Edition Twenty Six – May 2014
The trouble with gas Eight energy myths explained Is drilling in the Gulf safer? Regulators beg for an answer Cover image by katsrcool
1
OilVoice Magazine | MAY 2014
Adam Marmaras Chief Executive Officer Issue 26 – May 2014 OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: press@oilvoice.com Skype: oilvoicetalk Editor James Allen Email: james@oilvoice.com
Welcome to the 26th edition of the OilVoice Magazine. We’d like to say a big thank you to all of our featured authors. Without them, the OilVoice Magazine would be bare. If you haven’t done so already, check out our Opinion & Commentary section, packed full of interesting articles by the experts in the industry.
Director of Sales Mark Phillips Email: sales@oilvoice.com
This month we have great articles from Finding Petroleum, FTI Consulting and Mars Omega LLP. We'd also like to welcome back some of our regular authors, including Gail Tverberg, and Andrew McKillop.
Chief Executive Officer Adam Marmaras Email: adam@oilvoice.com
If you're interested to know more about seeing your articles featured on OilVoice, please get in touch.
Social Network Facebook Twitter Google+ Linked In Read on your iPad You can open PDF documents, such as a PDF attached to an email, with iBooks.
Cover image by katsrcool
flickr.com/photos/katsrcool/
Adam Marmaras CEO OilVoice
2
OilVoice Magazine | MAY 2014
Contents Featured Authors Bios for this months featured authors.
3
Insight: Current demographics, and the current issue, in the oil & gas industry by David Bamford
6
The trouble with gas by Andrew McKillop
7
Iraq: Shooting seismic into the political rifts and plays by Anthony Franks OBE
10
Oil exports: The rhetoric and the reality by Loren Steffy
14
Insight: What's happening to Exploration? by David Bamford
16
Eight energy myths explained by Gail Tverberg
18
Oil & Gas Boom 2014: A Withering Regulatory Assault by David Blackmon
28
Is drilling in the Gulf safer? Regulators beg for an answer by Loren Steffy
32
The absurdity of US natural gas exports by Gail Tverberg
34
3
OilVoice Magazine | MAY 2014
Featured Authors Andrew McKillop AMK CONSULT Andrew MacKillop is an energy and natural resource sector professional with over 30 years’ experience in more than 12 countries.
David Bamford Finding Petroleum David Bamford, a past head of exploration and head of geophysics at BP, is a founder shareholder of Finding Petroleum via his company New Eyes Exploration Ltd.
David Blackmon FTI Consulting, Inc. David Blackmon is managing director of Strategic Communications for FTI Consulting, based in Houston.
Gail Tverberg Our Finite World Gail the Actuary’s real name is Gail Tverberg. She has an M. S. from the University of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries.
Anthony Franks OBE Mars Omega LLP Anthony is responsible for managing and controlling the extensive information networks, as well as directing and working with the analysis team to create reports for clients, and also works with Hamish in the Liaison and Mediation service.
4
OilVoice Magazine | MAY 2014
Loren Steffy 30 Point Strategies A senior writer for 30 Point Strategies and a writer-at-large for Texas Monthly. Loren worked in daily journalism for 26 years, most recently as an awardwinning business columnist for the Houston Chronicle, and before that, as a senior writer at Bloomberg News.
Leaders in the world of natural resource location Globe
Getech’s flagship global new ventures platform.
Regional Reports
Focussed assessments of exploration risks and opportunities.
Commissions
Bespoke projects utilising clients’ proprietary data.
Data
Unrivalled global gravity and magnetic coverage.
