Resource nationalism among hot topics at WEC

Nov. 19, 2007
Resource nationalism is threatening the world’s economy and energy security in the long term, Rex Tillerson, ExxonMobil Corp. chairman and chief executive officer, told the World Energy Congress last week in Rome.

Resource nationalism is threatening the world’s economy and energy security in the long term, Rex Tillerson, ExxonMobil Corp. chairman and chief executive officer, told the World Energy Congress last week in Rome. “The key to innovation and creativity needed to address global energy challenges lies in free markets and strong international partnerships,” he said.

Tillerson said ExxonMobil is on track to eliminate gas-flaring in Nigeria, which the Nigerian government wants all operators to stop in 2008. The government has signaled that it wants to revise contracts with international oil companies (IOCs), but Tillerson said ExxonMobil has not received any statements on changing its position.

Resource nationalism was one topic among many discussed by oil and gas industry executives at WEC, organized every 3 years by the World Energy Council.

Some other topics included:

  • A reduction of natural gas in Europe’s energy mix will be needed to ensure that Europe does not suffer a shortage, said Paolo Scaroni, chief executive of Eni SPA.
  • Italy was mistaken to move away from nuclear power, a move that has resulted in tremendous cost to electricity users, Scaroni also said.
  • Italy’s Prime Minister Romano Prodi called for producer-consumer cooperation and attention to climate change.
  • Russian gas supplies to Europe face a serious risk because of the European Commission’s proposals to separate ownership of gas and power production from distribution, said Alexander Medvedev, deputy chairman of OAO Gazprom’s management committee.
  • The global oil industry should aim to produce at least 3 trillion bbl from conventional recoverable resources in known fields and discoveries over the next several decades, said Saudi Aramco Pres. and Chief Executive Abdallah Jum’ah. This would be achievable from proved reserves, growth in existing fields, and discoveries. Usual estimates of recoverable resources are about 1.7 trillion bbl.
  • The world will have to double its energy supplies by 2050 to meet global demand, according to a new study published by WEC. The key challenge is whether stakeholders can successfully align resources and skills with where they are most needed.

Europe’s gas shortage risk

Eni Chief Scaroni’s recommendation to reduce gas in Europe’s energy mix, made during a formal address at WEC, would mean building nuclear capacity of about 115 Gw by 2020 and a push for renewable energy sources, especially solar power.

Gas accounts for a quarter of all the energy used in Europe, and 60% of that is imported. Scaroni said cutting Europe’s reliance on gas combined with energy efficiency and gas supply diversity would position Europe to compete with other countries for energy supplies. “These are not alternative options. We need to do all three to avoid a gas shortage.”

Scaroni said use of Europe’s plentiful coal resources requires technologies to avoid increasing carbon emissions.

Gas imports in Europe are expected to double by 2030, but European gas production is expected to halve by 2020. With power generation set to be the key driver behind the growth of gas, “Europe’s total gas demand in 2020 could be 40% higher than it is today,” Scaroni said.

As international competition for gas supplies intensifies, pipeline gas and LNG supplies are crucial for diversity in Europe. Scaroni said a variety of transit routes would reduce transit risks. “Here, new pipeline projects such as South Stream and Nord Stream can help by making it possible to deliver Russian gas directly into the European Union.”

Scaroni proposed investment in interconnections across Europe to bring gas to where it is needed as well as more gas storage infrastructure to cope with variability of demand and temporary drops in throughput.

According to Scaroni, Europe is vulnerable to a shortage because it has a small number of gas suppliers, namely Algeria and Russia. It is important to develop “good and cooperative relationships” with suppliers, he said, calling for European Union member states to give Andris Pielbags, the EU energy commissioner, and Javier Solana, Europe’s representative for Common Foreign and Security Policy, “the right tools” to carry out a European foreign energy policy.

Europe could save as much as 100 billion cu m/year of gas in the housing consumption sector alone though energy efficiency, he said.

Scaroni admitted that the outlook for renewable sources is “bleak” because Europe would have to install up to 15,000 wind turbines and solar panels covering the space of 50,000 football fields every year if it is to meet incremental electricity demand. “It seems clear that alternative energy sources will not really be able to cover even just Europe’s incremental electricity demand from here to 2020. Much of this growth will inevitably be satisfied by gas.”

Scaroni said Europe had been “sleepwalking” on its previous approach to gas policy because it had focused on “fine-tuning the internal gas market” without realizing that it had limited suppliers and faced transit route risks. Europe was shocked into a “rude awakening” when it suffered a shortfall in deliveries in 2006 when Russia cut off gas supplies to Ukraine, Scaroni said.

Italy’s move from nuclear

Italy voted against expanding nuclear power in a referendum in 1987 and has imposed a moratorium on building new capacity. High oil and gas prices and Italy’s reliance on imported energy have sparked political debate on resurrecting nuclear power in Italy’s energy mix.

