Examination of Witnesses (Questions 443
- 459)
WEDNESDAY 10 MAY 2006
MR CHRIS
SKREBOWSKI
Q443 Chairman: Thank you for coming
back. We were engaged in a discussion which was not quite concluded
yesterday but obviously we have been dealing with this subject
again this afternoon. Do you want to say what peak oil means in
your view and when you think the world is going to get there?
Mr Skrebowski: Peak oil is essentially
a simple concept. It is simply the point at which rate at which
oil is declining, which all the fields do after a period, exceeds
the rate at which new production is expanding. Therefore, what
we are looking at is the flow. There is great confusion between
the stock, which is the amount of reserves in the world, which
only become of interest when they are converted into a flow because
what society requires, what business requires, what you and I
require is a flow of oil, whichever product it is. What I have
a look at is the flow of new projects and I take these down to
quite a small size. In fact, I was talking to someone by e-mail
this morning and he was confirming that I have now got as much
new capacity as CERA, which gave that very optimistic report in
the States earlier last year, has got. Where we differ is simply
that I recognise a much greater degree of slippage which is the
experience at the moment with oil field inflation and lack of
equipment and lack of people. That is tending to get worse. I
also recognise the rate at which capacity is eroding, which is
not quite the same as depletion, but I do not want to get into
a long, convoluted discussion on that. Essentially the capacity
to produce in somewhere like the UK is going down so the capacity
that is lost from there is being sold to someone and those people
have to go off and buy it from someone else. In effect, as more
countries start depleting you have displaced buyers who are going
to those who are left that are still expanding their production
and they are progressively getting more and more loaded, and clearly
there will come a point at which they cannot support the demands
that are likely to be made of them because they will also be depleting
their resources ever faster. This in some senses is already visible.
If you look at the OPEC production statistics over the last 18
months, OPEC output has barely increased. It is wobbling around.
One or two countries are going up, one or two are going down,
the rest are just struggling. They have got more money than ever
before. They have all of the best contractors, by and large, although
some of it is closed. Saudi Arabia has never had so many rigs
operating, it has never had so many workovers going on, it has
never had so much money being spent, and yet it is struggling
to hold production. That is the contemporary reality. When you
add all these together and do the calculation, my answer comes
out that somewhere in 2010-11 the numbers cease to add up and
you start getting less oil at the end of the year than you had
at the beginning on a global scale. That is when peak oil occurs.
In my view, it is really quite imminent. The oil companies themselves
are struggling. From 2000 they have all been grandly announcing
to their shareholders that they will produce 5% more each year.
They have consistently failed and by 2005 there was very little
growth at all. I have got a tabulation that shows the 21 largest
commercial companies (accounting for a quarter of the world's
oil production) produced ½% more last year. There was a hurricane
impact but then people are telling us—and there is a report
this morning—that this level of hurricanes is likely to
continue, that there has been a change, and maybe it is global
warming that has produced that change, maybe it is not, but the
expectation is that that sort of phenomenon is going to continue,
Q444 Colin Challen: You have heard
the evidence this afternoon from our previous witnesses that they
consider a 40 years away peak oil situation as being pessimistic
and their range is 40 to 100 years. Yours is clearly in that case
almost pornographic in its pessimism—2010. There must be
quite a range of other commentators. Is there any real science
to this? Are there people who say there could be oil beyond 100
years, for example? What is the range?
