Resource Insights

Will the International Energy Agency's oil forecast be wrong again?

noreply@blogger.com (Kurt Cobb) — Sun, 19 May 2013 12:13:00 +0000

The famous Danish physicist Niels Bohr once humorously observed, "Predictions are very difficult, especially about the future." And so, as the world considers yet another rosy oil supply forecast, this time from the Paris-based International Energy Agency (IEA), it is worth reviewing the agency's record.

Back in the year 2000, the IEA divined that by 2010, liquid fuel production worldwide would reach 95.8 million barrels per day (mbpd). The actual 2010 number was 87.1 mbpd. The agency further forecast an average daily oil price of $28.25 per barrel (adjusted for inflation). The actual average daily price of oil traded on the New York Mercantile Exchange in 2010 was $79.61.

(The IEA included in its 2000 supply projections not only crude oil plus lease condensate, which is the definition of oil, but also natural gas plant liquids--only a small fraction of which can be substituted for oil--and refinery processing gain which is the result of applying energy to break oil into its components, causing the final volume to expand. The agency refers to the resulting number as "oil" supply. But, clearly this number is not really just oil supply, and this practice continues to confuse policymakers and the public.)

So, what made the IEA so sanguine about oil supply growth in the year 2000? It cited the revolution taking place in deepwater drilling technology which was expected to allow the extraction of oil supplies ample for the world's needs for decades to come. But, deepwater drilling has turned out to be more challenging than anticipated and has not produced the bounty the IEA imagined it would. This is not to say that it hasn't been a critical adjunct to world oil supplies. It's just that deepwater oil production hasn't been able both to make up for declines in production elsewhere AND grow supplies beyond that--something that has resulted in a bumpy plateau for world oil production (crude plus lease condensate) starting in 2005.

Now, the IEA tells us that a "revolutionary" new technology called hydraulic fracturing--actually, a newly deployed variant called high-volume slick-water hydraulic fracturing--is going to cause what it calls a "supply shock" that spells ample and rising oil supplies. But, despite years of such drilling in the United States--which the agency says will be the center of this "shock"--world oil prices remain near all-time highs as measured by the average daily price. And, world oil production (crude plus lease condensate) has only occasionally bounced above 75 mbpd in the last seven years before retreating downward.

Perhaps the IEA means that using these new techniques to unlock so-called light tight oil deposits beyond the United States will bring about this supply shock? Nope. The report states specifically that over the forecast period through 2018, the IEA does not expect significant development in other countries of these deposits using the new type of hydraulic fracturing.

Perhaps the agency noticed the withdrawal of ExxonMobil Corp. last year from Poland. The company said it could not find commercial quantities of hydrocarbons in what had been billed as Europe's most promising shale gas deposits. Shale gas, of course, is extracted using the same fracking techniques as tight oil. And, both oil and natural gas tend to appear together in such deposits.

And then, just prior to the release of the IEA's latest forecast, Talisman Energy Inc. and Marathon Oil Company pulled out of Poland as well for similar reasons.

The point is not that there is no exploitable tight oil or shale gas outside the United States. Rather, the quality of those resources varies far more than the industry has led the public to believe. At first, the oil and gas industry portrayed such deposits as subject to what it called the "manufacturing model." The notion was that a company could drill anywhere within known deposits and extract commercial quantities of oil and/or natural gas.

The reality is far different. Even in the United States--the center of the putative boom--drillers have ended up focusing on a few "sweet spots" that yield commercial quantities of oil or natural gas. These can represent as little at 15 percent of the total area of the formation.

The IEA seems to be unaware of certain key information that is publicly available or doesn't understand the significance of that information. And, the agency doesn't seem to remember what it said in its last forecast. Here is a sampling:

The production decline rate of hydraulically fractured tight oil wells is around 40 percent PER YEAR in the two most prolific plays, Eagle-Ford in Texas and Bakken in North Dakota. This means that drillers must replace 40 percent of last year's production capacity EACH YEAR before they can increase the overall rate of production from their tight oil wells. The average annual production decline rate for existing wells worldwide is around 4 to 5 percent. Essentially, the IEA doesn't appear to understand that it is expecting oil extracted from wells that decline at a rate 10 TIMES FASTER than average wells worldwide to make up for worldwide declines elsewhere AND provide significant growth in world oil supplies. But, the agency apparently did not look at publicly available well data from each state to determine annual decline rates and their implications for future supply. The IEA seems simply to have taken self-interested industry forecasts on their face--forecasts made with an eye toward engendering confidence among investors and lenders and thereby pumping up the value of lucrative stock options held by company insiders.
The IEA expresses concerns about adequate infrastructure for the tight oil producers. Yet, the agency does not seem to be aware that the oil producers in the Bakken play refused to support a pipeline that would have given them their first pipeline access to major oil centers, preferring instead to rely on rail transport. Contrary to their public pronouncements, could it be that the oil producers don't really believe they have enough oil in the long term to support a pipeline and therefore did not want to make long-term shipping commitments to a pipeline company? Perhaps the oil companies would rather saddle the railroads with the capital costs of new tank cars so the oil producers won't be on the hook for any long-term infrastructure costs associated with transporting their oil.
The IEA talks about a surge in U.S. natural gas production. Yet, it seems unaware that natural gas production in the United States has been flat since January 2012 even as domestic gas prices rose from $1.82 per thousand cubic feet to above $4 today. The so-called shale gas boom has ended, and we are now finding out just how costly it will be to bring that gas out of the ground. Correspondingly, the rate of extraction will not be so great as promised either.
In just a few months time, the IEA has dramatically altered its view about the trajectory of world consumption of liquid fuels. Its 2012 World Energy Outlook released in November prophesied that world demand would reach 99.7 mbpd by 2035. The more recent report mentioned at the beginning of this piece, the Medium-Term Oil Market Report, now projects that world demand will reach 96.7 mbpd just five years from now, implying a growth trajectory far in excess of that projected in the agency's 2012 report.
The IEA says it does not forecast prices and then tells us it uses the futures prices for its model. What its model implies is continuing high prices for oil and oil products. The IEA makes no attempt to understand the effect that high prices have on the world economy and its ability to grow under such circumstances. Nor does it address the dampening effect of high prices on demand, calling into question its projection of rapid increases in demand.
The IEA then tells us that so-called oil production "capacity," the basis of which is never described, will grow faster than demand. This would imply falling prices as excess capacity overhangs the oil markets. But that would mean that the high prices which it agrees are needed to extract tight oil profitably would disappear. So, how would this allow tight oil volumes to grow dramatically if extraction is unprofitable or only marginally profitable? This contradiction is never addressed.
Burning all the known reserves of fossil fuels would put us on a path to a climate catastrophe, something the IEA acknowledged in the executive summary of its 2012 World Energy Outlook saying, "No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage (CCS) technology is widely deployed." CCS technology is not being widely deployed, nor is it likely to be. By contrast the agency's most recent forecast reads like a promotional brochure for the North American oil and gas industry. How does that square with the agency's concern about climate change?

It's not unusual for government-sponsored organizations such as the IEA to be given contradictory directives, in this case, to promote adequate energy supplies and also to warn about climate change. There has been little mention of this contraction in the media because the media has focused on what it perceives as sensational news about oil and natural gas supplies in North America.

Given that focus, it is troubling that neither the agency nor the media have bothered to revisit past forecasts. It turns out such forecasts fail so often that it's puzzling that the media, governments, corporations, and the public put so much faith in them. Those whose plans were based on the IEA's 2000 forecast were completely blindsided by developments just a few years later.

We would be much better served by looking at what we know right now from publicly available figures about actual trends. It's not as exciting as dramatic predictions about a future of plenty--or one miserable from want. But it's a far firmer basis for sound policy.

UPDATE: Not surprisingly, it is the foreign press which is reporting signs of fatigue in the tight oil boom in America. The American media has been thoroughly bamboozled by the industry. See "US shale boom starts to fade" in the Australian publication The Age.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Why the renewable energy industry ought to support U.S. natural gas exports

noreply@blogger.com (Kurt Cobb) — Sun, 12 May 2013 14:35:00 +0000

U.S.-based industries and utilities that consume a lot of natural gas have been trying to figure out just how to respond to proposals in Congress to allow expanded natural gas exports, a move that could significantly raise the price of one of their chief inputs.

But, there is one segment of U.S. industry that ought to be cheering for such an outcome--though I doubt that its leaders will be offering their support in anything above a whisper. The renewable energy industry would benefit from higher natural gas prices--and higher coal prices, for that matter--since, as these fuels for electric power plants become dearer, renewable energy sources become more competitive. The costs for renewables are in the production and installation of the solar panels, wind towers and dams; the fuels--sunlight, wind, and water--are essentially free.

But it would seem almost unpatriotic to cheer for higher energy prices in America. Higher prices--all things being equal--tend to depress economic activity. And, higher energy prices also tend to make American goods less competitive on world markets by increasing the costs of many inputs. Hence, my observation that the titans of the renewable energy industry will probably stay largely mum in the fight over expanded exports of U.S. natural gas.

But there are good reasons for the American public to shoulder the burden of higher energy prices now to help build a more secure future. First, climate change is already on course to destroy the way of life that Americans say they want to preserve. Second, there is no chance, NONE, that fossil fuels can sustain American society and the world in the long run. Only renewable energy can offer the promise of essentially perpetual supplies.

This second reason tells us that we must make an energy transition at some point. And, given the uncertainties about fossil fuel supplies and the wars and conflicts they engender, it would be wise to make that transition as soon as possible. In addition, history has shown us that energy transitions can take two generations. No one can say for certain whether fossil fuel supplies can continue to grow or even remain stable for 50 years to see us through such a transition. And, we will need to use fossil fuels to build the renewable energy economy. If we use them instead simply to have one last energy orgy, there may not be enough left to build the renewable energy infrastructure needed to replace them.

But the first reason, climate change, tells us that we must embark on the needed energy transition now. We cannot wait to see how things turn out. The melting of sea ice and the tundra tells us that time is up. Extreme droughts and floods--predicted by climate models--have already arrived and are the cause of soaring food prices and extensive property damage. Since the effects of warming lag by about 40 years--because the oceans take so long to warm--we are only seeing the effects of greenhouse gas emissions through the early 1970s. Even if we stopped emitting all greenhouse gases today, we'd still have 40 or so more years of warming ahead of us.

The best and most precise way to encourage energy conservation and a renewable energy buildout would be a steadily rising carbon tax. But, in the absense of sensible energy policy, it might now be time for those concerned about the ongoing delay in building the renewable energy economy to embrace world prices for all energy here in the United States.

Coal and oil already trade at world prices in the United States since they can be shipped to the highest bidder worldwide. (Even though crude oil exports from the United States are restricted, we produce far less than we consume and the effect is the same as if we had no restrictions.) Natural gas is essentially trapped on the North American continent because there are currently no operating export terminals that can liquefy the gas for transport by special liquefied natural gas carriers. Some export terminals are planned, however, and one is actually being built now in Louisiana.

There will be a fierce battle fought over just how much natural gas should be allowed to leave the United States for more profitable markets in Europe and Asia. And, that battle might be fought against the backdrop of rising prices as current wells deplete rapidly without adequate drilling to replace them.

Some will say that rising natural gas prices will cause utilities to switch back to coal. But, a switch back to coal en masse by utilities seems unlikely given the emerging regulation on greenhouse gas emissions. Instead, utilities are increasingly likely to favor renewables to help them to comply with those regulations.

In whatever manner higher prices are achieved, they will be better for America in the long run since they will hasten the day when the country can say goodbye to fossil fuels as its main energy source and reroute them to more valuable and critical purposes. Those include making fertilizers, pharmaceuticals, fabrics, industrial chemicals, and plastics of all kinds, all of which are far better uses of oil and natural gas than simply burning them and wrecking the climate in the bargain.

Patient contrarians: The natural gas market isn't what it seems

noreply@blogger.com (Kurt Cobb) — Sun, 05 May 2013 12:01:00 +0000

Maybe it's the gloomy Seattle weather that has made investment manager Jim Hansen and his son and partner, Kevin, at Ravenna Capital Management immune to oil and gas industry hype about the supposed U.S. shale gas "revolution." More likely it is thorough research focused on making their clients money and keeping that money out of harm's way.

The Hansens are patient contrarian investors whose time horizon is generally several years. They can't help you if you want advice on next week's or next month's natural gas price. In fact, they're not sure anyone can reliably help you with that. So they focus on much longer-term trends, and they think they've spotted one in the U.S. natural gas market.

About a year ago when domestic natural gas prices hit levels reminiscent of the 1990s, they began to move their clients into natural gas related investments. Amid the media hype about cheap natural gas for decades, they saw a different reality.

They believed that high production decline rates in shale gas wells--which now provide about 40 percent of U.S. production--were combining with rapid reductions in the drilling of new wells in a way that would eventually cause falling production and sharply rising prices. They weren't exactly clear on the timing. But, with their patient strategy, they just needed to sit and wait for what they felt was the inevitable.

"We are long-term investors and include investments that allow us to get paid to wait," Jim Hansen said, referring to securities that generate regular payouts to holders.

A year after their call, they have seemingly been vindicated as natural gas rose from a low of $1.82 per thousand cubic feet in April 2012 to over $4 currently. Prices might dip again, Jim Hansen added, but for long-term investors the trend still looks good.

What clues led the Hansens to their contrarian views? Kevin explained in one phrase: Look at what the industry does, not what it says.

While hyping the future of natural gas, the industry was doing the following:

Organizing their natural gas gathering systems into master limited partnerships and selling them to investors.
Selling producing acreage to foreign investors who, believing the hype, generally overpaid.
And when gullible foreign investors got wise, selling land packages at rock bottom prices when many companies were desperate to raise cash to meet their debt obligations.

Despite industry protestations to the contrary, all these things told Kevin Hansen that the industry "could not have been profitable." His views were eventually verified by none other than Rex Tillerson, CEO of ExxonMobil Corp., who told an audience in late June last year, "We are losing our shirts [on natural gas]."

Just recently one chastened industry executive, Matt Fox, ConocoPhillips' executive vice president of exploration and production, let slip what price level might entice companies to increase U.S. natural gas drilling again. During an April 25 conference call with analysts he had this exchange with analyst Blake Fernandez:

Fernandez: Okay. Great. Secondly, I guess it's on the natural gas side, I always view Conoco as having probably more leverage than peers do, U.S. Natural Gas, and certainly that creates some optionality. Obviously, we haven't heard anything on increased activity just yet, but is there a certain price that we should ear-mark as say, $5 [per] MCF where maybe you would begin to increase activity there?

Fox: We do have a lot of potential there, to invest. But we're really focused in on investment now on the liquids-rich assets [oil wells and also natural gas wells that yield large amounts of higher value ethane, propane, and butane] and of course we get associated gas [gas associated with oil wells] with that so we benefit from the gas price there. I would say that I wouldn't see us redirecting any capital towards gas assets until it's significantly north of the current prices. (emphasis added)

Apart from the awkward geographic analogy so popular on Wall Street these days--"north" simply means "higher"--it's not clear what "significantly" means. But since the questioner already offered the figure of $5, both Hansens believe Fox meant higher than that.

The general problem that Kevin Hansen sees is that oil and gas companies are going to continue to prefer to drill oil wells as long as the price of crude floats near the $100 level. They will be reluctant to redeploy drilling rigs to natural gas fields until higher gas prices have been sustained for quite some time, perhaps several months and maybe longer.

But with the rapid production decline rates in shale gas wells already bringing storage down below the 5-year average and more than 30 percent below year ago levels, both Kevin and Jim Hansen expect production to undershoot and prices to overshoot, perhaps dramatically, before a ramp up in new drilling begins in earnest. That means very high volatility in the U.S. natural gas market in the not-to-distant future.

Add to that any of the obvious pulls on natural gas supply--a very hot summer (electricity demand from natural-gas-fired power plants), a very cold winter (heating demand) or a hurricane (damage to gas production in the Gulf of Mexico)--and you have the makings of a true crisis in supply. Even absent any of these, they expect prices to jump significantly in the coming two to three years.

So, what do things look like after we pass through the crisis? Kevin explained that he expects the natural gas price to settle at levels much higher than today. And, those prices will bring out the supply needed to meet demand. The exploitation of the country's large shale gas resource will then proceed in a more orderly fashion for several years.

But, dreams of vast, cheap supplies, say, at around $3 or $4 per thousand cubic feet, will be gone, and, with it plans for many new natural gas export terminals. Kevin believes that most of the export terminals now on the drawing board will never get funded. The math works like this: Export terminal operators generally work under cost-plus contracts. If the U.S. benchmark Henry Hub natural gas price is consistently at or above $6, then it won't be particularly competitive in Europe, an obvious market for U.S. liquefied natural gas (LNG).

