Time to face the truth – Time to change the game

Expert Opinion by Dr Louis Arnoux

Getting to this point has been a very arduous journey, much more than any of us would have ever anticipated and yet, in the current global recession, the implementation of the capability that we have built could not be more timely.

I write this briefing as a scientist, process engineer and businessperson who has worked steadily for forty years to contribute developing and marketing solutions to the major challenges my mentors, my peers and I had anticipated forty years ago. I endeavour to give you my most carefully considered opinion, to the best of my knowledge, on emerging data and analyses by a wide range of other researchers and business people on the present global financial, economic, energy and ecological emergency and how it relates to our business.

What you will read will appear extreme to many of you. In fact, many people not only did find the analyses I present here extreme but also rejected them outright some 37 years ago when the threat of such dire prospects was publicised for the first time in a coherent manner in the famous Club of Rome Report on “Limits to Growth”.  In 2009, however, with the benefit of hindsight and the accumulation of massive evidence, in my view no one can afford not to face up to the stark realities. The time for being in denial about the dire energy and ecological situation humankind has placed itself in is long gone.

Most of what you will read has hardly filtered through the main news media. Or when it has been reported it has been dealt with in a controversial manner. In my view this is so because the media makes money by stirring controversy, simply because controversy sells. However, I am fully confident that what I present will become the main news in the near future.

Over recent years, I have shared with you my increasing concerns, in particular at our Annual General Meetings and through newsletters. At such occasions I have presented a number of scenarios as to what could happen. In the course of 2008, however, things have changed. In my view and in the view of many of my peers, it is high time to face the tragic truth.  While the detailed nature, magnitude and immediacy of those troubles remain poorly understood, there can no longer be any doubt that humankind has placed itself in very deep troubles. To put it bluntly, what must now be regarded as certain is that unless it takes a drastic turn towards sustainable ways, humankind is on a fast track to extinction over a century or two and that it is in the process of taking down along with it some 95% of life on Earth.  

What in my view is also clear, based on my reading of a large amount of new scientific material and data published in recent months, is that the present financial crisis and recession are but the first salvo in the global economic collapse that many energy analysts expect to result from the present peaking of fossil fuels supplies, the consequential rapid decline in available net energy from fossil fuels and the dearth of sustainable alternatives.   In other words energy challenges have begun striking first, well ahead of rapid climate change and other ecological challenges, and the global recession is a harbinger of far worse to come – unless rapid action is taken concerning energy, transport and communications.  Many of my peers and I have reached the view that it is already too late to avoid an energy, ecological and economic catastrophe.  In other words, the catastrophe that many feared was going to happen at some stage, maybe some 30 to 50 years into the future, that catastrophe has already been triggered and we are in the midst of it. We can at best, alleviate and mitigate its consequences and work towards a rapid transition to sustainable ways.  

Energy is key.  All other resources can be substituted for with other resources. Energy is the only resource that cannot be replaced by anything else.  Without it we are all dead. Among all forms of energy resources oil is key because we are over 90% dependent on it for transport and a substantial proportion of other forms of energy use, and because without transport all other infrastructures including electricity supply and communications do falter and collapse.

The International Energy Agency (IEA) is known as a very conservative body. Late last year, after extensive review of oil fields, production capacity, demand and oil market data, it released its World Energy Outlook 2008, and publicised it through a number of slide presentations. In this briefing I present my views on the data presented by the IEA and on the comments and views presented by a number of prominent industry figures.

Figure 1 - Most Optimistic IEA Projections from World Energy Outlook 2008

In Figure 1 , I quote from a slide presentation by Nobuo Tanaka, Executive Director, IEA, 28 Nov. 2008.

Figure 1 shows clearly that production of oil peaked in the 2005-08 period at around 86 million barrels per day (M bbl/day), including all forms of oil, and that the IEA’s most optimistic scenario is for production from existing resources to drop down to 25 M bbl/day by 2030.

The IEA makes it clear that to keep meeting demand and offset this abrupt decline six times the current capacity of Saudi Arabia must be found and brought to production immediately.  The fine print of the report also makes it clear to those of us used to reading this sort of material that the projections in pale blue, green and yellow, re new crude capacity to be found and/or developed, non-conventional oil and natural gas liquids are simply wishful thinking.

In a talk they gave in December 2008, Dr Robert Hirsch and Matthew Simmons made the following analyses of the IEA report and of related data that they have access to. In my view their analyses are correct.  Dr Hirsch is a world known energy analyst. Simmons is Chairman of one of the largest global private investment banks specialised in the oil and energy sectors (Simmons & Company International Inc., Houston, Texas, USA). Given its strategic importance and timeliness, I quote extensively from that talk, a talk that was largely ignored by the main media.

