Increasing global demand for energy: Challenges and opportunities
By Sam Onwa,
Business Development Manager,
Baker Hughes Nigeria Limited
Mohammed al Hamli, President, OPEC
The energy crisis has started and the world is about
to go through a profound and wrenching change.
We face an energy crisis never before confronted in human history . Energy for transportation , manufacturing and everyday living will have to come from other sources than the one we use now , most likely less efficient sources. That beautiful black liquid with the fantastic power / mass ratio that was the base building block of our civilization is going to hit its mid point , global peak oil , and then slid into permanent decline and we will be forced to make major changes in our way of living . Population goes up , the oil supply goes down . Year after year , decade after decade, demand and population increase, supplies of oil decrease. Until all the oil is gone.
It has been reported that the Energy Information Administration (EIA) estimate that between 2003 and 2030, the world will in crease its use of energy by 71 per cent.
Growth in energy demand will be particularly strong in both the developed and the developing world - including countries such as Korea, China ,India and several other countries around the world . Demand growth in the developing countries of Asia alone is forecast to grow at four per cent relative to the global average of about 2. 5 per cent.
This trend is likely to sustain the current high oil and gas prices.
The industry’s response to this demand has been to increase investment in new supplies - which we are doing at record levels across the entire energy value chain. It also falls on the shoulders of services providers such Baker Hughes to come up with viable new ways of doing things better in order to achieve a cost effective investment in the oil and gas industry . We’ve been through investment cycles before and in each cycles there were corresponding solutions to the challenges posed by surging demand for energy in the form of oil and gas. We saw three major investment phase in the 20th century . But there are several factors that differentiate today’s investment cycle from those of the past .
The first difference is the sheer scale of investment. The EIA estimates that through 2030 , investments in oil and gas will require about $ 6 trillion to meet demand projections. Oil investment is forecast at $ 3 trillion , with two – thirds going into non OECD countries . Investment in gas production will also require about $ 3 trillion . Many investors in oil and gas industry are now venturing into formerly untouched areas, harsh and demanding environments such as deep water and complex reservoirs . Another characteristic of the current investment phase that is different from the past is its complexity.
A significant portion of new in vestment is going toward large , complex projects such as extra heavy oil and the deep water projects in the GOM, offshore West Africa and in many other parts of the world , which take years to bring on –stream and involve multiple networks of partners , some times with different objectives. These projects have enormous Fixed costs , long lead times and extended recovery periods for capital investment . They require sophisticated , discipline and farsighted management and high technological approach .
A typical example of this complexity is a case where four operators combined their efforts to develop a very complex reservoir that required navigating through highly shaly and tight rock before accessing the productive formation . The project required major investments in seismic imaging and innovative drilling tools ( Autotrak X-treme TH, Rock View SM and Baker Atlas Resolution tool ) provided by Baker Hughes as required to solve problem that would have been impossible to deal with a few years ago. The project scale was so huge that the well test alone represented an investment of more than $ 100 million.
It will take about five years after the well test before the first drop of oil wil flow to the surface for such ventures. It is estimated that the project may contain anywhere from 4 billion to 12 billion barrels of recoverable oil ( equivalent $ 3 trillion ).
Recent publications indicate that if you add investment across the netire energy spectrum, including power generation and distribution, the investment target is nearly $6 trillion by 2030. Clearly , we haven’t dealt with investment on this scale before.
However , we need to match the current trend with innovative ideas and new technologies that deliver solutions that offer cost effectiveness . Baker Hughes has been at the forfront of new technologies and you will see at the end of this a paper a list of new and innovative services and products that will address most of the needs of highly challenging well conditions and environment.
This types of complexity is what we mean when we talk about the end of “easy” oil. Traditional reservoirs are drying up. It’s no longer easy to explore and produce oil and gas from the non traditional reservoirs . But it’s also ushering in a new and rewarding frontier for our most advanced technology and exploration methods . The Baker Hughes Teleperf , one – trip line hanger , cement , perforate and gravelpack and Extrmezone reactive core formation packer are some of the tools that have met the challenges imposed by extremely harsh well conditions, including HTHP reservoirs.
Another point of distinction in the current investment cycle is the range of risk that we face – geologic risk, natural disasters geopolitical risk , price risk and contract risk , just to name some. But the history of our industry is one of identifying , managing and overcoming risks. It is what we do. And despite all of the hurdles we face today , the global energy industry is stepping up to the investment challenge.
New investment by the five major international oil companies alone totaled approximately $ 70 billion in 2005, an increase of nearly 20 per cent over the previous year. Double – digit increases in capital and exploratory spending in 2006 and 2007 seem likely if current trends hold . investment on a similar scale is also being made by some of the national oil companies - notably Saudi Aremco , NNPC and Petrobras. Even with this historic level of capital spending , it’s probably fair to ask the question: Are we investing enough ? Are the services providers keeping pace with the demand for new technologies that offer cost effective solutions ?