After purchase it costs about another $6 to liquefy the gas, ship it and then regassify it. With European LNG prices currently running around $12 that would make U.S. imports only just competitive. Will buyers want to commit themselves to long-term cost-plus contracts with U.S. suppliers when prices have shown themselves to be so unstable as he believes they will be in the coming supply crunch?

Other pie-in-the-sky schemes that depend on cheap natural gas are likely to whither as well. He cites South African energy and chemical giant Sasol's dream of building a so-called gas-to-liquids plant in Louisiana, one that would turn natural gas into diesel and other products.

Given the high production decline rates, he believes that once U.S. shale gas resources are tapped out, "it's 2005 all over again." The country will be faced with declining natural gas production as it was in 2005, but this time with no relief in site. And unlike the industry, he doesn't think that scenario is decades away. Take the "s" off of decades, he says, and you'll likely be closer to being right about the timeline for America's next rendezvous with persistently falling domestic natural gas production.

The only true metric of energy abundance: The rate of flow

noreply@blogger.com (Kurt Cobb) — Sun, 28 Apr 2013 12:12:00 +0000

Okay, I'm going to give you the shortest course ever in energy abundance: Energy abundance depends entirely on the RATE of energy flow. Let me say it again: Energy abundance depends entirely on the RATE of energy flow.

Now, here is what it does NOT depend on: supposed, but often unverified, fossil fuel reserves in the ground; hypothetical, sketchy, guesstimated, undeveloped, undiscovered resources imagined to be in the ground by governments or by energy companies and often deceptively referred to as "reserves"*; claims about future technological breakthroughs; mere public relations puffery about abundance in the face of record high average oil prices.

Why is the rate of flow the key metric? Because in order to function the global economy depends entirely on continuous, high-quality energy inputs. We cannot shut down the world's electric generating plants for six months or even three months without crashing world society into a state of irretrievable chaos and decline. We cannot shut down the world's shipping fleet for even a few weeks without doing irreparable harm. Modern global society has become like a shark. It either keeps barreling forward or it dies.

Fossil fuels that are actually proven to be in the ground are by definition not currently being used, whatever we may consider their potential. Fossil fuels that are hypothetical and undiscovered by definition cannot be used. Technology is NOT energy. Technology runs ON energy. Energy first, then applied technology. The ancient Romans designed and built small steam engines and used them to animate children's toys. But, the Romans lacked the dense energy sources needed to make steam engines practical as a mode of transportation or of power for manufacturing.

Now, why am I making such a fuss about all this? Because this week we have yet another entry in the ongoing energy misinformation derby, this time from the usually sensible Atlantic Monthly magazine. In fairness, the headline on the magazine's cover which reads "We will never run out of oil" was probably not chosen by the author for it does not really respect the nuances found in the piece which inside has the only slightly less disinformational headline: "What If We Never Run Out of Oil?" The subheading makes the astounding claim that fossil fuels may not be finite making me believe that the editors didn't actually read their own story.

The editors are, of course, trotting out the tired canard that the opposite and urgent claim that we are running out of oil is made by those skeptical about oil abundance. But, the real claim from skeptics is that the RATE OF FLOW may begin to decline sometime in the not-too-distant future. Oil will be with us for a very long time, just not at these levels of production. If the rate of flow for oil declined by half in the next 20 years, we wouldn't be running out of oil at all. We'd still be pumping the same about as we were in 1967, a year of exceptional economic vitality. But, we'd feel the crunch because there are twice as many people on the planet now as there were then. And, the per capita consumption of oil has risen considerably since that year.

The Atlantic Monthly article does include some dissenting voices. But Charles Mann, the author of the piece, has missed the two most crucial points about the future supply of oil and natural gas. First, new unconventional sources of these hydrocarbons are more difficult and costly to extract than conventional ones. In addition, the unconventional well flows exhibit very steep declines in their rate of production--so steep that in the tight oil fields of Texas and North Dakota drillers must replace about 40 percent of their production PER YEAR just to maintain current output. The decline rates for shale gas are no more encouraging: 79 to 95 percent after three years according to a comprehensive survey of 65,000 oil and gas wells in 31 shale plays. Shale natural gas and tight oil drillers face a task similar to climbing up a down escalator. Each must replace enormous fractions of their current production frequently just to keep production flat. A path to persistently rising global production of oil and gas far into the future cannot be built on production from such fields.

Already, the shale gas production boom in the United States has ceased as natural gas production has been flat since December 2011 despite the more than doubling of natural gas prices from their lows in April 2012. World oil production has been on a bumpy plateau since 2005. Mann seems unaware of stalled natural gas production in the United States, and he failed to take into account the total picture of oil flows. Some 60 percent of current production flows come from aging giant fields representing just 1 percent of the world's fields, and as a group they are in decline. Production from all existing oil fields worldwide is believed to be declining at a rate of about 4 to 5 percent. We are trying to make up that decline from tight oil fields that decline around 10 times faster, and we are only just succeeding for the moment. Failing to understand the centrality of flow rates is such an elementary error that it is hard to believe that the Atlantic Monthly missed it.

But there's more. The affordability of hydrocarbons will also matter greatly. Gail Tverberg has outlined in detail on her blog Our Finite World how the high price of hydrocarbons tends to suppress economic activity which then leads to a downturn that then causes oil and natural gas prices to fall due to falling demand. That fall in prices makes unconventional sources of oil and natural gas uncompetitive leading to a slowdown in their production even as production from conventional sources continues to decline. As prices rise with economic recovery, we begin the same cycle again. This suggests that there is a limit to how much of the modern economy's financial and physical resources can be devoted to extracting energy without causing an economic contraction--something that the shark-like nature of the modern financial economy cannot withstand without the kind of severe repercussions we saw in 2008.

The Atlantic article makes one more misleading claim even as the author admits to a bias formed in 1998 while working on a previous energy article. He didn't correctly foresee the promise of experiments with hydraulic fracturing that led to the shale gas and tight oil production boom. Like a racetrack junky who bet on the wrong horse in the first race, the writer doesn't want to miss the next winner. But, he makes a faulty analogy between the new form of hydraulic fracturing and current pilot projects designed to harvest natural gas from methane hydrates, essentially natural gas trapped in ice crystals, most of which lie in deep ocean sediments. A successful test that produced natural gas from this source off the Japanese coast in 3,000 feet of water and 1,000 feet below the seabed has the energy optimists atwitter with talk of virtually unlimited natural gas supplies.

But, attempts to extract natural gas from methane hydrates should more properly be compared to the search for methods to extract oil profitably from the vast oil shale deposits in the western United States. After more than a century of trying, no one has been able to produce oil commercially from these deposits. It may happen someday at much higher prices and in very limited quantities given all the constraints. Not the least of those constraints is the water necessary to process what is not actually oil, but kerogen, a waxy, long-chain hydrocarbon that requires considerable energy and water to convert into what we call oil. Even the ever optimistic U.S. Energy Information Administration projects that by 2030 these deposits may produce only 140,000 barrels a day of what will essentially be synthetic oil. That compares to current world consumption of around 75 million barrels per day of crude oil plus lease condensate (which is the definition of oil).

As for methane hydrates, researchers have tried for decades to figure out how to extract the methane profitably and without causing the occasional explosion--a hazard encountered by companies drilling for conventional deepwater gas when they hit hydrates on their way to sought-after conventional reservoirs. As with oil shale, there are known methods now for extracting these gaseous hydrocarbons from methane hydrates. The remaining questions for both oil shale and methane hydrates are similar: How high must prices go before extraction of either will be profitable? So far, the answer is higher than what people will pay and therefore what the economy can stand. And, at what rate will we be able to get these resources out? Rate is the crucial question.

When it comes to oil shale, we know where it is. It's just that it costs so much to extract and process that we are not producing it commercially. When it comes to methane hydrates, however, we do not even know if the deposits are numerous enough or concentrated enough to make substantial commercial production possible. To pin our hopes on this has the makings of dangerously foolish energy policy.

I am not attempting here to address the climate implications of natural gas production from methane hydrates and shale, nor those of oil extraction from tight oil deposits or oil shale (kerogen). Needless to say, if the optimists somehow turned out to be right, burning all these hydrocarbons would lead to almost certain climate catastrophe. But, we are in bad enough shape as it is without compounding inaction on climate change with a misdiagnosis of oil and natural gas supplies.

Despite our best efforts, we have only just been able to keep oil supplies from declining in the last seven years. Despite (possibly exaggerated) claims that we have more oil reserves than ever, we need to remember that the rate of flow, that is, our daily consumption, has grown by a factor of eight from 1950 to the present. And, half of all the oil ever consumed has been consumed since 1985. The available reserves may be large, but they are being consumed at such a colossal rate that supposedly record reserves have been unable to lift that rate appreciably above a plateau that started in 2005. The result has been record average prices for oil worldwide for two years running. Rate is and always will be primary in evaluating our energy wealth.

While natural gas supply worldwide is likely to grow for a time, the cost of this new supply--especially if most of it comes from shale deposits and possibly methane hydrates--will be far higher than the optimists would wish. And, that has the kind of implications cited above for affordability and thus demand.

We seem to have hit a double wall that is both financial and physical when it comes to the flow of oil and natural gas. If we remain ignorant of the first principle of energy abundance, that flow rates are the key metric, then we will be doomed to bad energy policy and other serious consequences that flow from that ignorance.

*Reserves are properly defined as resources that can be extracted from known fields using existing technology and sold profitably at today's prices. Reserves are thus a tiny fraction of "resources," the estimates for which are actually vague, sketchy guesses about the amount of a substance present in the Earth's crust in a given area.

Scientific viewpoint or 'religious' belief: My cat explains energy optimism

noreply@blogger.com (Kurt Cobb) — Sun, 21 Apr 2013 13:15:00 +0000

Each morning when I release my cat from the basement where he sleeps, he rushes to the upstairs bathroom to drink water from a bowl placed there for him. He appears to have a 'religious' belief that the water in this bowl is far superior to that in the bowl sitting alongside his food in the basement. So far as I can tell, there is no discernible evidence available to him to make this distinction. I take his preference then as a matter of faith rather than evidence. The water upstairs is holy. The water in the basement—not so much.

How do I know that the upstairs water is really holy? When I forget to fill the upstairs bowl, the cat complains even if his basement bowl is full. It is hard enough to reason with a cat, but even harder to argue one out of what is essentially a religious belief.

And so it is with humans. Some ideas find their basis in fact, while others fall under the category of faith. As it turns out, those that are faith-based are the most difficult to overturn. I rarely try. But, then there is a vast sea of ideas parading as facts, when really, these 'facts' are nothing but ideology based on ideas that are empirically false or at least suspect.

Such is the ideology of the fossil fuel optimists who tell us that the marketplace will bring forth whatever fossil fuel supplies we need when we need them at prices we like. Some, but not all, tell us that fossil fuel supplies have no practical limits because it is our imagination that brings them out of the ground. Statements like that are part and parcel of the kind of magical thinking that infects the public discussion about the future of energy.

I style myself as an energy realist with an emphasis on risk management. No one can know the future. That's why it is important to use our imagination to picture outcomes that might hurt us badly and to suggest measures to prevent or mitigate those outcomes.

The fossil fuel optimists in the world tend to be economists, not geologists (who generally take an empirical rather than religious approach to matters). Those economists simply know that they know that the marketplace is a superior force—even a god-like one—to which we should exclusively entrust our energy future. Yet, that same marketplace has failed to yield enough crude oil in the last decade to provide the cheap energy that keeps the global system stable. In fact, the record price of oil has and continues to be a destabilizing force in global affairs.

My colleague Jeffrey Brown—who back in 2006 conceived the Export Land Model and through it correctly foretold the subsequent decline in global oil exports and the accompanying price rise—recently remarked that many of the optimists believe something which defies logic. They believe that the sum of production from discrete oil wells, oil fields and oil producing countries around the world—which provide innumerable examples of peak production followed by persistent declines—will never add up to a global peak and decline in oil production—ever! Oil production will grow at some percentage each year forever, indefinitely.

In fairness, I must point out that quite a few of the other optimists say that a peak in oil production is decades away. So, at least their case does not rest on a logical impossibility imposed on a finite Earth. But, they refuse to admit that no one knows the day when oil production will peak. And, the inescapable logic of their position is this: If world oil production will someday peak and decline, the risk of a decline grows with each day. Failed peak oil predictions of the past don't mean that peak oil is wrong, only that peak oil draws ever closer. The bumpy plateau in oil production proper (crude oil plus lease condensate) since 2005 ought to be cause for alarm.

Now, I should classify those economist/optimists so that their motives become more transparent. There are those who work directly for or as consultants to the oil industry. Enough said. There are those who work for Wall Street firms that do substantial business with the oil industry. Enough said. There are those who work in government all around the world. Here it can only be said that most of the world's governments have no plausible plan for addressing the consequences of a persistent decline in world oil production. So, given that, it hardly seems advisable to them to inform the public about a danger for which there is no response.

The optimists associated with the oil and financial industries will tolerate no dissent. Those of us who want a rational discussion about logical outcomes, prudent risk management and sound public policy are to be ridiculed and shouted down as heretics. In fact, those optimists are currently engaging in a public relations blitz designed to drown out dissenting voices and make people think the following: "I'm hearing that we have a lot more oil from a wide variety of credible sources: energy analysts and consultants, oil industry executives, think tank scholars, university academics, even government energy agencies. How can they all be wrong?"

But the simple truth is that—except for the government personnel—they are paid directly by the industry or have financial ties to it through donations to think tanks and grants for academic research. The government personnel get most of their information from the industry, so it is not surprising that they share the industry's view.

Keep in mind that the work that the optimists do on Wall Street and in the oil industry is focused specifically on making rich people richer—that is, the rich who own and run the oil industry and the rich who own, run and/or prosper along with Wall Street and all financial establishments worldwide. These optimists are not paid to think about the public good, but only to search out speculative profits and stoke speculative fevers for the advantage of their benefactors. Their pronouncements about energy or practically any other subject are not made for the sake of good policy, but for the sake of high profits.

If there is room for optimism about energy, logic tells us that it simply cannot lie with finite, depletable resources. We do know that the resource of sunlight is vast. The solar radiation which strikes the Earth over just 20 days is equivalent to all the energy in known reserves of coal, oil and natural gas. But, so far, we have only been able to harvest just a tiny amount of it for human purposes. While there are environmental impacts to large solar and wind installations (and, let's not forget that wind is just another form of solar energy), the energy source, the Sun, is on any human time scale inexhaustible.

As a practical matter, we would have to reduce our energy consumption drastically over time to make it possible for renewable energy to supply the lion's share of our needs. Even a very rapid and large build-out of renewable energy infrastructure would not allow us to consume the colossal amounts of energy that we do today, at least not any time soon.

But, we know how to reduce our energy consumption considerably. I always get a rise out of American audiences when I tell them that the average European lives on one-half the amount of energy of the average American. And, it's worth noting that oil consumption for Japan, Germany, and Italy has been in persistent decline since 2000. But, even in these countries, there is much more to be done.

It matters little whether my cat ever comes to the realization that he's getting the same water upstairs as he is in the basement. His 'religious' belief in upstairs water does no harm to him and inconveniences me only on rare occasions. But the religious devotion of the energy optimists to the oil abundance story and their campaign to prevent a reasoned discussion based on the facts and logic has the potential to harm us all very badly and soon.

The future of energy is not a parlor game or a poker match. It's dead serious business. The oil industry and its spokespersons in their various garbs are taking it seriously. Are you?

No post this week

noreply@blogger.com (Kurt Cobb) — Sun, 14 Apr 2013 13:53:00 +0000

A combination of computer-assisted difficulties and feline health problems have conspired to prevent me from finishing the piece I planned for this week. See you next week.

Aging giant oil fields, not new discoveries are the key to future oil supply

noreply@blogger.com (Kurt Cobb) — Sun, 07 Apr 2013 12:43:00 +0000

With all the talk about new oil discoveries around the world and new techniques for extracting oil in such places as North Dakota and Texas, it would be easy to miss the main action in the oil supply story: Aging giant fields produce more than half of global oil supply and are already declining as a group. Research suggests that their annual production decline rates are likely to accelerate.

The most recent research on giant oil fields has been available since 2009 so it doesn’t attract media attention the way new discoveries hyped by oil company public relations departments do. And yet, that research is far more important to understanding our oil future.