“Nuclear power is the only system where we’re in full control and we don’t produce any emissions,” Scaroni said.

He told delegates that Europe needs to increase nuclear capacity to reduce its reliance on gas and avoid a gas shortage by 2020. Russia and Algeria, which together account for 70% of Europe’s imports, should be “closely monitored” in the strategic alliance for their state-owned companies, Gazprom and Sonatrach, Scaroni added.

“We have got to mitigate this [peaking Russian gas]. Gazprom cannot produce more from existing fields, but it does have large, untapped reserves in eastern Siberia, and this needs investment and infrastructure to get it to market.”

Gas waste is rife in Russia because prices are a quarter of those on international markets. “Gas is so cheap there is no measure of energy savings,” he said.

Scaroni denied recent press reports that Eni plans to take a stake in Gazprom. “Our relations (with Gazprom) are excellent.”

The consortium that Eni is leading to develop Kashagan oil field in Kazakhstan remains unified, Scaroni said, stressing that the operator’s role had transformed Eni because the project was the most difficult in the world. “We think we can carry on with operatorship and do other projects in the world,” he said.

The consortium is in discussions with the Kazakh government, which has complained about delays and rising costs to develop the field (OGJ, Oct. 22, 2007, Newsletter). The government is reportedly seeking a bigger state for its state owned company KazMunaiGaz and a $10 billion fine for cost overruns. Eni’s stake in Kashagan is 18.5%. Other members are ExxonMobil, Royal Dutch Shell, Total, ConocoPhillips, Inpex, and KazMunaiGaz.

Eni would welcome cooperation with the Venezuelan government over Dacion oil field, which has been renationalized. “If there’s no room for cooperation we’ll go ahead with the arbitrage,” he said.

At the beginning of this year, Eni launched a damages claim against Venezuela as compensation for its loss of profits from the field. Resource nationalism is unsurprising considering high oil and gas prices, according to Scaroni, who noted this trend is not prevalent when prices are low. “Contracts were renegotiated in 1991 or 1992 when prices were low.”

Producer-consumer cooperation

In a speech disrupted by Greenpeace activists protesting nuclear power, Prime Minister Prodi said, “The markets alone cannot guarantee success, and a global effort is needed. Strong-willed governments and multilateral agreements are needed so that mankind can have a future.”

He blamed speculation in financial markets for driving up the price of oil, adding that “this speculation must be contained in the future.”

But Chicco Testa, president of the WEC organizing committee, offered a different view.

“A stable high oil price is not necessarily a calamity,” he said. Improved energy efficiency will help curb demand and increase supplies of renewable energy.

The energy industry needs to increase its investment, said Andre Caille, WEC chairman.

“We must keep all of our options open, and the price of energy must stay high to encourage innovation and investment,” he said. “We need to triple or even quadruple the current level of investment.”

Russian President Vladimir Putin sent a message to the congress calling for dialogue and transparency in energy markets to establish trade rules based on the principles of justice and mutual respect. Russia’s Minister of Industry and Energy Viktor Khristenko led the Russian delegation to the congress.

Italian President Giorgio Napolitano said, “Discovering sources of alternative and renewable energy has become a serious priority if we are to ensure that the planet has a fair chance of progress. The role of research is therefore essential if we are to meet the challenge of sustainable energy use and to safeguard the global environment and ecosystem.”

Russia’s gas supplies

Gazprom’s Medvedev sought “clarification” of the issue of separating ownership of gas and power production from distribution from Europe’s Energy Commissioner Andris Piebalgs. “At this stage I leave aside the question [of] whether the forced disposal of assets, which the Commission’s proposals would require, is compatible with the protection of private property in a market economy.”

Gazprom, which provides 25% of Europe’s gas needs, has repeatedly said it wants to move into gas transportation. It also is interested in building or buying power plants in Italy and is evaluating projects in the UK.

However, the EC’s proposals would limit its ability to buy European Union energy assets. To foster competition, companies would be forced to either sell their transportation networks or hand them over to independent operators.

Medvedev stressed that Gazprom has an incentive to deliver gas to the market and used the proposed 27.5 billion cu m/year Nord Stream gas pipeline as an example of a long-term project that would bring reliable gas supplies to Europe via the Baltic Sea. “This is an example of a real pan-European project in a turbulent environment.”

By 2015, Russian gas is expected to account for 33% of the European market, Medvedev said. He assured delegates that Europe remains an important market despite Russia’s plans to expand gas supplies to China. Talks with China are well advanced to supply as much as 80 billion cu m/year via two pipelines. Medvedev said he hopes the parties can reach an agreement soon. He also defended the company as a reliable supplier to Europe.

Gazprom is determined to step up involvement in liquefaction projects supplying North America and the Atlantic Basin. “We are looking at the possibility of exchanging LNG for pipeline gas in the medium term, but in the longer term we intend to export LNG from our own projects,” he said.

