Predicting the future of the oil and gas industry can be a dicey undertaking. There are simply too many interrelated variables to get a firm grip on the years ahead. We would do well to remember the caution economists were given some time ago, that, "If you can't forecast accurately, then forecast often." That admonition is certainly relevant today in these turbulent times, and consequently, we do see frequent forecasts.
We'll start by examining the single most important element of our business, or, for that matter, any business. It's also the reason I'm so optimistic about our future. That element is the demand for what we produce and sell.
As Figure 1B1 indicates, demand is expected to
rise through the year 2010 at a rate of about 2
percent per year for oil and 3 percent per year
for gas. 
This projection reflects the significant
benefits of hydrocarbon energy - namely, its
comparatively low cost, its ease of use and its
flexibility to enhance our lives in multiple
applications.
Perhaps most important, however, is the fact that oil and gas consumption is essential to sustaining economic growth in the industrialized world and is key to progress in nations working their way toward prosperity. This is true even with an outlook that assumes significant energy efficiency improvement. Without that improvement, the demand growth might be even greater. I should also note that much of this projected growth is expected to occur in the developing countries that still have very low levels of energy use per capita. The catch is that while demand increases, existing production declines. To put a number on it, we expect that by 2010 about half the daily volume needed to meet projected demand is not on production today - and that's the challenge facing producers.
This means industry may need to add some 80 million oil-equivalent barrels per day to production by 2010 to meet projected demand. The cost of doing so could reach $1 trillion, or about $100 billion a year. That's substantially more than industry is spending today.
A closer look at how our industry has met society's energy needs in the past will put some perspective on this (Figure 1B2). The growth in oil demand remained flat through the first five decades of the last century, then took off after World War II and continued to rise as it fuelled unprecedented economic growth. There was a temporary stall at the time of the second oil crisis, but demand resumed its growth by the mid-1980s.
We learn some very important information by comparing the 100-year demand curve with the volumes of oil discovered during the same period of time. The greatest exploration success occurred prior to the creation of OPEC, driven by large discoveries in the Middle East, Russia and on the North Slope of Alaska.
Obviously, technological advances in exploration have been matched by technology advances in development. Both have been key factors in raising production volumes. In recent decades, new discoveries in Africa and parts of the former Soviet Union, coupled with the ongoing increases from OPEC and vigorous exploration and production in other parts of the world, have led to increased supplies. Nonetheless, as Figure 1B2 indicates, resource additions have lagged behind demand since the early 1980s. However, the area under the discovery curve over the entire time period since 1900 is still over twice that under the demand curve.
We see a similar story in natural gas. Gas demand, which is rising at a slightly faster rate than oil, is currently being driven by rapid growth as a fuel for clean and efficient electric power generation.
As with oil, gas resource additions have exceeded demand for most of the last century. Much of this supply was discovered between roughly 1960 to about 1980. This was driven by major discoveries in Russia, the Middle East, the Netherlands and Indonesia.
The slight increase in resource additions in recent years reflects access to areas previously off-limits to industry, and technology advances that enable us to make drilling economically feasible in more challenging operating environments.
One other factor must be included in the supply and demand history of oil and gas over the last century, and that's price. In plotting discoveries against constant dollars, an interesting phenomenon appears: most of our discoveries were made in a much lower price environment than today, and cycles of discovery show little correlation with price over the long term. In recent times, however, the connection has grown closer.
What this tells us is that, contrary to some widely held beliefs, discovered volumes, over a long period of time, have not been closely related to price fluctuations. They have been driven more by the evolution of technology and geopolitical developments that improve access. This isn't to say that price doesn't matter, but technology and geopolitics will likely be the most important factors in our future as well.
These realities also define the business challenge we face as an industry. In the recent past, we have seen increasing demand for oil and gas, but generally decreasing discovery volumes, during a period of fluctuating but generally higher average prices. In spite of conventional wisdom and dire economic predictions, our industry has been successful in this environment. We have a business model that combines technology, political relationships, experienced personnel, environmental protection and economics (based on lowest possible unit cost) in the high-risk pursuit of a vital but finite commodity.
THE FUTURE ROLE OF PETROLEUM
Success in the future of oil and gas will require
the continued adaptation of a complex business
model to unforeseen challenges. One safe bet is
that demand for oil and gas will continue to
increase, as they are expected to remain the
leading energy sources for some time to come.
We also hope to see a continued increase in
exploration success and production as additional
areas are opened for exploration and as our
technologies evolve. Price is a question mark,
as usual. Figure 1B2 shows a range of thirdparty
price predictions from 2002 to 2020.