For further information contact Getech: Getech, Leeds, UK +44 113 322 2200 Getech, Houston, US +1 713 979 9900 info@getech.com www.getech.com
6
OilVoice Magazine | MAY 2014
Insight: Current demographics, and the current issue, in the oil & gas industry Written by David Bamford from Finding Petroleum What impact has almost 30 years of RIF-ing had on our industry? What can we say about the current demographics? What is the current big issue? By far the most authoritative insight into oil & gas industry demographics is that produced by Schlumberger Business Consulting’s annual review of HR benchmark data gathered from 40 E&P companies (at least that was the 2012 number). SBC sometimes present this data at conferences, the most recent presentation being accessible here. Their data covers Petro-technical Professionals (PTPs): geoscientists (geologists, geophysicists, petrophysicists) and petroleum engineers (reservoir, drilling, completion, and production engineers). To summarise their most recent findings, when the number of PTPs on a global basis is plotted as a percentage against the age bracket, their prediction for 2016 is that the peak will be at around 23% for the 25-29 age group, declining in pretty much wavy straight line fashion to around zero at 65. This is in complete contrast with the facts from 2005 where there was a secondary 13% peak for the 25-29 age group but a much bigger primary peak, at just over 20%, for the 45-49 age group. SBC argue that, by 2016, there will be, on a global basis, roughly a 20% shortfall in experienced PTPs whilst the overall numbers will look OK. This raises two questions: 1. Unless something is done, there is going to be a rapid near-term loss of skills and experience from the industry. Can anything be done to retain this generation that has (early) retirement on its mind? Or at least ensure that its knowledge is retained in the industry? 2. How can the younger generation more rapidly acquire the knowledge and absorb the experiences that others have, and be brought to earlier deep expertise? So, in principle, if you are under 30 and have just entered, or are considering entering, the oil & gas industry as a PTP, you can look forward to your skills, knowledge and commitment being much in demand. With rewards to match.
7
OilVoice Magazine | MAY 2014
And yet the lessons of the past should tell you that this industry is capricious, given to RIF-ing, given also to displaying what I might term the “Harry and Jack� syndrome. Look after your own career still seems like sound advice!
View more quality content from Finding Petroleum
The trouble with gas Written by Andrew McKillop from AMK CONSULT Cinderella Gas at the Thieves Ball Simple questions can have complicated answers, but for Cinderella Gas the clock has a habit of chiming 12-midnight all too often. The simple question is how come natural gas in the USA has grave problems to even attain $27.50 per barrel of oil equivalent - but in Japan it can fetch about $100 per barrel equivalent? Do Japanese like expensive things, or what? Germany's riotously shizophrenic treatment of the Russia-Ukraine sanctions issue, with Angela Merkel being the first G7 leader to cast out Russia from the G8 group, while her Vice chancellor Sigmar Gabriel says that Germany's 'rational-based decision making' treats Russia as a key energy partner, can also be explained to a large extent by gas supplies - and gas prices.
8
OilVoice Magazine | MAY 2014
No use for 'The Economist' magazine, 19 April, to chime that world gas offers everything a rational decider could want. It is cheap and simple to extract, ship and burn with a 'low carbon footprint'. It is abundant, and present proven reserves amount to 109 years of current consumption, according to BP. The oil equation is at best 40 years. Oil is expensive worldwide, as expensive as gas energy in Japan. While US and European mainstream media have overworked the subject of Ukraine and energy security in Europe, as Germany's Sigmar Gabriel almost said out loud, April 7, the Ukraine gas issue only concerns pipelines. It has nothing whatsoever to do with gas reserves. World gas reserves are in fact certain to go on growing a lot faster than consumption, but for oil that is a long way from sure. World gas supplies from a fast-rising number of countries - not many of them dictatorships, mostly not belonging to OPEC, and not located anywhere near Ukraine - are growing, and will go on growing. Many are 'politically stable places', as 'The Economist' puts it. The Lignite Revolution In fact a counter-revolution. In the bizarre and schizoid playground of European energy policy, today, lignite has a better place, than gas. As Bloomberg Business
9
OilVoice Magazine | MAY 2014