Here’s what the authors of “Giant oil field decline rates and their influence on world oil production” concluded:

The world’s 507 giant oil fields comprise a little over one percent of all oil fields, but produce 60 percent of current world supply (2005). (A giant field is defined as having more than 500 million barrels of ultimately recoverable resources of conventional crude. Heavy oil deposits are not included in the study.)
“[A] majority of the largest giant fields are over 50 years old, and fewer and fewer new giants have been discovered since the decade of the 1960s.” The top 10 fields with their location and the year production began are: Ghawar (Saudi Arabia) 1951, Burgan (Kuwait) 1945, Safaniya (Saudi Arabia) 1957, Rumaila (Iraq) 1955, Bolivar Coastal (Venezuela) 1917, Samotlor (Russia) 1964, Kirkuk (Iraq) 1934, Berri (Saudi Arabia) 1964, Manifa (Saudi Arabia) 1964, and Shaybah (Saudi Arabia) 1998 (discovered 1968). (This list was taken from Fredrik Robelius’s “Giant Oil Fields -The Highway to Oil.”)
The 2009 study focused on 331 giant oil fields from a database previously created for the groundbreaking work of Robelius mentioned above. Of those, 261 or 79 percent are considered past their peak and in decline.
The average annual production decline for those 261 fields has been 6.5 percent. That means, of course, that the number of barrels coming from these fields on average is 6.5 percent less EACH YEAR.
Now, here’s the key insight from the study. An evaluation of giant fields by date of peak shows that new technologies applied to those fields has kept their production higher for longer only to lead to more rapid declines later. As the world’s giant fields continue to age and more start to decline, we can therefore expect the annual decline in their rate of production to worsen. Land-based and offshore giants that went into decline in the last decade showed annual production declines on average above 10 percent.
What this means is that it will become progressively more difficult for new discoveries to replace declining production from existing giants. And, though I may sound like a broken record, it is important to remind readers that the world remains on a bumpy production plateau for crude oil including lease condensate (which is the definition of oil), a plateau which began in 2005.

One the clearest cases of the study’s key finding is Mexico’s Cantarell oil field, the second most productive in the world, until a steep decline began in 2004. Production from Cantarell stalled in the early 1990s leading Petroleos Mexicanos (PEMEX), the Mexican national oil company, to begin an aggressive drilling campaign and to build what at the time was the largest nitrogen extraction plant in the world. Once completed, the plant captured nitrogen from the air and injected it into the Cantarell field in order to counter falling pressure.

The result was a dramatic rise in production from about 1 million barrels per day (mbpd) in 1995 to above 2 mbpd in 2003, just two years after the nitrogen injection began. But, by the end of 2005 it was evident that Cantarell was in decline. What followed was a breathtaking slide from 2.136 mbpd in 2004 to just 394,000 barrels per day as of March this year. That’s a total decline of 81 percent in just over eight years.

PEMEX has stabilized total Mexican oil output from all fields at about 2.5 mbpd—it was 3.4 mbpd at Cantarell’s peak—by successfully increasing production from its Ku-Maloob-Zap offshore field. But once again the company is using nitrogen injection to achieve the increase just as it did at Cantarell. And so, PEMEX may be on course to repeat at Ku-Maloob-Zap the rapid decline previously experienced at Cantarell.

Four years on from the 2009 study it is possible that the percentage of world oil production from the giants has slipped as just enough production from new smaller fields has been added to keep global production flat. But if, as the study suggests, the decline rate for giant fields accelerates, the record-breaking expenditures and herculean technical efforts now being undertaken by the oil industry just to keep production flat may be overwhelmed.

Perched on a production plateau, either we are approaching ever closer to a decline in worldwide production of crude oil proper or new developments—that is, ones not yet in evidence—will boost the global rate of production definitively above the current plateau. The weight of the evidence, however, suggests an unfavorable outcome in the decade ahead.

UPDATED 4/9/13: After mysteriously disappearing, the missing PEMEX production report which included the latest production rate from the Cantarell oil field has returned to the company's website. I've now provided a link above.

Current U.S. energy policy: Risk management that is worse than ever

noreply@blogger.com (Kurt Cobb) — Sun, 31 Mar 2013 11:45:00 +0000

Current U.S. energy policy is, in fact, a hodgepodge of disconnected policies designed for specific constituencies with no coherent goal. The country has subsidies for fossil fuels, subsidies for nuclear power, subsidies for wind and solar, and subsidies for insulating and retrofitting buildings. We also have energy standards for some appliances and miles per gallon standards for automobiles.

What never gets asked and answered definitively in the policy debate is this: What should our ultimate goal be and when should we aim to achieve it? The first part of the question has elicited so many answers from so many constituencies that I may not be able to represent them all here. But here is an attempt to categorize the main lines of thinking concerning the country’s energy goals:

Seek the cheapest price for energy with the implication that environmental consequences should not be tallied as part of the cost.

Complete a transition to renewable energy as quickly as possible while drastically reducing the burning of fossil fuels.

Replace all fossil fuel energy with nuclear power.

Develop all sources of energy to make sure we have enough at reasonable prices. This is often called the “all-of-the-above strategy.”

Goal 1 is really the argument put forth by the fossil fuel industry and therefore a defense of the status quo. Goal 2 is the dream of every climate change activist and clean-tech executive. Goal 3 seemed to be gaining some momentum before the accident at Japan’s Fukushima Daiichi nuclear plant dashed hopes for a widespread nuclear renaissance.

Goal 4 is being touted by my congressman who heads the U.S. House Committee on Energy and Commerce, and it is the policy of Obama administration. The so-called all-of-the-above strategy is the de facto energy policy of the United States, and the one which I described above as a hodgepodge of disconnected policies designed for specific constituencies with no coherent goal.

Our energy policy wouldn’t matter except for two things:

Fossil fuels supply more than 80 percent of the world’s energy, and they are finite. We cannot count on them to supply energy to us indefinitely. We simply do not know when their rate of production might turn down though a bumpy plateau in global oil production since 2005 is an ominous sign.

Climate change induced in large part by the burning of fossil fuels is proceeding faster than models have predicted. We don’t have much time to reduce our carbon emissions radically in order to avert the risk of catastrophic climate consequences.

No one knows the future, not my congressman, not President Obama, not the fossil fuel industry, not even climate scientists. But, we can outline the risks we face based on what we know today.

About fossil fuel supplies we know two key things. Already mentioned is that production of oil proper (crude plus lease condensate) has stagnated since 2005. Second, the remaining fossil fuels, especially oil and natural gas, will come from deposits that in general are smaller, less concentrated, harder to extract (in some cases due to geology, in others because of their location such as deep under the seabed and in the Arctic) and harder to refine. This means these fuels will be far more costly and be produced at rates that are unlikely to rival the rates of the previous easy-to-get oil and natural gas.

About climate change we now know that it is proceeding faster than anticipated by climate modelers. That means the worst effects could arrive much sooner than expected, within a couple decades instead of several decades.

When it comes to oil and natural gas, it’s possible that yet-to-be-invented technology will make them cheaper and easier to extract in the future. We just don’t know. Even if that technology arrives, the ever increasing difficulty of accessing new deposits may more than wipe out any cost and productivity advantages.

It’s possible that climate change might slow down. But, that seems unlikely since events that are markers for the progress of climate change such as the melting of Arctic ice are occurring much sooner than anticipated. A few years ago it was thought that the Arctic might become ice-free in the summer by mid-century if we maintained our current greenhouse gas emissions trajectory. Now, some models suggest it could occur by 2020.

The point is that when it comes to fossil fuel supplies most of the current information suggests that supplies will likely not be as abundant or as cheap as the industry has been leading people to believe. And, when it comes to climate change, the effects and the time of their arrival have been consistently underestimated.

To manage energy supplies and climate risks, the United States has done little in terms of policy that makes sense given the gravity of the challenges it and the world face.

It is important to note that risk is not merely a function of probability. Rather, it is the product of probability times severity. But, neither variable can be assessed in a strictly numerical way given how complex the energy and climate systems are. We do know, however, that if the pessimistic scenarios for both energy and climate arrive, we are in deep, deep trouble.

Here is a key insight into risk management. The accuracy of any forecast decays quickly with time. That means that when it comes to long-term forecasts, it is not the forecast itself, but the RANGE of possible outcomes that is more important. Any forecast that doesn’t include a range is practically worthless for scenario planning purposes and probably designed to deceive rather than inform you.

And, it’s not the benign outcome that should concern us, but rather the possible dire outcomes. Why is this so? As Nassim Nicholas Taleb, author of several books relating to risk including Fooled by Randomness and The Black Swan reminds us: "[I]t does not matter how frequently something succeeds if failure is too costly to bear."

It seems obvious that the destruction of modern civilization as we know it due to inadequate energy supplies and rapid climate change ought to be something we consider “too costly to bear.” And yet, America continues with energy policies that are almost certain to fail because we are largely repeating what we've done before.

The de facto American all-of-the-above energy policy implies that increasing the rate of fossil fuel combustion should be one of our goals. That policy also fails to concentrate enough capital spending on the infrastructure (mostly electrical) needed to exploit renewable energy.

So, we end up with a strategy that assumes that fossil fuel supplies will remain adequate for decades and that climate change will remain largely benign during this period. This is not so much managing risks as ignoring them.

Some will point out that the administration is working on carbon sequestration so as to make it possible to increase fossil fuel consumption and reduce carbon emissions at the same time. The idea that carbon sequestration could achieve this result in time to avert a climate catastrophe has already been laid to rest by some fairly straightforward calculations done by energy expert Vaclav Smil. In 2010 he wrote:

This means that in order to sequester just a fifth of current CO₂emissions we would have to create an entirely new worldwide absorption-gathering-compression-transportation-storage industry whose annual throughput would have to be about 70 percent larger than the annual volume now handled by the global crude oil industry whose immense infrastructure of wells, pipelines, compressor stations and storages took generations to build. Technically possible—but not within a timeframe that would prevent CO₂ from rising above 450 ppm [parts per million]. And remember not only that this would contain just 20 percent of today’s CO₂ emissions but also this crucial difference: The oil industry has invested in its enormous infrastructure in order to make a profit, to sell its product on an energy-hungry market (at around $100 per barrel and 7.2 barrels per tonne that comes to about $700 per tonne)—but (one way or another) the taxpayers of rich countries would have to pay for huge capital costs and significant operating burdens of any massive CCS [carbon capture and storage].

Perhaps the simplest way to manage the energy transition we must undergo would be to impose a high and ever rising tax on carbon. Such a tax would not favor one particular solution to carbon-free energy. But, it would move people to conserve and to switch from carbon fuels. It would also provide inventors and businesses with the incentive needed to work out the quickest, most economical path to a renewable energy economy.

Quite often politicians and representatives of the fossil fuel industry—sometimes it’s difficult to tell the difference—will say that the United States shouldn’t undergo this energy transition alone because it will be put at a competitive disadvantage on world markets. Saying this is really the equivalent of saying that we should maintain our current course until it becomes obvious—even to the most dimwitted—that we are all committing suicide.

Waiting for catastrophe to happen before acting means that it’s too late to act. It is precisely this scenario that proper risk management is designed to avoid. If I were to grade America’s risk management strategy with regard to energy supply and climate change, I would, not surprisingly, give it a failing grade.

I only wish the damage inflicted by that strategy were limited to bad marks. Instead, the real-world consequences are almost certain to grow larger and larger, the longer the country ignores intelligent risk management principles.

Will the final blow for America’s shale gas ‘revolution’ be high prices?

noreply@blogger.com (Kurt Cobb) — Sun, 24 Mar 2013 13:47:00 +0000

As U.S. natural gas prices flirt with the $4 mark, some skeptics of the so-called shale gas revolution think prices are headed much higher. Such a move would, not surprisingly, seriously undermine the official story that the United States has a century of cheap natural gas waiting for the drillbit.

Several years ago when natural gas began flowing in great quantities from deep shale deposits beneath American soil, it seemed to be the beginning of the end of America’s troubled journey into dependence on energy imports—a journey marked by frequent worry, occasional war and enormous expense.

But, to some people this supposed solution to America’s energy needs has begun to seem as costly to the environment and human health as the country’s dependence on imported energy has been in terms of mental distress, money and blood. It turns out that this new kind of natural gas requires the industrialization of the countryside in order to extract it. And that, say those closest to the action, risks tainting air, land, and drinking water and compromising the health of humans and animals alike.

Well, at least we can say that shale gas is plentiful, cheap, American, and much easier on the climate than coal or oil. It didn’t take too long before people started looking into whether shale gas really was that much easier on the climate. A Cornell University researcher came to the conclusion that shale gas was probably worse for climate change than coal. His conclusion hinged in part on what are called “fugitive emissions”—unintentional, but unavoidable releases of unburned methane into the atmosphere during the hydraulic fracturing operations performed to extract the gas. Methane is some 20 times more potent than carbon dioxide as a greenhouse gas.

Naturally, the oil and gas industry responded vigorously to the researcher’s findings with its usual ad hominem attacks. But, it also highlighted uncertainties that are always part of any scientific study. This industry is, of course, the same one that has consistently denied the existence of climate change and continues to spend millions trying to convince the public that climate change either isn’t happening, or if it is, it won’t be that bad or if it is, it may actually be good for us.

The industry’s response to the study has, not surprisingly, been met with skepticism. That is befitting an industry that, having spent the last two decades denying climate change, now suddenly embraces it as a reason to produce more natural gas. So, despite the industry’s best efforts, the meme that shale gas is worse than coal is out there and being repeated again and again by opponents of shale gas drilling.

Well, at least we can say that shale gas is plentiful, cheap and American. But, then came the industry campaign to end federal limitations on the export of natural gas. What had been touted by the industry as a fuel that would help lead America to energy independence would henceforth be treated as just another world commodity seeking the highest bidder—even if that bidder is in China, Japan or Great Britain. The industry’s aim, of course, is to get higher prices for its product than customers in the United States can provide. As noted above, natural gas trades at around $4 per thousand cubic feet (mcf) in the United States. That compares to about $17 per mcf for liquefied natural gas delivered to Japan. The price in Europe is around $12.

Well, at least we can say that shale gas is plentiful and cheap. As natural gas prices declined from double digits in 2008 and the shale gas boom proceeded apace, the industry convinced Americans that cheap, plentiful natural gas was the country’s future for a century to come. And, when natural gas prices plunged briefly to $1.82 per mcf last April, even the oil and gas industry began to wonder whether cheap natural gas was really such a great thing. At that price or anything below about $2.50 really, almost no wells were profitable.

Last year independent petroleum geologist Art Berman, while reviewing the financial wreckage of the once flourishing, but now fallen shale gas drillers, noted that the industry was based on:

an improbable business model that has no barriers to entry except access to capital, that provides a source of cheap and abundant gas, and that somehow also allows for great profit. Despite three decades of experience with tight sandstone and coal-bed methane production that yielded low-margin returns and less supply than originally advertised, we are expected to believe that poorer-quality shale reservoirs will somehow provide superior returns and make the U.S. energy independent.

As Berman noted back then: “Improbable stories that great profits can be made at increasingly lower prices have intersected with reality.” The industry proceeded to abandon shale gas plays in favor of tight oil plays which have proven to be profitable with oil prices consistently crisscrossing $100 a barrel in the last two years.

Apparently, price does matter when it comes to natural gas. And so, it seems natural gas won’t be endlessly cheap in America after all. As Berman foretold in an earlier piece, prices would have to rise to between $5 and $6 to make currently paid-for leases profitable from this point forward and between $7 to $8 to make new leases worth pursuing. For comparison, back in the heyday of cheap natural gas, the decade of the 1990s, the average annual U.S. price was $1.92 per mcf, according the U.S. Energy Information Administration.

So what exactly has happened to U.S. natural gas production as reality has set in and companies have withdrawn drills to await prices that might actually be profitable? The answer ought to be troubling to those who are counting on endlessly escalating supplies large enough to displace the majority of oil and coal used in our economy. To wit, U.S. marketed natural gas production has been almost flat for the last two years.

The trend is so ominous that two industry insiders I know believe that U.S. natural gas production could actually start declining soon and send prices soaring. They say drillers have fallen so far behind that it will be impossible to make up for production lost from existing shale gas wells. Those wells typically see production decline rates of 85 percent after two years. (Translation: Some 85 percent of existing production from shale gas wells must be replaced every two years BEFORE production can grow.)

The future is, of course, unknown to us. But, the present and the past suggest that the so-called shale gas revolution is about to be laid to rest. Yes, shale gas might prevent total American natural gas production from dropping off a cliff even as conventional natural gas production continues to decline. And, at some point shale gas might even allow U.S. production to rise modestly above current levels. But, two things are now abundantly clear: It won’t be easy and it won’t be cheap.

Depletion: The one word oil optimists refuse to utter

noreply@blogger.com (Kurt Cobb) — Sun, 17 Mar 2013 13:50:00 +0000

With the media awash in stories telling us how much oil is being discovered around the world, there is one word which the optimists quoted in these stories refuse to utter: Depletion.

The simple fact is that depletion never sleeps. It starts as soon as an oil well begins production and goes on 24 hours a day, 365 days a year. Furthermore, it is not exactly news that oil is being discovered all around the world. The industry has been spending record amounts to find it.

What’s critical is the difference between the annual additions to oil production capacity and the annual decline in the rate of production from existing wells, a decline which is running anywhere from 4 to 9 percent depending on whom you talk to.

