[Part 4 of a series of reports on the 2009 ASPO Peak Oil Conference.]

The Vulnerabilities Of Complex Systems

Investing by the KISS Principle

By Chris Nelder
Friday, November 6th, 2009

Trader Chat: Chris Nelder Pt. 2 – How Will Limited Oil Affect Our Daily Lives?

[Part 3 of a series of reports from the 2009 ASPO Peak Oil Conference.]

Can Renewables Replace Fossil Fuels?

Efficiency: The Way to Close the Renewables Gap

By Chris Nelder

Friday, October 30th, 2009

With peak oil already upon us, sustaining oil supply is akin to running up a down escalator.

Or, as Nate Hagens put it at the ASPO peak oil conference earlier this month, “Technology is in a race with depletion and is losing (so far).”

The urgent question then is: Can renewables fill the gap of oil depletion?

Mind the Gap

The most recent global data summarized by fuel available from the EIA is, unfortunately, for 2006 and only preliminary (I know they’re trying to improve their reporting but seriously, they need to do better than that), but we’ll use what we’ve got.

In 2006, the total amount of energy the world consumed was 469 quadrillion BTUs, or quads.*  Charted in percentage terms, the global fuel mix looks like this:

World Primary Fuel Mix, 2008. Chart by Dave Waldorf. Data source: EIA Annual Energy Review 2008 (released June 2009)

If the latest information I gathered at the ASPO peak oil conference is correct–and I think it is, or at least is as close to correct as anybody is going to come at this point–then we should expect oil to begin declining at about 5% per year starting around 2012 – 2014.

Of the 157 quads provided by oil, at a 5% decline rate we’ll lose 7.85 quads per year, or 1.7% of the world’s primary energy supply.

The “Geothermal and Other” category, supplying 1.6% of the world’s primary energy, represents all the renewable sources combined: geothermal, solar, wind, biomass, and so on.

Since 1.7% is very close to 1.6%, we can put the challenge of substituting renewables for oil this way: Starting around 2012 – 2014, the world will need to build the equivalent of all the world’s existing renewable energy capacity every year just to replace the lost BTUs from oil.

Fortunately renewable energy of all kinds is enjoying a massive growth spurt, attracting trillions of dollars in investment capital. On average, the sector seems to be growing at about 30% per year, which is phenomenal…but it’s not 100%.

In terms of BTU substitution, then, it seems unlikely that renewables can grow at the necessary rate.

Not Just BTUs

However, the challenge is more complex than mere BTU substitution.

Replacing the infrastructure, particularly transportation, that’s based on oil with one based on renewably generated electricity will in itself require energy–and lots of it. As Jeff Vail, an associate with Davis Graham & Stubbs LLP, said at the conference, between 80-90% of the energy inputs for renewables must be made up front, before they start to pay any energy out.

Even if renewables were able to make up all of the lost energy from oil, still more would be needed to afford any economic growth.

In all it seems a fair bet that it will take at least a decade for renewables to merely catch up with the annual toll of oil depletion. The gap will likely manifest as fuel shortages in the OECD when the developing world outbids it for oil, and a long economic recession or depression…unless efficiency comes to the rescue.

To that point, Vail speculated that population increase alone could offset as much as 30% of the improvement in conservation and efficiency. He noted that despite the recession, car sales are up 29% in India as people buy their very first cars.

Falling Net Energy

Another driver of the down escalator is that the net energy (EROI, or energy returned on energy invested) of nearly all fossil fuel production is falling.

Dr. Cutler Cleveland at Boston University has observed that the net energy of oil and gas extraction in the U.S. has decreased from 100:1 in the 1930’s, to 30:1 in the 1970’s, to roughly 11:1 as of 2000.

Simply put: As the quality of the remaining fossil fuels declines, and they become more difficult to extract, it takes more energy to continue producing energy.

This begs the question: What EROI must the replacements have to compensate for oil depletion?