Week reported, 15 April, German power companies - especially the Big 4 - have obeyed Angela Merkel's 180-degree switch on nuclear power, following Fukushima, as German elections approached, and started shutting down their Cash Cow nuclear power plants. These NPPs were previously given generous (or foolhardy) operating lifetime extensions by Angela Merkel herself. On a regular basis. What the beleaguered utilities are doing, now, when forced by government to close their Cash Cows is simple. They turn to lignite - a cheap, soft, muddy-brown colored form of sedimentary rock riddled with pollutants and spewing (as Al Gore and the Climate Crazies like to say) more greenhouse gases than any other fossil fuel. Number 2 in Germany's Big 4, RWE now generates 52 percent of its power in Germany from lignite. And RWE isn't alone. Utilities all over Germany have shut down gas-fired plants and ramped up coal and lignite use as the nation watched the mix of coal-generated electricity rise to 45 percent last year, the highest level since 2007. Beat that for Carbon Correct! The counter revolution, for some observers like Joe Parson writing in 'Moscow Times', 17 April, could even embolden pro-Russian separatists in eastern Ukraine. The reason is the Donetsk (locally called Donbas) giant coal basin, ranking with Poland's USB or Upper Silesian Basin, and three times larger than the Ruhr coal basin. With increased tension in eastern Ukraine, coal basin cities like Donetsk and Luhansk could win a reprieve from almost certain decline and death. Rising coal use in the EU28 to generate power - because gas is too expensive - could be supplied from the Ukraine. Alternately, locally-produced power using coal could be shipped to Europe with relatively low capital costs and lead times, the key term 'relatively' of course needing caution. If the eastern regions of Ukraine were to shift to Russia's orbit, Ukraine could potentially lose control of about 45 percent of its coal reserves. The loss of the Donets coal basin would deal another substantial economic blow to Ukraine. The Shale Gas and Coalbed Methane Revolutions Almost certainly unknown to Yoko Ono and her 'Fracking Kills' star consortium, including Sean Lennon to show its a family business http://www.nydailynews.com/new-york/fracking-kills-yoko-fights-drilling-article1.1238624, of overpaid stars peddling dumb music and dumber ideas while they spew (to use Al Gore's terminology) aviation jet fuel kerosene residues worldwide on a very regular basis, shale gas 'fracking' attempts date from the first decade of the 19th century - not 20th or 21st. Today however it works, and putting that genie back in the bottle is beyond Yoko Ono. Coalbed methane can be compared to lignite and coal - people know about coal but not lignite, and have heard about 'fracking' but know nothing about methane extraction from coal beds, avoiding and eliminating the need to physically dig, then burn, almost always dirty coal. Net energy performance is good, although recovery of energy in place as coal, versus gas energy extracted, is low. Due to world coal resources (not reserves) to a depth of 3000 metres being roughly estimated by Beijing's University of Petroleum at probably 200 trillion tons (200 000 billion tons), resource depletion is no problem. Yoko Ono will certainly disappear first, although she's taking a lot of time to do it! We can she hope she speeds up.
10
OilVoice Magazine | MAY 2014
Overworked and hyped shale gas potentials in Europe, to be sure, have left a bad dirt line in the bath tub when the water of initial investor support ran out. This however certainly does not mean shale gas cannot be produced in Europe - nor coalbed methane. European gas prices have not reached the giddy heights of Japanese gas prices, but are high. Ukraine's massive coal reserves in place, in the Donbas, overworked and aged in conventional-extraction terms, like the Ruhr basin, are an attractive prospect for shale gas and coalbed methane extraction. Only the political decision making factor is negative - to say the least. World gas prices, as the Japanese will surely appreciate can only decline, while oil will tend to stay high, Cinderella Gas will at some stage get her LPG or CNG-fuelled limo at 12 midnight!
View more quality content from AMK CONSULT
Iraq: Shooting seismic into the political rifts and plays Written by Anthony Franks OBE from Mars Omega LLP Earlier this week, Turkey's Minister of Energy and Natural Resources, Taner Yildiz, was reported by Reuters as saying that one of the pipelines carrying crude oil from the Kirkuk oilfields to Ceyhan - Turkey's Mediterranean port - was “unusable� because of continued attacks by extremists. True. But that is not the only reason it is unusable; the pipeline is also politically unusable. The continuing deadlock between Baghdad and Irbil over the sharing of oil revenues and ownership of hydrocarbon resources in Kurdistan continues to cast a dark shadow over inter-governmental relations.
11
OilVoice Magazine | MAY 2014
Nothing is going to change on these issues before the elections, and we suggest it is debatable if anything substantive will in fact change in the short-term, and this will impact on both the business operations in Kurdistan of the various oil companies, and on their share and stakeholders. In fact, the way things are shaping up, we could potentially see the dark shadow turn into a black hole, and the break up of the Iraqi republic. However, it is wholly questionable how homogenous Iraq is nowadays in any case:
Kurdistan is talking openly of seceding; Anbar province in the west is scarcely under true government control with extremists operating openly in Fallujah and Ramadi – and indeed elsewhere; In the oil-rich south, Basra, the treasury of black-gold is restive and also periodically threats to secede from federal Iraq; In the fragile province of Diyala, the Islamic State of Iraq and the Levant (ISIL) has set up forward operating bases; Ninewah provincial governor, Athil al-Nujaifi (brother of Usama al-Nujaifi, speaker of Parliament and leader of Mutahiddun) is reportedly being sued by the Federal Ministry of Oil after he signed a preliminary contract for the establishment of an oil refinery without Baghdad’s knowledge, and by definition without its approval.