Mr Skrebowski: It broadly falls
into three groupings. There are people who are actively involved
in this sort of research like myself who, because they are retired
or because they are in a position like mine or because they are
doing it part time, have the disadvantage that they do not necessarily
get hold of best data. They have the advantage that they have
no institutional commitment to a particular outcome. You can do
the analysis in various ways. You can do it in a fairly theoretical
way on this midpoint of the reserves, which gives you the problem
of defining reserves. You can do it the way I do it, which is
on a flows basis. Then there are intermediate variants between
them. Those groups vary between the ultra-pessimist Professor
Deffeyes, who is the linear heir to Hubbard, at Princeton, who
had it as last year, through to two or three of us doing it up
to the 2010 period, and a couple more doing it to 2012. Then you
get a group of consultancies who agree with this sort of analysis
but are not prepared to be quite so pessimistic who tend to group
around 2015. Then you have the international agencies which still
seem to have a sometimes stated and sometimes unstated commitment
to business as usual, so you get the EIA and the IEA which are
around the 2020 to 2030 mark. Beyond that you get into the professors
who do not believe any of this and have rather grand theories
on the back of envelopes. I think the realistic range is about
2008-10 through to about 2030. To get to the 2030 you have not
only got to assume that the discovery rate picks up enormously
but you have also got to assume that the geo-political environment
is completely benign and that you will get access to the countries,
the countries that are producing will not put constraints on the
amount they produce, and that everything works like a Swiss clock.
This seems to me a pretty heroic assumption, particularly in the
light of the resource nationalism we have been seeing out of Russia
and out of South America and also we have seen a straight opportunity
to take a tax grab in places like Angola and places like Kazakhstan.
There is a next stage which I think has to be seriously considered
which is where a nation state says, "Hang on, we are depleting
our resource awfully fast. Would it be more appropriate to keep
that resource for ourselves, for our own people?" There have
been hints of this. The Russians flew a kite a couple of years
ago where one of the ministers talked about capping off production
and just keeping it at a particular level. I think that is another
idea that is waiting in the wings. We could quite easily see that
countries which might have the capability to produce more electing
to cap it off at a particular level and make it last longer. There
is the other, in my view, somewhat unacceptable idea of this miraculous
2030 where every nation on earth produces happily until it goes
into decline, so all these nations on earth are going to destitute
themselves in order to keep the Western world running nicely,
and the international oil companies have a smooth changeover to
hydrogen which, equally miraculously, is going to turn up in 2030.
I am sorry, I cannot believe it.
Q445 Colin Challen: The Shell fiasco
revealed the pressures on oil companies to boost their reserves
and that is presumably to boost their valuations and so on. Following
that, have oil companies been more transparent and more accountable
in the way that they calculate the figures?
Mr Skrebowski: They have conformed
more tightly with the rules. The primary problem is that the Securities
and Exchange Commission in the States requires oil companies to
quote their reserves according to their rules, which is fair enough,
in order to have a quotation on the US market, and as virtually
all oil companies wish to be quoted on the US market, they fall
in with the SEC definition. There is a whole series of technical
reasons to say where the SEC definition is not entirely satisfactory.
It is notionally a proven, which is one part of the distribution
curve factor. It has no probability ascribed to it and, utterly
perversely, two years ago they modified the rules to allow a certain
technology to be used for fields in the Gulf of Mexico but nowhere
else on earth. This led to the result that companies who had fields
in the Gulf of Mexico could, in effect, book more reserves than
ones who had similar sized fields but not in the Gulf of Mexico.
Thus it is a rather strange animal. The more generally used and
more useful number is the proved and probable, which is the statistical
one which says this number is the best one in the sense that it
is as likely to be too big as too small. The advantage of that
is that you can mathematically add the 50s together and get a
meaningful result. At the moment it is a bit of an apples and
pears situation. Some give both quotations; some have another
variant, and there is still a great reluctance to let too many
people into the craft mysteries.
Q446 Colin Challen: What do you think
will be the main effects of reaching peak oil production in a
full global sense, but particularly on transport where we are
so dependent on oil?
Mr Skrebowski: Given that, by
and large, people do not drive around the countryside for the
fun of it and that the bulk of the consumption has an economic
purpose, that cannot really do anything but spike the prices and
translate into some form of inflation.
