If you had to bet whether the price of oil would be higher or lower 10 years in the future, what would you say?
Some argue that the world is running out of low-cost oil and that oil prices will get higher and higher. Others argue that the current high price of oil will cause a flood of new oil, much of it from nonconventional sources; hence, prices will fall significantly (provided the political class in Washington, D.C., does not continue its energy and environmental death march policies).
The case for much lower oil prices is as follows. There are hundreds of years of oil supplies (at present and projected consumption levels) if oil in oil sands and shale is properly included in reserves. In some places, such as Saudi Arabia and Iraq, there is still much low-cost oil ($15 a barrel or even less) that can be produced for decades, but not in an amount sufficient to meet the world's demand; hence, much higher-cost oil is also pumped. This higher-cost oil includes much of the offshore oil (the huge cost of the mammoth drilling rigs has to be amortized over each barrel of oil produced) and on-shore oil in hard-to-reach places and/or produced from low-production wells.
Oil reserves are largely a function of price. Global proven reserves of conventional oil obtainable at prices of less than $40 per barrel are estimated at more than 1.3 trillion barrels, with much of it concentrated in the Middle East. Additionally, reserves of so called "heavy oil," the largest reserves of which are in Venezuela's Orinoco area, are estimated at 1.2 trillion barrels, and most of this . . .
could probably be recovered for less than $50 per barrel.
The reserves of oil sands, which are actively being mined in Canada's Alberta Province, are estimated to be 1.8 trillion barrels. Experts estimate that much of this can be produced for $45 per barrel or less. Global reserves of oil shale are estimated at more than 3.3 trillion barrels, with 70 percent in the United States (primarily in Colorado, Utah and Wyoming).
Shell Oil Co. last year announced it has developed a process for extracting the oil from the shale, without mining, at a price of roughly $35 per barrel. The United States also has the world's largest reserves of coal — enough for hundreds of years of production at present levels. Coal also can be turned into liquid petroleum (as the Germans and South Africans proved decades ago). Current estimates of the conversion cost are as low as $35 per barrel.
Does it seem a bit odd that the current price of oil is more than twice the cost of producing all the oil the world presently needs and will need long into the future? The reason the price is so high is that the supply has been artificially constrained by governments. Most (88 percent) of the conventional oil reserves are owned by governments, and these governments have underinvested in new production. As is well-known, the U.S. government has restricted offshore and onshore drilling, shale development, and coal conversion.
Some politicians argue, even if the U.S. government started to allow increased production, that it would be seven to 10 years or more before there would be additional output. This is nonsense. Oil wells can be drilled at an average rate of 1,000 feet or so per day, which means that the average U.S. well can be drilled in a week. It does take a few weeks to set up the pump and install the separation tanks, etc., but new land wells can be producing within months, even if the product has to be trucked rather than piped away.
Drilling in the Arctic National Wildlife Refuge in Alaska would not take all that long for some production to get started. Politicians often confuse the time it takes to get peak production from a field as compared to some production — each additional well takes time, plus the necessary new piping collection infrastructure for each additional well.
Offshore wells do take a lot longer, but most of the time involved is the government permitting process, not the physical production of the rigs, drilling and so forth. If the government gave a full green light to production of oil shale in the Rocky Mountains, it might take several decades to reach full production, but some production would be accomplished in the next couple of years.
The very same politicians who claim we cannot increase oil production quickly are often the same ones who tell us we need to move to alternative forms — windmills and solar, etc. — without seeming to understand these desirable technologies will take far more time to meet the goals of "energy independence" than ramping up oil production. Speaker of the House Nancy Pelosi said she would not allow a vote on more drilling because she wanted "to save the planet," without seeming to understand, if increased oil production does not take place in the United States with all its environmental safeguards, it will take place where U.S. environmental law cannot be enforced — and that is not healthy for the planet.
Fortunately, the people are beginning to understand they are paying twice more for a gallon of gasoline than is necessary, and the global environment is not benefiting. Less expensive energy and a cleaner environment are most likely to be achieved quickly not with alternative energy sources but with an alternative set of congressional leaders.
ANOTHER ITEM from the Globe and Mail interview with TransCanada CEO Hal Kvisle got lost in the smoke and steam resulting from Kvisle's comment that "nothing goes ahead until Exxon is happy with it."
Kvisle also suggested in an interview last Sunday with the Toronto-based newspaper that Denali and TransCanada are likely to join forces sometime in the next two years.
At least that is the apparent implication of his statement . . .
that it's unlikely more than one open season will be held in 2010. "This is not about TransCanada dreaming up the project we think will work," he said. "It's about the five key parties getting together and crafting something here." The five parties are apparently the three big producers, TransCanada and the state of Alaska.
