July 2009, and for solar energy in December 2011. Losses are variously estimated at a minimum of $250 million, but the real number is probably double that figure. Exxon's increasingly dubious flirt with algae-based biofuels development, already needing more than $600 million of spending by Exxon is a likely coming disaster for the corporation.
Other "historic majors" like France's Total were persuaded or forced by government stakeholders to move into renewable energy, in a symbolic way, but in solar energy Total is already losing money with a clutch of uncompetitive subsidiaries operating overpriced technology and production strategies. Italy's ENI has also followed the same "government friendly" path, notably in windpower development in Italy, but has been forced by losses to backtrack into focusing on technology R&D in the renewable energy field. The basic rationale, here, was that due to declining resources of oil and gas, higher prices for coal due to its environmental costs raised by carbon taxes and permit costs, and ever rising global energy demand driven by "Asian locomotive" demand, renewable energy was needed as a high cost "vanity tech" energy stopgap, and nothing more than that.
All components of this homely energy-corporate fairy tale were wrong, even if it was great stuff for those corporate after dinner speeches with government-friendly media on hand to spread the lie. The costs of getting things wrong are however high, as energy corporations are finding out today.
Being prepared is simpler when you know the game: when the game changes the problem is harder. E&P was always the key to future earnings — but at least since 2000 the costs of E&P have spiraled upward: even worse, when oil prices fall and in the US case gas prices crash to the floor, E&P stays expensive, or gets even more expensive. The financial risk of E&P, like other high cost activities in major oil corporations, such as oil transport and refining, has soared since the turn of the century — which was OK as long as energy demand went on growing, and oil prices stayed high or went on growing.
When these parameters change, the game changes.
Governments have plenty of responsibility for the lost focus in global energy, pursuing a widening range of contradictory and dysfunctional energy, economic and environmental policies, none more out of synch with reality than the climate-energy policies foisted on, and accepted by EU27 governments since 2008, but also applied in various forms and styles in the majority of OECD and Emerging countries. All of these policies have the two basic and fatal drivers which have wrongfooted the "historic energy majors": global energy demand can only grow, probably fast; fossil fuels are declining and depleting, and always cost more.
One simple example is now in the Romney-Obama duel and debate: the US has had an exceptionally hot summer. Drought is likely to further drive up food prices. Global warming is back on the agenda, at least in the US, so "decarbonizing energy" is back on the agenda, enabling Romney to say he can do it better than Obama, who with typical arrogance says he already did it. Both also claim that growing shale gas production is a chance for America — if not for the earnings, or possibly even the survival of US Big Energy companies.
Although outclassed and outperformed on building cost, security issues and operating costs by every alternative from shale gas and coal to the renewables — and wrongfooted by declining needs for more power capacity — nuclear power is back on the US political agenda: because it is "low carbon" and "secure". Nuclear power therefore has to be supported, otherwise the US will be held hostage by foreign energy exporters, but obviously not the exporters of the 80% plus of the uranium fuel imported and used by the US to operate its current reactor fleet.
Similar elite schizophrenia themes and memes, in energy, are available in other countries but the bottom line for major energy corporations is a red line for earnings — even for corporate survival. For as long as the economy holds up, and tax-and-borrowing support from governments to vanity tech energy can continue, the party can continue. In the short-term future however, this fool's game with its bent rules is likely to fall apart with heavy collateral damage across the energy sector.
More important and critical for Israel, the mega change in global energy that is continually advancing has changed the "strategic resourc thesis" for Israel-Middle East relations. Without this heavy background crisis-based theme, the future for enduring peace is certainly higher.
Andrew McKillop is a writer and consultant on oil and energy economics. Since 1975 he has worked in energy, economic and scientific organizations in Europe, Asia, the Middle East, and North America. Contact him by email at xtran9@gmail.com This article was submitted October 23, 2012.