At the Association for the Study of Peak Oil (ASPO) 2003 Conference, Simmons became world famous for breaking rank with other oil industry leaders and stating clearly, backed with a massive amount of data, that in his view “the world does not have a plan B”to address the then imminent decline in oil supplies. In the December 2008 talk, Simmons went much further and made it clear that supplies of conventional oil did peak in 2005 and that “the game is over”.

The IEA data that shows that crude oil supplies are currently declining at over 9% per year and that this is structural (i.e. not a speculative effect, and instead fundamentally due to the geology of oil fields, their state of depletion, and the sheer fact that the world has run out of new prospective reserves to replace the ones being depleted).

In their talk Simmons, basing his view on the best and most recent data available to him, stressed that to achieve the IEA figure of 25 M bbl/day by 2030 would require immediate investments in the order of US$100 trillion. This is an investment capacity that simply does not exist in the present global recession context.

The reason for such high investment requirements is that “over 98% of our oil and gas infrastructure from the well bore, to drilling rigs, to refineries to gathering systems, is all built out of steel and about 80-90% of it is beyond it’s original design life and it will literally rust away. So we will have to rebuild it all in the next five or seven years.”  This is what Simmons called the “war on rust.” 

He and Hirsch highlighted that the effect of the financial crisis, in particular the credit crunch, and of the recession and its depressing effect on oil demand and crude oil prices, is to massively destroy production capacity, with a high level of oilrig decommissioning and large numbers of staff reductions. Both Hirsch and Simmons were at pains to convey that the prospects of finding more oil are negligible.  Dr Hirsch pointed out that “people need to understand also that when you talk about multiple Saudi Arabias that are basically out there waiting to be discovered [in terms of large oil fields], they are saying inherently that the people in the oil industry are really stupid. They have missed these huge oil fields that are presumably out there – and they haven’t. These people are not stupid. They make mistakes but they have not missed the huge amounts of oil that are called for and really simply don’t exist from a geological standpoint.”

In consequence, Simmons made it clear that, in his most realistic scenario, production must be expected to be down to around 9 M bbl/day by 2030, that is, close to one tenth of 2005 peak production; hence him saying that “the game is over”.  He quipped: “We are probably now sliding down the hill without any brakes.”

In other words, instead of an initial slow decline followed with an accelerating decline in subsequent decades, as one would normally expect, the effect of the current economic crisis is to plunge the world immediately into a rapid decline of oil supply capacity.  Simmons stressed: “I think five years from now we will be lucky if we are at 60 [M bbl/day]”.

What does this mean for New Zealand, Australia and the rest of the world?

Accepting that millions of barrels per day are not meaningful to most people, let’s consider what this means for an average person. In my view the data presented by the IEA and Simmon show that in: 

2008:    Each person on earth has about 4.5 bbl per year of crude to live on.

2013: Oil availability per head is down to 3.3 bbl. Because, at the global level, energy is the ultimate basis for dollar values since it cannot be replaced by anything else, this means that we must expect that in about five years time, on average and in terms of constant dollar value, everyone’s income will be down by 27% relative to 2008.  Of course, smaller countries like New Zealand with substantially less economic, political, or even military power can be expected to suffer considerably more.

2030:    Oil availability per head plummets down to 0.4 bbl per head. Given that over a 20-year period it is not feasible to develop and deploy globally alternative infrastructures to replace the missing oil to a sufficient extent and that whatever new alternatives that may be developed will require a very significant amount of energy to be invested in their deployment, we must expect that on average everyone’s income will be divided by 12 relative to 2008. For example, expressed in 2008 dollars, someone who used to be on NZ$80,000 per year would end up with only about NZ$7,000/year to live on, i.e. around NZ$19 per day. I estimate that currently about 60% of the global population is surviving on less than NZ$20 per day. So the projections mean a very high danger of a global population crash combined with rampant destitution for the survivors.

In their talk, Hirsch and Simmons were acutely aware of the above implications of the latest data. Their dialogue is in my view revealing:

Hirsch: “…we’ve entered a phase where we are in very serious trouble and will be in serious trouble for a long time… The whole circumstance is very unpleasant, extremely unpleasant. Incredibly distasteful in fact.”

Simmons:  “It could have been pleasant had we been working on this 20 years ago…  what is really tragic is we didn’t need to be where we are today.”

Hirsch: “That’s right. Of course this is a terrible time, as we’ve discussed and gone back and forth on it, it’s a terrible time to bring out that there could be something, and indeed there is something that is much worse than the current economic problem that’s lurking right around the corner, if not bidding right here.”

Simmons: “The [IEA] Executive summary of this whole thing starts out with the very important quiet statement “The current energy supplier trends are patently unsustainable” and the last sentence of the executive summary is “The time to act is now, and the need to act is urgent”…

Hirsch: …“The other thing is that there is an obsession with global climate change and whereas all of us ought to be concerned about global climate change, living and having jobs and having some sort of economy are a hell of a lot more important, it seems to me, and it will seem to a whole lot of other people when we start to have the kind of pain that is associated with having less and less oil each year.”

