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Wednesday, December 22, 2004

Contingency Planning 101: Preparing for an world oil shortage

This posting at Geopolitcal Review concerning the most recent Osama bin Laden tape got me thinking. What if Osama bin Laden were to have his latest wish granted and terrorists were able to damage the Saudi oil fields and/or transportation system. Suppose it was damaged so severly that oil supplies to the world were effectively curtailed? What then? Geopolitical Review cites this article from the Institute for the Analysis of Global Security (while the IAGS report is generally pretty good, I find some of it a little overly dramatic).

As to how hard it would be to damage the Saudi fields? In my view, pretty damn hard. You can blow up well heads and pipelines, but they are relatively "easy" to fix. Just see how fast the Kuwaiti fields got brought back on line after Desert Storm. Refineries are harder to fix, but there are more of them (even if there aren't enough) and so there is a certain redundancy in the system. But for the purposes of this discussion, let's suppose that old OBL can get his supporters to act so effectively that they shut down the Saudi oil supply system.

First, recognize that nothing will happen immediately except for an increase in the price of crude oil and refined products. A certain amount of crude oil is always being moved by ship in what amounts to a virtual pipeline of oil. At any given moment there are several days worth of crude oil somewhere at sea.

Second, Saudi Arabia is the big dog supplier, but there are lots of other suppliers of crude oil. Canada, Venezuela, Indonesia, Nigeria, Kuwait, Iraq, Iran, Mexico and the U.S. are all players. Unless OBLites shut them all down there will be oil. More expensive oil, but oil.

Third, if the Saudi supply is cut, oil prices rise and the higher the price, the more sources of new crude open up. There is oil available now that is too expensive to go after at the current oil market price. In these locations, it costs more to extract a barrel than you can make by selling the oil at current pricing. However, at some price level, it becomes profitable to go after this oil. For example, in the 1970's the US saw several highly expensive 'shale oil" projects to extract the oil from oil bearing shale rock. These were generally abandoned when the price of imported crude dropped below the cost of shale oil production. Recent price increases in oil is driving some companies to revisit oil shale.
Companies that had shelved their shale oil technologies are dusting them off now, hoping to find a market.

In an effort to reduce the surface footprint, Shell is abandoning the traditional process by which shale is mined, crushed and then heated in giant ovens called retorts to extract the oil.

The new, patented technique involves drilling holes and inserting heaters in target underground zones to slowly heat the shale layers.

Once the shale is sufficiently heated, a chemical reaction starts and releases the lighter hydrocarbons, which rise. The heavier hydrocarbons remain within the formation. The lighter hydrocarbons, almost a gasoline-type product, are subsequently pumped out of the ground through conventional means.

The advantage of this new process is that it eliminates the problem of waste disposal, said Shell's Terry O'Connor, who works on the Mahogany project. That's because the heavy hydrocarbons are left in their original form in the underground shale. Also, the process requires much less water.
Source San Diego Union Tribune. In the early 1980's, when I was working at a large oil company in Houston, there were lots of plans for offshore drilling in really deep water. The problem: such operations could be justified only at $80/barrel oil (1980 dollars). When the price of crude dropped to $12 or so, those projects (and the engineers who designed them) were abandoned with alacrity. Get the price of crude high enough, though...

Fourth, an oil shortage may impel more rapid adoption of alternative fuel sources, including natural gas, hydrogen, nuclear power. Coal, of which the U.S. has a lot, can be "gassified".
Gasification, in fact, may be one of the best ways to produce clean-burning hydrogen for tomorrow's automobiles and power-generating fuel cells. Hydrogen and other coal gases can also be used to fuel power-generating turbines or as the chemical "building blocks" for a wide range of commercial products.
Coal is already powering about 50% of US electric production. For more information on coal see here.

An oil shortage should not be a surprise. Some have predicting it (regardless of OBL) for awhile.
Around 1995, several analysts began applying Hubbert's method to world oil production, and most of them estimate that the peak year for world oil will be between 2004 and 2008.
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Now back to the IAGS report. It says:
Over half of Saudi Arabia’s oil reserves are contained in just eight fields, among them the world's largest onshore oil field -- Ghawar, which alone accounts for about half of the country's total oil production capacity -- and Safaniya, the world's largest offshore oilfield. About two-thirds of Saudi Arabia's crude oil is processed in a single enormous facility called Abqaiq, 25 miles inland from the Gulf of Bahrain. On the Persian Gulf, Saudi Arabia has just two primary oil export terminals: Ras Tanura - the world's largest offshore oil loading facility, through which a tenth of global oil supply flows daily - and Ras al-Ju'aymah. On the Red Sea, a terminal called Yanbu is connected to Abqaiq via the 750-mile East–West pipeline. A terrorist attack on each one of these hubs of the Saudi oil complex or a simultaneous attack on few of them is not a fictional scenario. A single terrorist cell hijacking an airplane in Kuwait or Dubai and crashing it into Abqaiq or Ras Tanura, could turn the complex into an inferno. This could take up to 50% of Saudi oil off the market for at least six months and with it most of the world’s spare capacity, sending oil prices through the ceiling. "Such an attack would be more economically damaging than a dirty nuclear bomb set off in midtown Manhattan or across from the White House in Lafayette Square," wrote former CIA Middle East field officer Robert Baer. This "would be enough to bring the world's oil-addicted economies to their knees, America's along with them."
This thought is not shared by by the Saudis:
Abdallah Jum'ah, CEO of the normally secretive Saudi Aramco, recently went public with details of the state-owned oil company's security arrangements in an effort toreassure doubters. He said company facilities are protected by 5,000 security guards.
"There is nowhere in the world that oil facilities are protected as well as in Saudi Arabia and Saudi Aramco," he said.

Nail Al-Jubeir, spokesman for the Saudi embassy in Washington, says the kingdom has spent decades beefing up security. "Our oil can come out of the (Persian) Gulf, or... from the Red Sea. We've built in redundancies to make sure there's enough oil for the world and for our income for the future."


The report warns about "terrorism at sea" and the problem of certain "shipping choke points" through which shipping must travel to get crude oil/refined product to its end-users. The function of the US Navy is to protect the sea lanes vital to our nation's interests. If it requires escorting tankers through potentially troubled waters, that's what we have destroyers for. If necessary, voluntary convoying can be set up under Naval Control and Protection of Shipping (NCAPS) (formerly "Naval Control of Shipping Organization" or NCSORG). Even the WWII system of putting military "armed guards" on tankers could be reinstituted at an appropriate threat level. Interesting info on oil "choke points" here. Since the narrowest points in the Straits of Hormuz and the Strait of Malacca are 2 miles and 1.5 miles respectively, it would hard to block them completely with the sinking of a single shp.

The question is whether OBL and his al Qaeda group and affiliates could pull off an huge attack on multiple locations and do enough damage to stop the flow of oil for an extended period of time. I see no evidence of it in his current, reduced, circumstances.

Yes, in the worst case scenerio, an extradinarily well-coordinated attack, or series of attacks, on several facilities at once could ding the system. But I agree with the Saudis - there are enough "redundancies" in place that there is no need to spool completely up on the latest OBL tape. Sure, increase the security levels, but full General Quarters is not yet needed.

Meantime, get behind the effort to find alternative fuels.

Update: fixed NCAPS reference
Update2: Added link to DOE "choke point" info and comment.
Update3: Check here for the World Energy "Areas To Watch" as put out by the Department of Energy Energy Information Administration.
Update4: This site has some interesting information on the world's sources of oil and natural gas. It points out the U.S. gets 14.5% of its oil from Saudi Arabia.

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