Meanwhile, Iraq is some 120 hours away from the election that will determine its future trajectory. The various political rockets are on their launch pads with steam and smoke hissing out of their bottoms. Metaphorically speaking, of course. These various political parties have in the meantime continued to indulge in trench warfare. During a televised appearance on Wednesday, Iraqi Prime Minister (PM) Nuri al-Maliki accused political opponents of trying to put “obstacles” in the path of Baghdad’s counter-terrorism plans. Speaker of Parliament Usama al-Nujaifi responded by playing a backhand over the political tennis net by accusing the government of letting the chaos in Anbar continue as an act of commission. This – he claimed - was being done in order to disrupt the elections in the fragile Province of Anbar because Anbar is a Sunni majority region. The Kurdish media reported that the Secretary General of Iraqi Hizbullah, Wathiq alBattat, decided to try to make the political tennis match a game of doubles by jumping on the charabanc and calling the PM ‘a dictator’ in a media statement. For the record, Wathiq al-Battat is a Shi’a cleric and leads both Iraqi Hizbullah and the Jaysh al-Mukhtar. He has been arrested several times by the security forces. AlBattat was also reported to have said, somewhat ominously, that, after the election, the PM’s destiny would be worse than that of Saddam Hussein as a result of his part in fomenting violence against the Iraqi people. During his Wednesday TV broadcast, the PM also said Baghdad was committed to confronting the “plight of terrorism”, and suggested that the Iraqi army is securing victories against the Islamic State of Iraq and the Levant (ISIL) extremists that have been occupying parts of key cities in Anbar. He also suggested the local tribes were
12
OilVoice Magazine | MAY 2014
cooperating and coordinating with the Iraqi army to drive “terrorists” out of Anbar. Usama al-Nujaifi promptly questioned whether or not Baghdad was competent to deal with the situation in Anbar. He criticised the PM for failing to take the Anbar situation seriously, and then delivered a forehand volley “The government must take immediate action [in Anbar], including providing vital food and humanitarian aid to citizens, and exert every effort to end this problem before it develops into a real disaster.” However, it is worth noting that it has already developed into a real disaster now – according to information obtained by UNAMI from the Health Directorate in Anbar, the total civilian casualties in Anbar up to 30 Mar 14 were: 156 killed and 741 injured; with 80 killed and 448 injured in Ramadi; and 76 killed and 293 injured in Fallujah. Anbar has thus become a microcosm of the intransigence that continues to consign Iraqi politics to the limbo of feuding stasis. The State of Law coalition sees the situation in Anbar as being the logical result of Sunni extremism, while al-Nujaifi, Mutahiddun and their growing number of allies see the situation in Anbar as being the logical result of blatant sectarianism. And with that kind of political polarity, there seems to be little hope of real national unity now, or in the future.
View more quality content from Mars Omega LLP
14
OilVoice Magazine | MAY 2014
Oil exports: The rhetoric and the reality Written by Loren Steffy from 30 Point Strategies If not natural gas, then oil. That seems to be the latest reaction to breaking Russia’s energy grip on Europe. Harold Hamm, the chief executive of Continental Resources, reciting a new meme in the energy industry, told members of Congress this week to forget all the breathless banter about natural gas exports to counter Russian aggression in the Ukraine. If we really want to help wean Europe off its dependency on Russian energy, we should immediately begin exporting oil. The first export terminal for liquefied natural gas won’t begin shipments until next year. It will simply take too long for LNG exports to help Europe, Hamm argued. While opening LNG exports is a noble goal and one that we as a country are actively working towards, the fact is the infrastructure to undertake large scale overnight LNG exports does not currently exist. If we want to have an overnight impact on today’s global events, we can immediately begin exporting crude oil, which does not have the same infrastructure constraints. While oil may be unconstrained by infrastructure, it also won’t solve Europe’s dependency issues in the same way gas might. Different grades of crude may make it difficult for European refiners to simply switch to a new oil source. But oil exports also have a different impact on the home front than LNG exports. While we currently have more gas than we need, we still import, on a net basis, about 7.3 million barrels a day, or just less than half of our daily consumption. Any exports would have to be offset by additional imports, says Jeffrey Brown, an independent petroleum geologist who tracks import data. Embracing exports the way Hamm suggests would simply shift the burden of greater foreign oil dependency from Europe back to the U.S. This is why the notion of energy independence is unrealistic. Midwest producers like Hamm talk about rising oil production as if we have a surplus, but we are a long way from domestic production levels that would reduce imports to zero. Even if we achieve those levels, we are unlikely to maintain them for long. For consumers, the entire debate doesn’t matter much. Exporting crude probably would have little effect on gasoline prices because most refiners are already selling their products based on the Brent price for crude, which is higher than the price for West Texas Intermediate, the U.S. benchmark. The Brent, or world, price is currently about $6.50 a barrel higher than WTI.
