By JEAN MARC VON DER WEID*

The double challenge of oil: while the world faces supply shortages and pressure for clean energy, Brazil invests heavily in pre-salt

1.

Sulla and Charybdis were two mythological monsters from ancient Greece. They lived in the strait that separates Sicily and the Italian peninsula and threatened sailors with violent winds and sea currents, causing them to crash into the rocks on either side of the passage. The myth has been forgotten by many, but the expression has remained in the language of many countries to describe situations of double threat. Fleeing from Sulla means being hit by Charybdis and vice versa.

Translating this into the reality of oil production, Sila is the global trend in oil production and Charybdis is the global trend in oil consumption.

This dual threat implies a radical change in the context of the oil industry worldwide. Until recent years, the threat was a decrease in oil supply, but among industry experts the threat of a “peak in demand” is emerging.

The debate over “peak” oil production, known internationally as “pick oil” began in the 1950s with the prediction of the American geologist King Hubert, indicating that American production, then one of the largest in the world, would reach a maximum in the year 1970 when it would begin a continuous decline.

To explain this to non-experts: every oil well has a well-defined lifespan, the duration of which depends on the size of the reserves in the well being explored, the speed of extraction, the technology used and the relationship between operating costs and the price of the product on the market. After a while, when half of the useful reserve has been explored (what can be extracted profitably), production begins to fall until it becomes economically unviable. The terms mature wells and senescent wells are used in the industry.

Extending the concept to all the wells in a country, in this case the United States, King Hubert evaluated the evolution of wells in production and the evolution of discoveries of new wells and their potential to show that there would be a trend of continuous decline in supply from a “peak” in 1970.

Reaching a peak did not mean an abrupt interruption in supply, but rather an inevitable gradual decline. Hubert's peak occurred precisely in the year indicated. However, the explosion in oil prices in 1973 and the creation of OPEC (Organization of the Petroleum Exporting Countries) allowed the American oil industry to extend the exploitation of mature and aging wells for longer, since the higher costs of this “scraping the bottom of the barrel” operation remained, for a time, below market prices.

King Hubert made the same calculation for the rest of the world and predicted a global peak in production in the year 2000. This peak did not occur, and oil production continued to rise after that date, leading many to believe that the threat of a global peak was incorrect. However, studies by numerous experts sharing King Hubert's analysis indicated that the data he used were less accurate than those available to the American industry and that the peak would occur sometime in the next few decades at most.

Time has shown that King Hubert's hypothesis was valid and the peak occurred much earlier than expected. The production of so-called conventional oil (the object of the geologist's calculations) reached a peak in 2006, taking prices to an unimaginable level of 149,00 dollars per barrel, generating a deep and broad economic crisis. However, the supply of oil continued to rise after remaining at a limit level for a few years. Did the prediction fail?

2.

What happened was a radical change in the supply of oil in the world. Until the crises of 1973 and 1979, the oil produced was the so-called “conventional” oil, a light oil known as Brent type, with lower extraction and refining costs and higher quality.

Higher prices, which rose from five dollars per barrel to fluctuate between a minimum of thirty and a maximum of one hundred and fifty between 1973 and 2006, with an average of sixty, allowed other possibilities to begin to be explored more intensively.

First, conventional oil was found offshore and, later (with Brazilian contribution), oil was found in ultra-deep waters and under layers of salt on the seabed, the pre-salt layer. On the other hand, many companies turned to the exploration of shale oil (United States) and tar sands (Canada). These possibilities were well known, but only became viable with the higher prices that dominated the oil market in the second half of the first decade of this century.

The supply of oil, from the second decade of this century onwards, began to be guaranteed by so-called heavy oil, with American production alone guaranteeing coverage between the ever-increasing demand, the stagnation of conventional light oil production and the constant fiasco in the search for new wells.

This occurred with a huge subsidy from the US government, combined with a 54% increase in the efficiency of shale oil extraction with new technologies. It should be noted that none of this is guaranteed without a price above 60,00 USD/barrel, both for the extraction of conventional deep-water oil and heavy oils or shale oil.

The debate over a peak in oil supply was largely put on hold throughout the 2010s, as optimism spread among both oil producers and consumers. But by the end of the decade, signs began to emerge that a general peak in fuel oils was near.

The first sign was the rapidity with which American wells were running out, forcing investments in new wells at a frantic pace. On the other hand, the American industry had to face rising costs and stagnant or falling profits from 2018 onwards, leading experts to predict an inexorable peak (some in 2025, others in 2030).

Only the US Energy Agency has extended the forecast to 2035. Oil reserves in the Alberta tar sands in Canada are far larger than estimates for US shale oil, but this oil is by far the most expensive and of poorer quality.

To make matters worse for oil supply, the past decade has shown that conventional oil peaks have been occurring in several major producing countries, notably Russia and Saudi Arabia (the second and third largest producers in the world).

