Tight Trouble

02/03/2014 06:22 pm ET | Updated Apr 05, 2014

Co-written by Jeremy Leggett, author of Energy of Nations. He is founder and chairman of Solarcentury, the UK's largest solar solutions company, and SolarAid, a charity set up with Solarcentury profits.


Based on the optimistic headlines heralding a new age of oil plenty, most people in the United States believe their energy supply is as secure as it's been in decades. The most recent addition came on January 16, where splashed on the front page of the USA Today was "Oil! New Texas boom spawns riches, headaches." Yet beneath the headlines there is a growing body of data and analysis causing concern among a number of industry and financial experts.

Much of the new oil optimism owes to the roughly 2 million barrels per day (mb/d) of tight oil supply from "fracking" in the United States. Oil boosters have suggested that this new bounty will swell to more than 4 mb/d and maintain that level for decades. Others tout the potential for significant new production from nations such as Mexico, Iran, Iraq, Canada, Brazil, and Kazakhstan. While we appreciate the human appetite for such appealing notions, a realistic assessment of future oil supply is in order.

For example, in its Annual Energy Outlook 2014 Early Release, the U.S. Energy Information Administration (EIA) projected that with:

"domestic crude oil production rising to 9.5 mb/d [million barrels per day] in 2016, the import share of U.S. petroleum and other liquids supply falls to about 25% (estimated to be 5.76 mb/d). Domestic production begins to decline after 2019, and the import share of total petroleum and other liquids supply grows to 32% in 2040."

Therefore, even under the best of circumstances, US will still have to import almost 6 mb/d in 2016 and then increase again to current levels by 2040. Since transportation overwhelmingly runs on petroleum fuels, the United States will remain dependent on imported oil supplies, and pay global prices for them.

There are more concerns about the true state of US and UK energy security:

• According to BP data published in 2013, global oil production increased 11.2 mb/d from 2002 to 2012, while developing countries increased their consumption by 14.04 mb/d. The difference was made up by developed-world countries, which were forced to reduce their consumption as a result of higher prices and some improvement in efficiency.

• The International Energy Agency's recently released World Energy Outlook 2013 (WEO 2013) estimated that China and India will increase their consumption of crude oil by a combined 11 mb/d by 2030. The Middle East will become the third largest source of new oil demand, reducing its export capacity.

• WEO 2013 also reports that production from mature oil fields which are past their primes is declining by 6 percent per year, and notes with sobering frankness that "the implication is that conventional crude output from existing fields is set to fall by more than 40 mb/d by 2035."

If the IEA's estimates prove correct, in the next two decades the world will have to discover and bring online more than 50 mb/d of new oil supply -- more than the combined 2012 daily output of the Middle East, Russia, Canada, Mexico, and Venezuela.

New evidence indicates that the world may not be able to sustain such a dramatic increase in production.

On December 10, when most of the U.S. government was shut down due to snow, a hardy group of experts gathered about five blocks from the White House to take part in an inaugural event called the Transatlantic Energy Security Dialogue (TESD).

Participants in the U.S. included oil industry experts and analysts, diplomats, academics, military officers, defense experts, and business executives. They were joined via videoconference to a group in London, which included Members of Parliament, former ministers, retired admirals and generals, investment experts, leading business executives, oil industry analysts, and others. Two presentations in particular sharply questioned the global oil industry's ability to continue producing enough oil to meet expected demand.

Mark Lewis, former head of energy research for Deutche Bank, discussed the rising capital expenditures (capex) in the oil patch.

"I was absolutely stunned when reading this year's World Energy Outlook," Lewis remarked. "If you look at the global upstream capex for the oil and gas industry, about 75% of the total is just for oil. It has trebled in real terms since 2000. Over the same period the increase in oil supply has only been about 12%. So you've had a 200% increase in capex, effectively, for a 12% increase in global oil supply. That is a very striking number and one that I think should be ringing alarm bells."

Lewis' warning was amplified recently when Royal Dutch Shell revealed how the capex problems were affecting its operations. In a January 17 article, Bloomberg reported, "Shell saw the cost of finding and developing oil fields triple from 2003 to 2012, in line with the 12 largest European oil producers, data compiled by Bloomberg Industries show."

David Hughes, a 32-year veteran geoscientist of the Canadian Geological Survey, presented an analysis of U.S. tight oil production. He pointed out that 74 percent of all U.S. tight oil production comes from just two plays, the Eagle Ford and the Bakken, where the economics and oil well performance are beginning to show signs of trouble.

"Tight oil production from the top two plays is likely to peak in the 2016-2017 timeframe," Hughes said. "High well and field decline rates mandate sustained high levels of drilling to maintain production. Sweet spots become exhausted early on in field development; hence drilling rates must continue to escalate to maintain production levels."

Perhaps those claiming that the U.S. may one day be energy-independent will be proven right. Perhaps as tight oil production begins to wind down, other alternatives will be found in sufficient quantities (and at an affordable price) to make up the difference, and the U.S. economy will continue growing. Perhaps.

But we must soberly recognize that we are betting our entire national economic life on the hope -- indeed, the expectation -- that they are right. If the hoped-for outcome doesn't materialize, the consequence to the U.S. and global economies could be severe. With so much at stake and with evidence growing that the assumptions of perpetual abundance might have been overdone, it is time to expand the public discussion of oil supply fundamentals and move away from basing national energy policy on feel-good headlines.