Even at the low end of decline rate estimates, the world must find and put into production the equivalent of what is currently coming out of the entire North Sea, one the world’s largest finds, and we must do so EVERY SINGLE YEAR before worldwide production can rise. So difficult has this task become, that we’ve only just been able to keep global production on a bumpy plateau since 2005. For now, the oil industry is on a treadmill which requires ever more drilling just to keep production even.

(Many regular readers will wonder why I continually emphasize the flat trajectory of world oil production since 2005. It’s so new readers will be introduced to this central fact about oil supplies—an indisputable trend which the industry simply refuses to talk about and even tries to obscure by changing the definition of oil to include things which are not oil. This trend has ominous implications for our society if it continues or, even worse, turns downward.)

To the untrained observer the quantities of oil recently discovered sound large. But, when put into the context of how much we consume, they won’t extend the oil age by much. Norway, which produces oil from the North Sea, recently announced its largest find since 2000, a field with nearly 1.8 billion barrels. How long would the oil in that field last the world at the current rate of consumption? About 24 days.

The math looks like this. The world currently consumes about 27.4 billion barrels a year of crude oil including lease condensate—which is the definition of oil. So, just divide 1.8 billion by 27.4 billion and multiply the fractional result by 365 days in a year, and you’ll get the number of days such a discovery could supply the world if we could pump it out at any rate we want to (which we can’t).

Well, there are larger discoveries in Brazil, you may say. If we accept the government’s figures on their face (and we really ought to be a little skeptical), then the Tupi field has 5 to 8 billion barrels and the Sugarloaf field has 33 billion. (The truth is no one really knows because there hasn’t been enough drilling.)

Let’s take the top end of the estimates and call it 41 billion barrels. If we do the above calculation for just one billion barrels, we find that it will last about 13 days. And so, a little multiplication tells us that two of the most massive finds ever (if they actually pan out) will give us 41 X 13 days of oil or 533 days, which is about a year and a half. It’s nothing to sneeze at; but it doesn’t exactly change the overall picture that much.

And, of course, this number holds only if the world does NOT increase its rate of oil consumption. But economic growth is dependent on ever increasing supplies of oil, a fuel central to every economy on the globe. India, China and many other developing countries have consistently increased oil consumption to fuel their economic growth. But because worldwide production has been flat since 2005, consumption in places such as the United States has had to fall in order to make room for growing demand from Asia.

This has happened because American and European consumers aren’t willing or aren’t able to pay as much. Oil analyst Steven Kopits has explained the counterintuitive idea that poor Asians are willing to pay more for oil and oil products than rich Westerners because poor Asians get so much more economic productivity out of the marginal barrel of oil than rich Westerners who consume many times more barrels of oil per person. The result has been that developed countries in North America and Europe have seen very little growth in their economies as Asian economies continue to sprint ahead.

Of course, the optimists have been telling us (and telling us and telling us) that so-called tight oil—the kind that comes from hydraulically fractured wells—will now finally move the needle on worldwide production. Well, so far, the net result is nada, nothing, zilch. Production from such wells has risen, but not enough to offset declines elsewhere.

And, as it turns out, fracked oil wells are now the poster children for the problem of production decline. Average annual oil production decline rates for two of the most well-developed tight oil plays, Bakken in North Dakota and Eagle-Ford in Texas, are 38 percent and 42 percent, respectively. That means that drillers in those plays must replace 38 to 42 percent of their current production EACH YEAR before they can increase production. It’s a ferociously high decline rate, some 10 times the rate worldwide. And, this is the oil that the optimists tell us is going to raise global production!

Humans evolved to be optimistic risktakers. That genetic heritage has served us well up to this point. But, sometimes that trait makes us incautious and gullible. And, the oil industry is taking advantage of a natural human inclination to believe the presumed experts, especially when they offer an optimistic tale that is designed to make us comfortable with the status quo.

In truth, unprecedented disruptions and changes in our worldwide energy system have been underway for more than a decade. We can ignore that fact, but only at our peril.

Oil's average price posts new records and they’re telling us it’s abundant!

noreply@blogger.com (Kurt Cobb) — Sun, 10 Mar 2013 16:03:00 +0000

It is a slick piece of public relations to convince people to disregard what is right in front of them and believe the opposite. And yet, that is what the oil industry has achieved with an oh-so obviously coordinated campaign to tell the public and policymakers that there is no need to be concerned about future oil supplies.

Many people remember the price spike of 2008 which shot prices to an all-time high of $147 a barrel. Oil subsequently crashed all the way down to about $35 at the end of that year as a brutal contraction gripped the global economy. But, oil has subsequently been making new all-time highs when you consider the yearly averages.

U.S. drivers should not be that surprised by this for they paid average daily gasoline prices that were higher in 2011 and 2012—$3.53 and $3.64 per gallon respectively—than they did in the previous record year of 2008 when they paid an average of $3.26, according to the U.S. Energy Information Administration (EIA).

Brent Crude, which has become the de facto world benchmark price for crude oil, has also just posted back-to-back years of record prices, higher than even the average daily price in the fateful year of 2008. In that year Brent achieved an average daily price of only $96.94 according to the EIA. But, in 2011 the average daily price was a record $111.26—which was followed by another record in 2012 of $111.63. The price in 2013 has so far averaged about $114.

It is true that the American benchmark crude—Cushing, Oklahoma West Texas Intermediate—has been trading at a discount to Brent Crude. This is because Cushing, one of the country’s largest oil depots, is being flooded with supplies from North Dakota and the Canadian tar sands, supplies currently unable to find their way to a seaport that would connect them with world markets and thus world prices. An operator I know in Houston said that rather than send his production to Cushing where the discount is between $20 and $25, he is happy to put his oil on a barge and send it to Louisiana where he has consistently been getting prices over $100.

As it turns out, most inhabitants of the globe pay prices reflective of the Brent Crude price, and that’s why it is frequently quoted as the world price.

So, how is it that the public and many policymakers have swallowed the abundance argument even though the evidence of prices suggests the opposite? The industry has made its case by saying that newly accessible tight oil deposits in North Dakota and elsewhere are going to vastly expand oil production. It has coaxed Wall Street firms with whom the industry does business to put out rosy forecasts; it has made an army of paid think-tank propagandists available to the media; it has convinced government agencies that the future is bright; and, in one case, it sent one of its own to Harvard to write an industry-funded report that says everything will be fine—in the future!

You will notice one theme here. The industry’s case for abundance rests not on a current glut or a downward sloping oil price chart, but rather on the promise of abundance at some indeterminate time in the future, that is to say, on magical forecasts. But colorful charts and cheery prognostications are not facts. And, as always, it is important to consider the source.

Keep in mind that what a good magician does is not really magic. Rather, a good magic show is based primarily on misdirection. Get the audience to look in the wrong place while you do your handiwork unobserved.

And, so it is with the oil industry. It has been able to get the public and policymakers to focus on marginal gains in U.S. oil production while ignoring declines in the rest of the world. Mathematically speaking, that is how it must be since the rate of worldwide oil production has been essentially on a bumpy plateau since 2005. As U.S. production has grown, production in the rest of the world as a whole has declined by about the same amount.

Now, that wouldn’t matter quite so much if oil were not traded in a world market dominated by large countries that are still huge importers of crude oil. But, the other fact that the industry PR magicians don’t want you to focus on is that global net exports of oil—that is, the oil available on the world market to importers such as the United States, China, Japan, India and much of Europe—has been shrinking since 2006. The global competition among importers for those shrinking exports has been a major factor in sustaining record prices for the past two years.

It is worth keeping in mind that all of this is happening as the so-called fracking “revolution” is proceeding, as record investment in oil exploration and development continues, and as consistently high prices drive the necessary profits for all this effort. And yet, the impact on supplies worldwide has been almost imperceptible.

In fact, as John Westwood, chairman of the energy consulting firm Douglas-Westwood, explained in a slide presentation, it is becoming exceedingly difficult to add new oil production capacity. Some $2.4 trillion in oil industry capital expenditures from 1994 to 2004 increased the worldwide rate of oil production by 12 million barrels per day. However, $2.4 trillion in capital expenditures spent from 2005 to 2010 resulted in a decrease in the rate of oil production of 200,000 barrels per day. (See slide 8 of Westwood’s presentation.)

I am reminded of the late comedian Richard Pryor who, when caught by his wife in bed with another woman, explained that things weren’t what they seemed. When she resisted his explanation, he asked her, “Who you gonna believe? Me or your lyin’ eyes?”

Once you’ve seen the troubling facts about flat global oil production, shrinking global oil exports, and record high prices, about all the industry can do is insult your intelligence by asking the same question.

Lower highs: The real trajectory of U.S. oil production

noreply@blogger.com (Kurt Cobb) — Sun, 03 Mar 2013 14:33:00 +0000

The way the oil industry is touting gains in U.S. crude production, you would think that production is soaring to new all-time highs. But the facts say otherwise. Below is a monthly plot of U.S. crude oil production through December 2012.

U.S. production remains well below the peak achieved in 1970 and below a secondary peak in 1985—a lower high, if you will—which resulted from the ramp-up of production in Alaska. But since then production has gone relentlessly downhill until just recently.

It is true that a new form of hydraulic fracturing—high-volume slick-water hydraulic fracturing—has made available sources of oil not previously accessible. But it is also true that the industry’s hyperbole doesn’t square with the evidence. The U.S. Energy Information Administration’s (EIA) latest estimate of technically recoverable oil from so-called tight oil deposits—the ones made accessible by this new type of hydraulic fracturing—is 33 billion barrels (see below). It sounds like a lot. But, in fact, it would only supply the United States for about 6½ years (assuming current net annual consumption of about 5.1 billion barrels). Not bad; but not a world-changing number, especially when you consider that all oil goes onto a world market where 33 billion barrels would last a little over a year. Beyond this, the estimate says little about how much of that oil will ever be economically recoverable. Wherever it isn’t, no one is going to extract it.

But there is another column in the EIA table above that is worth focusing on, the one labeled “% of Area Untested.” We don’t yet actually know that much about the potential for the country’s tight oil (often mistakenly referred to as shale oil). In some areas drilling has only just begun, and in others there’s been no drilling at all.

There is reason to believe that things may not go as planned. In the areas already drilled, drillers have focused on a few sweet spots that have proven profitable. That makes perfect sense. But, it suggests that they must now venture beyond those sweet spots to find additional supplies from deposits that will be more refractory and thus more expensive and difficult to exploit. No one is certain how drillers will fare. But logic suggests that production growth will slow and then at some point stop—after which a production decline will begin in earnest.

The EIA projects that U.S. oil production will peak later in this decade—a little below the previous secondary peak in 1985. That would result in a tertiary peak, or yet another lower high. In the meantime the extra supply promises to lower America’s bill for oil imports. But the modest turnaround in America’s oil fortunes won’t solve the larger problem of worldwide oil depletion which, despite American gains, has kept worldwide oil production on a bumpy plateau since 2005.

We live in a global oil market, and that market remains tight as is evidenced by an oil price hovering around $90 in the United States and $110 in Europe, the latter price being more representative of what most people pay.

For obvious reasons the oil industry doesn’t want us to think about weaning ourselves off oil anytime soon. They believe that if they can convince us that oil is abundant, we won’t even try. But oil prices have been telling us for almost a decade that supplies are much tighter than the industry is acknowledging. And, the facts about U.S. oil production tell us that if there is a revolution going on in American oilfields, it is only a minor one, and one that will soon be reversed.

That doesn’t leave us much time to prepare for a world in which oil supplies are almost certain to dwindle globally as the current plateau in worldwide production turns into a decline. And, that will be a problem for everyone including the United States, a country that remains the planet’s largest importer of crude oil.

The questionable logic of U.S. natural gas exports

noreply@blogger.com (Kurt Cobb) — Sun, 24 Feb 2013 17:18:00 +0000

With U.S. natural gas production having risen more than 25 percent from its nadir in 2005, natural gas producers are pushing for an end to limits on U.S. natural gas exports. The growth in supplies comes primarily from previously inaccessible shale deposits deep in the Earth, a development that has convinced many people that the country is now entering a new era of natural gas abundance.

Trouble is, the United States remains an importer of natural gas. Through November 2012 the country imported 12.5 percent of its natural gas consumption for the year, mostly from Canada. That's down from an average of 15.7 percent for the previous 20-year period. But it's not exactly energy independence.

So worried are industrial consumers of natural gas about exports pushing up prices and thus their production costs that they've formed an alliance to fight the loosening of export restrictions. The alliance includes utilities dependent on natural gas to fuel electricity generation, chemical companies that use it as a feedstock for making myriad industrial chemicals, and heavy industrial users such Alcoa and Nucor who use natural gas to fire their metal-making operations. (Those who heat their homes and businesses with natural gas also stand to benefit if the alliance prevails.)

The members of the alliance have reason to worry since Europeans are paying close to $12 per thousand cubic feet for liquefied natural gas and the Japanese are paying more than $17. Compare that to the U.S. domestic pipeline price for natural gas of just $3.27 as of last Friday (Henry Hub spot price).

It's a classic case of those in an extractive industry seeking top dollar for their minerals, and those who buy the minerals to make other things seeking to keep a lid on the price of their inputs. Here in a nutshell is the logic on each side:

Natural gas producers believe they ought to have the right to sell production coming from under American soil to the highest bidder worldwide. They can't do that now because of U.S. export restrictions. Whether the United States produces enough natural gas for domestic consumption is actually irrelevant to this argument since it rests on the notion that the owners of the natural gas have the right in a free market to dispose of it as they wish. (For context, these same companies have been promoting the idea of American energy independence in the media in order gain public acquiescence to lax environmental regulation and support for opening public lands to more drilling. So much for energy independence!)
The industrial consumers believe that there is a broader good to be served by keeping the prices of energy and chemical feedstocks low for domestic industries, and thereby giving those industries an advantage over competitors abroad. This translates into higher employment and income across wide areas of the American economy since low natural gas prices benefit practically every business and homeowner—everyone, in fact, who pays a natural gas bill. High natural gas prices, on the other hand, only benefit those in the natural gas production business while dampening activity in natural gas consuming industries and the economy in general.

But what if U.S. natural gas production does ultimately exceed U.S. consumption? Won't that make both sides happy? Actually not necessarily, because in a worldwide market for natural gas, every consumer is bidding against every other consumer. Even if U.S. domestic gas production does rise significantly from here, exporting it would make everyone in the United States subject to worldwide pricing pressures. Right now the U.S. exports small amounts of natural gas to Mexico and Canada in places where it makes economic sense to do so because of the proximity of American supplies.

But, what the natural gas producers want is the development of a vast network of export terminals that cool natural gas to -260 degrees F where it becomes a liquid that can be shipped overseas by special liquefied natural gas carriers. If that expansion proceeds far enough, it might bring U.S. natural gas prices to parity with world prices. If it doesn't proceed very far at all—perhaps due to pressure from the alliance of natural gas users mentioned above—then the producers may only see a slight rise in domestic natural gas prices beyond what they would have seen without such export terminals.

All of this assumes that there will be plentiful supplies of natural gas in the United States. But, that might not be the case. U.S. natural gas production has been essentially flat for more than a year. Partly this is due to very low prices and subsequent cutbacks in drilling. But it belies the claim made in Congressional testimony by the industry's protagonist-in-chief, Chesapeake Energy CEO Aubrey McClendon, that supplies can grow 5 percent per year through 2018.

While the industry still clings to the now widely discredited notion that the United States has a 100-year supply of natural gas (at current rates of consumption), new assessments have suggested vastly reduced numbers for the amount of U.S. natural gas from shale—the main source of new supplies—that is technically recoverable. In 2011 the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, reported 862 trillion cubic feet (tcf) in shale gas resources. In 2012 the agency revised the number downward dramatically to 482 tcf based on new information from the U.S. Geological Survey. Keep in mind that this number says nothing about whether such resources will be economically recoverable. That number is bound to be much smaller.

Actual proven reserves of dry natural gas in the United States at the end of 2010 (the most recent date for which U.S. Department of Energy figures are available) amounted to about a 12-year supply at current rates of consumption. A reserve is something that can be produced profitably at today's prices with existing technology from known fields. As you will see, it is a much smaller amount when compared to "resources," a term in the oil and gas industry that really only refers to estimates based on sketchy evidence of what might be in the crust of the Earth under a country, state or field.

Resources are never exploited to 100 percent, and often only a small fraction ever become reserves. Keep in mind that only 35 percent of all the oil ever discovered has actually been produced. The rest is too expensive and sometimes even impossible to extract. That's in fields we have drilled extensively! The percentage of an estimated resource that is likely to be extracted is often less than that because resource estimates have almost never been tested with an actual drill.