Many argue that investment should be more aggressive - projections of demand growth justify it and current cash flow in the industry certainly makes it possible . But we also have to take into account the realities of constraints in investment today, which are significant. In Nigeria alone the investment in the oil and gas sector alone is estimated at 18 to 20 billion dollars. Such scale of investment is also common in some other parts of the world .
One of the straints is the rising cost of almost every investment in put. Rigrates, for instance, have soared in the past 18 months, compounded by last year’s hurricanes in the US. Rig rate in the GOM and North Sea have more than doubled since last year. Jack-ups in the North sea are commanding fees of $ 350,000 a day . Rates for deep water , high –end drillships are expected to grow up to $ 500,000 a day for 2008 – 2009 contracts. Sourcing for operating rigs has become very difficult as many operators have been forced to delay investment due to the non availability of rigs suitable for their operations.
The price of raw materials is also emerging as a bottleneck to investment. Spot prices for steel and iron have nearly quadrupled since mid 2002. Copper prices have increased about 500 per cent since 2002. Nickel has nearly doubled in price over the last year.
These trends play out as increased costs for a broad range of fabricated steel structures , valves , compressors , formation evaluation tools, pumps , drilling tools completion and production equipment and other items . Coupled with reduced numbers of contractors and high demand for shop space, facilities and engineering resources , the cost of these goods has increased as much as 200 percent over the last few years .
This is putting additional constraint on investment in oil and gas sector of the energy spec-trum.
Another constraint – and just as challenging is the availability of skilled people . For example , after reaching a peak of 11,00 in 1983, the number of petroleum engineering graduates in the united states alone hit a low of 1,300 in 1997 – rising slowly to about 2,400 today . I could not get a similar statistics on the numbers from other parts of the world .
This is not surprising in the wake of 120,000 positions eliminated by the 25 largest private oil and gas companies worldwide since 1999, due to several factors leading cut down in activity. Add this to the fact that thousands of the industry’s most experienced engineers are planning to retire over the next decade, and we are clearly facing a labour deficit that will be an investment bottleneck just when we’re reaching the most intensive phase of the investment cycle for some time to come . The current trend demands for accelerated recruitment of fresh engineers and technologists that will take the place of the retiring and experienced work force who are planning few years.
Lastly , investment decisions are clearly impacted by access or lack of access to new production opportunities. Successful development of oil and gas thrives best in an environment where multiple players apply and combine a broad range of financial , technical and management resources. It is no surprise that the U. S. GOM, one of the few offshore areas in the United states open to robust exploration and production, continues to be a prolific source of oil and gas . The same integration of efforts , finance and logistics is also in place in other areas such as West Africa and the Middle East. It is a function of hundreds of oil and gas companies from all over the world , working in a variety of partnership - and competing with one
Another - to develop the region’s oil and gas fields to its full potential.
I thank it’s clear that as we look at the oil and gas landscape , our industry faces a paradox – we’re generating strong revenues and cash flow tied to the price of crude , but we are also facing a variety of challenges required to sustain that performance. So I’ll continue my remarks by offering a few ideas about how to navigate those challenges and take better advantage of the opportunities in front of us . These opportunities are available through extensive research, development and provision of high technological advanced tools and equipment. The fact is that we need to make investments for the near term , the medium term , and the long term . The challenge is to do them all, but to weight them and prioritize them in a way that will deliver predictable , economic returns – and uninterrupted flows of oil and gas.
The Industry is also broadening their portfolio with growing investments in unconventional hydrocarbons such as extra- heavy oil in Venezuela, oil sands in some parts of Canada, and gas -to liquids in Nigeria and Qatar . And in a world that needs every molecule of energy it can develop, we also see a business model emerging for reasonable investments in alternative energy . Some operators in the Us are coming up with a strategic emphasis on investing in second- generation bio- fuels base on cellulosic conversion technology . For example , some research is going on aimed at developing indigenous feedstocks into fuel products and some are focusing on conversion of local forest products and the use of high end agricultural waste as a resource to produce energy. Some companies have also invested heavily in a project that will produce bio-diesel from soybeans . it’s clear to me that oil and gas will continue to anchor the global energy portfolio for decades to come . But new energy sources – as well as focused technology that are cost effective and leading to higher levels of energy efficiency can make a material contribution to long – term supplies . In the past few months Baker Hughes have offered the industry with new high tech tools and system such as EXPress Expandable Screen system – reduction or elimination of annular space, StimCoatTM – self stimulating screen and Equalizer Tm Distruteibal inflow control Device.
These tools have saved operators millions of dollars since their introduction into the market. This is a development that clearly demonstrate the commitment of Baker Hughes to the oil and gas Industry with the Nigerian sector being given top priority in view of its rich potentials .
