Peak Oil and India
Are we scraping the bottom
of the barrel? Despite the Big Oil bravado, energy gurus actually
believe the world might be nearing Peak Oil - The End of Cheap
Peak oil is the point at which
about half the oil reserves in the world have been produced.
Peak oil is not the end of oil. It is the end of cheap oil.
After peak oil is reached the
production will reverse the momentum and will start to slowdown.
Estimates put this figure in the range of 4-6% per annum,
where as the demand will still continue to grow amid the growing
economy and industrialization. This will create an energy
void throwing the oil prices further north and causing double
sided damage to the growth - one due to high price of oil
and other due to its gradual increase in scarcity.
When will the peak of world
oil production come is much debated topic and various experts
provide various dates ranging from the year 2000 to 2020.
Currently most accepted date is in the vicinity of 2010.
may be a much hated man in the Big Oil World but there is
no denying that his views on the global oil scenario is increasingly
gaining ground and this surely has got oilmen worried. He
has been one of the key advisors on energy to the Bush administration
which is now turning around to making "Powering Down"
its mantra. Policy makers across the world are grudgingly
coming around to Mr. Simmon's view that this time around the
peak oil scare is for real.
But is the world ready to bite the bullet?
Big Oil believes that there is enough oil going to meet the
energy hungry nations. Says Sue Payne, planning manager (exploration),
Exxon Mobil: "An estimated 2.2 trillion barrels of oil
still remains as reserves worldwide, compared to the 1 trillion
barrels already extracted. And this does not include shale
oil, oil sands and extra heavy oils, which is pegged at another
1 trillion barrel." New technology - injecting water
or carbon dioxide, horizontal drilling - should be able to
siphon more oil out of old oil fields, amounting to 10-15%
of what was initially recovered.
Frontier technologies are being employed
to produce tar oil or shale oil even as gas to liquid are
being considered as an option. Others like British Petroleum
believe that the existing fields have more reserves than what
is shown. In fact, advanced seismic technologies should yield
better reserve results.
But this is exactly what Simmons questions.
"I think the three groups together along with Exxon Mobil
and BP have been responsible for a drumbeat of publicity that
has basically convinced a lot of people in the world that
we really don't have any energy problems. They basically have
to live in the world they created which was an illusion."
The data available on oil productivity is
sketchy as little is devolved on field by field production.
There is no public information on the historical decline rates
of most producing fields. Proven reserves are commingled on
a company by company basis or lumped together under an entire
country so breaking down the reserves into high quality light
oil instead of low quality heavy oil is impossible to even
guess at, analysts say.
Oil companies, however, have a completely
different take. It is claimed that data collated over the
years has only improved with better technology and they are
now in a better position to assess the hydrocarbon reserves.
Yergin had till recently quoted a comprehensive field by field
study which projected an addition of 16.4 million barrels
a day of new oil capacity being created. But Mr. Simmons counters
that "it's not a very good piece of work and the odds
of that happening are about as high as having a subdivision
on Mars by 2010."
And even as the world at large
continues to debate over whether we have reached peak oil,
global oil prices have managed to remain northward bound for
more than a year defying every economic logic. Blame it on
the growing demand by China, US and India or the increasing
geopolitical tensions in Iran, Asia Pacific region or Africa.
There is no escaping the high oil prices and a global crude
price of $100 a barrel is no longer an outrageous thought.
Energy guzzling economies like the US are
beginning to feel the pinch of high oil prices. At pump prices
moving to $3 a gallon, economists at IAEA feel demand elasticities
would soon set in. A similar thought is echoed by Wang Zhonghong
in the Development Research Centre in the state council of
PRC. "Consumers are moving in for lower grades of fuel
I would move onto grade 93 which is a cheaper fuel. And in
the long run high fuel prices will impact car usage patterns."
Retail prices were hiked by over 25% this year alone, although
it is still 35% cheaper than US retail prices.