Petroleum consultant Art Berman estimates that when all natural gas resources thought to be available under the United States are totaled, and an appropriate reduction is made based our experience with extraction, the actual economically recoverable resource of natural gas is likely to be closer to 23 years of supply at current rates of consumption, not exactly a figure that makes one confident about committing to send large quantities of natural gas abroad.

Yet another thing to keep in mind is that none of the estimates discussed above contemplate increases in the rate of U.S. natural gas consumption, increases that natural gas producers have been promoting. The producers have suggested that there is enough natural gas to justify building a fleet of natural gas powered vehicles and increasing considerably electricity generation from natural gas (something that is already happening). If the rate of consumption were to increase each year, the time to the exhaustion of the presumed natural gas resource would shorten dramatically and the time to a peak in output followed by an irreversible decline would happen much, much sooner as well. Exactly what will we do with our new natural gas powered generating plants and vehicles if we experience a continuous decline in natural gas supplies, say, starting in 2025?

Given all this it's surprising that industrial natural gas users are even considering accepting a compromise to allow a limited, but considerably higher volume of exports. U.S. shale gas resources—the biggest source of new supplies—continue to be a moving target, and their estimated size is moving swiftly downward. Possibly for that reason, the alliance of natural gas users mentioned above is suggesting that a decision about U.S. exports be delayed until a clearer picture of the country's natural gas endowment emerges. A Dow Chemical Company spokesman opined that if there really is a 100-year supply of natural gas under the United States, then we need not be in any rush to make a decision about exporting U.S.-produced gas.

Kinda makes you wonder why all the natural gas producers are in such a hurry.

Natural gas consumers just got a big subsidy from investors, but it can’t continue

noreply@blogger.com (Kurt Cobb) — Sun, 17 Feb 2013 15:30:00 +0000

It isn’t often that the world’s working stiffs get a chance to fleece rich investors. But that’s essentially what has happened as a result of the vast overinvestment in natural gas drilling in the United States. That overinvestment has led to a glut which last April pushed the price of U.S. natural gas down to $1.82 per thousand cubic feet (mcf), a level not seen since 2001.

Investors have essentially subsidized natural gas through huge loss-making investments, creating an oversupply that has sent prices significantly below the average cost of new production. That means consumers get cheap natural gas while investors kick themselves for not realizing that they were buying into a flawed concept—one that oil and gas consultant Art Berman has called “an improbable business model that has no barriers to entry except access to capital, that provides a source of cheap and abundant gas, and that somehow also allows for great profit.”

The conventional wisdom is that prices are likely to stabilize between $3 and $4 per mcf and stay there for the rest of the decade as the natural gas drilling juggernaut continues. There just one problem with this outlook. The juggernaut has most definitely NOT continued.

Since the last week of August 2008 when the count of active U.S. natural gas drilling rigs peaked at 1606, the number of active rigs has plunged to just 425 for the week ending February 8.

Investors who helped to fuel the boom included hedge funds, wealthy individuals and institutional investors, all of whom chipped in a lot of money to finance the drilling of individual wells for what turned out to be meager payouts. None are eager to get burned that badly again.

In addition, the share prices of publicly traded drillers such as Chesapeake Energy, Devon Energy, Encana, and Southwestern Energy—who put an extraordinarily large proportion of their efforts and funds into finding natural gas (as opposed to oil)—have plummeted. That decline has for now made raising new capital through stock issuance a relatively rare event.

Furthermore, many drillers—who borrowed heavily to help finance their drilling efforts—now find themselves deeply in debt, groaning under the weight of interest charges and loan repayments. But, they’ve been unable to do much except sell assets to counter the devastating effects that low natural gas prices continue to have on their balance sheets.

It’s hard to imagine the same investors and banks deciding that for the rest of the decade, they’ll keep repeating what they’ve just done.

As for the drillers, they have moved on. They have already repositioned their rigs for drilling oil which is currently fetching a splendidly profitable price near $100 a barrel, that is, near the historically high levels seen since 2008. It turns out that even the natural gas drillers don’t believe the natural gas story any more if we judge by their actions. Indeed, even the biggest booster of the cheap (but somehow profitable) natural gas forever narrative, Chesapeake Energy, has given up and turned its focus to oil.

So, where does that leave the working stiffs who heat their homes with natural gas, the utilities who burn it to make electricity, and the chemical manufacturers who use it as a feedstock for many chemicals including nitrogen fertilizer? They all face an uncertain future in which natural gas prices are likely to rise significantly, perhaps even returning to the double-digit nosebleed levels of 2008 before gun-shy investors and drillers will dare to take the necessary steps to bring on significant new supply.

Which begs the question: What if drillers and investors wait that long to move back into the natural gas fields in force?

Petroleum geologist Jeffrey Brown of Export Land Model fame offered a startling response in a conversation at a recent conference I attended. The production decline rates of the shale gas wells that are providing the bulk of new U.S. supplies are so high—60 percent in the first year and up to 85 percent by the end of the second year—that we may never be able to return to today’s production level.

That would certainly put a nail in the coffin of the natural gas abundance narrative.

BP Energy Outlook 2030: An exercise in wish fulfillment

noreply@blogger.com (Kurt Cobb) — Sun, 10 Feb 2013 16:34:00 +0000

“Like dreams, statistics are a form of wish fulfillment,” French philosopher Jean Baudrillard once said. Substitute “forecasts” for the word “statistics,” and you’ll have a good understanding of the public reaction to the recently released BP Energy Outlook 2030.

The psychoanalytic definition of wish fulfillment is “the satisfaction of a desire, a need, or an impulse through a dream or other exercise of the imagination.”

The oil giant’s long-term forecast—really an “exercise of the imagination”—was greeted with a sort of breathless astonishment by the media who took it for a statement of fact concerning the one thing about which we cannot know anything for certain: the future.

My first response to the coverage was: “Well, what did you expect the company to say?” This is the world’s third largest oil company. Of course, its forecast through 2030 is that the world will remain hooked on fossil fuels, particularly oil which, BP tells us, is going to be plentiful despite what those peak oil killjoys are saying.

To admit any near-term limitation would have meant that the company’s business model wasn’t just flawed, but about to be revealed as a sinkhole for long-term investors as its main business winds down. That would have led to an immediate downward valuation in the stock price and a considerable hit to the wealth of the company’s managers due to the effect on their stock options and holdings.

Once again, I say, “Of course, they’re telling everyone they’re optimistic about oil supplies.” And yet, a look at the company’s actual situation ought to lead to a much different conclusion.

BP’s oil and natural gas production combined has declined about 15 percent since 2009. (The linked article is in French, but Google Translate does a pretty good job of rendering it intelligible for those who can’t read the language.) And, it’s not just the 2010 Gulf of Mexico oil spill that’s been plaguing the company. The oil giant’s production is declining in the North Sea, in the United States and in Africa. Even in Central Asia where BP has dominated production in Azerbaijan, it is losing production volume.

Lest you think BP is alone, read the entire article. ExxonMobil’s conventional crude production is down 27.5 percent since 2007. French oil giant Total’s oil production (reported as crude and natural gas liquids production) declined by 18.8 percent between 2007 and 2011. Among the top four oil companies in the world only Shell seems to have sidestepped the decline for the present.

The strategy for most of the majors now is to replace their reserves with something called “barrels of oil equivalent.” In essence, this means natural gas on an energy equivalent basis. (Approximately 6,000 cubic feet of natural gas contain the same energy as a barrel of oil.) But to admit the ongoing decline in their oil production capacity and then also to admit that there is little chance of turning that trend around would be tantamount to corporate suicide—at least if the objective is to collect the largest possible quarterly bonus and stock options payoff.

But there is something else at work here, namely, the credulity of the media and of public policy makers. It would be easy to ferret out a few facts that would cast serious doubt on BP’s forecast—for example, that world oil production proper has been flat since 2005 despite record prices and record investment in new production. If the record prices and record investment of the last seven years can’t lift world oil production significantly off its current plateau and if the supposedly revolutionary technology that is being deployed can’t either, then what is going to happen between now and 2030 to change things?

So, the explanation for this credulity and the oil industry’s ability to exploit it must lie elsewhere. Here’s my attempt to explain. First, most people don’t know that long-term forecasts are almost useless except as ways to explore various scenarios. The margin of error quickly escalates just a few years out and becomes incalculably large when the forecast is stretched to decades. In fact, previous long-term oil supply forecasts from government and international agencies and from ExxonMobil have been considerably wide of the mark. All of them were too optimistic about supply and wildly low on prices. (This is another one of those facts that would be easy to check.)

And yet, because the forecasts come from official agencies and the industry itself, people believe that these experts can somehow discern the future clearly. Well, clearly they cannot. But, most people never go back to check.

Second, the stability of global society depends entirely on the continuous flow of energy and materials into that society. More particularly, we have now become addicted to uninterrupted growth in those supplies. It is simply unthinkable to most people—even ones in high places who ought to know better—that this growth could come to a halt and indeed go into reverse.

If such a reversal were sustained, the consequences would be outside our experience within that last 150 years which have seen nothing but rapid economic expansion. When something is outside one’s experience, it’s easy to classify it as simply “not possible.”

And so, our system is utterly reliant for its stability on the presumed correctness of optimistic long-term supply forecasts for finite fossil fuels, particularly oil, put out by BP and others. These fuels are the backbone of the world economy supplying more than 80 percent of our energy with oil supplying about a third of the total. We know—we are certain, in fact—that based on previous experience with oil wells, oil fields, and oil-producing countries, worldwide oil production will someday decline. And yet, even with the fabulously faulty record of long-term forecasts, we still put our fate into the hands of self-interested parties who tell us not to worry. We do this because somehow many of us cannot face a future which would require deep structural changes in our lives.

As it turns out, the BP Energy Outlook 2030 is not a statistical or scientific document, but rather a political one. It is not a statement about the way the world is so much as about the way BP wishes it to be over the next 20 years. Naturally, that includes BP continuing as one of the world’s largest and most influential corporations.

In short, the BP Energy Outlook is an exercise in wish fulfillment. The company and many who read its forecast think that if we dress up our wishes in the form of color graphs and charts, those wishes will come true—or possibly they have already come true because BP conveniently tells us so in advance.

Certainly, one of the world’s major oil companies wouldn’t mislead us on a matter as grave as the future of oil, would it?

____________________________________________________________

P.S. For your edification here is the disclaimer on page 2 of the BP Energy Outlook 2030:

This presentation contains forward-looking statements, particularly those regarding global economic growth, population growth, energy consumption, policy support for renewable energies and sources of energy supply. Forward-looking statements involve risks and uncertainties because they relate to events, and depend on circumstances, that will or may occur in the future. Actual outcomes may differ depending on a variety of factors, including product supply, demand and pricing; political stability; general economic conditions; legal and regulatory developments; availability of new technologies; natural disasters and adverse weather conditions; wars and acts of terrorism or sabotage; and other factors discussed elsewhere in this presentation. (emphasis added)

In other words, you shouldn’t really count on any of what you read in the forecast turning out the way BP says it will. It’s boilerplate, I know. But there is more truth to this boilerplate language than the rest of the report. Should we really be basing our energy policy on information this shaky and uncertain? The risks are wildly asymmetrical. If BP is right, then it’s business-as-usual. If they’re overly optimistic then we could be in for a period of turmoil that could destabilize the entire global economic system which will be unprepared for the consequences of a persistent decline in oil supplies. Why? Because BP and other major forecasters told us we don’t have to prepare.

P.P.S. Another astute reader of the Outlook 2030 noticed that at the end of BP’s cheery presentation, the company wrote that if its forecast comes true, we will be faced with a climate catastrophe. The forecast didn’t put it that way; but, that’s the implication of this language:

Carbon emissions from energy use continue to grow, increasing by 26% between 2011 and 2030 (1.2% p.a.). We assume continued tightening in policies to address climate change, yet emissions remain well above the required path to stabilise the concentration of greenhouse gases at the level recommended by scientists (450 ppm).

It turns out then that if the BP forecast comes true, it is actually a doomsday prophecy. Not so cheery after all.

Oil, climate and time: Why some problems will wait and others will not

noreply@blogger.com (Kurt Cobb) — Sun, 03 Feb 2013 13:47:00 +0000

America believed it could put off the question of slavery. It did for 73 years from the drafting of the U.S. Constitution to the beginning of the Civil War.

America believed it could put off women’s suffrage after the Civil War even though so many women had worked so hard for abolition and for the rights of former slaves. It did for 54 years until the passage of the 19th Amendment.

The right of gays and lesbians to marry and to be free from discrimination in employment and housing is an ongoing struggle.

All these problems, however painful in their consequences, were or are being addressed over time. I say over time because, by their very nature, they were or are capable of being addressed by human action alone. In short, they are social problems. And, while those who are suffering from discrimination and hatred would like both to end now, the American republic has experienced continuity for more than 220 years despite many such trying social issues.

With gun control, the soaring federal deficit and the sluggish economy dominating the headlines now, it easy to confuse problems that are primarily social in character such as gun control with ones that involve the laws of physics such as climate change and resource depletion.

Exclusively social problems have a way of being addressed—if they are addressed at all—over many decades. Problems such as climate change and resource depletion will not wait for that kind of schedule.

The laws of physics are indifferent to the political schedules of humans. Climate change appears to be speeding up as ice melts faster and faster on Greenland and at the poles. Last year was the warmest year ever recorded in the United States. Climate change is not struggling to be emancipated or seeking the right to vote or to marry. It cannot be put off with assurances that it will have to wait until next year when the political climate might be better.

Climate change is indifferent to such condescension and remorseless to boot. It proceeds whether we like it or not, whether we acknowledge it or not.

The same can be said of resource depletion. We can pretend that America is heading toward so-called “energy independence,” even as worldwide oil production remains stalled for seven years running. But oil cannot be cajoled to do anything that the laws of physics will not allow.

Lawmakers and presidents think in terms of what the public or a particular lobby will permit. Physics does not have a lobby. It merely has laws which we have no choice but to follow. If our human laws, regulations, customs and practices don’t come into alignment with the laws of physics, then it will be our grief since the laws of physics show mercy for no one.

It really is that simple. The complex part is the human side of the equation. We did not evolve in a climate that was rapidly changing. We did not evolve in a full world in which both renewable and nonrenewable resources were being tapped at ever higher rates. We did not evolve in societies so complex and global in their scope that our circle of electronic “friends” might include thousands, many of whom live continents away. We did not evolve in societies in which planning for events decades into the future—for example, highway and airline traffic—was a necessity.

We are fit to understand and align with the laws of physics in matters that are close to us, say, playing catch or accurately steering a car. But when it comes to abstract worldwide phenomena, we seem to be at a loss.

Some say it is the vested interests in the fossil fuel industry and elsewhere that are preventing us from taking the necessary actions to address climate change and resource depletion. There is certainly some truth in this. But those interests are counting on us to stay stuck in our evolutionary training which makes us blind to the most urgent problems around us.

Transcending that training will be our most difficult and necessary task ahead if we are to survive as a species in the coming century.

Energy literacy through an astonishing coffee table book

noreply@blogger.com (Kurt Cobb) — Sun, 27 Jan 2013 17:15:00 +0000

It is hard to imagine a more unlikely vehicle for advancing energy literacy than a finely crafted large format picture book. Energy, after all, is invisible. We see its effects, but never the thing itself. And yet, Energy: Overdevelopment and the Delusion of Endless Growth succeeds and succeeds profoundly for it puts on display those effects so compellingly that the reader cannot help but turn the pages to see more.

Taken with the eye of the fine art photographer, the book’s images project a disturbing beauty. They seduce the viewer with their attention to composition, color, light, and perspective. This impels us to enter into these images and contemplate rather than merely visually consume an exploding offshore oil platform; a desolated landscape strewn with derelict drilling rigs; a decapitated mountain; a pelican coated with oil; a coal strip mine seen from its bottom; and a tar sands mine seen from the sky. Once drawn in, the viewer cannot help but feel the immensity and drama of the energy issues we now face. And, once drawn in, the viewer wants more images that will somehow explain this immense drama and its significance for each of us.

Leafing through the pages, you will be astonished at each successive image. Eventually, you will reach a substantial block of text. By then you will be more than ready for some explanation to put into words what all these images taken together might mean.

The essays that follow are penned by noted writers such as poet, novelist and farmer Wendell Berry, climate change activist Bill McKibben, and peak oil author Richard Heinberg; by scientists such as climate scientist James Hansen and sustainable agriculture researcher Wes Jackson; and by big-picture pragmatists such as Plan B author Lester Brown and energy efficiency guru Amory Lovins.

These and others take readers through the entire controversy surrounding energy starting with key energy concepts and then moving onto the waning of the fossil fuel age, alternative energy, climate change, energy conservation, and energy efficiency. Opposite these essays, many full-page images continually remind us of the colossal nature of the subject.

I feel comfortable revealing the overall conclusion of the book without issuing a spoiler alert for in order to understand this conclusion, you must understand everything that precedes it. Here it is: We must drastically reduce our use of energy over the coming decades if we expect human civilization and perhaps even humans to survive.

