Peak oil returns: the “unconventional oil” bubble may well pop in Arctic waters

Last week, I attended a Washington event on Arctic energy; I was hoping for some insights on the challenges ahead, namely greenhouse gas emissions, diplomatic tensions, and indigenous rights. Since Arctic exploitation hasn’t yet enjoyed a “Keystone XL” level of public attention, it seemed healthy to get some first-hand information from Arctic experts, as major oil players like Shell are getting closer to full-scale commercial exploitation. After all, a generation’s treasure chest often turns out to be another generation’s ticking bomb.

Instead, I ended up listening to lengthy presentations by analysts, consultants, fellows and executives talking about climate change “removing constraints”, “effective diplomatic work” being made, and “supply chain complexity” hampering the process, for a solid two hours. There’s a saying in the marketing industry that ‘eco-friendly’ should be the third button to push when advertising a product, after, say, affordability or quality. In this discussion, ‘eco-friendly’ was clearly the fourth or fifth button, if it was mentioned at all. One should have expected this, however, as the event invitation used no apparent irony when announcing in the same sentence that Arctic experts would examine “what nations can do to protect the environment andincrease production” (my emphasis).

"Heart of Whiteness”: an oil rig installed among thinner-than-ever Arctic ice (source: Guardian)

Still, it should at least grab some attention that Arctic energy exploration will only be made possible by a much faster warming than expected in the region – and that’s saying nothing about the extraordinary Greenland ice cap melting that took scientists by surprise last week. The Arctic region contains about 13 percent of the world’s oil reserves and 30 percent of its natural gas reserves. In terms of today’s emissions, it is already enough to start worrying about the planet’s climate balance and the health of its ice caps; but another point of concern is that the Arctic ice melts faster if it is drilled, shattered, torn apart – or in brief, exploited. Granted, icebreakers are not having a significant impact on the status of ice caps today, but as their numbers are expected to skyrocket in the next few years, the ‘black gold rush’ could endanger the Arctic’s capacity to act as “the Earth’s refrigerator” – its bright, white surface reflects some of the sun’s incoming radiation, while the dark waters around it tend to absorb and trap it, thus fueling future global warming. Disrupting the ice/water balance through resource exploitation can lead to a dangerous feedback known as the “albedo effect”, as ice caps represent one of the planet’s main cooling mechanisms.

It took the panelists more than two hours to put Arctic energy exploitation in the context of climate change and diminishing resources, and it was only in passing. One expert asserted that “the energy transition story was more a hundred years story than a thirty years story”, and left it at that. From there, it was easy to wonder: what, if not spectacular climate change occurring right before our eyes, could move the industry towards a transition to renewable energy rather than a scramble for every last scrap of fossil fuels? In a dramatic op-ed published recently, British writer and climate advocate Georges Monbiot said: probably nothing – and certainly not the global and inexorable decline of oil production, a.k.a. “peak oil”. According to him, “the unlikely coalition of geologists, oil drillers, bankers, military strategists and environmentalists” predicting imminent peak oil was wrong. A boom in unconventional fossil fuels – see our analysis of carbon emissions consequences here – was indeed made possible by persistently high oil prices, creating an opportunity for previously unprofitable extraction of tight oil, shale oil, continuous oil, deep offshore oil, and of course, Arctic oil. Concludes Monbiot: “there’s enough to fry us all.”

Don’t bury peak oil too soon, though – Monbiot himself has already been quite compellingly rebutted here and there. The International Energy Agency (IEA) said in 2010 that production of conventional crude oil had peaked in 2006. Moreover, unconventional sources have a typically low Energy Returned on Energy Investment (EROEI) – it takes a barrel of energy to produce four barrels of North Dakota shale oil, for example, and you can expect future Arctic extraction numbers to be even worse. In the golden days of cheap, abundant oil, the EROEI was about twenty-five times as large; scholars from the University of New York estimated that a “complex society” like ours must function on a minimum 6-to-1 EROEI ratio. Exploiters of unconventional oil must count on a triple-digit price for crude oil, face delays and hazards (Arctic exploitation being the most extreme case in point), and deal with fast-falling yield rates. They might be able to extract enough to endanger our climate future, but they will not be able to durably keep up with an ever-increasing demand. In that regard, the confidence displayed by industry executives might just be a strategy to deter future ‘untapped’ major oil players – Russia, Iran, Venezuela, and others – from making prospective companies pay top dollar for future exploitations.

Whether we squeeze every last drop of oil out, or leave some in the ground, will be crucial for our planet’s climate balance (source: peak-oil-technology.com)

Granted, peak oil has been somewhat delayed by a handy twist in “proved reserves” accounting (now understood as the volume of total extractable resources, and no longer the sole reserves in production), and a scarcity-investment-production dynamic, but most experts (among them many retired industry executives) still believe the peak of conventional and unconventional production alike will happen, at the latest, by the end of this decade. If anything, the current boom on unconventional fuels, and in particular the frenetic push for new exploitation, can be interpreted as a way to make up for the intrinsically low returns on investment. In the end, striving to keep up with the investors’ expectations might just accelerate the ultimate decline in production.

Even from an environmental perspective, however, this is not necessarily good news. Sudden and unforeseen “peak oil” would probably mean a coal and natural gas rush, not to mention a prolonged economic collapse that would likely dry up investment in renewable energy and energy efficiency efforts. Short-sightedness could end up doing even more harm to the world’s climate than greed. Not so long ago, a handful of financial institutions led the global economy into near-collapse by failing to address obvious flaws in their “unconventional” activities, and thus setting the stage for a devastating bubble. I have very few reasons to believe that mankind is currently acting more wisely with its fossil fuels reserves, and the Arctic event provided me with no evidence that convinced me otherwise. I was hoping for a comprehensive outlook of the region’s energy situation; instead, and perhaps more importantly, I came away with a clearer vision of “business as usual” than I ever thought I would get.

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