Depending upon whom you choose to believe, price could grow substantially or not at all. Take your pick. There is no way to predict it or control it. Whatever the case, we must push ahead to keep production costs low, while developing new technology that we can control. Another trend is much clearer than price. It's getting harder and harder to find oil and gas. Industry has made significant new discoveries in the last few years. But they are increasingly being made at greater depths on land, in deeper water at sea, and at more substantial distances from consuming markets.
Maintaining this record of exploration success will require the development of new and better technology. A key example, and one of today's more exciting prospects, is technology that directly detects and distinguishes the presence of hydrocarbons.
MAJOR CHALLENGES
Let's begin to wrap this up with a summary of the major challenge facing the industry. That challenge is to ensure that both new and discovered resources can be produced in an economically and environmentally sound manner to meet increasing demand and offset natural field decline. We've already shown this can be done, but the pressure to maintain that performance will only intensify because the absolute requirements are higher.
Environmental fears have already led to restrictions to explore in places such as Alaska and other parts of the world. Concerns over potential climate change have led to demands for greater control of energy use and could well impede our ability to produce adequate amounts of energy.
Further, new supplies are located at increasing distances from consuming markets. That's especially true for gas. Finding economic ways to solve this problem is part of the challenge - and an area of great competition within our industry, which, of course, the public benefits from. So how do we meet this challenge?
We will increasingly rely on technological advances. I've always found it noteworthy - and disappointing - that ours is seen as an old economy, low-tech industry. Everyone in the industry knows better. We are one of the highest- tech industries in the world. My company and others maintain vigorous programs of research and development to expand the capabilities and lower the costs of our operations.
Another major element in our success will be making the most of corporate resources to lower costs and increase operational efficiency. Most recently, this has taken the form of mergers. Exxon and Mobil did not merge to become bigger. We merged to become better. We wanted a broader portfolio of exploration and production prospects, optimization of our downstream assets, synergies in our research and increased competitiveness through reduced costs. The importance of reducing cost will remain.
In recent times, we have seen a trend of opening or re-opening large areas for international exploration and production. These openings have come about because we have developed partnerships with governments so that energy development can provide mutual benefits.
In addition, we have usually been able to work out reasonable tax and fiscal regimes that recognize the long lead times and risks involved in what we do. Maintaining these partnerships will be key to our success in the future as it has been in the past.
Among other factors that could affect energy supplies is political instability in key energyproducing regions. We have already seen this following the historic changes in the former Soviet Union. And we all recognize the potential fragility of supplies from the conflict-torn Middle East.
In closing, let me say that I believe industry has the resources to meet future global energy demand for some considerable time. I base this in part on my belief that technological advances will continue in exploration, development and production, just as they have in the past. This is the one major component in our success equation that we can control, and we must be relentless in its pursuit.
Such advances will be critical to meeting energy demand after 2010. I think it is well within the realm of possibility that many of our future discoveries will come not just from new frontier areas, but also from proven areas, as evolving technology improves our ability to virtually "see" and distinguish the oil and gas before we drill.
REASONS FOR OPTIMISM
I believe we can be optimistic as well about maintaining constructive relationships among producing countries, consuming nations and energy companies. Periodic disagreements may arise, but one very positive factor is that all involved have an interest in ensuring the adequate production of energy. This cooperation has been tested and proven throughout our history.
To be sure, this factor is not as controllable as technology, but we have established an excellent record, thanks to the mutual benefits energy development creates and the fact that we make good things happen in developing nations. In other words, in my view, none of the potential challenges we face is likely to become so serious as to threaten world supplies over an extended period. My confidence in this opinion is based largely on the success we in the industry have had, over many decades, in rising to the occasion and finding a way to solve problems.
We have continued to establish new arrangements with governments, construct new organizational structures and develop new technologies to meet the challenges we have periodically faced. Responding to change has been and will continue to be the great strength of our industry and the source of excellent opportunities for our people, who make it all happen.
COLIN CAMPBELL COMMENTS:
This paper confirms that the discovery of oil peaked in the mid 1960s, followed shortly thereafter
by gas. It is remarkable to find a director of a major oil company revealing the true situation with
such clarity while in office. Others in his position have preferred to wait for the safety of retirement
to do so. He deserves a medal. It is also noteworthy that his past discovery line is an exact replica,
down to the smallest detail, of a graph I published in Population & Environment (vol.24 no. 2.,
2002). The use by Exxon-Mobil of this plot is particularly important because it demonstrates an
acceptance of the need to backdate reserve revisions to the discovery of the fields to obtain a valid
discovery trend. This endorsement by the world's largest oil company is an important development.
This is one of almost 50
chapters and articles in the 336-page large format book, Before the Wells
Run Dry. Copies of the book are available for £9.95 from Green Books. Continue to Section C of Part One: The role of coal in acheiving energy sustainability