Q447 Mr Stuart: I wonder if you could
comment on the Government's position which is they have based
their projections on the IEA's World Energy Outlook Publications
and they say there are sufficient oil reserves for 30 years and
possibly, with some technological and other means, stretching
that out to 60 years. We know your opinion of those particular
conclusions but could you comment on how they got there?
Mr Skrebowski: I think because
all the major Western nations are members of the IEA and contribute
data to it and interact with it, it is philosophically fairly
difficult to say that perhaps we should be looking at some other
scenarios, but I think there are some very good reasons on this
occasion because we have at least a possibility of a quite heroic
discontinuity here, in that in addition to examining the benign
scenario that life goes on much as before, that other scenarios
are at least examined a bit further than just not being taken
into account. There is a dreadful analogy, but I think I will
make it, which is that throughout the 1930s Mr Hitler did not
keep his intentions secret. It was perfectly well-known what his
aspirations were. There was lots of information about the rearmament
of Germany. There were people writing books about it and people
lobbying for it, but the idea of another major war at so short
an interval from the previous one was so horrendous that people
would rather not contemplate. We went all the way through the
1930s and the British Embassy in Berlin was sending constant messages
to London which were piled up and ignored. If we had even taken
notice of it a couple of years earlier the outcome would have
been significantly different. If there had been a greater preparedness
to say that, "Yes, we certainly hope there will not be a
war but it cannot be ruled out," then the outcome would have
been more benign, and similarly here. Oddly enough, I passionately
believe it, and all the analysis I have done suggests that what
I am saying is right, but of course I have to consider the possibility
that I might be wrong but, equally, I do not think it is reasonable
any longer looking round the world and looking at what is happening
in the oil field just to blindly assume that you can go on much
as before, and that is what we are doing.
Q448 Colin Challen: So we know what
the Government's official view is. Committees like this rely on
expert evidence from people like yourself and also from people
within government. Are you finding that there are any individuals
within government who are beginning to take your ideas more seriously?
Mr Skrebowski: I think there always
have been. It is a paradox, is it not, that halfway down most
organisations there are people who are prepared to think further
out of the acceptable box than you get higher up. As you get closer
to the top, it is not always clear whether you are providing analysis
or reassurance, and I think certainly in the energy field that
is very much what we are seeing. That is a subjective, personal
opinion and must be treated in that light. What else is there
to say?
Q449 Colin Challen: You will recognise
that our difficulty while looking at this is that we have just
had evidence from the industry which is quite clear about the
fact that there is at least 40 years' worth and more like 100
available, and that contrary to your argument in fact production
is going to be able to brought on-stream, and again they are telling
us that. The Government's official view is that, the IEA's view
is that. Why should we believe you and not all these authorities?
Mr Skrebowski: I think my answer
to that would be to check what I am saying, ask other people whether
what I am saying makes sense, and if you find (which I am sure
you will) that they start to squirm a bit, then recognise that
there is this very real possibility that this is happening. If
we look at some of the other governments, the EIA, the American
one, puts out happy nonsense numbers and actually at the beginning
of their reports they have in very, very tiny letters the statement
"this is what is required for business as usual", which
no-one ever reads and moves swiftly on. They in fact commissioned
indirectly the Hirsh Report. The Hirsh Report last year was a
report which basically wanted to examine the impact of peak oil
and what you could do to mitigate its effects. To do a one-line
summary of it, the answer was if you had 20 years you would get
through; if you had 10 years, it would be pretty rough; if it
was any quicker than that, forget it. There is now a follow-on
to that report, the executive summary of which is just about to
be issued, which is looking at the primary mitigation proposals
which are, broadly, conservation, coal to liquids, shale oil (which
frankly is romance), and I forget what the fourth one is. I can
dig that out for you, if you wish, and send it to someone. We
had a very strange story in the New York Times on Sunday
claiming that Mr Bush knew all about peak oil, that he had been
briefed by Mr Simmons and Mr Cheney and that was the real reason
for his rather strange remarks in the State of the Union Address.