Another requirement for sustained and successful investment is predictability , based on contract sanctity and increased transparency . This is an important and topical subject to itself , but I’ll simply highlight just a couple of points. In the current price environment there is a natural and rightful inclination on the part of governments and resource – holders to maximize the returns on production. But there is clearly a dipping point where those policies can be counterproductive , hence extra care must be taken to ensure that government polices are not counterproductive to the investment climate required to currently in place. infact, “ Governments must strike a balance between short and long –term objectives ,” ‘’Once investment has occurred , the host government may be inclined to raise taxes and royalty rates to increase revenues quickly, but at the risk of discouraging further investment.”
We believe this concept of balance is extremely important. Sudden shifts in contract terms should be carefully considered in the light of increased costs, more sophisticated technology and the inevitability of a cyclical downturn in prices at some point in the future. Stable , predictable and reasonable terms are needed to ensure that investments continue to flow .
Another way to increase predictability in the marketplace is through the support of multilateral organizations that create a robust environment for global trade. As an industry, we need to demand political leadership that promotes inclusive commercial frameworks - and level playing fields - to stimulate trade and investment. The services provider companies should be encouraged as much as possible in such a way that fair competition exists that will pave the way for a healthy and profitable research and investment to enable the continuous support of the oil and gas industry.
Enhancing the global network of trade and investment will be one of the most important drivers of stability in the marketplace. This investment portfolio should encourage and stimulate the development of the local economy where inclusive participation of the local work force is in place. “ Local content” as the term is applied should also include the increment of local spending, investment in local infra structure and the use of indigenous or Local resources as inputs to the production of tools and services provided to the oil and gas industry. This policy termed the “ Nigerian content development” (NCD) is already in place and should receive the encouragement of all players in the oil and gas industry. In terms of measurement and accountability , Baker Hughes Nigeria can boast itself as having met and achieved about the criteria set forth by the government for fiscal year 2006. The company also has plans in place to ensure it achieves higher than the target set for year 2010. The commitment by Baker Hughes also extends to community developments where the company is engaged in several projects aimed at assisting the development of the rural areas and its people.
I will like to make the final point on how we can effectively navigate the investment challenge and this is probably obvious to most of us here . It is “ people’ how we employ them, how we serve them and how we motivate them. A highly motivated work force excels in performance to the benefit of its employers and the industry in general .
We need smart, skilled people to deploy investments effectively . That means more investment in training a new kind of skill set in the industry , particularly people with hybrid skills – half earth scientist or engineer and half information technologist, for example . People who can function in the interface and see the future . The people equation also means that all of us – the industry , governments , communities – must be committed to extending the economic benefits of oil and gas production to all levels of society , especially the rural communities whose environments contain the areas where oil and gas are prospected and produced.
Government in conjunction with operators and services providers can act directly, through the creation of jobs in the industry and indirectly, through the investment of oil and gas revenues in education, economic development and other forms of social capital.
The more that our industry and all other stakeholders work together to create broader prosperity and stability in the communities where we operate , the more secure we will become as long term, profitable enterprises - and the more secure the global oil & gas supply will be.
We can now spend the rest of my time remaining in talking about a subject tied directly to investment the price of oil , and whether, in fact , we’ve seen the end of cheap oil. But whether we’ve seen the end of cheap oil is probably not the right question to ask. The more relevant question might be - what is the fair price of oil ?
What is the price of oil that will allow sustained investment over the long term? What is the price of oil that won’t create material demand destruction ? what is the price of oil that will continue to generate global economic growth ?
The marketplace will ultimately determine that price . !! I can assure you all that Baker Hughes is at the forefront of the provision of new generation high technology tools designed to provide enhanced solution aimed at improving performance and adding value to our customers. Our commitment to HSE, community development and the attainment of the Nigerian content is on the upswing and will continue into the future.
But every one of us here today must play a role in helping to ensure that the marketplace works efficiently , predictably and inclusively. That is best framework for getting at the fair price of oil and gas and ensuring a sustainable investment for the long term globally and in particular the Nigerian sector.
I will like to recapture some of the points that need to be taken into consideration that are required to arrest the shortfall between demand and supply in the hydrocarbon chain.
Technology Needs and Drivers
• Cost - effective technology for mature environments
• Cutting-edge technology fro exploration and hostile environments
• Digitally enabled technology for real – time operations
• Technology for production of unconventional hydrocarbons.
Intelligent Technology objective
• Recovery improvement from 30, 40 % to 60, 70 %
• Reduction of operational risk
• Ensure stable production by employing New technology that increases efficiency that adds value to investors
Research and Development Priorities
• Security of supply domain:-
- More efficient exploitation of mature fields
- Deep and ultra- deep offshore fields
- Non – conventional resources
• De –carbonization domain:-
- Migration to natural gas
- Carbon capture, use and storage
- Migration to hydrogen economy.
• SAM ONWA is country Business Development Manager, Baker Hughes Nigeria Ltd. He delivered this paper at NAPE conference.
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