Houston, USA – Oil companies, oil-producing countries, and consumers need to act now to avoid the oil crisis that is coming within the next 10 years, said John B. Hess, chairman and chief executive of Hess Corp.

“It is not only a matter of demand. It is not only a matter of supply. We need to take steps on both fronts, and we need to start today,” Hess told an overflow crowd Feb. 12 at the Cambridge Energy Research Associates’ annual energy conference in Houston.

“Given the long lead times of at least 5-10 years from discovery to production, an oil crisis is coming and sooner than most people think. Unfortunately, we are behaving in ways that suggest we do not know there is a serious problem,” Hess said.

That’s partly because of conflicting viewpoints. “Some say that there is a large endowment of resources and that there is nothing to worry about. Some say that we have already hit peak oil, and there’s little we can do. Others say that the rapid development of renewables will fill the gap between demand and supply and reduce our carbon footprint in the process,” Hess noted. However, he said, “It is imperative that we change our mindset, our sense of urgency, or the consequences will be severe.”

On the demand side, Hess said, “We need to improve fuel efficiency in transportation and increase investments in breakthrough technologies to make fuel cell vehicles a reality.” As for supply, the Organization of Petroleum Exporting Countries and non-OPEC producers need to increase long-term investments “to grow production greater than currently planned to ensure we avoid a supply shortfall in the next 10 years and the calamity that would ensue,” he said.

“Each of us has the responsibility to act in the long-term global interest rather than short-term self interest so that we leave a more secure world for future generations,” Hess said. “Resolving this issue through greater global collaboration can be a model for managing other future shortages, such as water, and benefit the global community. The more interdependent we are, the greater our chances of having a sustainable future together.”

Demand

Most demand is for transportation fuels. In the US, there is an average fuel mileage requirement of 23.4 mpg for passenger cars and 17.7 mpg for light trucks and sport utility vehicles, “all powered by an internal combustion engine that is fairly energy inefficient, with less than 20% of fuel actually converted to useful energy,” Hess said.

The federal government has mandated that fuel economy standards increase to 35 mpg by 2020 and new hybrid vehicles are now on the US market. “But unless there is a major breakthrough beyond these improvements, such as the introduction of a commercially and technically proven fuel-cell car, we should not expect to lower demand,” Hess warned.

In the developing countries of the world, the problem is worsening with the fast-growing demand for transportation. Goldman Sachs Group Inc. estimates the number of cars on the road will soar to 500 million in China and 600 million in India by 2050. “That’s 1.1 billion vehicles in two countries that 3 years ago had fewer than 20 million cars total—creating an overwhelming increase in the need for automotive fuel,” said Hess. Countries outside the Organization for Economic Cooperation and Development now account for 40% of total oil demand and is expected to reach 50% of world demand by 2020.

“Current population of the world is 6.6 billion and is projected to reach 9 billion by 2050. As the population in developing countries grows, the demand for oil for personal transportation will increase, too. In many cases, the political decision has been made to put subsidies on gasoline, which inflates demand even more,” said Hess.

Meanwhile, a $20-100/bbl surge in oil prices in recent years has failed to weaken world demand for crude because consumer incomes have grown faster than energy expenditures. “While energy’s share of personal spending in the US is 6%, it is still much less than food, which is 14%; housing, 15%; and medical expenses, 17%. In fact, even after the recent increase in prices, gasoline on a per unit basis is still three times less than the cost of Evian water and 10 times less than a Starbucks latte,” said Hess. “We are currently consuming 86 million b/d [of crude], and we project that oil demand will continue to grow between 1-1.5 million b/d each year for the next decade, at least. Recessions may interrupt this growth, but only temporarily.”