Vail presented several models attempting to answer it. In his optimistic scenario, assuming a 5% rate of net energy decline and an EROI of 20 for the renewables, the “renewables gap” was filled in year 3. In his pessimistic scenario, assuming a 10% rate of net energy decline and an EROI of 4 for the renewables, the gap wasn’t filled until year 7.

For a sense of how reasonable those assumptions are, we must turn to the academic literature, since no business or government agency has yet shown any particular interest in EROI studies (much to my dismay).

Studies assembled by Dr. Charles Hall (source) put the average EROI of wind at 18 (Kubiszewski, Cleveland, and Endres, 2009); solar at 6.8 (Battisti and Corrado, 2005), and nuclear at 5 to 15 (Lenzen, 2008; Hall, 2008). No data is available for geothermal or marine energy. All the biofuels are under 2, making them non-solutions if the minimum EROI for a society is indeed 3 (Hall, Balogh and Murphy, 2009).

[A quick aside: The huge range of the nuclear estimate is one indication of how difficult it is to accurately asses the costs of nuclear, which is part of the reason I still haven’t written the article I know many of you are hoping to see some day. I’m working on it, and still looking for current research with appropriately inclusive boundaries and updated numbers. Nearly everyone is still using cost estimates that predate the commodities bull run, not even realizing how it distorts their analysis. So far I have found nothing to change my outlook that the nuclear share of global supply will stay roughly the same for several decades.]

I am not aware of any studies on the EROI of biomass not made into liquid fuels–for example, methane digesters using waste, landfill gas, and so on–but its sources and uses are so varied that if the numbers were available, they probably wouldn’t be very useful. While such applications are generally good, they’re not very scalable—they work were they work, and don’t where they don’t.

Theorem of Renewables Substitution

Where EROI analysis leaves us is unclear; it needs more research and a great deal more data. There are some useful clues in it though.

First, we know that biofuels–at least the ones we have today–won’t help much, other than providing an alternate source of liquid fuels while we’re making the transition to electric.

Second, we know that solar tends toward Vail’s pessimistic scenario, and wind fits the bill for his optimistic scenario.

But here’s the rub: The lowest EROI source, biofuels, is the easiest to do, with the vigorous support of a huge lobby and Energy Secretary Chu himself. Rooftop solar is the next-easiest to do but making up the lost BTUs takes longer due to its moderate EROI. And the source with the highest EROI, wind, is the hardest. (I explained why solar is easier here.)

Therefore I propose the following, slightly snarky Theorem of Renewables Substitution: The easier it is to produce a source of renewable energy, the less it helps.

The Winner: Efficiency

All of these factors–the declining supply, the pressures of the developing world on demand, the renewables gap, and the theorem of renewables substitution–underscore how crucial efficiency is to addressing the energy crisis.

It also underscores how profitable the entire energy sector will be for many, many years to come.

With supply maxed out, and demand at the mercy of a developing world, the name of the game now is doing more with less. More efficient vehicles and appliances, building insulation, co-generation…and all the other ways to eliminate waste.

I know it doesn’t have the sex appeal of, oh, say space based solar power, but it’s where the real gains will be made.

Until next time,

Chris

[This is Part 3 of a series of my reports from the 2009 ASPO Peak Oil Conference. See also Part 1 and Part 2.]

* The thermal values (heat content) of various fossil fuels are typically measured in BTUs. One BTU is roughly equivalent to the heat produced by burning a wooden kitchen match. One cubic foot of dry natural gas contains approximately 1,031 BTUs. For those who prefer their data measured in joules, 1 quad = 1.055 exajoules (EJ, or 10¹⁸ joules). Renewable energy, however, is typically measured in kilowatt-hours (kWh), or the amount of energy delivered by a one-kilowatt source over the course of an hour. 1 kWh = 3412 BTUs.

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Chris Nelder’s Notes on Past ASPO Conferences

You can download the show (1 hour) here: RealPlayer | WinAmp | Windows Media | Mp3

My segment begins at 36:50.

Trader Chat: Chris Nelder Pt. 1 – How Accessible is the Oil That’s Left?

