After the credit crisis – next it will be oil

As it now admits, BP “did not have the tools” to contain a deepwater oil leak. Its failure with that risk must now raise questions about its approach to other risks. Top of the list must be the threat that global oil production will fall sooner than generally forecast, ambushing oil-dependent economies with a rapidly opening gap between supply and demand. The approach of the point at which global oil supplies reach an apex, “peak oil” as it is often known, worries growing numbers of people. But, until now, BP has poured scorn on the worriers, encouraging the oil industry’s effort to reassure society about peak oil. The disaster in the Gulf of Mexico casts doubt on the viability of the deepwater production on which industry forecasts depend.

Every year BP publishes a report that is effectively a risk assessment on peak oil arriving prematurely. Its Annual Statistical Review of World Energy, due out today, routinely states that there are about 40 years of proved oil reserves, that advances in technology will enable much more to be found and produced, that rising oil prices can finance the necessary exploration and infrastructure, and that global oil supply can go on rising for decades. Every year, peak-oil worriers say they doubt the Opec oil producers’ reserve statistics that are echoed in BP’s review, that technology can only slow depletion not reverse it, that rising oil prices do not help when it takes so many years to extract new oil from increasingly exotic locations and that global supply is heading for an imminent fall.

BP’s disaster has mired a regional economy, hammered the company’s share price and dragged down the FTSE 100. Yet failure with the peak-oil risk assessment would render such wreckage insignificant. Leaders of the companies in the UK’s Industry Taskforce on Peak Oil and Energy Security (ITPOES) – Arup, SSE, Solarcentury, Stagecoach and Virgin – argue that premature peak oil would be quite as bad as the credit crunch. In the foreword to our report published in February we urged the UK government to “act now …don’t let the oil crunch catch us out in the way the credit crunch did”.

The credit crunch nearly gave us the second Great Depression. As for the oil crunch, the ITPOES companies fear an irrecoverable fall in global oil supply by 2015 at the latest and that if oil producers then husband resources, a global energy crisis could abruptly morph into energy famine for some oil-consuming nations.

On June 2, the day BP found itself facing a criminal investigation into its deepwater-production risk management, Tony Hayward, the company’s chief executive, admitted it had to find entirely new ways of handling “low-probability, high-impact” risks. Today, as it publishes its review of energy statistics, the question is: will BP find entirely new ways of handling the high-impact risk that is peak oil?

Precedent offers little encouragement. At last year’s launch of BP’s review, Mr Hayward said: “Our data confirms that the world has enough proved reserves …to meet the world’s needs for decades to come.”

“Confirms”. “Decades to come”. These are hugely confident assertions, rooted in a cultural consensus across a broad and powerful peer group. Mr Hayward added, in an aside that now seems poignant, that any constraints on production would be “human, not geological”.

If, today, BP retreats from its misplaced confidence, it will be in good company. Before the ITPOES report, the UK government accepted BP’s line on peak oil unquestioningly. After it, the Department of Energy and Climate Change conceded there was significant doubt, and much need for government and industry to work together on risk management.

The business world needs to rewrite risk assessment more generally. Two industries have failed society. The investment banking industry told the world it had created a massive new asset class in complex derivatives. Among many disservices in peddling that great mistake, it corrupted its own rating agencies. The oil industry has told the world it has massive assets in deep water, producible at little risk. In pushing that conspicuous failure of risk management, it has corrupted its own regulators – at least in the US. Parallels between the financial crunch and the coming oil crunch are clear, and immensely troubling.

From here on, how BP plays peak-oil risk ought to be scrutinised as no business risk ever has been before.

The writer is executive chairman of Solarcentury and author of Half Gone