Supply

“Since 1980, discoveries have not replaced our annual global crude oil production,” Hess noted. “Discoveries are getting smaller and located in more difficult environments, such as the deepwater Gulf of Mexico, Brazil, and West Africa, where companies are now drilling in water depths of up to 7,000 ft and searching for targets that are in some cases more than 30,000 ft deep. Such numbers were unimaginable 10 years ago and speak to the industry’s extraordinarily innovative technology to meet increasingly complex challenges to find, develop, and produce crude oil.”

He said, “We need to find a new production province like the Alaska North Slope or Angola every year to ensure that we can grow our oil resource base to support increases in production for future generations. We stopped making such meaningful discoveries during the late 1990s.”

There is concern whether non-OPEC producing countries can maintain their supply role of a few years ago. According to Hess, US oil production peaked in 1970. North Sea production peaked in 2000. Mexico peaked in 2004. “Within the next few years, conventional non-OPEC production will reach a plateau. In fact, 60% of the world’s oil production is from countries that have already peaked,” Hess warned.

Renewable fuels, natural gas liquids, and unconventional oil resources such as oil sands and oil shale “need to be encouraged,” Hess said. However, he said, “Their contributions to supply are not material enough to bridge the gap in oil requirements over the next 10 years.”

With OPEC now down to 2.5 million b/d of spare capacity, Hess said, “We no longer have the safety margin for supply interruptions and demand spikes to ensure price stability. OPEC, with approximately two thirds of the world’s proven conventional crude reserves and one third of its production capacity, certainly has the resource base to relieve the pressure.” However, he said, “All oil producers—OPEC and non-OPEC alike—simply are not investing enough today to ensure sufficient capacity to meet oil needs in the next 10 years.”

Conservation and climate

Hess said, “We need to make significant progress in conservation. The growing population of hybrids and an overall improvement in automotive miles per gallon is helpful, but we need to spend more money on research to make hydrogen fuel cell vehicles a commercial reality so that the average fuel economy of a new passenger car could increase to the equivalent of 80 mpg or better. Anything we can do in terms of fuel efficiency in transportation would have the important added benefit of helping to solve another critical challenge the world faces—climate change.”

He said the US “with 5% of the world’s population and 25% of its oil consumption needs to take the lead by continuing to encourage fuel efficiency and improvement in mileage standards while driving for a technological breakthrough. With the US setting the example, hopefully, developing nations could also do their part by moving away from subsidies that send a false signal to their consumers about the real cost of energy and artificially inflate demand.”

Hess said, “We must increase investment. In 2007, global E&P investment was estimated to be approximately $350 billion, having grown about 15% each year over the previous 5 years. This increased investment has helped offset field declines and added new production.” But given the long lead times from investment to production, he said, “The current sum that both OPEC and non-OPEC nations are investing is far below what is needed to ensure sufficient production for our future.”

With oil demand growing 1-1.5 million b/d, global crude supply capacity will fall short of global demand between 2015-20. “While the International Energy Agency predicts global demand to average 98.5 million b/d in 2015, based upon current behavior, I do not see how we will meet this projection,” Hess said.

Another challenge is the growing cost and reduced availability of equipment, supplies, and services needed to increase production. “All producers have felt the impact of the rapid rise in costs, as rates for steel and offshore drilling rigs have skyrocketed. For example, a deepwater rig that cost $100,000-200,000/day in 2002 today costs $500,000-600,000/day—if you can find one available. Even if the supply industry were able to increase its investment, the significant lag time would still mean a shortfall in terms of meeting future requirements,” said Hess.

There also is a shortage of trained and experienced manpower, with US upstream employment down from 700,000 people in the early 1980s to 400,000 today. “The project delays our industry is seeing today result in part from workforce shortages and inexperience. While enrollments in engineering programs have begun to increase, they remain significantly below levels of 25 and 30 years ago,” Hess said. “We are replacing our 30- and 40-year veterans with recent graduates. Even if we stepped up our investment levels today where they need to be, we simply do not have the skilled workforce to support the many projects that may be needed.”

By Sam Fletcher - Senior Writer, contact Sam Fletcher.

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