[Part 2 of a series of reports from the 2009 ASPO Peak Oil Conference.]

The Narrow Ledge of Oil Prices

Why $150 May Be the Maximum Tolerable Oil Price

By Chris Nelder
Friday, October 23rd, 2009

One of the most bedeviling problems for oil producers (and oil investors) is knowing when it’s too cheap to keep producing, and when it’s too expensive to sell.

Last year gave us new boundaries: $147 a barrel was too expensive, and $33 was too cheap. But those aren’t terribly useful numbers in the real world.

We now know that $147 was extra-inflated by too much money sloshing into the sector, and $33 was extra-deflated by the fear and confusion that dominated all markets in December of last year. It’s likely that tighter regulation of the oil futures market will tamp down the former, and the latter will not be seen again so long as the world banking system continues to beg, borrow, and steal its way to stability and “full faith and credit.”

[Part 1 of a series of reports from the 2009 ASPO Peak Oil Conference.]

Reflections on the 2009 ASPO-USA Peak Oil Conference

The Next Oil Crisis is Just Ahead

By Chris Nelder
Friday, October 16th, 2009

I have just returned from the annual conference sponsored by the U.S. contingent of the Association for the Study of Peak Oil (ASPO-USA) with a wealth of new information and perspective to share, so this will be the first of a series of reports.

I look forward to the ASPO-USA conferences all year, because they consistently deliver good, solid data on the state of energy and afford an opportunity for vigorous and stimulating discussion with some of smartest and up-to-date experts in the world-particularly over dinner and drinks late into the night. This year was typically outstanding.

As usual I took detailed notes, which will be uploaded in the weeks to come. (My notes from previous conferences are here.) But I’ll begin with some high-level updates on the key aspects of the peak oil study.

Past the Peak?

Perhaps the thing that struck me most was how much the outlook on peak oil has changed since the first conference in 2005.

Those who thought conventional oil had probably peaked back then were considered extremely pessimistic, where the consensus view saw the peak another 5-10 years off, and the optimists put it 20 years away or more. Some thought the peak rate of “all liquids” would be around 100 million barrels per day (mbpd), up from 85 mbpd at the time. Most thought non-OPEC production would increase up through 2010. Biofuel boosters were sunny about their future.

Four years later, the view on oil and biofuel has grown considerably worse.

We now know that conventional crude did in fact hit its peak-plateau in 2005, having remained around the 74 mbpd level ever since. The expected growth from non-OPEC mostly failed to materialize, as depletion of mature fields took its toll and the cost of new projects soared—especially for deepwater and production from marginal sources. More pessimistic observers now think the 87 mbpd all liquids peak recorded at the height of the 2008 boom was the peak, and the more optimistic ones have cut their expectations to under 100 mbpd, with 90 mbpd looking more likely.

Biofuels now have a black eye from the corn ethanol frenzy of 2007-2008, which has all but collapsed. Ethanol from algae and cellulose still looks about as far in the distance as it did in 2005, as no one has figured out how to produce either one at commercial scale or with an acceptable net energy return. And biodiesel has remained a minor player, with little expectation for it to scale up any time soon.

But the most surprising change has been the outlook for North American natural gas. In 2005, the majority of observers seemed to think it had peaked for good, and saw gas prices remaining in a high range of $11-15/Mcf. I don’t think any of them expected the recent boom in North American shale gas, and there was certainly no suggestion that gas prices would crash to nearly $2 this year.

In fact the main worry about gas now seems to be that the shale gas boom will prove to be short-lived, and sucker us into building more vehicles and infrastructure to use it just as it sputters out. We only have a couple of years of data to work with on shale gas wells, and the only good data is from the Barnett Shale.

Running down the depletion numbers on shale gas, analyst Arthur Berman found that in the first year of production decline rates have been in excess of 50% for Barnett wells, and 90-95% for Haynesville Shale wells. The average well in the Fayetteville Shale is “profoundly non-commercial” he said, and predicted that most shale gas wells will be abandoned in less than five years after their first production because the output will be so low.