15
OilVoice Magazine | MAY 2014
For Midwest producers like Hamm, oil exports would narrow that spread. They’ve been forced to sell their crude to Midwestern refiners at WTI prices, only to watch the refiners turn around and sell it at prices set by Brent. In other words, in the Midwest, margins are migrating to the refiners. Exports would be a way for companies like Continental to reverse the trend. Our export policies, though, shouldn’t be based on the special interests of a handful of companies. Just like Europe, U.S. refiners require different grades of crude, and some of the biggest ones require heavier oil from places like Venezuela rather than the light sweet crude produced in the domestic shale plays. Oil exports may, indeed, make sense at some point, and lawmakers need to revisit energy policy that is based on 40 years of resource scarcity. The issue, though, needs to be studied carefully based on its domestic impact, rather than as a knee-jerk response to Russian aggression in the Ukraine or the opportunistic urging of oil producers at home. The changing energy landscape in the U.S. has already altered the nature of global petro-politics, and it will continue to do so. But we can’t look to exports of gas or oil as a quick fix for the world’s problems.
View more quality content from 30 Point Strategies
16
OilVoice Magazine | MAY 2014
Insight: What's happening to Exploration? Written by David Bamford from Finding Petroleum Explorers should be deeply troubled by recent events, namely: 1. The general lack of success, especially in Frontier plays, and the evident lack of New Ideas and instead the re-cycling and re-hashing of old ones. 2. Exponentiating costs, especially for deep water drilling. Exploration outcomes over the last 18-24 months Over this period, the notable exploration successes have been:
US Shale Oil, notably the Eagleford, Bakken and Barnett plays. Brazil Pre-Salt, with seven key oil discoveries – Lula, Sapinhoa, Iracema, Carioca, Carcara, Jupiter and Iara. East Africa Gas offshore, in Tanzania and Mocambique East Africa Oil onshore, in Kenya.
You will note that these are all continuations of earlier themes. Where are the “New Ideas”? Other notable successes are hard to find and indeed it is much easier to point to some troubling failures. There has been disappointment all over NW Europe (North Sea, the Barents, onshore), for example, and Richmond Energy Partners have spotted 1 arguably commercial discovery in the last 27 Frontier wells drilled by the group of companies they cover! Is exploration getting harder? The poison of exponentiating costs At the same time that exploration appears to be getting much, much harder, costs have been exponentiating. Let’s consider a very simple model in which an enterprise aims to discover 100 million boe in a 4 well program:
17
OilVoice Magazine | MAY 2014
Suppose the drilling cost per well is $25m and other associated costs for the whole 4 well program are $100m (drilling costs being 50% of total exploration spend are a normal working guideline), then the total program cost is $200m and the implied (success outcome) Finding (F) cost is $2/boe. Now let’s suppose the drilling cost per well is $50m and, by a super human effort, other costs are kept at $100m, then the total program cost is $300m and the implied F cost is $3/boe. Next, we take a big step and assume a drilling cost of $100m/well, with other costs powerfully constrained at $200m, giving a total cost of $600m and an F cost of $6/boe. And finally, if we assume a drilling cost of $200m/well, with other costs still constrained to $200m, then total costs are $1000m and F cost is $10/boe.
So there could be then an “Explorers’ view” which says “so what? Oil price is over $100/barrel, F costs of $2 - 10 per boe are all OK!” Why does F cost matter? Let’s consider a simple metric for a “growing through exploring” company, namely:
X = Enterprise Value/2P reserves
It turns out that X ~ $8/boe for a “matured” E&P company. Thus, for any company, the extra Enterprise Value (EV) potentially created by an extra 100 million boe is $100 x (8 – F). So….. 1. If F cost = $2.5/boe, then extra EV = $550m 2. If F cost = $5/boe, then extra EV = $300m 3. If F cost = $8/boe then extra EV = $0m. For an Investor in:
A $100m Market Cap company, 1. and 2. are fantastic outcomes. A $1bn Market Cap company, 1. is excellent, 2. is pretty good. A $10bn Market Cap company, only 1. is of any interest.
