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This past Thursday the U.S. Government Accountability Office, an independent, non-partisan group that works on behalf of Congress to monitor the programs of the executive branch, released a long awaited report on Peak Oil. The fact that Congress's has released this report should bring some legitimacy to the issue, which revolves around whether there is a looming peak in the production of hydrocarbons, after which output of oil and its fossil-fuel confreres will begin a long decline.
Of course, it's belated confirmation of what many assume already. For those who have been following the issue, there isn't much new in the report. Pushed by Maryland Representative Paul Bartlett, it calls Peak Oil a geological fact and notes that no one disputes the idea, only the timing of the onset of decline (estimates range from now until 2040). The report does confirm that U.S. domestic production peaked in the Lower 48 in 1970 at 10 million barrels, and has since declined to production of just five million barrels, a fact that has forced the US to rely more heavily on foreign oil than ever. The report concludes that there is a chance the onset of hydrocarbon decline will lead to a worldwide depression, and suggests that the U.S. government develop a plan to deal with the issue at the very least.
You don't need a report to realize that there are a lot of interesting shifts taking place within the energy sector. On a recent trip to Belgium, I noticed many of the European papers were closely following a story coming out of France involving an employee of French oil giant Total. It was being reported that Christophe de Margerie, then a senior executive at Total, was charged after an investigation found funds in a Swiss bank account controlled by a secretary of the former were connected to former Iranian president Ali Akbar Hashemi Rafsanjani. Those funds were traced back to Total, and De Margerie is accused of paying a bribe to Iranian officials so that Total could have a stake in the massive South Pars gas field in the Persian Gulf. As one of the world's largest natural gas fields, South Pars is a rich resource, and the allegation is that Total bought its way into the development of the field alongside Russia's Gazprom and the Malaysian natural gas firm Petronas. But what else are you going to do in areas of the world where corruption and bribes are common?
In an era when Western oil companies increasingly find themselves on the outside looking in when it comes to access to oil and gas reserves (reserves outside the Mideast are generally running down, something the GAO report confirms), the bare facts of the energy industry are that you've got to get in bed with those who have the resources, no matter what the business practices.
According to a source quoted in the New York Times, the predicament of De Margerie is one that will become more of an issue for the rest of the world's oil companies as reserves outside the Mideast run down. "A lot of oil majors are going to have to move toward Total's model rather than the other way around as they replace volumes from the United States and the North Sea," the analyst was quoted as saying.
The facts of geology and limited hydrocarbon reserves are going to force corporations and governments into a tough decision: Do you cling to your ideals or do you keep the lights on?
It's interesting to note that since the charges surfaced, De Margerie has been promoted to CEO of Total Group, which puts him at the top of the French elite. He is currently negotiating a $10 billion LNG development at South Pars. It's almost as if France has developed a bi-polar condition about what to do about its energy sector. But what choice does it, or any western country, really have?
On the bright side for France, it is one of the most nuclear-dependent nations in terms of electrical generation and isn't as dependent on fossil fuels as, say, the United States. Not surprisingly, the GAO report suggested that because of its huge reliance on large autos and relatively low public transportation, the U.S. will be the most adversely affected by problems arising as a result of peaking oil. Let's hope it gets some kind of plan in place.
One of the most outspoken members of the Peak Oil contingent, Matt Simmons, an author and energy industry investment banker from Houston, was on CNBC last week and called the GAO report an important step forward for the U.S. in dealing with the issue. But that was about all he had to say that was positive. He also talked— a bit alarmingly — about some of the problems brewing in Mexico.
Down at the southern end of the NAFTA geographical area, the 69th anniversary of PEMEX, the Mexican national oil company, was observed. The event is a big one in Mexico, where PEMEX is the pride of a nation and provides 40% of government revenue. The problem, however, is that production at PEMEX fell 2.3% last year, causing the CEO to suggest the company is in "critical condition."
So far the debate has been over what to do about the drop in production and whether the Mexican constitution should be rewritten to allow foreign companies to work on the country's oil assets — something currently against the law, but which might see new technology brought in that could help keep production up. But would even that be enough? According to Simmons, the problem with PEMEX isn't technology; it's really one of Peak Oil.
One of the world's great oil fields is Cantarell, located in the Bay of Campeche (the southernmost area of the Gulf of Mexico), and it has been worked by PEMEX for years. According to Simmons, it's gone into decline. "That's a disaster happening in front of our eyes," said Simmons last week. He mentioned he had been in Mexico the week before and suggested Canterell is down 20% in a year, a frightening prospect. "[Canterell] produces six out of every 10 barrels from our friendliest supplier right across the border," said Simmons. (Let's ignore the diss to Canada there.) "The big discussion in PEMEX is, will the 20% persist or might it ease off to 14%? I raised the issue it might go to 25%."
So it's not just tensions with Iran that are pushing the price of oil. T. Boone Pickens, a famous Texas oil investor, also appeared on television last week and was asked about his outlook on oil prices. He didn't quibble: "I think we'll go to $75 before we go to $55."
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