So there are all sorts of conflicting counter-currents going on
and there certainly does seem to be some evidence that there are
at least some people taking it seriously and having a look, while
at one and the same time there is a very strong "don't frighten
the horses" attitude.
Q450 Colin Challen: Thank you for
that. That is a very full answer and an interesting one. The Government
currently uses three different projections of future oil prices
in 2020. $50 is the high one, they have a central price of $35,
and a low price of $20, all at 2004 prices. Would you comment
on what you think of those estimates? Are you able to shed any
light on how you think the DTI might possibly have come up with
them?
Mr Skrebowski: I do not think
I can shed any light on how they might have come up with them
other than they probably went back to the IEA projections and
there was an interaction that way. If—as I am—you
are projecting a huge discontinuity and a shortfall in oil supplies
then logically oil prices have got to go very high because what
you are trying to do or what the market is trying to do is drive
them into the highest return uses, and then you are going to try
and fill up the remaining bit with other sources of energy in
some shape or form. So if you accept the discontinuity, and remember
if you are going out to 2025 you are 15 years after when I think
it will occur and you are 10 years after when many people think
it will occur, I would anticipate very high prices because, apart
from anything else, you have got to have an incentive to draw
forth either a conservation measure or alternative energy source
in order to try and fill a gap which is in danger of opening up
each year.
Q451 Mr Caton: We have touched on
transparency earlier. The Government says it has been working
with the IEA and various governments to promote greater transparency
in oil markets and to improve the investment climate in oil-producing
countries. What do you understand them meaning by this and why
is transparency of oil data so important?
Mr Skrebowski: The oil industry,
as I hinted, rather likes to keep its secrets and rather likes
to keep its mysteries. This has been an historic pattern, which
is not surprising. It is no different from any other industry
in that sense. Producing countries very often declare their reserves
to be state secrets and their actual production figures to be
state secrets and all the rest of it. They do not want people
calculating out things like declining curves. Just out of interest,
if you have data on a field and you know something about its characteristics,
it is relatively simple to know where it is going which is why
production data tends to become state secrets, otherwise you can
tell what is going to happen to them. If you go back, some of
this is actually still in the public domain so we can catch up
with some of it. Matt Simmons, who is fairly apocalyptic and is
a New York banker and close to the Bush administration and close
to Bush personally, has been going round the world talking about
peak oil and the likely impact of that. One of the things that
came out of that was that we really needed much, much better data
from both the oil companies and the producing countries because
then we could start doing what in effect we want to do which is
plug the right numbers in and see exactly where things are going
because then we can see how big a problem we have got. So far
where has this got to? OPEC has certainly started publishing its
future investment plans in much greater detail than we have ever
seen. We know that is in response to the pressure. The companies
after the Shell debacle have definitely been more scrupulous in
their presentation of reserves and definitions and one thing and
another, so that has tightened up. We have some countries that
are exemplars, and I am proud to say the UK is one, where you
have very detailed production data and an excellent web site where
you can look it all up. The Norwegians are the other ones, they
have very comprehensive details. The Danes are not so bad (but
they are not quite as good as the Norwegians) and some of the
states in Canada are not too bad. So the Anglo-Saxon world, loosely
defined, is not too bad on data release and allowing you to calculate
whatever. Most of the rest of the world is still not very good,
but possibly getting a bit better.
Q452 Dr Turner: How seriously do
you think the Government is acting in anticipating and addressing
the problems that would undoubtedly be caused by the problem of
reaching peak oil?
Mr Skrebowski: The short answer
is I honestly do not know. I have not heard even unofficially
anything that would suggest that they are doing very much. It
was quite interesting that a friend of mine who is writing a book
on the subject challenged Malcolm Wicks openly about peak oil
and got some denial. He also challenged Sir David King at a luncheon
who said, "Oh yes," and essentially confirmed it but
put it about 10 years out, so that is five years beyond, so it
sounds as though he is talking about 2015. The short answer is
I think there is some awareness of it but a great reluctance to
talk about it or take any obvious, overt steps to do anything
about it.