There is also a fear, which I have articulated previously, that with an average production cost of $7-8/Mcf for shale gas and prices through most of 2009 staying around $4 or less, new wells simply haven’t been getting drilled. The effects of that lapse should show up next year and cause our “glut” to disappear quickly, taking prices much higher.

Supply Decline Rates

With the end of growth in the rate of global oil production now either in the past or looming in the next few years, attention is progressively focused on the depletion rates of mature oil fields and the rate and date of overall decline.

Most observers believe the globally averaged depletion rate has risen from 4.5% per year in 2007 to about 5 – 5.5% now, which will accelerate to around 6.5% per year by 2014. This is more or less in line with the average rates from IEA’s report last year. Petroleum geologist Chris Skrebowski pointed out that a 5% per year decline rate means a loss of 4 mbpd per year, equivalent to all the volume of biofuels, tar sands and heavy oil combined, or losing the entire North Sea in about 14 months, and that it would be a huge challenge to replace those lost volumes.

Analysts using the Megaprojects database (of large oil projects started up after 2005) generally agree that production will peak in the 2009 – 2010 time frame. Net new supply each year is expect to begin declining around 2014 – 2015 as depletion overwhelms new projects. Supply may reach as high as 92 mbpd in 2010, then plateau to around 89 mbpd in 2014, then decline to 84 mbpd in 2020 and 78 mbpd in 2030.

That view was generally in line with comments from oil consultant and former head of exploration and production for Saudi Aramco, Sadad al-Husseini, in a video interview clip. Seeing insufficient large new projects in the next 5 – 6 years to compensate for decline rates of 6.5% in non-OPEC and 3 – 4.5% for OPEC, he expects a shortage of capacity in the next 2 – 3 years.

The poster child for decline rates is, of course, Mexico with its crashing Cantarell field. Matthew Simmons projected that its decline would end Mexico’s long era as an oil exporter in 18 – 36 months. David Shields, an author and expert on Mexican oil production, delivered a devastating indictment of the country’s political leaders and its oil company Pemex, asserting that Pemex officials knew exactly what Cantarell was going to do as far back as 2002, but said exactly the opposite in public. A chart that Pemex shared with the Mexican Senate showed that production from its largest fields would fall to 1 mbpd by 2017, a full 1.8 mbpd lower than the official forecast of about 3 mbpd. If political manipulation is distorting the public impression of Mexico’s near-term oil potential (and I believe Shields on this point) then it could be very bad news for the U.S., for which Mexico is the #3 source of oil imports.

Demand Growth Rates

On the whole, I would say there is now a strong consensus (at least among analysts who prefer data to faith) that global oil production will begin to decline in the 2012 – 2015 time frame. The later-dated estimate is based on the notion that the global recession of the last two years has probably given us that much longer before terminal decline sets in.

Peak oil deniers who have projected continued growth for many decades hence and ultimate peak rates of 120 mbpd or more have obliquely capitulated in the face of the recent evidence and switched to a “peak demand” argument: It’s not that supply couldn’t keep up for geological reasons, it’s that demand wasn’t strong enough to support high enough prices to raise supply further.

It’s a classic tactic to try to change the game if you can’t win it, but the peakers aren’t buying it. As Skrebowski pointed out, the peak demand argument only really holds for the OECD, where demand is off a few percent from the peak.

The real demand story is shifting quickly to the developing world, particularly China. Analyst Steven Koptis projected that China would overtake the U.S. as the top consumer of oil by 2018, and if supply is available, would double U.S. consumption by 2025.

Indeed, as petroleum geologist Jeffrey Brown pointed out in his presentation of the Export Land Model, the U.S. has already been outbid by Kenya for oil. According to the model he developed with Dr. Samuel Foucher, the top five oil exporters in 2005 will in aggregate reach zero net exports by 2032, and most of that will be shipped early on. In just three years, they shipped 1/5 of their total expected net exports after 2005.