Peak oil fears

Aramco’s Jum’ah said the world “seems to have over 3 trillion bbl of recoverable conventional and nonconventional liquid fuel resources if we opt for extra-conservative assumptions and about 6 trillion bbl if we adopt the target scenario.”

Research and development will be crucial for improved oil recovery, and more technological work needs to be done to boost economic efficiency and use of oil in an environmentally sensitive manner, he said. Oil recovery stands at an average of 35% of oil in place around the world. Around 1 trillion bbl of additional reserves from known fields could be produced with pioneering technology and aggressive targets. At the conservative end, at least 200 billion bbl could be produced from conventionally recoverable oil resources in known fields, he said.

Jum’ah said past theories of peaking oil production had failed as more reserves had been found over time, and evolving technology meant that companies had tapped fields previously thought to be unworkable.

“Based on total global reserves of both conventional and nonconventional oil and the world’s current demand for oil of some 86 million b/d, we still have almost a century’s worth of oil under the conservative scenario...and nearly 200 years’ worth under the target scenario,” he stressed.

He is confident that global reserves will be increased under accommodating policies, favorable economics, and sufficient investment in research and development.

Under Aramco’s analysis, the Middle East is expected to be the major source of future oil finds. “Depending on just how conservative their assumptions are, analysts believe there are between 250 billion and 1 trillion bbl of conventional oil reserves still waiting to be found. Again, I urge our scientists to accept the challenge of a trillion barrels in new discoveries,” he said.

Estimates of conventional oil in place around the world vary between 6 trillion bbl and 8 trillion bbl depending on whether figures are conservative or at the higher end of the spectrum.

Nonconventional sources of oil, found mainly in Canada, Venezuela, and the US West, will become increasingly important. Nonproducing regions have a huge stake in the future of petroleum.

Jum’ah said a conservative estimate for nonconventional resources is 7 trillion bbl, and a target scenario is 8 trillion bbl or higher. “A key area of contention is oil shales, since the characteristics of their accumulations, especially the degrees of resource richness, vary so much and their development has been perennially impacted by overwhelming challenges involving technology, economics, water and land impacts, and environmental concerns.”

His analysis suggested that ultimate recovery from nonconventional resources could range from 1 trillion bbl to more than 2 trillion bbl, depending on whether the figure is a conservative or target one. There is great scope for improved recovery, Jum’ah stressed. “I believe that recovery rates for oil shale will fluctuate over time but that the world’s need for liquid fuel supplies over the very long term, coupled with continued advances in technology, mean oil shales will eventually be viable for future generations,” he said.

National oil companies (NOCs) control 50% of the world’s proved conventional reserves. According to the International Energy Agency, IOCs have rights to about 30% of global reserves.

In contrast, Jum’ah said, nonconventional oil reserves are shared by multinational firms. “NOCs are generally more focused on the discovery and recovery of conventional oil, which accounts for virtually all of their reserve bases, while IOCs are targeting nonconventional resources to a larger extent.” He called on IOCs, NOCs, service companies, technology developers, and research institutions to cooperate in research and development.

“There are huge uncertainties associated with biofuels,” Jum’ah added. It is “difficult to predict their contribution to the energy mix.”

Biofuels’ growth depends on government policies and incentives rather than market fundamentatals, he said, adding that some biofuels demand a choice of using crops for food or fuel.

Jum’ah recommended that energy efficiency and using technology to make fossil fuels more environmentally friendly were the best ways to cut environmental impact of energy usage and consumption.

World energy supplies

Brian Statham, chair of the WEC Energy Scenarios Study, said an “unprecedented level” of cooperation would be needed to address the world’s energy problems. “Almost one third of the world’s population doesn’t have access to energy and they don’t care about the environment,” he said.

WEC has proposed that governments and companies should aim to halve the number of people without access to a minimum level of commercial energy to 1 billion by 2035, and halve that again to 500 million by 2050. Greenhouse gas emissions should be stabilized by 2035, and manmade emissions should be reduced by 2050, according to the report, Deciding the Future: Energy Policy Scenarios to 2050. The study focuses on policies needed for a sustainable energy future rather than using economic modeling to construct scenarios.

Statham said there are sufficient resources to meet demand. However, major investment is needed in research and development on energy sources and technologies, Robert Schock, WEC director of studies, told WEC Today. He said $10 billion is currently spent worldwide, but this figure is miniscule considering the importance of energy to the world economy which is estimated to be $50 trillion. “We need all energy options on the table. It’s up to countries to decide whether they want to use nuclear or not. Energy efficiency is important for [research and development].”

The report concluded that new concepts for public and private partnerships would need to be developed and that governments need to provide consistent long-term signals for companies to make investments in the energy sector.