Marginal Oil - What is driving oil companies dirtier and deeper? - COP 17

Executive Summary

This paper was written for a workshop on the expansion of investment in tar sands, in their current centre of production in Canada and beyond, and particularly the prospect of investments in developing countries. Tar sands development in Canada has had serious negative impacts on local communities and ecosystems.

Current and new developments pose a significant threat to global climate protection efforts, given the highly carbon-intensive nature of the production process and the fact that protecting Alberta’s tar sands industry is feeding the Canadian government’s opposition to national and international mitigation efforts.

However, tar sands development is both a symptom and manifestation of a broader underlying trend: a drive to exploit unconventional oil resources that are more difficult and costly to produce – and usually more carbon-intensive – than conventional oil. Oil companies are increasingly bent on accessing the world’s remaining conventional oil resources found in “frontier” locations, where their development often involves a high risk of irreversible damage to local ecologies and communities.Current exploration projects include bitumen-type resources in Venezuela and in Africa, deep offshore oil in Africa and Brazil, and heavy oil in the remote Western Amazon.

Both these trends represent an ongoing drive towards what can be called “marginal oil” with potentially devastating implications: for global and local efforts to curtail carbon emissions by transitioning away from a fossil fuel-based energy model; for the energy security of importing countries; and ultimately for sustainable growth in developed, emerging, and developing countries.

The paper begins by exploring the “macro” forces driving the search for marginal oil. Fundamentally, oil exploration is driven by the economics of global supply and demand. Global oil demand is on an upward path, mainly due to increasing demand from emerging economies such as China, according to the International Energy Agency (IEA). However, concerns about China’s rapid demand growth may be overblown and need to be balanced with an awareness of the country’s efforts to curtail domestic demand in the longer term.

However, while concerns about peaking oil supply are a factor, it is in fact lack of access by international oil companies (IOCs) to the remaining “easy-to-produce” oil that is driving them in search of the “marginal barrel.” In the 1960s, IOCs had access to around 85 percent of global oil reserves: today that has shrunk to only 6 percent. OPEC controls the vast majority of the world’s remaining “easy” oil, which means the majority of future non-OPEC production growth will be in unconventional oil.

The IOCs’ decreasing access is mainly due to geopolitical factors such as the continued rise of resource nationalism in key producer countries, as well as rising oil prices. In addition, what little remaining access IOCs enjoy comes with much less favorable terms attached. They also face increasing competition from national oil companies (NOCs) that are becoming more technically competent or business savvy and are cash rich. This insecurity of access has been further exacerbated by the accelerating depletion of oil fields located in politically stable and “friendly” territories.

IOCs also face pressure from investors to keep adding new oil reserves to replace existing production. In some cases, the deals now available to IOCs fail to deliver new reserves, as ownership of the reserves tends to remain with the producer state or NOC.

The IOCs response has been to develop technologies to access “difficult oil.” The past decade has seen increasing involvement of IOCs in offshore production at ever-greater depths, Canadian tar sands production, the development of gas-to-liquids (GTL), and technologies to produce oil shale. Analysis of the top six IOCs’ reserves profile reveals that they all increasingly rely on such marginal resources.

However, the push into the margin means spiralling costs for the IOCs as, almost without exception, these resources are more expensive to develop and produce than conventional oil and thus rely on a high oil price to be profitable. Marginal oil is a symptom of high prices and excessive demand rather than a means of combating either.

This is why the arguments deployed by the oil industry and its supporters that increasing development of marginal resources is the key to improving the energy security of major importing states such as the United States are fundamentally flawed. Development of expensive-to-produce and limited supplies of non-OPEC marginal oil will not reduce OPEC’s hold on the market. Unlike marginal resources, OPEC oil is relatively cheap and easy to bring onstream, and its market share will grow even if marginal oil is developed.

For the same reasons, more marginal oil will not mean less money for unsavoury regimes, so long as overall demand increases. The supply and demand balance that supports marginal oil is also a boon for OPEC producers, because it supports high oil prices.

Finally, marginal oil production will not protect oil importers from a supply crisis because of the global nature of the oil market. No marginal oil sources (such as Canadian tar sands) have significant spare capacity to address a supply crisis.

The only sure answer to improving energy security is cutting oil demand. Otherwise, the “business as usual” energy scenario will see marginal oil development inevitably expand beyond its current centre in North America, with companies pushing to open up ever more risky and challenging resources with potentially devastating consequences for the climate, as well as local ecosystems and communities in producer countries. Arguably, the United States is still the pivotal market in terms of its impact on global oil demand. Roll-out of existing technologies combined with robust government interventions across the board could potentially cut US oil consumption by 40 to 50 percent by 2030, setting it on a downward trajectory thereafter and more than counteracting growth in demand from China.

However, even if successful, reducing demand for oil in the medium term must be combined with a coherent supply-side approach. Governments cannot cut demand while also putting into place policies aimed at maximizing supply of oil and other fossil fuels, undercutting the political and economic case for clean energy. In addition, reducing oil demand alone will not resolve the fundamental environmental and social justice issues facing local communities at the frontline of oil development.

For climate protection and for environmental and social justice reasons, further oil investments must be monitored and challenged to prevent the ongoing environmental and social damage they entail and also to prevent states and other actors from getting “locked in” to a resource extraction model that makes the transition to a truly sustainable development path more remote.