Demand drivers like India have opted for
a more political option. In what may seem as a complete paradox,
consumers in India pay the highest fuel price in the Asia
Pacific region even though oil companies bleed. Simple, the
government pockets almost 50% of the sale price as taxes even
as it doles out huge subsidies in the federal budget.
But the truth on peak oil and its impact
on prices would probably be more in the grey than black and
white. Says Lane Sloane at the Global Energy Management Institute
at Houston: "Peak oil is certainly a raging debate which
happens every time crude oil prices rise rapidly because of
current low spare production capacity. We know for sure that
oil is a depletable resource and we know that oil has already
peaked in some countries such as the United States. The Hubert's
curve people are claiming it will peak globally within this
decade while others envision technology and man's innovation
will bring us to Robert Mabro's observation that "the
Stone Age did not end for lack of stones."
Bio-fuel, it's a bubble looking for the first
prick. Yes, the world over, governments are doling out billions
of dollars as subsidies to secure an alternative sustainable
source of energy, but questions are already beginning to crop
up on the cost effectiveness and the energy efficiency of
While countries like Brazil have taken the
lead and have brought in the ethanol revolution, others like
US are looking at corn/soya solutions while India is banking
upon its sugarcane-based ethanol for its gasoline doping program.
And the search for alternatives is not just about cane or
Soya British Petroleum recently launched tallow blended diesel
oil for the Australian market. Although, on an experimental
basis, the company has put in place facilities in one of its
refineries in Australia to blend the tallow from Australian
sheep with crude and produced blended fuel.
But even as this may come as a fancy innovative
solution, this is at best a local answer to existing oil crisis.
Bio-fuels are expected to play only a small part in substituting
for oil, perhaps not more than 10% and possibly as high as
20% with major environmental impacts.
And myth-busters like David Fridley, scientist
at the Lawrence Berkeley National Laboratory, have this to
say on bio-fuels: "This will fulfill a market niche in
the near-term, but long-term potential is low. Also large-scale
bio-fuel production is environmentally destructive and more
importantly bio fuel production impacts food security. Cellulosic
technology creates the same problems as grain-based technology
and most of all bio fuels will drain investment away from
other appropriate alternatives."
India Can't Produce Enough Ethanol As Most Of The Cane Is
Required For Producing Sugar
Hydrogen & Fuel Cell
Here's Mr. Fridley on hydrogen: "Hydrogen
is a myth. It is an energy carrier, not an energy source,
and thus must be made from another form of energy." This
may be highly contested by leading automakers like Toyota,
Ford or Daimler Chrysler who have been pumping in huge investments,
albeit with large doles from the US government, in collaboration
with the big oil guys, to develop those fancy hydrogen cars.
Proponents say hydrogen can be made with
renewable energy, but since renewable energy is approximately
1% of world energy, and oil is about 1/3rd, you could end
up losing energy both in the production of hydrogen, in its
transport, and then in its use in vehicles.
The government appears to have divergent
views on the fallout of high oil prices on the country's economic
growth. The Planning Commission has opted for a cautious view
and has warned that high oil price may have an impact on the
growth rate, even as the finance ministry maintains that rising
oil prices are unlikely to impact GDP.
"In a high oil price scenario, our growth
rate could be lowered by between 0.5 and 1.0 percentage points
below our normal potential," the Planning Commission
said in the draft approach paper of the 11th Five-Year Plan.
According to its assessment, oil prices are expected to remain
high and it will "exert contractionary pressure on the
economy, both directly and also through their impact on world
The finance ministry, however, has a different
view on the issue of fuel price hike and its impact on GDP
growth. Commenting on the country's revised annual estimates
on May 31, 2006, finance minister P Chidambaram said if oil
prices rose and if it was reflected in domestic prices, it
would have an impact on inflation. "Rise in oil prices
worldwide need not affect growth rate," he had said.
The revised annual estimate records 8.4%
GDP growth in 2005-06, surpassing the advance estimate of
8.1%. The growth has been significantly high compared to previous
year's figure of 7.5%.
