Shifting Sands - The future of the oil industry

The supply enigma

No one disputes the fact that global demand for oil is rising. But when it comes to supply, the picture is less clear.

While there does seem to be a consensus that reserves are tightening, some experts argue the world is not running out of oil, pointing to the vast resources of the Middle East, Canada, Venezuela, the Former Soviet Union (FSU) and West Africa.

Many of these reserves are controlled by NOCs or are being acquired by statecontrolled corporations from nations with a strategic imperative to secure their oil supply, such as China.

Cambridge Energy Research Associates (CERA) says world oil production capacity, including crude oil, condensate, natural gas liquids, oil sands, gas-to-liquids and other sources, has the potential to rise from 87 million bpd in 2005 to as much as 108 million bpd by 2015.

CERA also claims that, over the coming decade, OPEC countries will produce a net gain of 12.2 million bpd – almost 60% of the total expected capacity increase – with non-OPEC capacity rising by 8.2 million bpd.

CERA believes that supply can meet demand. “We see no evidence to suggest a peak before 2020, nor do we see a transparent and technically sound analysis from another source that justifies belief in an imminent peak,” says Director Robert Esser.

However, more and more observers are accepting that there is a tightening of conventional reserves.

Some analysts have even switched camps, most notably at the International Energy Agency (IEA). In its 2006 Natural Gas Market Review, the IEA states that there are 64 years’ worth of gas reserves – and roughly the same amount of oil – based on current global consumption.

The big problem with the estimates is that more than 90% of oil and over 70% of natural gas reserves are owned by NOCs and they do not have the disclosure requirements of a public company and remain guarded over quantifying specific reserves held.

As a result, in the first half of the decade, the IEA has been consistently lowering its supply forecasts.



Between 2001 and 2004, estimates for non-OPEC, non-FSU production were reduced by 3.7 million bpd.

IOCs provide more information, largely because of stock exchange disclosure rules, though there are questions over methodology. SEC regulations require that reserves are proven by drilling, which some argue is anachronistic given the prohibitive cost ($30m–$40m) of drilling test wells in ultra deepwater and advances in 3D seismic imaging technology.


Hans Middelthon, 3i Investment Director

“Because so much is owned by NOCs, how can Western analysts and CEOs possess a realistic view?” asks Sword. “The sheer scale of resource under NOC control holds the key to understanding future global production and global reserves, as opposed to focusing on the Western companies. However, there’s an information gap that needs addressing if the world economy and global trade is to continue to grow in confidence.”

Standing strong

In its June 2006 International Energy Outlook, the Energy Information Administration (EIA) in the US said that worldwide demand for oil would rise from 80 million bpd in 2003 to 98 million bpd in 2015 and 118 million bpd in 2030. The high-growth economies of non-OECD Asia, including China and India, are expected to account for 43% of the increase.

As yet, the rising oil price does not seem to have dampened demand. The EIA forecasts that oil demand growth will rise from around 1.3 million bpd in 2005 to 1.5 million bpd in 2006 and 1.8 million bpd in 2007. “Although high world oil prices are expected to moderate oil demand, global demand will continue to grow because of economic growth in Asia and the US,” says Hans Middelthon, 3i Investment Director.



Current oil demand in the US remains strong, though the high price is beginning to make some consumers look for more economical alternatives. For example, in July 2006, Toyota overtook Ford to take the second spot in US car sales, boosted by sales of the relatively fuel efficient Corolla. However this has not yet had an impact on overall consumption. The EIA forecasts US oil demand will grow by almost 250,000 bpd over the course of 2006 and 450,000 bpd in 2007, based on an oil price of $60 from 2006 through 2008.

Unless there is a significant short-term economic downturn in the US – a market which consumes nearly a quarter of total world consumption – there is no real reason to see demand decreasing even at a price of $70 per barrel. “Production levels will have to rise to keep pace with anticipated demand increase,” says Middelthon. “And as demand rises, so the reserves conundrum will deepen.”

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