Kvisle noted that plans at this point call for both Denali, the company formed by ConocoPhillips and BP to build a gas pipeline, and TransCanada to hold open seasons in 2010. The open season is when customers are solicited to ship their gas through a pipeline.
The Globe and Mail reporter said Kvisle told him it's unlikely two open seasons will be conducted. That makes sense, since TransCanada couldn't really compete with a line being built by the companies that control North Slope gas — nor could it woo the companies away from using their own pipeline.
But it would mean at least one of the two entities would either delay an open season — TransCanada is obligated by its contract with the state of Alaska to hold an open season in 2010 and Denali is ahead of TransCanada — or Kvisle expects both sides to join forces sometime in the next two years.
So unless natural gas prices go in the tank sometime soon, which doesn't seem likely, the next two years should be an interesting time in Alaska.
VANCOUVER -- TransCanada Corp. has won support from Alaska to build a $26-billion natural gas pipeline, but ground won't be broken until Exxon Mobil Corp. signs on, says TransCanada chief executive officer Hal Kvisle.
Calgary-based TransCanada, which secured Alaska's official backing Friday, is in competition with BP PLC and ConocoPhillips Co. to build a pipeline that would connect large untapped gas reserves on the north slope of the state to consumers in the continental United States.
But Exxon, the company that controls the most gas in Alaska, hasn't yet backed either of the competing proposals, though it has an active Alaska team monitoring the pipeline race.
"Nothing goes ahead until Exxon is happy with it," Mr. Kvisle said in an interview yesterday.
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More Report on Business Stories One airline's castoffs are another's startup fleet Exxon key to Alaska pipeline WHEN BIG OIL WANTS THE FAMILY FARM Skilled hand to take reins at the Bay Rolling up the rim on Tim Hortons Competitive Canadian business - the government's role Go to the Report on Business section For TransCanada to proceed, it will also need to attract the shipping business of rivals BP and Conoco, which control part of the natural gas.
"This is not about TransCanada dreaming up the project we think will work, it's about the five key parties getting together and crafting something here," Mr. Kvisle said.
That presents some big challenges. All of the companies would likely seek a longer-term deal with Alaska on such issues as taxes before deciding to make a long-term commitment to a pipeline.
Reaching such a deal could be an uphill battle because the relationship between the firms and Alaska is frayed after a previous pipeline proposal fell through two years ago. Further, while it looks like it's BP-Conoco versus TransCanada in Alaska, the relationships are much more tangled.
London-based BP is TransCanada's largest customer on its sprawling gas pipeline network, and Conoco, based in Houston, and TransCanada are partners on a major new oil sands pipeline.
In this foggy and seemingly fractured picture, Calgary-based TransCanada is positioning itself in the role of intermediary, hoping to own part of the pipeline while getting closely involved in its design and construction by pitching its pipeline expertise as an important card.
An ownership stake in any pipeline is something the producers want if they are to sign long-term contracts, Mr. Kvisle said.
But TransCanada also has the right, under federal Canadian legislation from the late 1970s, to build the Canadian portion of the line, the company says.
Mr. Kvisle said he thinks TransCanada can figure out a deal that will work for everyone and offer advantages such as savings amounting to several hundred million dollars with technology that eliminates the need for pressure-testing the pipeline.
Late Friday, the Alaska Senate approved a licence for TransCanada to start preliminary work with $500-million from the state - but also a long list of requirements to ensure that the line benefits Alaskans. The licence was issued under the Alaska Gasline Inducement Act, a process that Exxon, BP and Conoco rejected as unreasonable, and led BP and Conoco to independently propose a $30-billion pipeline called Denali.
TransCanada's new pipeline licence does not affect Denali, said Bud Fackrell, a BP executive who is now president of the venture, in an interview with Bloomberg News on Friday.
Mr. Fackrell added that an open season for contracts to ship gas on Denali will be conducted in 2010. It's the same year that TransCanada plans to do the same, as required by its licence, but Mr. Kvisle said it's unlikely two open seasons will be conducted.
While Alaska inches ahead, the proposed $16-billion Mackenzie Valley pipeline - whose lead backer is Exxon - in the Northwest Territories is much further along and is nearing the end of a long regulatory review.
Mr. Kvisle doesn't think the two ventures are in competition and said construction on Mackenzie could begin in 2010 while Alaska likely won't break ground before 2015.
And in Alaska, Exxon remains the deciding factor.
"Things aren't always as they seem," Mr. Kvisle said. "Exxon is not the front-and-centre party in the press but I know for a fact that they've got very hard work going." Rean More
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