Construction Clients Group The Impact of Oil Supply Constraints on - - PowerPoint PPT Presentation

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Construction Clients Group

The Impact of Oil Supply Constraints on Capital Investment Strategy

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• False Alarm !!
• Oil below US$ 70
• Problem Solved
• Save the SUV

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If Only That Was So ……..

Recent Events Demonstrate the System Dynamics

• Supply & Demand Now Finely Balanced
• Rising Demand Drove Prices Through the Roof
• High Fuel Prices Destroyed Demand – after a while
• Falling Demand Caused Rapid Fall in Prices
• Volatility Will Continue to Keep the Balance
• High Fuel Prices Made the Collapse Worse ??
• All Previous Price Spikes Linked to Recessions

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Figure 1 - Moving 12-Month Total on ALL Roads

2,650 2,700 2,750 2,800 2,850 2,900 2,950 3,000 3,050 3,100 3,150

2000 2001 2002 2003 2004 2005 2006 2007 2008

What Happened to the Traffic ?

105 110 115 120 125 130 135 140 145 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08

Auckland Traffic Monthly Fuel Sales Million litres/mth

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If Only That Was So ……..

All we Need is Recession to Keep Prices Down ??

• Supply may be in Still Rising - Very Slowly
• Or in the Plateau Stage Now
• But After “Peak” Oil Supply will Start Falling
• Slowly at first then maybe Faster
• The Only Way to Exit Recession & Settle Volatility ??
• Proactively Lower Demand – Ahead of Falling Supply

This is Oil Depletion – this is the Energy Descent

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What is Oil Depletion ?

WE ARE NOT RUNNING OUT OF OIL

• But there will be Max Rate of

Production – Peak Oil

• Now 86 m bbl/day = 31.4 bn bbl/yr
• After Peak Oil rate of production will

start to decline

• But demand continues to grow
• Example: Chindia phenomenon
• So, A Growing Supply/ Demand Gap
• Unmet demand = High Prices

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Peak Oil Rules : It’s a Game of Two Halves

• 1. Production rate increases

with added wells to max geological yield

• 2. Max production rate @ half

way thru & can never return

• 3. The first half of the oil

resource is higher quality & easier to extract

• 4. After Peak
• production will decline
• quality will decline
• Risk profile will decline

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• PollyAnnas

– Petro Prozac – Techno Mirage – Market Mystic – Climate Change ? Will Reduce CO2

• Life Boats

– Internal Locus of Control – Catabolic Collapse – Managed Depletion – Energy Descenders – Transition Townies

• Denialists

– Cornucopeans – Abiotic Oil – Conspiracy – Not yet Proven – Drill, Baby Drill

• “Doomers” –

– External Locus of Control – Catastrophic Collapse – End of Times – Armageddon – Head for the Hills

Players in the Theatre of Peak Debate

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Forecasts of Supply, Demand & World GDP

International Energy Agency (IEA)

• Set up by OECD countries (includes NZ) in 1970s
• Agent for oil management
• Annual, semi-annual and monthly reports
• Focus on Supply and Demand related to world GDP
• Many others, including

– Energy Information Administration EIA – US Dept of Energy – Oil Drum – ASPO

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Medium Term Supply & Demand Growth (IEA)

• 0.25

0.25 0.75 1.25 1.75 2.25 2.75

2007 2008 2009 2010 2011 2012 2013

mbbl/d

OPEC Crude OPEC Gas Liquid Biofuels Non- OPEC Crude Demand @ 4.5% GDP High Demand @ 5.9% GDP Low Demand

1.45 mb/d

Supply / Demand Shortfall = $$ Price Gains New Projects Delayed All Very Complex

• High Cost
• High Risk
• New Technology
• Credit Squeeze ??

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Scenario History

• 5

10 15 20 25 30 35 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 Volum e (Gbbl/yr) $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 Price ($2007/bbl) Production Capacity Actual Production Demand Sold Cleared Price

Draft ARC Study of Future Oil Prices (July 2008)

(McCormack Rankin) Short Term Price Dip (+ US$80) Due to new Projects Long Term Demand Drop Due to Falling Supply, High Price & Falling GDP Long Term Sustained Price Rise

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Conventional Oil Peak 2006 Total Oils Peak 2010

WORLD What Happens After the Peak ? (Excludes Biofuels)

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What Happens After the Production Peak ?

SOME SCENARIOS TO EVALUATE “WHAT IF ?”

• Portland, Oregon (2007) approx 2.5% pa (50% by ’32)
• Average long term World Decline 4%
• Scenario for War or Disaster not considered
• 1.

Risk & Probability Scenario (+ IEA Reduction stages) 2. Scenario “Progressive 2+4+8” 3. Electric Vehicle Replacement Scenario

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Portland Plan to reduce by 50% In 25 Years

Final report 7th March 2007 Many Other Cities incl London, Hamilton, Ontario, Ventura, Calif have similar initiatives

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Risk & Probability Approach to Energy Descent

Meta Forecasts & IEA Fuel Reduction targets (Dantas, Krumdieck) Risk Appetite with p = 50% Allow 10 years preparation

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What Happens After the Production Peak ?

• Scenario “Progressive 2+4+8” – Assumes

– Supply/Demand Squeeze from 2012 (IEA date) – Initially 2% only decline (new fields still added) – 2007 IEA 4% net annual decline – Then Avge 8% (>10% OECD & some national limit) – Result is 70% decline by 2032 (Graph Shows %age daily Oil Production rate remaining)

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Why the Steep Production Decline Later ?

