Oil giants ponder challenge of spiralling demand

Talk of an energy challenge may seem odd from an oil industry awash with record profits but Royal Dutch Shell this week showed how hard it is working to keep the good times going.

With a finite supply of oil in the world and many of the major fields having already been tapped, Shell and its rivals are now having to find new ways to meet spiralling demand.

Shell has stated that the world’s energy needs could increase by half within 25 years – presenting a significant challenge for a company that only managed to replace up to 70% of the oil that it pumped out of the ground last year and 25% before that.

In a strategy update this week, Shell conceded that it was now unlikely to hit its target of fully replacing its reserves during the period from 2004 to 2008.

This was of no surprise to analysts who had dismissed the idea of Shell booking at least 130% of new reserves over three years considering its past problems.

But the reasons given by Shell were more of a shock – that it was preparing to examine “unconventional” sources of energy and it did not want to rush into decisions just to meet its goal.

These sources included oil sands which have previously been viewed by analysts as uneconomic because extraction is tough and they produce heavy oil that is difficult to refine.

Record oil prices above $75 a barrel have led to a rethink on production as companies increasingly believe that they can make adequate returns.

At its annual meeting last month, BP said the advent of sustained high oil prices had also made it look at the shape of its business “through a different lens”.

BP chairman Peter Sutherland said: “Our core strategy remains unchanged but it has to be refined.

“Access to reserves, the impact of rapid economic growth in China and India, alternative forms of energy production and developments in technology are all issues which are being actively considered.

“We are a business with a long stride. We must extend our strategic view to a distant horizon.”

BP launched its Alternative Energy business in 2005 and has been using the advertising slogan Beyond Petroleum to highlight its commitment to other fuel sources for many years.

It highlighted one project that should go ahead this year and should produce “carbon-free” electricity at Peterhead in Aberdeenshire.

In a complex process, BP plans to separate carbon from hydrogen and reinject it into the Miller field in the North Sea.

Describing the technology as having “huge commercial potential for the future”, BP boss Lord Browne said it could improve the rate of recovery of oil while taking the hydrogen to an onshore power station to generate clean electricity.

Shell, which has invested more than $1bn (€788.3m) in alternative energy, said its vision beyond 2009 was to tap the “great potential” of gases that can be converted to liquids as well as oil sands.

Its comments came after its liquefied natural gas (LNG) unit enjoyed record sales volumes between January and March and profits lifted by 61% to $765m (€603m).

Chief executive Jeroen van der Veer said: “These ‘unconventionals’, and Shell’s technology, should help us….sustain long-term production growth.”

While experts do not believe that conventional oil will run out any time soon and Shell is planning to open up some 20 billion barrels of oil reserves by the end of the decade, the oil and gas industry is in a tight corner.

Wind power, solar power and biofuels – fuels derived from plant crops such as oil seed and straw – offer other options to oil but cannot completely bridge the gap. This is particularly evident in the transport sector, which is energy intensive and has few substitutes to petrol.

But tapping alternatives to oil is likely to spark criticism from environmentalists who feel that the world should be weaning itself off its reliance on fossil fuels rather than finding new ways to feed its habit.

Oil sands could prove a flash point as they are largely located in Canada, where more than 170 billion barrels of the tar-like substance of bitumen are estimated to be held by deposits in the province of Alberta.