Oil and gas markets face a number of challenges to their continued development, with producers confronting three main issues: peak oil, alternative energy and/or nuclear power and the risk of geopolitical instability.
The United Arab Emirates is as affected by these issues as any other energy-exporting nation. Dubai is already experiencing the effects of peak oil, as its reserves dwindle to nearly insignificant levels. The country is pursuing nuclear and renewable energy to offset its consumption of fossil fuels. The UAE also relies heavily on the Strait of Hormuz for most of its export capabilities — leaving it vulnerable to the potential effects of war with Iran.
Peak oil represents one key theoretical challenge to producers in the oil industry. The idea is that because global stores of oil are finite, the world will one day reach a point where it is extracting the maximum amount possible, and will thereafter confront a period of decline in oil output. While some analysts expect peak oil to occur around 2030, others expect it to occur sooner than that. Analyst and author David Strahan expects the net global production to reach peak oil by 2020 at the latest. According to him, oil production is shrinking in 60 of the world’s 98 oil-producing countries. Indeed, he predicted in 2008 in a speech at the World Energy Summit in Abu Dhabi that the total oil output for non-Organization of Petroleum Exporting Countries (OPEC) states will reach its apex in 2010.
The United States Energy Information Administration (EIA) appears to agree on this point. According to a report it published, “the EIA projects the total non-OPEC supply of crude oil will grow by just over 1 million barrels per day [bpd] to an average 51.5 million bpd in 2010 — the largest year-over-year increase since 2002. The increase in total non-OPEC supply for the year is the result of higher production in the United States, Brazil, China, and Russia.”
But after this bumper year, the EIA expects non-OPEC supply set to drop by 280,000 bpd in 2011 — the third time in the last 15 years that non-OPEC supplies have fallen year-over-year. Previous declines in 2005 and 2008 were primarily the result of supply disruptions in the Gulf of Mexico related to hurricanes.
There are other indicators that peak oil may be a serious concern in the coming decade. For instance, the 30 biggest oil companies upped their exploration budgets by 45 percent to more than $400 billion in 2006 alone. Yet, oil and gas reserves only grew by 2 percent despite the massive investment.
According to Kate Dourian, Middle East editor at Platts, yields from existing fields are dropping about 5 percent to 7 percent annually. At the same time, analysts predict that 30 to 40 million barrels of new daily capacity will be needed to meet global demand between now and 2030. That’s due to the fact that the capacity expansions currently underway in the Gulf don’t cover the difference. “There will be a supply shortage if people don’t invest now because of the long lead time” in exploration and delivery to market, she said. But because of the increased viability of alternative fuels, producers are reluctant to invest. “It’s difficult to ask producers to pour billions into the ground to keep it there,” she explained.
Alternative energy and nuclear power
A wide range of alternative energies are being brought to the market and there is some expectation that they will displace oil and gas market share globally, which today is generally estimated to be between 80 and 90 percent. According to the International Energy Agency, in 2005 nuclear generation provided 6.3 percent of the world’s total primary energy supply and its share of the market is likely to have climbed. Alternative fuels encompass a range of sources such as biodiesel, chemically-stored electricity, hydrogen, vegetable oil and biomass sources.
There are two main reasons for why governments and people around the world seek to become less dependent on fossil fuels. First, the consumption of oil and gas creates greenhouse gasses, which are heavily implicated in global warming and the destruction of ecosystems worldwide. Environmental degradation is arguably the direst threat confronting the world today. In the words of United Nations Secretary-General Ban Ki-Moon: “Business as usual cannot be tolerated, for it would condemn millions — no, billions — of children, women and men around the world to shrinking horizons and smaller futures.”
Indeed, climate talks may be having a chilling effect on the amount of new investment oil and gas producers are making in increased production, even before any viable alternatives hit the market. Dourian explained that: “The producers are saying ‘Well hang on a second we don’t know how Kyoto is going to impact future demand; we don’t know how much is going to be displaced.’” The Kyoto protocol is an international agreement designed to combat climate change that expires in 2012. Efforts are underway to replace the agreement with similar or more robust international agreements.
Second, as economies in the developing world grow — most notably China and India — they will require ever larger amounts of energy. Energy from oil producing states is far from guaranteed in the long term, and renewable energy that can be produced within a country’s own borders is often preferable. Many governments regard energy security as a priority, and a heavy reliance on foreign governments exposes them to potentially destructive consequences.
The UAE is already making provisions for nuclear energy in response to increased domestic energy demand and to further capitalize on petroleum’s exportability. At present the country is in consultation with the International Atomic Energy Agency (IAEA) to create a nuclear program, and it accepted a $20 billion bid from a consortium of South Korean companies in December of 2009 to build four nuclear power plants for commercial use by 2020. This is in keeping with Dubai’s plans to produce 20 percent of its energy from renewable sources by 2030.
The UAE is a signatory to the Nuclear Non-Proliferation Treaty. It also signed and ratified an additional safeguards agreement with the IAEA in 2003. In 2008, the country appointed an ambassador to the IAEA.
The Middle East and parts of Africa are some of the most politically volatile areas of the globe. They also contain the largest stores of fossil fuels, which means that global supply lines are threatened by every regional conflagration.
The Iran-Iraq war, the first Gulf war, the 1973 war, and ongoing strife in the Niger Delta all precipitated spikes in the price of oil and natural gas. Today, there is a real possibility that Western countries and/or Israel will attack Iran under the banner of quashing its nuclear capability. If that happens, the Iranians may retaliate by striking tankers and cutting supply routes through the all-important Strait of Hormuz, through which passes approximately 17 million barrels of crude oil per day. While many countries have energy reserves (America’s stockpile consists of about 700 million barrels of crude oil), they probably will not be enough to offset the adverse effects of a war with Iran. Such a conflict would thus likely lead to a ‘double-dip’ global recession.
There are many challenges to the continued provision of steady oil and gas supplies to the world market. The industry is being forced to grapple with steadily shrinking supplies, adverse environmental effects which result from fossil fuel consumption and a high-risk supply area. While much can be done to mitigate these risks in the short and possibly medium term, these are likely long term, irreversible trends. In other words, the world will continue to move away from oil.