This conclusion runs so contrary to the conventional wisdom that those new to energy issues may conclude that it cannot be so. But I urge you to keep reading and contemplating the images. The book’s second section correctly characterizes our energy situation as a predicament. The dictionary defines predicament as a “a difficult, perplexing, or trying situation.” Frequently, it means a situation for which there is no response that restores the status quo ante. Problems have solutions; predicaments require coping mechanisms.

To disabuse readers of the solutions currently on offer—such as new unconventional sources of oil and natural gas, “clean” coal, nuclear power, massive hydropower dams, biofuels, and geoengineering of the climate—an entire section of essays explains why these are false solutions if by solutions people mean that we can go on with business-as-usual after implementing them.

As image upon image builds in your mind, you will begin to see that there are deeper concerns at stake, and the essayists help elucidate these: the rights and survival of other species; the voracious human appetite unleashed by modern global capitalism and its creed of perpetual growth; the nature of human happiness; and the importance of beauty. (The book, in fact, treats us to some images of unspoiled landscapes to remind us of the beauty we are losing.)

Economic growth has limits on a spherical planet. Those limits are already in evidence. What Energy does in a profound way is demonstrate that human beings are limited creatures, both in their understanding and their powers. We humans have already amply demonstrated that by not anticipating and then not addressing the myriad critical environmental and resource problems we face today.

What this book seems to ask then is whether accepting limits, ours and the Earth’s, can make us and our posterity better humans—or whether it is simply inevitable that our hubris borne of nothing other than a brief period of cheap, plentiful but finite energy will lead us to ruin.

History and science tells us that this era must end. How it will end is partly in our hands. Energy does make a few suggestions: conservation, distributed renewable energy, reinvigorated local economies, family planning, and a renewed emphasis on the intangible rewards of being human including the fellowship of others and our encounters with beauty.

Will we continue to accept the religion of unlimited economic growth—which must also be accompanied by unlimited growth in the production of energy and other resources—until a remorseless nature enforces its limits upon us?

Or will we accept those limits—now so painstakingly outlined to us by our own science—and seek out the happiness and beauty that come from working in concert with others to transform our society into one that can sustain us—and sustain all the living things which make our lives possible and which have a claim on the biosphere that we can no longer afford to ignore?

Political transformation in the age of energy scarcity

noreply@blogger.com (Kurt Cobb) — Sun, 20 Jan 2013 14:54:00 +0000

A professor friend of mine recently asked his freshman writing class what makes civilization possible. The students puzzled for a minute and then someone said, "Cities." Of course, that's really just the definition of civilization. "But what makes those cities possible?" the professor asked. No one could really come up with an answer.

Here were students drawn in many cases from rural areas, some of whom lived on farms; and yet, the most basic energy flow in modern civilization—in any civilization—from farm to city in the form of surplus food was completely opaque to them. My friend remarked to me that a century and half of cheap energy in the form of fossil fuels has attenuated our awareness of energy flows so much that we as a society have become essentially unconscious of energy.

That is a state of mind that could only be the product of energy abundance, of an exceptional period in human history when the surplus energy available to society was so great that the average person simply did not have to think about it. And, so as energy scarcity returns to civilization as the norm, we are being forced—often painfully—to become conscious once again of the energy flows in our daily life. As a whole, human societies are only just beginning to wake up to this new era—except, of course, where life has remained close to the land, and failure to understand and create the necessary energy flows (particularly food) has always been tantamount to a death sentence.

The era of abundance which is now coming to an end created a dependence on a technical-corporate-financial energy elite which took over the provisioning of energy for society as that enterprise became ever more complex—advancing light-years beyond the pick ax of the 19th century coal miner. So long as energy remained abundant, the legitimacy and autonomy of this energy elite went largely unchallenged. Even in countries where the government controls energy resource exploitation, a small elite remains in charge of the process, a process thought to be largely technical in nature.

But the return of energy scarcity in the last decade—in the form of record high oil prices, high and volatile coal prices, wildly volatile natural gas prices in the United States and high prices for liquefied natural gas internationally—all this now threatens to undermine the legitimacy and autonomy of the energy elite. People are beginning to wonder whether it is wise to leave such matters to the putative experts. Should the government take a more active role in directing energy policy? Should communities and households seek to provide their own energy in the form of renewables or even community-owned utilities? Should steps be taken to reduce energy use dramatically to cushion a possible future decline in the availability of energy?

So rattled by these stirrings is the oil and gas industry that it has launched a campaign to convince the public that these hydrocarbons will return to their former abundant state for the long term. This campaign goes by the moniker "energy independence" in the United States. Of course, energy independence for the United States is unlikely unless it is based on radical reductions in energy use and widespread deployment of alternative energy. Naturally, the oil and gas industry does not have this kind of energy independence in mind.

The industry campaign relies on the clever and deceptive move to redefine what oil is. “Oil” is now supposed to include natural gas plant liquids (which as you might guess come from natural gas wells and include propane, butane, ethane and pentane), biofuels which include ethanol and biodiesel, and refinery processing gain (which merely measures the well-known scientific fact that the volume of refined products from crude always exceeds the volume of crude oil input). Back in the land of reality worldwide production of crude oil proper, which is defined as crude oil including lease condensate, has been flat since 2005. But, that doesn’t work well with the abundance narrative. So the industry has persuaded government agencies and especially the media to accept this redefinition without them really understanding it.

The campaign also depends on ignoring inconvenient statistical trends. For example, U.S. coal production has been flat since 1998. But the more interesting news is that the total energy content from that coal has been dropping. We are now exploiting coal that is lower and lower in quality. And, the boom in U.S. natural gas production that was supposed to go on for a century has already stalled. Natural gas production in the United States has been flat for over a year.

While the basis for the claim of renewed abundance and energy independence is not borne out by the evidence (see here, here, here and here), the purpose of the campaign is two-fold: 1) To persuade policymakers and the public to open more public lands to fossil fuel exploration while relaxing environmental regulations and 2) to convince both groups that because energy abundance is returning soon, no changes in the current structure of energy production and distribution need to be made. In other words, the technical-corporate-financial energy elite that currently controls the bulk of the world's energy supply should remain intact and in charge.

Constraints experienced in oil supplies in the 1970s gave a foretaste of how the public might become more engaged in shaping our energy future. Many alternative energy projects involving solar and wind became the responsibility of the household and the individual business owner. The return of cheap energy in the 1980s and 1990s, however, reinforced the power of the energy elite as public awareness of energy plummeted along with energy prices. Since then, wind and solar energy have been increasingly concentrated in the hands of utilities as the energy elite sought to put these forms of energy under its dominion.

But what if we are, in fact, moving into an era of energy scarcity? And, what if our previous energy abundance was, in fact, not merely a product of our inventive genius, but actually the chance concatenation of political, social, economic, technical and even ancient geologic events?

The pronouncements of the fossil fuel industry and its paid spokespersons on Wall Street and elsewhere are clothed in certainty. Their nicely designed graphs of fossil fuel use go up and up into the future. But what if instead we are not at all certain about future energy supplies? What if our previous abundance has been more a product of good fortune than technical competence? The discovery of fossil fuels was essentially a one-time event in the epoch of humans. And, we are on course to use the bulk of those fuels in just two centuries, fuels which took hundreds of millions of years to deposit in the Earth's crust. Given the uncertainty, shouldn't we all be engaged in thinking about and acting on our energy future?

The current technical-corporate-financial energy elite knows only how to manage abundance. Abundance smoothes over questions about equity in energy distribution. And, the very ideology this elite adheres to says that energy constraints can only be temporary. In the long run, economic incentives and technical progress will always elicit new sources of energy in ever greater quantities at affordable prices. In short, the framework from which this elite governs our current energy system does not even include the possibility of long-term constraints in energy supply. This is why this elite may even believe its own propaganda about renewed abundance since its worldview doesn't allow for any other outcome.

No one knows the future, and so no one can know for certain what our future energy supplies will be. The real question is not how to attain certainty, but how to deal with the uncertainty that has always been a part of our energy future. This is a political question, and therefore one that the energy elite does not wish to see as an object of public discussion. It moves the management of energy supply and distribution away from being merely a technical question into one which invites and necessitates broad public participation. Uncertainty should not be an excuse for inaction; uncertainty is the very place where politics intervenes. Knowing with certainty what your actions will bring means you are merely demonstrating a law of physics. Where certainty reigns, there is no need for political give-and-take since the path is clear.

This is why the industry must insist that it is certain about an abundant fossil-fueled future. As an aside, this same industry insisted for two decades that the science behind climate change was uncertain and therefore that we should not take any action. The industry's highly successful propaganda efforts have forestalled any effective action on curbing fossil fuel emissions. Now, the industry tells us that it is certain about an issue—fossil fuel supplies—that is plagued with far more uncertainty than the link between the burning of fossil fuels and climate change. Greenhouse gases can be measured by anyone, anywhere on the globe with the proper equipment. The worrisome acidification of the oceans (a result of increasing levels of dissolved carbon dioxide) can be verified by anyone near an ocean with the equivalent of a well-calibrated litmus test.

Stores of hydrocarbons, however, are increasingly found miles under the earth or the seabed. The methods for measuring the amount available to society for its use are imprecise at best. And, those measurements depend on nongeologic factors such as future prices and technology, both of which can only be guessed at. No underground resource can be exploited 100 percent. In fact, oil extraction to date has averaged around 35 to 40 percent of the original oil in place. Unconventional oil resources such as tar sands are likely to yield smaller percentages because of the difficulties involved in the extraction and refining of these resources. In addition, such unconventional energy resources are highly sensitive to price because they are so costly to exploit.

As it turns out, we are far more certain about the science behind climate change than we are about the methods used to calculate future world energy supplies. The degree of certainty about climate change calls out for immediate and drastic action because we understand how large the risks are. The degree of uncertainty over future energy supplies calls out for immediate and drastic action because that uncertainty poses large risks for society.

It's not necessarily the degree of certainty or uncertainty which ought to drive our public policy on any issue, but rather the level of risk which our current state of knowledge suggests is present. In the case of climate change, the risks are known with more certainty each day that we observe massive melting on Greenland and the poles, intense drought and hurricanes, and dying forests made vulnerable to disease and infestation by a warming climate.

In the case of energy supplies, the risks become more apparent because of what we do NOT know. We do not know whether fusion energy will be mastered any time this century. We do not know whether the new unconventional supplies of oil and natural gas will be able to make up for declines in existing fields over time. We do not know whether society as it is currently structured can withstand the very high energy prices in the long term which appear to be necessary to sustain the development of unconventional energy resources.

As the uncertainties over energy grow and as abundance wanes, the technical-corporate-financial energy elite will be faced with a citizenry that has become increasingly aware of its predicament. Scarcity implies rationing. Either the rationing will be done by price—i.e., the rich get what they need and the rest get what they can afford—or it will be done by political mechanisms. The pain comes in either case, and the big question will be whether that pain can find political expression in our unfolding age of energy scarcity—expression that could mean renewed engagement by citizens in an area central to their happiness, their comfort and perhaps even their survival.

(This piece was informed by an excellent book entitled Carbon Democracy by Timothy Mitchell and by a line of thought which began with two pieces which I wrote many years ago: Can democracy survive without fossil fuels? and Risk and probability: MIA in the peak oil debate.)

Not at that price: Why long-term forecasts for cheap oil and natural gas are baseless

noreply@blogger.com (Kurt Cobb) — Sun, 13 Jan 2013 15:29:00 +0000

Here's the short version of why forecasts of low long-term oil and natural gas prices are almost certainly wrong: It costs more than that to get the stuff out of the ground. Only two things could actually lead to low long-term prices: 1) Somebody could invent and deploy some genuinely brand new technology that makes it really cheap once again to get oil and gas out of the ground or 2) we could have a deep and grinding deflationary depression that brings demand for oil and natural gas down so much that prices collapse.

The people who are predicting $50, now $45 oil, and $3, now $2 natural gas (in the United States) for as far as the eye can see believe that such prices will result from the already widespread application of current technology. And yet, the very companies that use that technology to extract these hydrocarbons say that there's no way they can produce them profitably at those prices. ExxonMobil's CEO said last year, "We are losing our shirts" selling natural gas at such low prices. Forecasts for much lower oil prices would also represent losses on new wells for most oil producers.

Here's why: The full cost of producing new oil for the 50 largest publicly traded oil companies in the world is $92 a barrel according to Bernstein Research. While average costs are lower because they include previously discovered conventional oil which is cheaper and easier to produce, the Bernstein report challenges the notion that new technologies will lead to cheaper oil. Those technologies including hydraulic fracturing will make it possible to extract previously uneconomic oil resources--but only at very high and rising costs. In fact, the cost of producing the marginal new barrel of oil has been rising at 14 percent per year since 2001, Bernstein says. Finding, developing and producing new oil isn't getting cheaper; it's getting much more expensive. So while oil prices could fall below the cost of producing new barrels for a while, they simply could not stay there unless the world were to become content with ever shrinking supplies of oil. No company will continue to drill for oil when each new well loses money.

So given that the world will probably continue to seek expanded supplies of oil, prices in the long run below $92 a barrel seem implausible. And, that floor is likely to rise as the oil resources that companies are now forced to pursue become costlier and more difficult to extract. We've already extracted the easy-to-get oil in the first 150 years of the oil age; now comes the hard stuff.

The same logic applies to natural gas. The bulk of new U.S. supplies are coming from so-called shale gas deposits. Looking at the actual data, petroleum consultants Art Berman and Lynn Pittinger found that industry claims of profitability of shale gas production at $4 per thousand cubic feet were based on excluding important costs such as land acquisition. Once all the costs are figured in, Berman and Pittinger found that costs for gas wells drilled in the Fayetteville Shale, the Haynesville Shale, and the Barnett Shale were $8.31, $8.68 and $8.75, respectively. If land acquisition is excluded and only drilling, completion and other variable costs are included, the cost falls to $5.06, $5.63, and $6.80, respectively. Even these lower costs are still far above what some forecasts say will be the long-term U.S. price of natural gas. But, natural gas drillers will not drill wells indefinitely that lose money.

All of this flies in the face of the current popular meme that the United States and perhaps even the world will enjoy both cheap and plentiful supplies of oil and natural gas for the foreseeable future (whenever that is). Keep in mind that the costs cited above include the use of the latest technology. That tells us that depletion is long since winning the contest with technology. Yes, technology has helped to mitigate the damage that constrained energy supplies are inflicting on the world economy. Without it, matters would be much worse. But it is clear now that technology will no longer be able to overcome the fact that we as a species have used up the easy-to-extract hydrocarbons. We are now faced with exploiting ever leaner resources with diminishing returns on ever higher investments. In fact, record investment in finding and developing new oil resources has only just kept the rate of worldwide oil production on a choppy plateau since 2005.

When it comes to oil, major agencies such as the U.S. Energy Information Administration and the International Energy Agency recognize this reality and predict continuing high oil prices. But neither seems to understand the relevant data about U.S. natural gas extraction costs that also spell higher U.S. natural gas prices unless the country chooses miraculously to use a lot less. (The United States is now actually choosing to use more natural gas which is logical since the price of competing energy sources is currently so much higher on an energy equivalency basis.)

Of course, it's possible that someone could invent new technology that will make it much cheaper to extract the remaining hard-to-get oil and natural gas. But even if they do, as I have said before, if that technology is not on the shelf and ready to deploy today, it will make almost no difference in the next two decades. It takes a very long time for new technology to be adapted for use in the field, tested and then widely deployed. It took more than 60 years for hydraulic fracturing to move from field testing to regular use in vertical wells and then finally to a painstakingly expanded and refined technique that uses long horizontal wells to unlock oil and natural gas in deep shale deposits.

Currently, there appears to be no new transformative on-the-shelf technology that will significantly reduce the cost of extracting oil and natural gas. And so, barring a deep economic depression, we can look forward to prices for oil and natural gas that are consistently above the cost of production and therefore far above the bizarrely low forecasts in the air today. In fact, we should expect costs to continue to escalate as we seek out resources that are ever more difficult to extract and refine.

Why the natural gas industry hates the movie 'Promised Land' so much

noreply@blogger.com (Kurt Cobb) — Sun, 06 Jan 2013 13:00:00 +0000

Matt Damon's new fictional movie about natural gas development in a rural township was being lambasted by the natural gas industry even before it premiered. And yet, the film shows no tanker trucks laden with toxic fracking fluid. It depicts no roughnecks descending on a small town unprepared for the influx of new workers. It features no ghastly wastewater ponds and not even one drilling pad or derrick. In fact, drilling has yet to begin in the fictional township of McKinley.