Petrobras’ Promise

As a counterpoint to the generally gloomy data on global oil supply and demand, a razzle-dazzle keynote was given by Dr. Marcio Rocha Mello, president of HRT Petroleum and a 24-year veteran of Brazil’s oil company Petrobras (NYSE: PBR). He asserted that the recent pre-salt finds in very deep formations off the shore of Brazil, like the much-hyped Tupi field, indicated that there was a great deal more oil in the pre-salt layers—we just need to drill deeper.

In an extremely animated presentation that at times seemed more like a carnival sideshow than a serious analysis, Dr. Mello served up combination of stratigraphic charts and contrarian theory to make the case that between the pre-salt of Brazil, West Africa, the Congo basin and the Gulf of Mexico, there are another 500 billion barrels yet to find.

While entertaining and humorous, I don’t think Dr. Mello made too many converts in the room. As former BP oil exploration chief Jeremy Gilbert pointed out the following morning, none of the alleged pre-salt oil is yet proved, and in fact he’d be surprised if there were 5 billion barrels of proved oil there. “Don’t confuse passion with precision” he warned, and noted that it would take 20 – 30 years to prove the resource. In short, it doesn’t change the peak oil story at all. By the time pre-salt barrels come online, we’ll be well down the back side of the production curve. Rising resource nationalism in Brazil also bodes poorly for very many of those new barrels to make it to foreign markets.

I’ll conclude this report with a brief comment on oil prices. As I mentioned in my update three weeks ago, the outlook for oil prices has been murky for months as they traded in a $60 to $75 range. I was long oil but cautiously bearish, and watching for signs of a new signal. This week, that signal came as oil breached the $75 level and touched $78 this morning. It’s a decidedly bullish move and I think it portends higher prices to come, at least in the near term.

I took the opportunity to beef up my oil exposure with positions in EOG Resources (NYSE: EOG) and, naturally, Petrobras. Even if Dr. Mello is wrong about the pre-salt, Petrobras is one of the most sophisticated and aggressive oil companies in the developing world, and they are positioned better than most to mint money for years to come. And if he’s right…well, it will be a great position to hold long term.

Stay tuned to this space for much, much more from the cutting edge of peak oil analysis in the coming weeks.

Until next time,

Chris

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Chris Nelder’s Notes on Past ASPO Conferences

First I must mention that as I hoped when I wrote this article, Gov. Schwarzenegger did in fact sign SB 32 into law at the last minute last Sunday, which should be a nice shot in the arm for solar projects on commercial buildings in the state. He also signed AB 920, authored by my own district’s Jared Huffman I’m proud to say, which is even more exciting because it will allow residential and small commercial solar systems to get paid by the utilities for producing more power than they consume. Instead of being incentivized to under-size their systems and use up every last watt they produce, as has been the case for many years, they’ll be encouraged to install larger systems and conserve. The positive implications of the bill are broader than most people realize and I will have to find some time to write about it soon.

For Green Chip Stocks last week, I surveyed some recent good news on feed-in tariffs for renewable energy, electric cars, energy monitoring on and off the smart grid, and progress in U.S. energy policy.

Solar, Electric Cars, and Policy Advancing Quickly

Making Tracks to the Renewable Future

By Chris Nelder
Friday, October 9th, 2009

After all that I have written in this column about the enormous challenges that the future of energy holds, it’s good to focus once in a while on the progress that is being made.

So this week I have brewed up a batch of good news soup.

I begin with an update on feed-in tariffs (FiTs). (A feed-in tariff, for those of you who don’t know, is an incentive structure to encourage the adoption of renewable energy via government legislation.)

Two weeks ago, I wrote about the superiority of FiTs over our existing incentives for renewable energy and criticized California for its failed approaches. This week, I discovered that in fact California already has a FiT, which the California Public Utility Commission (CPUC) introduced on January 31, 2008.

The reason nobody talks about it is that it is an ineffective incentive based on the avoided wholesale cost of natural-gas fired generation, plus a greenhouse gas premium — far too low a price to attract much interest. Only 14 megawatts (MW) have been installed under this 500 MW program, according to a study by E3 Analytics.