While the finance ministry's views may hold
some ground given the demand elasticity of the product, countries
across the world are now coming around to the view that it
would impact GDP if global prices continue to be northward
The Planning Commission has, however, suggested
that the adverse impact of high oil prices on GDP growth can
be substantially moderated in the medium term by "appropriate
oil pricing policies, increased exports and appropriate fiscal
and monetary policies.
The approach paper suggests a long-term solution:
"The only viable policy to deal with high international
oil prices is to rationalise the tax burden on oil products
over time, remove fat which may exist in existing pricing
mechanisms which give the oil companies as excessive margin,
realise efficiency gains through competition at the refinery
gate and retail prices of petroleum products, and pass on
the rest of the international oil price increase to consumers,
while compensating targeted groups below the poverty line
as much as possible."
It has suggested that the government reconsider
the current method of determining prices for petroleum products
on the basis of import parity. "India is deficient in
crude oil but has developed surplus capacity in products.
Product price entitlement should, therefore, be based on export
parity pricing, which would be much lower than import parity,"
It has suggested to further reduce the duty
on petroleum produced by 5% to equate it with the duty on
crude. The 10% duty on products has recently been reduced
Stating that the increase in oil prices is
now expected to persist for some years, the paper said, "Although
prices of some petroleum products have been raised, the increase
still leaves a large uncovered gap." It has said that
the gap was partly being borne by the oil companies and partly
by the issue of bonds, which was equivalent to a government
subsidy. According to the draft approach paper, consumption
of petroleum products is likely to rise from 112 mt in 2005-06
to about 135 MT by the end of the 11th Plan, with net crude
oil imports reaching 110 Mt.
The Republic of India covers an area of some
3M sq km, making it the seventh largest country in the World.
Topographically, it is divided into a mountainous north, flanking
the Himalayan Range; the North Indian Plain, drained by the
Indus and Ganges Rivers; and the Deccan Plateau in the south,
which itself is flanked by the Western and East Ghat mountain
ranges, locally rising to around 3000m. Its climate is characterised
by three seasons: hot and wet from June to September; cool
and dry from October to February; and hot and dry from February
to June. But they are subject to marked annual variations,
spelling famine if the rains are late or weak, or flooding
in the opposite case. Much of the country is forested.
India (which included Pakistan prior to 1948)
has had a very long history, with the earliest records of
the Indus Civilisation going back more than 4000 years. That
was followed by the so-called Aryans, so admired by the Nazis,
who spread out from Central Asia to populate India as well
as Europe and intervening territories. Later, came Greek,
Roman, Arab and Turkish influences, and the growth of sundry
kingdoms, whose fortunes waxed and waned with the passage
of history. The people enjoyed an advanced culture embracing
many religions, principally Buddhism, which itself evolved
and split into diverse sects. Arab invasions and raids brought
the Muslim faith particularly to northern and western India
from the 12th Century onwards. The great Mughal Empire, lasting
for 200 years from 1526, effectively unified the sub-continent,
bringing an age of affluence and stability, as well as the
growth of trade with Europe, but it finally disintegrated
with conflicts between the nobility. The Portuguese navigator
Vasco da Gama had landed in 1498, paving the way for the establishment
of Goa as a Portuguese territory. The Dutch and French also
had a presence, but it was the British who finally made India
the jewel of their Empire. British influence started with
the East India Company that secured a trade monopoly in 1600,
and later demanded military and political support, becoming
an early kleptocracy as its functionaries amassed great wealth.