At present, predictions from various players in the oil industry are multiplying to indicate the risk of a supply shortage. The International Energy Agency estimates that it will occur in 2030, the French company Total in the second half of this decade and the specialized magazine Rystad International in 2035. The only ones maintaining the discourse of sufficient supply in the medium term are the leaders of OPEC, setting a horizon of security until 2050.

3.

The only good news in this scenario comes from Brazil. Petrobras recently announced a new discovery that could increase Brazilian reserves by 50 to 70%, in just one new field in the Santos region. On the other hand, the company has investment plans in 51 new fields, 25 on the south and southeast banks, 15 on the equatorial margin and 11 on dry land, totaling 7,9 billion dollars.

These new fields are not expected to come into production before the next decade, but investment in fields already close to exploration or in exploration is budgeted at 66 billion dollars. The aim is to triple the company's exclusive production, with the entry into operation of 14 new platforms by 2029 to extract 3,2 million barrels of oil equivalent (oil and gas) per day.

In addition, there is also production in consortiums with private companies and independent production by the latter. I did not find any forecasts for expanded production by the latter, but they should be significant and could bring Brazil's total production to close to seven or eight million boe/day by the end of the decade.

This expectation of increased production in Brazil is important and could take the country, if everything goes well, to a higher level among oil-producing countries (and companies), placing us among the five largest. However, knowing that global demand is expected to reach 2030 million boe/day by 104, the supply from our pre-salt layer will not be able to cover the current declines in almost all conventional fields (including deep-water fields in other countries) and the stagnation of shale oil production in the United States.

The only alternative not evaluated so far to cover demand is the expansion of the exploration of Canadian tar sands, but this possibility will depend on huge investments and oil prices above 100,00 dollars per barrel, which would cause a gigantic impact on the economy of the entire world.

To conclude this analysis of the oil supply crisis, I will recall a key figure released by the IEA itself: global spending on direct and indirect subsidies for oil production is in the order of one trillion dollars per year. There is no better indicator than this to show how much this industry is unbalancing the international economy, sucking up resources that would be extremely important for financing sustainable development and the transition to renewable energy. All to keep the system in production for longer at prices that are tolerable to consumers.

The threat of Sila (the global peak in oil supply) seems to be terrible for the whole world, but apparently a bonus for Brazil. Now we just have to see the threat of Charybdis (the peak in demand).

According to some evaluators, including the International Energy Association (which for many years represented the interests of the oil industry), the demand for fossil fuels will peak in 2030 and the multinational British Petroleum, in 2025 (that's right, this year).

However, the vast majority of assessments indicate that the movement to replace fossil fuels with wind and solar energy, although it has made a spectacular leap forward in the last five years, has barely covered a part of the total increase in energy consumption over the period. There has been a noticeable reduction in this consumption only in the countries of the European Union, Japan and, to a lesser extent, the United States.

Even in China, by far the largest investor in renewable energy, consumption of fossil fuels (including super-polluting coal) has continued to grow at significant rates.

4.

On the other hand, almost all countries that committed to reducing greenhouse gas emissions in the Paris Agreement fell far short of meeting their targets, and emissions have increased significantly in developing countries. There is no chance that reducing oil demand will become a reality, even if the deadlines are extended to 2040. OPEC estimates that demand will only stabilize in 2050!

The attitude of oil companies indicates that they are willing to reduce the prospecting of new oil wells (particularly because costs are increasingly important and results increasingly frustrating), but also that they will sell their reserves up to the limit of profitability to recover previous expenses.

Finally, Petrobras' heavy investments in oil prospecting and extraction may have to face two global threats: a drop in demand (quite unlikely) and a drop in supply (quite likely).

In the first case, if the world reacts in time to the threats of global warming and invests heavily in replacing the use of fossil fuels with renewable energy with low greenhouse gas emissions, the demand for oil (and its prices) will fall and all the investment in expanding our supply will become a joke.

In the second case, despite Petrobras being privileged by higher prices caused by the global shortage of oil, when its new wells come into production in the first half of the next decade, the impact of the global deficit in energy production will cause chaos in the economy and a heavy brake on globalization, in particular due to the cost pressure on the transportation of goods.

Can we survive this situation? Will our relative advantage help us make the transition? Does it make sense to continue to increase oil production (and greenhouse gas emissions) in the hope that the market will continue to grow in demand?

These questions are answered positively by all advocates of a Petrobras 2.0, but it ignores the other major problem for the future of humanity: the climate emergency caused by the increase in global emissions of Greenhouse Gases, caused by emissions originating mainly from the use of fossil fuels, including our own.

*Jean Marc von der Weid is a former president of the UNE (1969-71). Founder of the non-governmental organization Family Agriculture and Agroecology (ASTA).

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