BP Admits Oil Has ‘Affordability Issues’

While denying that Peak Oil will take place for at least a generation, BP Special Economic Advisor Peter Davies admitted at a meeting at the House of Commons that unless there was substantial investment in the oil industry infrastructure, “there were issues of affordability.”

The talk was organised by the All Party Parliamentary Group on Peak Oil and Gas (APPGOPO) and took place at Portcullis House in Westminster on 16th January 2008. The evening was chaired by Liberal Democrat MP for Birmingham, Yardley John Hemming and Chair of APPGOPO.

Peak Oil Definition

Davies placed himself firmly as a Peak Oil denier on the basis of his definition of Peak Oil as
‘the risk that the world’s oil production will decline in the near future as a result of the progressive depletion of the world’s oil resources’.

Investment Key To Oil Supply

He repeatedly emphasised that there is adequate supply of oil if enough investment is made. Indeed he repeated this so often in the course of the evening that one began to conclude that this is the caveat that will be referred back to when supplies get tighter.
“There have been many predictions of Peak Oil” he said, “but for over a century production has exceeded consumption. Oil reserves today are not scarce and an imminent peak in production is not likely. It will occur at some time but not soon.” However responding to questions about the risk of a peak in production, Davies advised the UK government to monitor Peak Oil and to address the investment issue with the producing countries.

Davies reminded the audience that statistics complied by BP show the world has proven oil reserves of 1.2 trillion barrels, enough to sustain current output for 40 years. However he admitted that reserve estimates are “subjective and not objective, it reflects government estimates of what can be recovered with today’s economics and technologies. Different governments use different methodologies and have different levels of certainty.”
For example Davies said that OPEC members have not done a full appraisal of how much oil reserves they have as they have not need to while they are able to supply as much as they need. He also noted that some countries have not done horizontal drilling and when they do reserves will increase by 10%.
John Hemming MP described peak oil as a “live issue”, and that massive increases in stated OPEC reserves in the 1980s were not reliable. Likewise former Shell & BP geologist Jeremy Leggett suggested that the risk of an early peak in global oil production was much greater than BP believed. He pointed to Kuwait as not having 90 billion barrels and instead only having 40 billion or even 20 billion barrels.

Increasing Reserves

Another of Davies’s reasons for denying Peak Oil is that world oil reserves continue to rise. “For every barrel of oil that is consumed at least another barrel of new oil is added to reserves. Since 1990 world proved oil reserves have increased by 25% during which time world oil production has also increased by 25%.”
Davies confidently stated that economics matters as well as geology. “The higher the price, the more can be extracted” he said. He stated that it was possible to boost world oil production to 100 million barrels per day. “This is achievable in resource terms but it does come down to how much investment is going to take place.” However others in the industry such as the chief executive of French oil company Total, have questioned whether this is achievable in recent months.

Environmentalists Will Reduce Demand For Oil

Davies did admit that we shouldn’t be complacent pointing to “Rising population and the need for investment especially in the resource rich countries.” He repeated that “The risk is not a resource risk but at the rates of investment.”
He also pointed to the impact oil consumption has on the environment predicting that if global oil production peaks in coming decades it will be because of declining demand, not supply. “I believe there is a realistic possibility that world oil production will peak within the next generation as a result of peaking demand” he said adding that “There’s a distinct possibility that global oil consumption could peak as a result of climate policies. My suspicion is that we will run out of demand and move to a world beyond oil.” While many would see this as fanciful on current progress towards reducing demand, it perhaps reflects a concern within the oil industry.

Contracting Constraints

Asked to explain the current high prices of oil, Davies said there were two reasons for this. Firstly OPEC production has been cut in order to sustain prices and secondly concern by markets about a future Peak Oil and also lack of investment.
Confusingly Davies then said that the industry is spending every dollar that it can and that the constraint was in the contracting industry which would be there for the next decade.
“When oil was only $10 a barrel in 1990, the contracting industry shrank and now while demand has risen along with higher prices, the human resource can’t just be turned on like a tap. Indeed having repeatedly emphasised the need for investment, he questioned whether there were in fact enough opportunities to invest in the industry. With prices at around $90 a barrel, this could lead oil producing countries to conclude that they are getting enough revenue already and so not invest in infrastructure.

Affordability Issues

The strict definition of Peak Oil that Davies adhered to being oil depletion ignored the potential for economic effects that arise from restricted supply for other reasons such political turmoil. He agreed that we may have higher oil prices depending on the rate of investment. Responding to a question that with oil around $90+ a barrel, Peak Oil was already being experienced for many countries, he agreed that “there are issues on fuel poverty, affordability and the income distribution effects.”
In my book that is Peak Oil. Welcome to the new double speak world of available but unaffordable oil.