International Colloquium: Changing World Order and Energy Cooperation


Energy Security: The "It Takes a Village" Approach

My former colleague Hillary Clinton famously wrote that it takes a village to raise a child. That piece of parenting advice is especially useful in discussing how to enhance energy security around the world. The go-it-alone approach of child rearing is strangely similar to the international geopolitics of oil: any country that tries to achieve energy security alone is setting itself up for an isolationist future where it will be more energy insecure than ever.

Having been freed of the shackles of diplomatic double-speak, I can be clear: energy independence is a meaningless concept. Energy security, however, is a completely attainable goal if consumers and producers around the world collaborate to tackle security of supply as well as security of demand issues.

Three months ago, on the back of the shale gas and oil boom, the United States officially became a net exporter of hydrocarbons. The "Shale Gale" as it has been called has undoubtedly provided the United States with a greater element of energy security in terms of physical quantities than it has had since the early 1970s. But it cannotsubstitute for a coherent policy of US engagement around the world. While the US's shale gas deposits are vast, natural gas cannot replace oil as the fuel of choice for transportation. Fossil fuels now account for 82% of transport fuels. By 2035, that share is expected to drop almost imperceptibly to 80%, albeit 80% of a pool that is about 50% larger than it is today. The demand for oil will increase by at least 20 million barrels a day during that period.

The world now consumes almost 90 million barrels of oil a day. The extra 20 million barrels a day that will be required in 2035 is the net production that will be needed after producers replace existing field declines. This means that the world must bring on stream another Saudi Arabia, Kuwait and the UAE, combined. At best, US shale oil production last year produced only about 2 million barrels of oil a day. That has barely made up for the lost Libyan production since the fall of the Qaddafi regime.

Even if capacity-constrained producers like Iraq, Iran, Libya, Venezuela and Nigeria sort out their political and security situations and reach targeted production, the net additions to the global oil markets will barely account for half of the required production increases by 2035.

Where will the rest come from?

There is no doubt that GCC producers – principally Saudi Arabia, Kuwait and the UAE – remain the principal sources of production growth for the world. These three countries collectively account for just under 20% of the world's oil production, but they enjoy double that share of the world's oil endowment. It will be these producers who will drive much of the oil supply growth in the coming decades.

Most of these countries' oil production for the last 70 years has been primary production – production of easy oil. As these fields begin to mature in the next few years, producers will face challenges of deploying technology to handle higher water production and lower underground pressure. These Enhanced Oil Recovery techniques will raise the volumes of recoverable reserves to much more than what has currently been produced.

Only 30 years ago, if a producer extracted 10-20% of the oil originally in place in a reservoir, he would claim success and declare that the recoverable reserves have been mostly produced. Now, as technology has advanced, we are seeing recovery factors increase to 70% in some fields.

This has allowed Kuwait for example to maintain remaining recoverable reserves of about 100 billion barrels by most estimates, despite that fact that we are producing about 1 billion barrels of oil a year. This means that by increasing the recovery factor by as little as 1% a year we can offset an entire year's worth of production.

In the GCC fields, we are still only accounting for 35-50% of the oil in place. By those very conservative numbers, we have 100 years' worth of production already accounted for. But by deploying new technologies to drill deeper and more cost-efficiently, we can vastly increase the remaining life of our existing fields.

No amount of political pivoting or pirouetting can escapethe irrepressible fact that oil is a global commodity whose price is set on the international markets. And these markets, as we all know, are influenced not only by fundamentals, but also by speculation that is largely driven by the financial engineering and geopolitics – specifically Middle Eastern politics.

So how have we as GCC producers confronted the energy security challenges?

In Kuwait, we have taken the "It Takes a Village"approach, only for us we use the global village.

Through forward-looking policies enacted in the early 1980s, we made massive investments in international upstream and downstream business to act as strategic complements to Kuwait's oil industry:

On the upstream side, KUFPEC produces oil and gas in 60 fields in 14 countries (including in my co-panelist's home country of Pakistan). Increasingly, its investments have been targeted at developing technology that can benefit Kuwaiti domestic production, especially heavy oil and enhanced recovery schemes.

On the downstream side, KPC has invested in over 5,000 service stations throughout Europe under the Q8 brand, but more significantly in 2 European refineries and a new grass-roots refinery in Vietnam that will run exclusively on Kuwait Export Crude. These strategic downstream investments provide us with a secure outlet for Kuwaiti hydrocarbons.

It is through this strategic collaboration between oil producers and consumers that we can secure greater energy security for the world. Just as isolationism has been proven disastrous in international politics, so is the fool's errand of energy independence. The global oil village must work together by sharing technology, reservoir access, and political stability to reach the common goal of energy security.

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