So what? Well, to generalise, drilling costs of $25 or $50m/well are nowadays characteristic of onshore exploration; $100/$200m per well costs are characteristic of deep water exploration. Ergo, if you want to invest in a “growing through exploring” company find one that is exploring onshore...or invest in a drilling company running deep water rigs! Conclusion – Back to the Future! Exploration needs to become much more successful and at significantly lower F costs than have been the norm over the last couple of years.
18
OilVoice Magazine | MAY 2014
Both “New Ideas� and dramatically reduced drilling costs are required. These two will only be found together onshore.
View more quality content from Finding Petroleum
Eight energy myths explained Written by Gail Tverberg from Our Finite World Republicans, Democrats, and environmentalists all have favorite energy myths. Even Peak Oil believers have favorite energy myths. The following are a few common misbeliefs, coming from a variety of energy perspectives. I will start with a recent myth, and then discuss some longer-standing ones. Myth 1. The fact that oil producers are talking about wanting to export crude oil means that the US has more than enough crude oil for its own needs. The real story is that producers want to sell their crude oil at as high a price as possible. If they have a choice of refineries A, B, and C in this country to sell their crude oil to, the maximum amount they can receive for their oil is limited by the price these refineries are paying, less the cost of shipping the oil to these refineries. If it suddenly becomes possible to sell crude oil to refineries elsewhere, the possibility arises that a higher price will be available in another country. Refineries are optimized for a particular type of crude. If, for example, refineries in Europe are short of light, sweet crude because such oil from Libya is mostly still unavailable, a European refinery might be willing to pay a higher price for crude oil from the Bakken (which also produces light sweet, crude) than a refinery in this country. Even with shipping costs, an oil producer might be able to make a bigger profit on its oil sold outside of the US than sold within the US. The US consumed 18.9 million barrels a day of petroleum products during 2013. In
19
OilVoice Magazine | MAY 2014
order to meet its oil needs, the US imported 6.2 million barrels of oil a day in 2013 (netting exported oil products against imported crude oil). Thus, the US is, and will likely continue to be, a major oil crude oil importer. If production and consumption remain at a constant level, adding crude oil exports would require adding crude oil imports as well. These crude oil imports might be of a different kind of oil than that that is exported–quite possibly sour, heavy crude instead of sweet, light crude. Or perhaps US refineries specializing in light, sweet crude will be forced to raise their purchase prices, to match world crude oil prices for that type of product. The reason exports of crude oil make sense from an oil producer’s point of view is that they stand to make more money by exporting their crude to overseas refineries that will pay more. How this will work out in the end is unclear. If US refiners of light, sweet crude are forced to raise the prices they pay for oil, and the selling price of US oil products doesn’t rise to compensate, then more US refiners of light, sweet crude will go out of business, fixing a likely world oversupply of such refiners. Or perhaps prices of US finished products will rise, reflecting the fact that the US has to some extent in the past received a bargain (related to the gap between European Brent and US WTI oil prices), relative to world prices. In this case US consumers will end up paying more. The one thing that is very clear is that the desire to ship crude oil abroad does not reflect too much total crude oil being produced in the United States. At most, what it means is an overabundance of refineries, worldwide, adapted to light, sweet crude. This happens because over the years, the world’s oil mix has been generally changing to heavier, sourer types of oil. Perhaps if there is more oil from shale formations, the mix will start to change back again. This is a very big “if,” however. The media tend to overplay the possibilities of such extraction as well. Myth 2. The economy doesn’t really need very much energy. We humans need food of the right type, to provide us with the energy we need to carry out our activities. The economy is very similar: it needs energy of the right types to carry out its activities. One essential activity of the economy is growing and processing food. In developing countries in warm parts of the world, food production, storage, transport, and preparation accounts for the vast majority of economic activity (Pimental and Pimental, 2007). In traditional societies, much of the energy comes from human and animal labor and burning biomass. If a developing country substitutes modern fuels for traditional energy sources in food production and preparation, the whole nature of the economy changes. We can see this starting to happen on a world-wide basis in the early 1800s, as energy other than biomass use ramped up.