…”we’ve got to work very hard in ways that we haven’t done since maybe the Second World War, to be able to work at this problem at an extremely urgent basis.”

To clarify matters further, in our post-modern globalised societies all three key infrastructures concerning energy, transport and communications have grown intimately interdependent. Disrupted transport fuel supplies mean disrupted power and communications supplies regardless of the temporary availability of other fossil fuels (gas and/or coal). Furthermore, none of the mostly ageing existing energy, transport and communications infrastructures can cope with the crisis that is unfolding. Even under a crash programme, it would take well over 40 years to replace these existing infrastructures globally with non-fossil fuel based ones while we have at best 10 years to take a radical turn away from the troubles.

To make matters even clearer, structurally, Australia and New Zealand are extremely vulnerable and stand to be among the first of the industrialised countries to feel the brunt of the “double whammy” of the combined energy and ecological emergency. To be down to 60 M bbl/day in five years time, as expected by Simmons, means that both Australia and New Zealand must expect severe supply disruptions before by 2013. The expected supply gap between global demand and supply is several times the combined Australasian demand. We can be confident that the largest economies and super-powers, the USA, the EU, Russia, Japan and China will ensure they are served first. Australia and New Zealand currently do not have fallback positions and no longer have the time or resources to build them along business-as-usual (BAU) lines.

In other words, we are now in the midst of a global emergency unfolding in two intimately related waves, energy crisis first and rapid ecological degradation next, an emergency most decision makers are simply not prepared to deal with and do not know how to address:

Hirsch: “And too often the Government doesn’t want to hear the real news”…

…“I think the IEA made a major step forward by leaving its econometric models and taking a serious look at resources and if you read it carefully – because they did do some muting in what it is they wrote – they are saying we are in terribly serious trouble. That’s what these folks are saying as they travel around.”  

Simmons:  “What they basically didn’t want to do is scream out in the middle of a packed theatre ‘The house is on fire!’ But what they are basically saying is we need to start evacuating the theatre folks.”

Hirsch: “But you know at some point somebody is going to have to stand up and say that we’ve got a fire in the theatre.”

Simmons: “Well that’s what I’m doing because I can take the data and not have to be politically correct”...

In recent years, a growing number of concerned scientists, engineers and businesspeople from a wide range of horizons have insistently made virtually the same points over and over: we face a global emergency that is the result of BAU actions, about which decision makers have been in denial for far too long, time to address it has run short, addressing the troubles requires radical new approaches, policies, ethos, modes of thinking and decision making, and the required expertise to do so is desperately in short supply.  Humankind is sailing through totally uncharted stormy waters and resolute innovation radically departing from BAU is required. In one form or another, all stress that the best chance humankind has to sail through the troubles it has created for itself is going to be thanks to resolute entrepreneurship, free market and partnerships between such pioneering entrepreneurs and governments.

As I pointed out at the beginning of this briefing, I anticipated the present situation some 40 years ago. This is why, when I begun to have solutions in sight and with the assistance of a number of colleagues, business associates and brave founding investors, I contributed to the creation of the IndraNet Group in 1998, on a 100% entrepreneurial basis; why in 1999 I strongly advised the Board of IndraNet to invest in the MDI Technology; why we subsequently formed a joint venture with MDI in 2006 and formed and developed the IT MDI – Energy business.

We now have the capability, technology ingredients and business models to make a difference and significantly contribute to changing the game. In the course of last year we have assembled the means to now begin moving into the manufacturing and deployment phase. We have forged an alliance with the well-known high performance automotive engineering company Perfectune Engineering – Yella Terra (YT) in Melbourne and begun the transfer of manufacturing capability from MDI to YT.   We have also forged an alliance with the Holmesglen Institute of TAFE in Melbourne concerning all training matters for both manufacturing and deployment. We have secured a testing and initial equipment integration facility in Christchurch.   Beside the MDI engines we have selected or designed all the components required to integrate a tri-gen power generator capable of also providing air conditioning, hot water and water recycling services. We have developed the capability to integrate such tri-gens into an IndraNet FraMe communications network for remote control and management. We have selected a number of sites and associated parties keen to take part in an initial show casing and early deployment programme in both New Zealand and Australia.   We have developed the business, marketing and financial models for this industrial implementation and deployment.

Our aim is to future proof our customers, business partners and shareholders against the consequences of the present global energy and ecological emergency and enable their rapid transition to sustainable ways of doing business and living. All together we can make a difference.

It is our contention that 100% Solar energy based and Sustainable lifestyles for all are achievable rapidly, affordably, in a demand driven, market based fashion not requiring massive and highly punitive government interventions such as the emission trading schemes some advocate.