As a result there are no wheezing people made sick from fumes associated with the drilling. There are no flaming water taps--first seen by many in the documentary Gasland, a film which displays devastation which it attributes to hydraulic fracturing and other processes associated with natural gas drilling in America's deep shale deposits. In Promised Land there is not even one dead farm animal unless you count the ones pictured on a yard sign distributed by an environmental activist who opposes the drilling.

So why is the natural gas industry having such a hissy fit over the film? I think the answer lies in its premise: That the people of this small community ought to have a public discussion about whether they want the drilling--one informed by all the facts, not just the ones the natural gas drillers want them to hear--and that the community should then take a vote. God knows that in corporate America, democratic governance should never, ever take precedence over corporate imperatives. Could things be any more infuriating than that?

Well, yes they can. We are treated to acts of perfidy on the part of Steve Butler (played by Damon) who believes that everyone has a price, one that his company is only too willing to pay. Butler is a landman for a large drilling company though he is never referred to using this industry term. His job is to lease the mineral rights from landowners in the township quickly and cheaply. But a well-informed high school teacher (played by Hal Holbrook) challenges Butler at a meeting of townsfolk that was designed to close the deal. After that things get complicated. Butler and his partner, Sue Thomason (played by Frances McDormand), must abandon the playbook that has worked so well for them in the past and improvise.

As resistance grows, Butler and Thomason hurry to close as many deals as they can. Increasingly, people turn them down. Here is where Butler's frustration leaks out as he loses his cool in front of people he ought to be trying to gently persuade. Whether such flashes of temper accurately portray the behavior of landmen, I have my doubts. But these fits are illustrative of the arrogant attitude of the industry in general. How dare anyone question what the industry is doing to make America energy independent! How dare people who have so little money and so little prospect of getting any turn down the chance to become wealthy! How dare these little people from rural nowhere resist a big, powerful company that is only trying to help them, their communities, and the country at the same time!

Butler is likeable, even sweet when we first meet him. But later he seems to pout on behalf of the entire natural gas industry when he runs into inconvenient questions about his story and his motives. It's possible that people in the industry who watch the film will mistake his arrogance for righteous indignation, a pose which industry leaders have spent time perfecting so as to portray themselves as victims.

In his initial townhall-style meeting with community members, Butler challenges the townspeople saying that if they are against natural gas, then they are for more oil and coal consumption, both dirtier alternatives. He adds that the only other option is to reduce our energy use, and, of course, nobody wants to consider that. This is the one positively revolutionary thought slipped into the film. For it would be utterly revolutionary to proceed on the premise that we could remake our society into one that ultimately does not depend on fossil fuels for energy. The first crucial step would be to reduce our energy consumption dramatically. And, we actually know how to do this, both by adjusting our behavior and through existing technology. Optimists love to tout technology when talking about increasing the energy supply. They seem to forget that that same technological prowess can and should be focused on reducing our energy consumption. But then no oil and gas company can make a profit on that.

Will you be entertained by Promised Land? I was and I think an open-minded moviegoer will have much to enjoy in this film. The acting is excellent, the characters are well-developed, and the plot has enough twists to keep the audience interested. The script is a little heavy-handed in places. But keep in mind that this film is as much about an issue as it is about the characters. If the characters never talked about or defined the issue as carefully as they do, then Promised Land might still be a good film. But it would not be an issue-oriented film which is part of its appeal.

The reaction from the natural gas industry has been as predictable as it has been puzzling. By launching an all-out smear campaign, they are only helping to make Promised Land a must-see movie for 2013. Everyone will want to know what all the fuss is about, even those who have no strong feelings one way or another about fracking and natural gas. Those who do see the movie will certainly have more questions about the motives and veracity of the industry than before.

But the natural gas industry continues to be extraordinarily foolish in its handling of the media and completely idiotic in its reaction to environmental and health concerns. Instead of ignoring critics in the media, the industry has vilified them, thereby making them even more visible to the public. Instead of vowing to address environmental and health concerns with some kind of credible industry-wide standards, the industry has dismissed those concerns as imaginary, making the public all the more distrustful.

With that kind of track record, the producers of Promised Land should be thanking the natural gas industry for all the free publicity and for elevating what might otherwise have been an obscure, low-budget film into a contender for socially conscious movie-of-the-year--one that will now be labeled mandatory viewing for all right-minded people.

Five possible energy surprises for 2013

noreply@blogger.com (Kurt Cobb) — Sun, 30 Dec 2012 14:56:00 +0000

Many people trot out their predictions for the coming year right about now. I'm generally allergic to predictions and think rather in terms of probabilities. Naturally, the world we live in is far too complicated to yield anything approaching certainty concerning such matters as the future price and supply of energy, future economic conditions, and future political developments. In the end, the future is simply unknowable. So, I've tried to think of some developments which conventional wisdom has judged rather unlikely and which would therefore significantly alter our lives and perceptions should they occur--precisely because we are not prepared for them.

I don't think any of the following is likely to happen in 2013. But, any one of them would certainly surprise most people and most experts and upset the plans and expectations of many governments, businesses, investors and consumers. Here are my five possible energy surprises for 2013:

U.S. natural gas production falls. There has been so much talk of the vast resource of natural gas now available to America in the form of shale deposits that it is practically unthinkable that U.S. natural gas production would actually fall. Of course, very low natural gas prices have led drillers to cut way back on drilling until the current glut is worked off and prices rise. What most people don't know is that U.S natural gas production has essentially been flat so far in 2012.
One person I know who is tracking natural gas production closely believes that drillers will wait too long to ramp up drilling again leading to a plunge in supply--and here's the real kicker--one from which we cannot recover. The annual production decline rate for U.S. natural gas wells taken as a whole has reached 32 percent. That means that if we were to forgo drilling any new natural gas wells in the coming year, production would fall by one-third. The production decline rate for shale gas wells is considerably higher than that of the average natural gas well--above 50 percent in the first year with many shale gas wells declining by more than 60 percent from initial flow rates. By the end of the second year, shale gas wells are often down 85 percent from initial flow rates. This means that by the end of the second year of operation, 85 percent of the production from any given set of shale gas wells must be replaced just to keep shale gas production level.
The logistical challenges of shale gas are daunting, i.e., getting enough rigs and workers quickly enough in the field along with the necessary millions of gallons of fracking fluid needed for each well. But perhaps even more important, investors who took a shellacking in the previous drilling boom may be reluctant to part with more capital to drill wells until they are absolutely certain that prices will stay high enough long enough to reward them. That will mean further delays in reviving drilling once it becomes apparent that supply is shrinking in earnest.
All this adds up to not enough rigs, not enough personnel, and not enough capital to keep up with the ferocious production declines in shale gas and even conventional fields. It will nevertheless be a surprise to most people if U.S. natural gas production actually falls in 2013. But, it'll be an even bigger surprise if production then fails to rise or recovers only marginally once prices get high.
Oil production from the America's most prolific tight oil region, North Dakota, falls. Tight oil (often mistakenly referred to as shale oil) is typically extracted using the same method as shale gas. But, as a result, tight oil wells experience the same types of declines. Wells drilled into the Bakken formation in North Dakota show an annual production decline rate of around 40 percent. As the rate of production grows from this deposit, more and more effort will have to be devoted to simply replacing production from wells that are swiftly declining. Already production increases are slowing. But almost no one expects oil production in North Dakota to decline in 2013 which is why it will be a surprise if it does.
Oil prices plunge to $30 a barrel and stay there. This is really a macroeconomic scenario based on plunging oil demand. And, the reason for plunging demand might be that Europe finally implodes under the pressure of its slow-motion financial crisis; the United States goes into a recession, perhaps because Congress fails to agree on reducing hefty tax hikes now scheduled to go into effect automatically; and China has a hard economic landing and stays economically moribund. All these events coming together imply essentially a deflationary depression. In such circumstances, commodity prices in general would decline because of both excess capacity and falling demand. Oil won't be the only commodity whose price plunges under this scenario.
Oil prices go to $200. This scenario is based on the idea that the civil war in Syria spills out into other Middle Eastern countries and becomes a general conflagration that hampers oil exports throughout the Middle East. Of all the scenarios I'm mentioning here, this one seems the least likely. But, if it does happen, look for scenario 3 above to take hold within a few months as the world economy, shocked by extremely high oil prices, goes into a profound economic contraction. If the fighting continues to rage throughout the Middle East for the entire year, we may get the economic contraction, but prices won't come down nearly as far as in scenario 3.
The U.S. Congress forbids additional natural gas exports. Even though the United States remains a net importer of natural gas--imports constituted 12.7 percent of consumption in 2012--the country currently exports small amounts of natural gas to Canada and Mexico. This is because the North American gas pipeline system connecting all three countries makes it economically sensible to do so in a few instances. If it becomes clear that America's natural gas endowment is actually quite limited, Congress may be keen to keep natural gas produced in the United States at home in order to keep prices low.
If Congress doesn't act, the Federal Energy Regulatory Commission may simply continue to grant permits for more liquefied natural gas (LNG) export terminals from which special refrigerated tankers will carry natural gas overseas to importing nations. With LNG prices in Europe and Asia three to four times pipeline prices in the United States, there is no doubt that natural gas drillers will spend prodigious amounts of time and money trying to prevent any export restrictions. If such a measure is introduced in Congress, it will result in a battle of corporate titans as the natural gas producers come up against large, well-funded users of natural gas such as utilities, chemical companies and fertilizer manufacturers. And, if such a fight does arise, it's not at all certain who will win.
My money, however, would be on the users of natural gas including the 50 percent of those who heat their homes with natural gas. These consumers represent an enormous number of votes, perhaps enough to overcome the lobbying acumen of the country's powerful natural gas producers.

As I said, all these developments would be surprises because so few people believe they are even within the realm of possibility. I will, however, not be surprised if we get through all of 2013 without any one of them coming to pass.

There's no such thing as energy independence in our globalized, fossil-fueled world

noreply@blogger.com (Kurt Cobb) — Sun, 23 Dec 2012 15:30:00 +0000

Anyone who tells you that energy independence can be achieved based on globally traded commodities such as oil, coal and natural gas is either trying to mislead you or doesn't understand the structure of energy markets. As of 2011 fossil fuels produced 83 percent of the world's energy according to the U.S. Energy Information Administration (EIA). Because fossil fuels can be transported anywhere in the world, producers seek out the highest price unless they are constrained by law or infrastructure from doing so.

This means that energy independence for a country is something of an optical illusion when it is based merely on the domestic production of fossil fuels. Here's why:

Events far away such as wars; embargoes; strikes; and mine, oilfield and refinery disasters affect the level of domestic prices for fossil fuels in all countries where these fuels are freely exportable regardless of whether that country produces enough for its own consumption. In such countries consumers of these fuels including domestic industry and transportation, commercial establishments, households and government agencies are all subjected to fluctuating world prices that can be unrelated to anything happening in the host country even if the country extracts enough fossil fuel from its own soil to meet domestic demand.

Even fossil-fuel exporting countries that subsidize purchases of fossil fuel energy by businesses and consumers are affected by events outside those countries as prices for their exports are largely determined by external events. The revenue they forgo by keeping domestic prices low is a hidden cost to the energy sector of the economy. Those subsidies mean reduced investment both in new production and in the maintenance of the existing energy-producing infrastructure. That hidden cost grows as energy prices rise if subsidized domestic prices do not rise as well.

Unless fossil fuel companies are owned by a government, those companies focus on maximizing both returns for their shareholders and compensation for their managers. They seek out the highest prices for their products worldwide (adjusting for transportation costs) regardless of the effect on the energy security or energy independence of the country in which the oil, natural gas or coal is produced--unless, of course, those companies are prevented from doing so by law or by the infrastructure. It is disingenuous, therefore, for such producers to tell the public in any country that they are focused on energy independence. On the other hand, government-controlled fossil fuel companies such as those in China actively seek acquisitions in other countries that can serve as suppliers to the home country regardless of the needs of the country those companies operate in.

Let's see how this is playing out in the United States where the oil and gas industry and its financial backers on Wall Street have lately been touting in the media the notion that the United States will soon become energy independent. That same industry is currently seeking permission for oil exports even though U.S. crude oil production of 6.3 million barrels per day (mbpd) this year remains far below U.S. consumption of finished petroleum products including gasoline and diesel of 16.2 mbpd. (To be precise we should subtract U.S. exports of finished petroleum products of about 2.5 mbpd to come up with a net U.S. consumption figure of 13.7 mbpd which is still far above U.S. crude production). Yes, it's possible for the United States to become free of oil imports; but, the most likely course will be a drastic reduction in oil consumption made possible in part by the electrification of the nation's transportation system and by aggressive conservation measures.

As for the supposed natural gas boom in the United States, U.S. natural gas imports were 12.7 percent of U.S. consumption so far this year, according to the EIA. That's down from an average of 15.7 percent for the 20 years prior. It's progress, but it's not energy independence. Nevertheless, the natural gas industry is pushing ahead with plans for U.S.-based natural gas export terminals which must be approved by the Federal Energy Regulatory Commission (FERC). One terminal in Sabine, Louisiana has already been approved and is under construction. Many more applications are under review.

Naturally, the industry will tell you that it is seeking permits for these terminals in anticipation of the day when U.S. natural gas production exceeds U.S. needs. Does that mean they'll hold off exporting gas until that day? Not a chance. Not when liquified natural gas (LNG)--the form in which natural gas is transported by ship--is selling in Japan for $17.30 per million BTUs and $11.83 in Europe (both as of November 30). Compare that to $3.42 for spot natural gas in the United States (the Henry Hub price as of December 21). The profit potential for U.S. producers is too great to pass up.

So, what does this mean for manufacturers, especially those chemical and fertilizer companies that rely heavily on natural gas as a feedstock? They have been moving operations back to the United States because of cheap natural gas prices. If the natural gas industry gets all of its currently planned export facilities approved and built, that would mean 22 percent of current daily production of U.S. natural gas could be exported. This is certainly enough to bring U.S. prices much closer to world prices. If we include all projects identified by sponsor companies but not yet under review by the FERC, the percentage rises to 37 percent of current daily production. Of course, natural gas producers tell us that U.S. production will rise significantly from here even though production has been essentially flat for a year. That's only temporary, they will say. But should we take their word for it?

And, even if production grows significantly, can we not assume that the producers will simply ask for more export terminals to be permitted so that these producers can capture world prices for natural gas?

So, U.S. manufacturers are in for a surprise if they believe natural gas prices in the United States will stay low because America is moving toward "energy independence." It is the duty of U.S. natural gas producers to seek the highest price for their product. Only two things could stop them: If the FERC ceases issuing permits for export facilities or if the U.S. Congress passes a law preventing the export of LNG. Both seem unlikely.

On the other hand, it may be that there will simply not be enough natural gas produced to justify very many export terminals which require extremely long-term delivery contracts, on the order of 30 years. If American natural gas producers cannot guarantee adequate production to fulfill such contracts over their full period, it seems unlikely that those interested in receiving the gas will be willing to make the necessary commitment to and investment in import facilities. With all the talk about America's vast shale gas deposits, this may seem an unlikely scenario. But a growing number of skeptics have outlined plausible reasons why shale gas will turn out to be much more expensive and much more limited in its production than is currently believed. Keep in mind that it is NOT the size of the resource that matters so much to the daily functioning of society, but rather the rate at which we can extract gas on a daily basis.

So, is there anything that really could make a country energy independent? The answer is yes, and the method is two-fold. First, vast reductions in energy use can be had through retrofitting buildings to the so-called passive house standard. This almost eliminates the need to burn fuel to heat most buildings. Those reductions could also come from changes in the transportation system: more emphasis on public transportation including rail and on ridesharing for drivers. The electrification of most transportation would almost surely be part of any such independence plan. And, we need to reconfigure the way we live so that our cityscapes allow us to work, socialize, and shop nearer to where we live.

Second, we would need to build a distributed energy system, allowing people to gather energy at the individual household and business level. Much of this would have to be renewable energy from wind and solar. Expanding hydropower where possible is another way, particularly small hydropower utilizing the myriad smaller dams which either used to generate electricity or which have never been exploited for this purpose.

This path would require a sustained effort over decades to achieve. But once it is achieved, the country that undertakes this path would never be subject to disruptions of energy supplies in faraway places. And, that country would never have to worry about the inevitable declines in the production of fossil fuels which must come someday because they are finite.

This alternate route to energy independence is rarely discussed as the world continues to fixate on increasing production of fossil fuels as the path to energy independence. But in truth, these fuels only put us further in thrall to fickle global markets and unstable exporting nations while exposing us to the ever present threat that fossil fuel supplies will begin to decline before we've made adequate preparations for an energy transition. Already worldwide crude oil production has been on a plateau since 2005.

If any country really wants to be truly energy independent, a feasible, durable path is already available. All that country has to do is look away from the false advertising of the fossil fuel industry and look toward the future of energy that is already unfolding before us.