Q453 Dr Turner: If the Government
were to do anything about it, it would clearly face some quite
significant challenges. Can I ask you what you personally would
do? If you were the Secretary of State for Transport, what would
you do in terms of government transport policy to start replacing
oil in transport in the United Kingdom?
Mr Skrebowski: I think my answer
to that would be that the first thing one would try and do in
a fairly controlled manner is indicate that, for all manner of
reasons, future oil supplies are going to be tight and we are
going to be at the behest of regimes that we might not have much
in common with. Once the population in a general sense has even
a limited perception that many of the things that it is doing
are both silly and extravagant, then there is a reasonable possibility
they will react. At the moment we have this slightly perverse
thing where we have all sorts of noble initiatives on saving or
conservation or insulation, but the problem is that no-one out
there sees any immediate position to do anything about it. They
have got to have a reason to do something. Once they have a reason
to do something, humanity is really quite clever and ingenious
and will start doing things. I can see that for financial reasons,
for the stock markets, for political reasons of not creating panic,
people might be very reluctant to attempt this because they are
worried that it might run out of control, but I think if they
do not do anything about it the public is necessarily going to
catch up, the reality is going to catch up, and then the government
is going to be heftily blamed. Just ducking slightly sideways
Chevron, the oil company, has got this strange web site called
"Will you join us?" which is basically admitting to
peak oil and talking about all the good things you need to do
to mitigate it. What, in effect, Chevron is really saying is:
"Don't blame us. We told you. It was all there. You only
had to look", and governments almost by definition always
do get blamed. That is what the population does. It may be grossly
unfair but that is the reality, so I think the Government is taking
a great risk by not even starting to bleed out the idea because
there is no real downside. If you bleed out the idea that fuel
is valuable and is likely to remain expensive, then you encourage
conservation, and if you encourage conservation then you mitigate
carbon emissions. Then you have a whole series of not necessarily
dramatic but small wins from a controlled admission that there
is a problem. Then if the problem deteriorates, as I anticipate
it will, the population is not howling and screaming; it is something
it is starting to understand has got worse.
Q454 Dr Turner: The Government is
sort of dipping its toe into the water into this field fairly
gingerly in terms of biofuels obligations, et cetera. Do you think
it could do more and do more effectively and do you think it has
got the right fiscal instruments to encourage action?
Mr Skrebowski: Again entirely
a personal opinion, I think it could be a little bolder. The Germans
have just made the biofuels obligation there mandatory. There
is no real reason why we should not make it mandatory in this
country. The Americans quite successfully a few years ago improved
air quality by offering scrapping premiums for elderly vehicles.
If you want to start changing the perception about SUVs you could
offer scrapping premiums for SUVs. No-one is going to take it
up because they are new vehicles but it just starts to change
the perception of that sort of action. I think there are quite
a lot of little things that could be done and probably should
be done.
Q455 Dr Turner: What do you think
are the practically attainable limits, if those things were done,
in terms of the amount of fossil fuel we could replace?
Mr Skrebowski: What you are really
asking is, what is the immediate fat in the system. I would think
somewhere between 15 or 20%, if pushed. Obviously the first 5%
would be quite easy even if things got a bit higher still. That
is simply a good guess.
Dr Turner: Fair enough.
Q456 Colin Challen: We heard from
our previous witnesses that they thought the reason why oil was
currently around $70 a barrel was because of speculation. If you
agree with that assessment, is that speculation based on the approaching
peak oil problem or is it based on Chinese demand or uncertainty
in the Middle East or all three?
Mr Skrebowski: The first point
is speculation is not necessarily unreasonable. In other words,
if you pay over the odds because you think there is a lot of insecurity
at the moment, that is not an irrational act. It may come to seem
an irrational act if it subsequently proves it was not really
a problem, but it is not necessarily an irrational act at the
time. Then there are hedge funds and speculators and that popular
part, people who want to say why prices have suddenly got so high.