• Global net decline 5% pa for 2008-2013
• Need > 3.5mb/d new start-ups every year to stand still
• OECD facing mature field decline >10% pa

International Energy Agency MTOMR Sept 2008

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012 2017 2022 2027 2032 2037

Energy Descent Scenarios

2%, 4%, 8% Progression 4 % Regular Descent 2.5 % - Portland Energy Plan

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MED: - Energy Data file June 2008

The Economic Effects of Energy Descent in NZ

Economy & Energy Growth Closely Related

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Energy Use & GDP Are Tightly Coupled

governments try to “uncouple” GDP & Energy (In NZ 50% of energy is from Oil in 2007) 1990 2027 15 years 2012

0% 50%

14% DECOUPLED

Energy demand (Consumer) GDP 20%

15 years 23% Energy Supply Drop

If NZ Can’t Decouple = 9% GDP Decline

2005

(MED Energy data 2006)

4%Oil = 1.5% avge Energy Decline

0.6% GDP Decline/yr = Sustained Recession

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#2. Energy Efficiency Slides Economy Slides #1. Improve Energy Efficiency Sustain Economy

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500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036

ICEs EVs

The Electric Vehicle Scenario

BEV replacement can be achieved But:

• New Vehicles vs Second Hand Imports
• Cost 2 - 3 times
• Break even with ICE not before $4 / litre
• Probably Recession Conditions

Lower /cap Ownership

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1 6 11 16 21 26

Planning to Decouple in Progressive Energy Descent Scenario

2%, 4%, 8% Progression 2.5 % - Portland Energy Plan

Roll-Over Transition Orderly Descent Rapid Production Decline

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How to Decouple ? Reverse Transport & Land Use Hierarchies Link Land Use & Transport Planning

Short to Medium term 2016 - 2022

• No More Subsidy for Personal Car infrastructure
• Stop & Withdraw Free Parking
• Invest in PT – include operations, e.g. frequency
• Convert PT to Electric – Rail – Trolley buses - Trams
• Safety, Amenity for Vulnerable Modes

– Walking – Cycles - Motorcycles

• Freight Management Strategy with Business
• Focus on Small town Centres – Counter “Big Box”
• Energy Sensitivity in Planning – Shorter Travel
• More Mixed Use & TOD with Mixed Use
• Defend MUL & Avoid Distant Dormitory Cities

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A Vision of Transport in Rapid Descent Period

Medium to Long Term - Progressive 2022 - 2038

• Liquid Fuels - Expensive, Rationed
• Private Cars - Electric, HOV, Workshop, PT
• Electric PT Backbone & Feeders - Electric Rail,

Trolley Buses & Trams, CNG Buses

• Electric Rail to North Shore – with Freight Capacity
• Convert Arterial lanes for Trams & Trolleys
• Convert Motorway Lanes to Trolley Bus & Light Rail
• Freight using Trolley network & CNG distribution
• Road Maintenance Cost Crisis: - Abandon No Exits /

Minor Roads, Preserve Footpaths for Cycles, Carts

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0% 20% 40% 60% 80% 100% 2015 2020 2025 2030 2035 2040

What About That Rapid Descent Scenario ?

(Portland Chose not to Plan for this)

USA / Canada & China Bilaterals EU & India Bilaterals

14 m bbl/day production extracted each time

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• Oil is a Limited Resource – It Will Run Out
• Oil won’t Suddenly End – It Will Gradually Deplete
• The Peak Moment is Uncertain, but not Far Away
• Oil = Transport = Economic Activity
• Energy and Economy Are Closely Linked
• Energy Descent Could Mean Economic Descent
• Risks of “Inaction” Higher than “Action” to Decouple
• Transport Infrastructure Must Change to Decouple
• City Structure Must Change to Decouple
• How Does Your Client’s Business Fit the Challenge ?

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Thank You !

• Any Questions ??

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ARC Research on Fuel Price

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World Oil Production (EIA)

70 72 74 76 78 80 82 84 86

1997 Average 1999 Average 2001 Average 2003 Average 2005 Average 2007 Average

M illio n B a rre ls /d a y

$17 $34 $24 $28 $22 $67 $28 $33 $75 $90 $55

Approx Oil Price (2007$) Sept 11 Effects Flat Production In spite of Price Rising Steeply

$120

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Expect Highly Volatile Pricing

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Why Little Travel Behaviour Change ?

Household Expenditure

Housing Group 24% Food Group 16% Transportati

• n Group

16% Household Operation Group 13% Apparel Group 3% Other Goods Group 11% Other Services Group 17%

Transportation group

PT within NZ, 0.8% Overseas travel, 3.5% Vehicles Purchase 4.9% Car

• peration,

3.0% Fuel, 4.2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

2003/2004 NZ Household Data Household Stats 2007 Category Changes Makes Data Hard to Compare Except Transport ………….. Transport declines to 14% Fuels up to 4.4% Overseas Travel Down to 1.2%

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Summary of Forecasts & Resource Estimates

Low Estimate 2 – 2.4 t bbl Peak 2006 – 2010 Median Estimate 3 – 3.6 t bbl Peak 2010 - 2020 High Estimate 4 t bbl Peak 2030 - 2050 All these dates are relevant in the life of a City

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Robert L. Hirsch, Ph.D., Senior Energy Advisor, MISI, Clean Technology 2008 Conference, June 4, 2008

“Peaking Of World Oil Production: Impacts, Mitigation, & Risk Management” at SAIC for USA DoE, Feb 2005