Previous long-term government, industry oil forecasts badly overestimated supply; why should we listen now?

noreply@blogger.com (Kurt Cobb) — Sun, 16 Dec 2012 14:48:00 +0000

[I]f you're still operating under the assumption that the earth's petroleum--or at least the cheap stuff--is about to run out, you're not going to thrive in the new oil era. Technology is making it possible to find, produce, and refine oil so efficiently that its supply, at least for practical purposes, is basically unlimited.
--Businessweek, December 14, 1998

The writer of the above sentences was reacting to oil prices hovering around $11 a barrel. He could not have known then that we were about to embark on a bull market that would take oil to its highest price ever--even adjusted for inflation--just 10 years later. And so, after oil's run, it's all the more astonishing that as Brent Crude--now the true worldwide benchmark price--stands above $100 a barrel, we are hearing a similar message about the future of oil both from official agencies and the oil industry.

The reverence accorded each new forecast of future energy supplies from international and government agencies and from major oil companies seems to go far beyond that accorded to the oracle of Delphi in ancient Greece. That oracle's record may be lost in the mists of time, but we can check the record for these modern energy oracles.

The U.S. Energy Information Administration (the statistical arm of the U.S. Department of Energy), the Paris-based International Energy Agency (a consortium of 28 countries), the National Intelligence Council (an advisory body to the U.S. Director of National Intelligence) and the oil giant ExxonMobil, all regularly release long-term forecasts for world energy supplies. The last three have released their latest forecasts this fall. The U.S. EIA updated its world projections in 2011.

Looking back at forecasts made in the year 2000 by the U.S. EIA, the IEA, and the NIC, it becomes obvious that drawing an upward line on a chart does not make an oil forecast magically come true. All were considerably off the mark. ExxonMobil's oldest forecast available online dates back to 2006. It, too, has proved wide of the mark.

First, let's see by how much each forecast missed. Reports issued in the year 2000 by the U.S. EIA and the IEA contained similar projections. The U.S. EIA forecast that total world liquid fuel supplies would reach 93.2 million barrels per day (mbpd) in 2010. The IEA forecast 95.8 mbpd. Though the NIC report did not provide an explicit forecast for 2010, the implied forecast was around 92 mbpd. All those numbers include not only crude oil and lease condensate which constitute the proper definition of oil, but also natural gas plant liquids (only a fraction of which can be substituted for oil) and refinery processing gain (which is the result of applying energy to break oil into its components, causing the final volume to expand). We can now check those numbers. Actual total worldwide liquid fuel production for 2010 was 87.1 mbpd.

All three groups overestimated production by a considerable margin. This helps to explain the colossal miss on prices. The U.S. EIA report included a price projection for crude oil of about $28 a barrel for 2010 (adjusted for inflation). The actual average price for oil traded on the New York Mercantile Exchange in 2010 was $79.61. The 2000 IEA report forecast an inflation-adjusted price for oil in 2010 only 25 cents higher than the U.S. EIA forecast. The NIC report did not provide an explicit price forecast for oil, but did say this: "Meeting the increase in demand for energy will pose neither a major supply challenge nor lead to substantial price increases in real terms." All three groups failed to anticipate the plateau in worldwide crude production that began in 2005. All failed to gauge properly the pace of growth in oil demand in Asia, particularly China and India, which put upward pressure on prices.

Of course, it's easy to pick apart long-term forecasts when the actual data become available. But, the point here is not that the forecasts were wrong, but that they were all wrong in the same direction, namely, overestimating actual production. Taking an average of all three would still have resulted in a substantial overestimate. That's a serious concern because the forecasts provided by these groups are used worldwide for government and corporate planning and policy purposes. They are extremely influential. And, yet experience should have taught us by now that long-term energy forecasts by anyone--even people whose job it is to study energy markets and supplies--are a poor guide to policy and planning.

There is a basic asymmetry in the effects of energy supply forecasts. If an oil production forecast promises a business-as-usual future (i.e., continually growing production) as all three forecasts mentioned above did and that forecast turns out to be too low, the mistake is benign for most people. Extra supply means lower prices and therefore more money available for other things. If, however, such a forecast turns out to be too high, the consequences can be severe because the global system we now have is acutely sensitive to changes in the price and supply of energy, especially oil. We have seen just how sensitive it can be as we've watch oil prices reach historic highs in the last decade and remain high. Negative supply surprises have the potential to undermine the very stability of our global system, and the only way to prevent that is to prepare for scenarios that these official reports refuse to contemplate.

Now keep in mind that the comparisons made here between forecast and actual production and prices are for a 10-year period. The latest U.S. EIA and IEA world forecasts extend out 23 years to 2035. The newest NIC forecast purports to know the state of the world in 2030. The accuracy of any forecast deteriorates rapidly the further it goes into the future, and these forecasts go out about twice as far. We are taking many more times the risk if we rely on them. This is because energy transitions can take up to 50 years. Waiting until the last minute to begin the inevitable transition away from fossil fuels could cause terrible discontinuity and possibly disaster.

Imagine how different government energy policy and corporate planning would have been had all three forecasting groups predicted in 2000 that oil prices would rise above $100 a barrel by late in the decade. Imagine if all three groups had predicted a plateau in the worldwide rate of production of crude oil proper (defined as crude oil including lease condensate) starting in 2005. Imagine further if all three groups had predicted that global net exports of petroleum liquids--the petroleum fuels available for import by such importers as the United States, China, India, Japan and most of Europe--were going to decline consistently starting in 2006, leading to intense competition for supplies among importing nations.

There were voices warning that such things might happen. But the entrenched institutional prejudices in all three groups prevented them from contemplating these outcomes. So deep are those prejudices that none of the three seems yet to have picked up on the issue of shrinking global net exports even though it is now clear in the data. Of course, it is safer to be wrong when the vast majority are wrong with you. That way you can say, "Nobody could have seen it coming."

As the realities of constrained worldwide oil supply have become apparent, all three groups have gradually lowered their long-term oil supply forecasts. But, all three continue to believe that supply will be there to match projected demand, a dubious assumption given the experience of the last decade.

It's true that forecasts can miss by being too pessimistic as well. None of the three groups foresaw the shale gas phenomenon back in 2000. It was assumed that North America would be importing a considerable amount of liquefied natural gas (LNG) by now as domestic supplies declined. Having missed the rise in gas production, it is possible that all three groups are now simply following the trend and projecting it forward with little skepticism--much as they did for oil in 2000.

One thing they all seem to be missing is that production of large amounts of shale gas will depend on much higher prices as drillers move from the easy-to-get gas--which is currently flooding the North American market at prices that are below the cost of production--to the difficult-to-get gas that will flow at slower rates and be much more costly to extract. They also seem to be missing the fact that high decline rates for such wells mean that rig counts and infrastructure will have to expand almost geometrically to keep supplies growing. That expansion will hit a wall at some point when the price of natural gas rises to reflect this reality and forces some consumers to cut back on natural gas use. Already U.S. natural gas production has been essentially flat since December 2011 as prices have vaulted from multiyear lows. This comes after years of persistent growth in supplies from the low seen after Hurricane Katrina in 2005.

Because ExxonMobil has recently released its 2013 Outlook for Energy with projections to 2040, I had hoped to find the company's report from 2000. The oldest I could find came in the form of a slide show from 2006. Even at this late date, ExxonMobil's forecast was predicting consistent, uninterrupted growth in the worldwide production of crude oil proper and assuming that North America would need considerable LNG imports in the coming decade. The report shows that the conventional wisdom remained intact well into the period when underlying events made them no longer tenable.

ExxonMobil's latest report, not surprisingly, concludes that fossil fuels will continue to provide the bulk of the world's energy well into the future and that there will be plenty of them. With the media repeating what will inevitably turn out to be a flawed forecast, they are forgetting to point out the obvious. The company has an interest in convincing consumers and shareholders that oil and natural gas will be the dominant fuels of this century--which is all the more reason to be skeptical about the company's projections.

When the U.S. EIA, the IEA and the NIC made their long-term forecasts in 2000, supposed game-changing technology was going to make it possible to extract oil in the Arctic and in deepwater "at improbably low costs." The NIC even prophesied that natural gas from methane hydrates, essentially methane trapped inside ice crystals in the deep ocean, would become an increasing part of the natural gas supply. No commercial production of methane from methane hydrates has so far taken place.

And, with regard to oil, even though prices have risen from an average $30.26 in 2000 to an average of $94.60 this year on the New York Mercantile Exchange, we are told again by all three groups that a new miracle technology called hydraulic fracturing is going to make future oil supplies plentiful. (By the way, that technology is 60 years old.) Given their record on such pronouncements, we would be wise to be cautious.

Long-term forecasts are inherently unreliable. In the case of the U.S. EIA, the agency does provide three forecasts based on various price assumptions. But price is not the only variable, and among those forecasts, even the most conservative in 2000 was still too optimistic about supplies and wildly wrong about prices. At the very least, all long-term forecasts should have wide error bands around them. Those error bands would aid us in understanding the risks. No one can know the future. So, we are left with evaluating scenarios that help define the risks we face.

When it comes to policy, it is not the benign energy supply scenario which should guide us, but the most severe because it has the potential to undermine the very stability of global society. It may be for political reasons that statisticians who plot the data for such projections choose to leave out the error bands which they know ought to be there. If policymakers and planners understood just how big the uncertainty about future fossil fuel supplies is, they might panic. But, they might also do something else; they might quickly wean society off finite fossil fuels wherever possible in favor of energy sources such as wind and solar which won't be running out any time in the next few billion years. And, they might also require deep reductions in energy use starting now to guard against the day when fossil fuels decline.

It comes down to whether it is wise to continue with a system of energy, the stability of which is entirely dependent on highly uncertain long-term forecasts for fossil fuel supplies. I repeat: History tells us that it can take up to 50 years to complete an energy transition. Previous transitions gradually moved us to new fuels having increasing energy densities--wood to coal, coal to oil and natural gas, oil and natural gas to uranium. But coal, oil, natural gas and uranium are all finite, and we will someday--perhaps very soon in the case of oil--find that their supply cannot grow any more and will even begin to decline.

When long-term forecasts promise energy that is both cheap and plentiful as the U.S. EIA, the IEA, and the NIC reports did in 2000, governments, businesses and individuals do little to prepare for scarcity. Wouldn't it be wiser to build an energy system which would free us from the inherently risky and unreliable racket of long-term forecasts? Wouldn't it be wiser to build an energy system that is forecast-proof because the energy that powers it is constantly renewed?

The one chart about oil's future everyone should see

noreply@blogger.com (Kurt Cobb) — Sun, 09 Dec 2012 13:22:00 +0000

When people read about a long-term forecast of world oil supply--say, out to 2030--they often believe that the forecasters are merely incorporating our knowledge of existing fields and figuring out how much oil can be extracted from them over the forecast period. Nothing could be further from the truth. Much of the forecast supply has not yet been discovered or has no demonstrated technology which can extract or produce it economically. In other words, such forecasts are merely guesses based on the slimmest of evidence.

Perhaps the best ever illustration of this comes from a 2009 presentation made by Glen Sweetnam, a U.S. Energy Information Administration (EIA) official. The EIA is the statistical arm of the U.S. Department of Energy. The following chart from that presentation will upend any notion that we know exactly where all the oil we need to meet expected demand will come from.

The chart shows that by 2030 world output of oil and other liquid fuels from current fields is expected to drop to 43 million barrels per day (mbpd), some 62 million barrels below projected demand of 105 mbpd. (Though prepared in 2009, the chart takes into account known projects expected to be producing by 2012.) This drop is consistent with the observed decline in the worldwide rate of production from existing fields of about 4 percent per year. Certainly, there will be more projects identified in the 18 years ahead. And, many people will say that we already have a large new resource of tight oil (often mistakenly referred to as shale oil) which can be extracted through hydraulic fracturing or fracking. But even if the optimists are correct--and there can be no guarantee that they will be--this source of oil will only add 3 to 4 million barrels of daily production. What Sweetnam's chart tells us is that we must find and bring into production the equivalent of five new Saudi Arabias between now and 2030 in order to meet expected demand even if the volume of tight oil reaches its maximum projected output. (The Saudis currently produce about 11.7 mbpd of oil and other liquids.)

Because Sweetnam's chart is for total worldwide "liquid fuel supply," it's worth noting that in recent years something called natural gas plant liquids (NGPLs) have been included in world oil supply based on the assumption that these hydrocarbons are 100 percent interchangeable with oil. NGPLs are components of natural gas other than methane such as ethane, propane, butane, and pentane, and their production grew recently with the natural gas drilling boom in the United States. Only a small portion of NGPLs can directly substitute for oil, and ramping up production of that portion independently is impossible since it is mixed in the methane.

But oil proper--defined as crude oil including lease condensate--continues to trace out a plateau in production that began in 2005.This makes the oil situation all the more concerning. It is true that rising and ultimately record high oil prices in the last decade have prompted oil companies to increase capital expenditures including those for exploration and drilling to their highest level ever. But, the vast effort represented by those expenditures has failed to boost true crude oil production definitively above the current bumpy plateau.

Some will point to vast deposits of so-called oil shale in the American West and suggest that production from these can fill the gap in the coming years. But right now commercial production of oil from this source is exactly zero. And, current reserves are also exactly zero since reserves are defined as those underground resources that can be produced profitably at today's prices from known fields using existing technology. (For a more detailed discussion, see my recent piece on unconventional oil resources.)

Perhaps most important is that Sweetnam's chart shows not how much oil we must discover, but the rate of flow we must achieve from any discoveries in order to match supply with projected consumption. Huge discoveries mean little if we cannot extract the oil profitably and at rates that are commensurate with our desired rate of consumption. With conventional oil in decline since 2006 according to the International Energy Agency, a consortium of 28 mostly importing nations, we will now be forced to rely increasingly on sources of unconventional oil such as the tar sands of Canada and the heavy oil of Venezuela, both of which are difficult and costly to extract and refine. So far the flows of unconventional oil have only just offset declines in the rate of production of the cheap, easy-to-get, free-flowing conventional oil which has powered modern civilization to date.

The global economy is entirely dependent on continuous flows of energy and raw materials. Oil is absolutely central because it provides one-third of the world's energy and more than 80 percent of its transportation fuel. Unless oil production rises from here, global economic growth will eventually stall (if it hasn't already).

With the EIA projecting oil production from oil shale of 140,000 barrels per day by 2030, we should not expect to close Sweetnam's deficit of 62 mbpd from this source. Even if the EIA is too pessimistic on oil production from oil shale by a factor of 10, such production would barely put a dent in the anticipated supply gap by 2030.

It should be apparent that energy policy around the world is essentially based on the idea that Sweetnam's gap will be filled in time and comfortably. And yet, there can be no assurance of this. In fact, the ongoing plateau in the rate of world oil production in the face of record high prices ought to give us pause. If seven years of very high prices can only marginally move the rate of production of all liquids (which includes crude oil, natural gas plant liquids, biofuels, and refinery processing gains) up about 3.15 percent and if crude oil proper can only stay flat during the same period, how can we expect that the next seven years and the next seven after that will be filled with nothing but good news on supply?

If the answer to this question is that technology will unlock new resources and overcome the declines in existing fields, keep this is mind. If that technology is not on the shelf and ready to deploy today, it will make almost no difference in the 18 years between now and 2030. For those who point to hydraulic fracturing as a recent technological breakthrough, they need to do a little research. Hydraulic fracturing was first used in 1947. More than 30 years later in the early 1980s, building on government research, George Mitchell and his company Mitchell Energy and Development began pursuing natural gas in deep shale deposits. It took Mitchell 20 years of experimentation, government help and government incentives to perfect the type of hydraulic fracturing which is now used to release both natural gas and oil from deep shales. It took another 10 years for his methods to be widely deployed by the oil and gas industry.

So, here's the timeline on hydraulic fracturing. It took 60 years from the time the technique was first deployed until it was refined and widely adopted by the industry for the specific purpose of extracting natural gas and oil from deep shale deposits. Don't look for any new miracle technologies to make a significant difference in oil production between now and 2030 unless they are already in the field performing their magic today and have not yet been widely adopted.

The effects of hydraulic fracturing on oil production are already in evidence. And, while the technique has allowed us to recover oil from previously inaccessible deposits, it has not allowed us to grow oil supplies worldwide as declines in production elsewhere have offset increases in production of oil from shale deposits (properly called tight oil).

With high oil prices and the hottest new technique unable to move the needle on worldwide production of crude oil, we should look at Glen Sweetnam's chart with considerable concern. We should ask ourselves whether it is wise to base energy policy on the fantasies of industry and government forecasters. Perhaps we should focus instead on the trends and data we can verify and prepare ourselves and our economies for a world that may not have the copious amounts of oil that the industry is promising.

Taking a short break--No post this week

noreply@blogger.com (Kurt Cobb) — Sun, 02 Dec 2012 15:00:00 +0000

I am taking a short break and expect to post again on Sunday, December 9.