Tea plantations were established in the early 19th Century,
especially in the hill country of Assam, becoming a major
source of export earnings, as Europeans developed a taste
for it. British control was achieved gradually by a series
of alliances with the separate principalities making up the
country as well as through military engagements (one notable
General was named Sir Colin Campbell). The pinnacle of British
power came in the latter part of the 19th Century, and seems
to have enjoyed wide support from the people at large. Indian
regiments under British officers were raised, playing heroic
parts in the both World Wars. But stirrings of independence
developed in the early 20th Century, receiving some sympathy
in the mother country. The movement was led by Mahatma Gandhi
(1869-1948), who preached tolerance and non-violence. The
eclipse of the British Empire in the Second World War and
the ensuing socialist regime paved the way for Indian independence,
which was granted in 1947. It saw the partition of the country
into mainly Hindu and Muslim territories, the latter becoming
Pakistan, but it cost the lives of more than a million people
in various factional massacres. The new government, led by
Mr. Nehru, faced a continuation of communal conflict resulting
from partition and economic dislocation, to be soon followed
by the outbreak of an undeclared war with Pakistan over the
status of Kashmir, with its predominantly Muslim population,
which found itself on the other side of the dividing line.
India has not proved to be an easy place
to govern. Nehru's daughter, Indira Gandhi, came to power
after the death of her father. She proved to have an iron
will and an autocratic style, taking a non-aligned position
between the opposing powers in the Cold War, but was shot
dead in 1984 by two Sikh guards following a dispute with the
Sikh minority. She was succeeded by her son Rajiv, who was
in turn assassinated by a Tamil suicide bomber in 1991. His
Italian-born widow, Sonja (Sonia in India), might have come
to power recently with adequate political support, but perhaps
wisely stepped aside for the present incumbent, Manmohan Singh,
a gentle economist, educated at both Oxford and Cambridge.
In geological terms, India forms a segment
of the ancient southern continent of Gondwanaland that moved
northwards to collide with the Eurasian Plate some 50 million
years ago. In regional terms, this continent was deficient
in oil prospects, primarily because the conditions for oil
generation were restricted in high southern latitudes. It
is not surprising, therefore, that India is not rich oil territory,
although some marginal basins have delivered modest results.
The largest of these, with some 2.5 Gb, is the Bombay High,
off the west coast, which was found in 1974. The industry
is dominated by the State Company, ONGC, although some small
foreign private firms are also active. About 1300 wildcats
have been drilled, finding 10.5 GB of oil, of which 6 GB have
been produced. Exploration drilling peaked in 1991 when 88
wildcats were drilled, but is now down to about half that
number. A fairly high level of activity is likely to continue,
as the country is in desperate need of oil, but is unlikely
to be rewarded by more than perhaps another billion barrels,
mainly in small fields. Some interest is now being devoted
to deepwater possibilities, but the outcome is far from assured.
Production stands at 685 kb/d, which is likely
to be the peak, the midpoint of depletion having been passed
in 2002. At the current Depletion Rate of 4.4%, production
is set to fall to about 500 kb/d by 2010 and 330 kb/s by 2020.
Consumption stands at 2.4 Mb/d, giving the country a large
and growing need of imports, which will be increasingly difficult
to obtain. This readily explains why State-backed Indian companies
are taking up rights overseas in for example the Sudan, Libya,
Iran and Venezuela (see also Items 511 and 513).
The country's gas potential is also limited.
Only 42 Tcf have been discovered, of which 13 Tcf have been
produced. Production stands at about 2 Tcf/a. The country
has substantial coal deposits, although some have a high arsenic
content which has caused serious environmental damage in the
past. India has recently enjoyed something of an economic
boom, based in part on services run through the Internet.
Western manufacturers have also set up to benefit from cheap
labour. It is however likely to be a short-lived chapter of
relative prosperity, as imported energy becomes at first expensive
and then in short supply. An economic downturn will likely
impinge on an already fragile political structure, rendered
even more difficult by the country's huge population of more
than a billion. How India will fare during the Second Half
of the Oil Age is hard to predict, but disintegration is a
possible outcome, as people revert to their old communal and
religious identities, a process which will probably be accompanied
by much bloodshed and suffering. Clearly, the present population
far exceeds the carrying capacity of the land, but the Indian
is blessed by a smiling, benign spirituality that helps.
Continued on the Next Page - Oil Crisis
28 July 2006