I think you need to be a bit cautious. After all, they have staked
real money and if they get it wrong, they will lose real money
in quite large volumes. I will not cry one way or the other about
that, but it is a real bet. It is quite interesting that there
is a divergence between the oil company view going forward and
the financial community view going forward. The financial community,
generally, is much more open to the idea that there could be serious
difficulties in this area, serious constraints, because they have
seen the failure of the oil companies to deliver volume and the
way oil companies, to keep their share prices up, are having to
buy enormous quantities of shares, so the financial community
is literally at odds with the oil community. The oil community
sees forward prices dropping down, the financial community, in
effect, is betting they will go on at high levels. Place your
own bets who historically has done better, the bankers or the
oil companies; they have both done pretty well.
Q457 Colin Challen: I notice that
the new Chief Executive of Exxon predicts that prices will drift
down again but probably not as far as to $25 a barrel, which is
what the Government's Aviation White Paper of airport expansion
is based on.
Mr Skrebowski: Can I interject
at that point. If the price fell to $25 a barrel, it would be
a catastrophe. The reason it would be a catastrophe is that is
the sort of production cost you are now getting in the Canadian
tyre sales. If it dropped anywhere near $25, all sorts of projects
would start getting cancelled. Some of the marginal projects,
the extensions that these lands are depending on to give them
their bananas in a hurry, are totally predicated on high prices
continuing; $25 would be a catastrophe.
Q458 Colin Challen: In that case,
somebody needs to write to the Secretary of State for Transport
asking that the Aviation White Paper be redrafted because that
is based on $25 a barrel for aviation fuel, and that price level
is predicted to continue until 2020. What do you make of that
kind of government assessment which just seems so awry?
Mr Skrebowski: Can I tell you
a story. Many years ago, I worked as a long-term planner for BP
and every year the demand went up by 7%. I went to my boss and
said, "I really cannot believe that demand is going to go
on up at 7% a year." He said, "Well, you may be right,
but it has gone up at 7% for the last eight years. I cannot do
anything other than include that assumption in next year's plan
because, to change it, I would have to have an unbelievably good
reason", so we got out the ruler and drew the line on. That
I think is what is happening, that people are just sitting there
with a ruler and extrapolating a formula, because they cannot
think or are not prepared to believe there is a reason good enough
to take them away from this straight line they have been living
with. It is a sort of oil industry idée fixe, that
the long-term price of oil is that and for the best part of 100
years that was correct.
Q459 Colin Challen: Are we blinded
by the history of our growth? I am thinking particularly of aviation
where recently the huge growth has been spurred on by cheap airlines.
Are we going to have to start looking at a situation where we
will be rationed by price in the not too distant future in commercial
aviation?
Mr Skrebowski: Naturally enough,
I do not know. What I do know is that making an aeroplane that
flies 500 or 600 miles an hour consumes enormous volumes of fuel.
If you make an aeroplane that flies at 200 miles an hour, because
it goes up by the square, it will use a small fraction, so one
possibility is that you will get a segmentation of air travel
where there will be a high-priced, fast air travel and a lower-priced,
slower air travel. That, at least, would start the mitigated constraint.
I was surprised to hear that there is only sasol jet kerosene.
The Russians have been extending jet kerosene with ethanol; you
can do this. Ethanol has a lower calorific value so you have a
penalty in terms of carrying the sasol, but you can extend jet
fuel with ethanol. There is a lot of experience out of Russia;
I am sure if you ask them nicely, they will probably tell you.
I think you can say that the present growth in air travel is unlikely
to continue on its current trajectory, but that does not necessarily
mean it will fall off completely catastrophically because of the
high rise. I think it will work hard to get around it and sort
of package itself in various ways.
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