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Sands are shifting for oil supply
Expert says we should be ready for big jump in price
Diane Francis, Financial Post
Published: Saturday, April 21, 2007
The world continues to run rapidly out of oil and natural gas, which points to dramatically higher prices in a handful of years.
That was the message from Henry Groppe, a lanky Texan who advises oil companies and investors around the world about the world of prices. His firm, Groppe, Long & Littell, is based in Houston and was founded after he did stints as a chemical engineer for Saudi Arabia's Aramco, Dow Chemical, Monsanto and Texaco.
"The fundamentals always prevail, which is that the minute you start producing, you are depleting your resource," he told an audience of investors last week at a conference sponsored by Calgary's Pengrowth Energy Trust.
He showed production curves in the North Sea and Mexico that are catastrophically sudden in terms of their declines.
"This has a huge impact on the economies of Britain and Mexico," he said. "Britain became an oil importer this year for the first time in decades."
Oil production worldwide peaked months ago, but figures and prices don't reflect that yet because the production of liquids stripped from natural gas has been filling the gap, he said.
But that potential is peaking, too, which means that "in several years" the world will enter a new era of higher prices.
"The only question is how high will prices have to go before there is a decline in usage?" he said.
Price hikes will mean the freeing up of less viable supplies, but there are limits economically and geologically to this, too, given current technology.
"Do we ever run out? Well, 40 years ago we ran out of US$2 a barrel oil; then 25 years ago we ran out of US$10 to US$12 a barrel oil and recently we ran out of US$40 to US$45 a barrel oil," he joked.
Current prices in the US$60- range make oilsands and Venezuela's tar sands viable, and prices will continue rising, he forecasted.
"The issue for the United States is that it uses one-quarter of the world's energy [oil, gas, coal] but has only 5% of the world's population," he said. "As realities intrude and consumption goes from 80 million barrels a day to 120 million [in 10 years], you will see a major shift in all financial and energy markets."
Canada's oilsands is the only bright spot on the production side, along with Venezuela and Kazakhstan. He estimates that Canadian oil exports will go from one million barrels a day now to 2.5 million by 2015.
But industry players say this may be understated if prices continue higher and could hit as much as five million barrels a day by 2020 out of Alberta and Saskatchewan.
"Unfortunately, these new sources require energy to make energy," he said.
Ethanol is a break-even proposition because it takes as much energy input to make ethanol as it produces. Coal to liquids is another costly energy unit, requiring inputs equivalent to 60% of the energy produced. Gas to liquids requires 45% input while oilsands is at 25%.
Governments must subsidize ethanol production, which is based on corn in North America. Ethanol represents roughly 10% of transportation fuels in the U.S. and are mandated to go higher.
"This also has a huge impact on agricultural prices for food," he said.
Natural gas is a completely different market, regionally based. The good news for Canadian and U.S. producers is that the formation of a natural gas cartel by Saudi Arabia, Iran, Russia and others will shore up prices, thus encouraging more exploration in the continent.
"But Canadian exports to the U.S. will begin declining in 2010," he said.
Much of this may be diverted to oilsands production. Gas is burned for heat in the refining process.
North America, on the consumption side, has been able to curb its use of oil, but supply shortages loom for the developing world and Europe.
The world's biggest winners will continue to be the Middle East producers joined by Russia and some Central Asian producers such as Kazakhstan.
Natural gas production has not peaked, as has oil, and there are trillions of cubic feet of untapped reserves.
Russia has one-third of the world's gas reserves or three trillion cubic feet; Iran has two trillion cubic feet; Qatar, one trillion and North America, 225 billion cubic feet.
"Russia will increasingly be playing off China and Asia against Western Europe for its gas supplies," he said.
"Few people noticed that the King of Saudi Arabia 2? years ago visited Russia on an official state visit for the first time in history," he said.
© National Post 2007