But a new bill passed by the California legislature in September might improve the FiT. SB 32 would require the CPUC to include “environmental and distributed attributes (values)” in the tariffs, increase the cap on the existing program to 750 MW, raise the maximum project size to 3 MW, and make a number of other changes that should benefit rooftop solar PV projects on commercial buildings like schools, government buildings, and warehouses.

SB 32 is now sitting on Ahhnold’s desk — along with about 700 others — with a deadline for him to sign by this Sunday at midnight. Unfortunately, he has threatened a mass veto of the whole lot in his showdown with the Legislature over an overhaul of the state’s water system. I certainly hope SB 32 manages to escape that fate. It’s not a perfect bill by any means — and it still pays far too little per kilowatt-hour — but it might finally create a successful FiT in the nation’s largest power market that can be improved over time.

Three other new FiTs hit the news this week:

The Hawaii PUC decided to offer a 20-year FiT for solar projects up to 5 MW in size for Oahu and 2.72 MW for Maui and Hawaii Island (how they came up with those numbers, I have no idea). The tariff rates are not yet set, but it seems likely that with the most expensive electricity in the nation at 21.3¢/ kWh (EIA 2007 data) and a power generation system that mostly runs on fuel oil, they will be attractive. Hawaii is arguably the most vulnerable state in the nation to the threat of peak oil.

Ontario, Canada, also launched a 20-year FiT that will pay anywhere from C44.3¢/kWh for large ground-mounted PV systems (up to 10 MW) to a whopping C80.2¢/kWh* for residential-sized systems (10 kW or less), when the going rate for grid power is typically C5.7 – 7.9¢/kWh. A pricing structure like that could quickly make Ontario the hottest solar PV market in North America. The province is leading the charge to a renewable energy future in Canada, with a commitment to phase out all coal-fired generation by 2014, several gigawatts of solar and wind generation built or in the pipeline, and a deal with Better Place to deploy electric cars.

Last month, India apparently introduced a FiT that embraces a comprehensive list of renewable energy sources and establishes a calculation framework for setting the rates. Depending on how the numbers turn out, India could become the next nation to deploy PV in a big way.

Electric Cars

The future of electric cars got a nice boost last week when the French government announced that it would spend about $2.2 billion to create a network of battery charging stations for electric cars. One million charging stations will be built under the plan by 2015, with 90% of them in private homes and the rest in parking lots and other sites. Additionally, all apartment buildings with parking lots will be required to install the charging stations after 2012, and all office parking lots must install them by 2015. This should result in a total of four million charging points by 2020.

The new charging network will support France’s goal of putting two million electric and hybrid cars on the road by 2020. Currently, the country has only a few thousand such vehicles. To jump-start their deployment, the government will give carmaker Renault €125 million to develop of a new battery manufacturing plant and a €150 million loan to build an electric car factory. Another €100 million will be made available for other electric carmakers. Fleet orders for electric vehicles are expected to reach 100,000 units by 2015.

It’s a far more ambitious plan than Cash for Clunkers, and will deliver a lot more bang for French buck.

I’m pleased to announce that I have joined up with logi Energy, a brand-new hedge fund that has some very smart strategies for investing in oil and gas with a specific focus on peak oil. The team was founded by some actual rocket scientists and petroleum geologists(including a couple of longtime contributors to The Oil Drum) as well as seasoned investors and traders, and I’m very excited about the fund’s potential. It’s about time a hedge fund targeted the peak oil event directly.

The logi Energy management team had an interview this week on Jim Puplava’s Financial Sense podcast. On the call was:

• Larry Ortega, CEO
• Dennis Mangan, VP Hedging Operations
• Alex Brown, VP Trading Operations
• Jeffrey Brown, VP Global Oil Supply Analysis
• Chris Nelder, VP Global Oil Transition Analysis

Check it out, and if you are a qualified investor who might be interested in exploring what the fund has to offer, drop me a line.

logi Energy Interview on Financial Sense – posted 10/10/2009