The Hindu Business Line : Reporting oil reserves is a political act

The potential rewards for the savvy energy investor are huge even as an überspike in oil prices looms large, assures George Orwel in Black Gold. Matthew R. Simmons takes a grimmer view in Twilight in the Desert, in which he talks about `the coming Saudi oil shock.' And Brahma Chellaney maps the geopolitics of energy in Asian Juggernaut.

Energy. The world needs lots of it, but supply is getting tighter, writes George Orwel in Black Gold, from Wiley (www.wiley.com). "An überspike in oil prices is in the making," he alerts us; but don't be dismayed, because "the potential rewards for the savvy energy investor are huge," he assures.

Über, for starters, is German for super. If you remember, it was in March 2005 that Arjun N. Murti of Goldman Sachs had cautioned us about oil markets entering a `super-spike' period that could see price surging to $105 a barrel! Back then, oil was trading at $54, and Murti's critics said the spike story was far-fetched.

Yet, after Katrina struck, and oil shot up by 20 per cent, Murti became a `prophet.'

There have been many such `gloom and doom forecasts,' which paint a picture of the end of oil. And, there are the alternative views that we would come up with a solution in the form of additional oil supply. Both these are very simplistic ways of looking at the issue, says Orwel. "The truth lies somewhere in between."

According to him, the right question you should be asking yourself is this: "Whether you are going to take advantage of the situation to save and get rich or at least make enough money through various energy investments."

The book begins with a chapter titled `The end of an era?' where the author discusses `energy economics.' He counters the common belief that energy is an elastic commodity, "meaning consumption and production behaviours change in response to price changes." There is a lag in consumption changes in response to price changes, says Orwel. "For instance, it takes time for car owners to shift to more energy-efficient vehicles in response to higher fuel prices. A similar lag can occur in other conservation efforts because manufacturing plants require time to change production methods or shift to alternative sources of energy."

Among the disturbing statistics in the chapter are these: The world consumes 83 million barrels of oil per day, with production at about 84 million barrels. "That leaves a cushion of one to two million barrels per day, which typically gets lost in the event of a supply disruption." If the world demand continued to grow at two per cent a year, by 2035, our consumption would double to 160 million barrels per day. "That kind of demand is almost impossible to satisfy," notes Orwel.

He cites Colin Campbell for the view that companies seldom report their true findings for commercial reasons; "and governments, which own 90 per cent of the reserves, often lie." While estimating reserves is a scientific business, reporting reserves is a political act, points out Campbell. "Companies typically underreport their new discoveries to comply with strict US stock exchange rules, but then revise them upwards over time, partly to boost their share prices by releasing good news later on," explains Orwel. "It's a form of cheating and they know it, but since it's industry-wide, no one bothers to question the practice."

According to the author, alternative sources of energy that will mitigate `the sting of decreasing oil supplies' may not be what politicians and environmentalists often speak of — such as hydrogen cars and solar power. We may have to go back to last century's technology, of converting coal into energy, through liquefaction or gasification.

"Coal gasification is a process that converts coal from a solid to a gaseous state," explains www.clean-energy.us. "The gas that is created is very similar to natural gas and can be used to make chemicals, fertiliser, and/or electric power." A topic in current news, this is. For instance, Princeton Daily Clarion speaks of plans for $1.5 billion coal gasification plant, in an October 29 report. And closer home, the Government is considering a policy and legal framework to promote private sector participation in UCG or `underground coal gasification.'

Evolve back to the `village'

Another oil-y read for the week can be Twilight in the Desert, by Matthew R. Simmons. The sub-title `The coming Saudi oil shock and the world economy' can make you brace up. "For years, every important energy supply model has assumed that Saudi Arabian oil is plentiful and can be produced so inexpensively that its supply is expandable to any realistic demand level the world might need, at least through the year 2030," notes the preface.

But, contrary to assumptions of 25-30 million barrels a day, the Kingdom has demonstrated production capacity at less than half that much, says Simmons. "Saudi Arabian officials have enthusiastically encouraged their oil consuming customers to believe this plentiful supply scenario, while at the same time they have resisted third-party verification of their ability to deliver."

The `twilight' of Saudi oil is not a remote fantasy, but almost inevitable, argues the author. "Ninety per cent of all the oil that Saudi Arabia has ever produced has come from seven giant fields. All have now matured and grown old." One learns that the Kingdom's three most important fields have been producing at very high rates for over 50 years. "High-volume production at these key fields, including the world's largest, has been maintained for decades by injecting massive amounts of water that serves to keep pressures high in the huge underground reservoirs and also to sweep the mobile, more easily recoverable oil toward the producing wells."

Of great value is a survival guide at the end of the book, to help cope with post-peak oil. "Workers need to begin working closer to their residences and reduce the hours now wasted by commuting... We need to grow our food supplies closer to where we live... In short, the world of the twenty-first century needs to evolve back to the `village'." Globalised food will be too energy intensive, so countries that now import food from all corners of the earth may have to make better use of bottling and canning what they produce in local farms. "Fortunately, food picked at its ripest and canned tastes better than the well-travelled, ornamental imports," entices Simmons.

Geopolitics of energy

One of the chapters in Asian Juggernaut is on `geopolitics of energy'. It foresees murkier times due to `the voracious appetite for energy supplies.' The need to secure stable energy sources will drive the larger players in the continent `to increasingly integrate their energy policy with foreign policy,' predicts Brahma Chellaney. "Mercantilist efforts to assert control over oil and natural gas supplies and transport routes certainly risk fuelling tensions and discord."

The author rues the lack of regional institutions in Asia `to avert or manage conflict.' A challenge he outlines for Asian countries is "to manage their energy needs through more efficient transport and consumption and more cooperative import policies."

When discussing `clean-coal technology,' Chellaney chronicles how the nationalisation of the Indian coal industry led to `the bizarre situation where India, with proven coal reserves that are among the highest in the world, turned from a coal exporter to a coal importer.' Chellaney is of the view that India can emulate Beijing, "which is developing its own CTL (coal-to-liquids) processes." Sasol, which produces most of South Africa's diesel fuel from coal, is exploring the commercial production in India too, "using a technology known as Fischer-Tropsch, for the German chemists who invented it in the 1920s."

Just the reads to keep you warm, when a mid-November evening greets you with a nip in the air.

http://BookPeek.blogspot.com

D. Murali

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