20
OilVoice Magazine | MAY 2014
Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent The Industrial Revolution began in the late 1700s in Britain. It was enabled by coal usage, which made it possible to make metals, glass, and cement in much greater quantities than in the past. Without coal, deforestation had become a problem, especially near cold urban areas, such as London. With coal, it became possible to use industrial processes that required heat without the problem of deforestation. Processes using high levels of heat also became cheaper, because it was no longer necessary to cut down trees, make charcoal from the wood, and transport the charcoal long distances (because nearby wood had already been depleted). The availability of coal allowed the use of new technology to be ramped up. For example, according to Wikipedia, the first steam engine was patented in 1608, and the first commercial steam engine was patented in 1712. In 1781, James Watt invented an improved version of the steam engine. But to actually implement the steam engine widely using metal trains running on metal tracks, coal was needed to make relatively inexpensive metal in quantity. Concrete and metal could be used to make modern hydroelectric power plants, allowing electricity to be made in quantity. Devices such as light bulbs (using glass and metal) could be made in quantity, as well as wires used for transmitting electricity, allowing a longer work-day. The use of coal also led to agriculture changes as well, cutting back on the need for farmers and ranchers. New devices such as steel plows and reapers and hay rakes were manufactured, which could be pulled by horses, transferring work from humans to animals. Barbed-wire fence allowed the western part of the US to become cropland, instead one large unfenced range. With fewer people needed in agriculture, more people became available to work in cities in factories.
21
OilVoice Magazine | MAY 2014
Our economy is now very different from what it was back about 1820, because of increased energy use. We have large cities, with food and raw materials transported from a distance to population centers. Water and sewer treatments greatly reduce the risk of disease transmission of people living in such close proximity. Vehicles powered by oil or electricity eliminate the mess of animal-powered transport. Many more roads can be paved. If we were to try to leave today’s high-energy system and go back to a system that uses biofuels (or only biofuels plus some additional devices that can be made with biofuels), it would require huge changes. Myth 3. We can easily transition to renewables. On Figure 1, above, the only renewables are hydroelectric and biofuels. While energy supply has risen rapidly, population has risen rapidly as well.
Figure 2. World Population, based on Angus Maddison estimates, interpolated where necessary. When we look at energy use on a per capita basis, the result is as shown in Figure 3, on the next page.
22
OilVoice Magazine | MAY 2014
Figure 3. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data. The energy consumption level in 1820 would be at a basic level–only enough to grow and process food, heat homes, make clothing, and provide for some very basic industries. Based on Figure 3, even this required a little over 20 gigajoules of energy per capita. If we add together per capita biofuels and hydroelectric on Figure 3, they would come out to only about 11 gigajoules of energy per capita. To get to the 1820 level of per capita energy consumption, we would either need to add something else, such as coal, or wait a very, very long time until (perhaps) renewables including hydroelectric could be ramped up enough. If we want to talk about renewables that can be made without fossil fuels, the amount would be smaller yet. As noted previously, modern hydroelectric power is enabled by coal, so we would need to exclude this. We would also need to exclude modern biofuels, such as ethanol made from corn and biodiesel made from rape seed, because they are greatly enabled by today’s farming and transportation equipment and indirectly by our ability to make metal in quantity. I have included wind and solar in the “Biofuels” category for convenience. They are so small in quantity that they wouldn’t be visible as a separate categories, wind amounting to only 1.0% of world energy supply in 2012, and solar amounting to 0.2%, according to BP data. We would need to exclude them as well, because they too require fossil fuels to be produced and transported. In total, the biofuels category without all of these modern additions might be close to the amount available in 1820. Population now is roughly seven times as large, suggesting only one-seventh as much energy per capita. Of course, in 1820 the amount of wood used led to significant deforestation, so even this level of biofuel use
23
OilVoice Magazine | MAY 2014
was not ideal. And there would be the additional detail of transporting wood to markets. Back in 1820, we had horses for transport, but we would not have enough horses for this purpose today. Myth 4. Population isn’t related to energy availability. If we compare Figures 2 and 3, we see that the surge in population that took place immediately after World War II coincided with the period that per-capita energy use was ramping up rapidly. The increased affluence of the 1950s (fueled by low oil prices and increased ability to buy goods using oil) allowed parents to have more children. Better sanitation and innovations such as antibiotics (made possible by fossil fuels) also allowed more of these children to live to maturity. Furthermore, the Green Revolution which took place during this time period is credited with saving over a billion people from starvation. It ramped up the use of irrigation, synthetic fertilizers and pesticides, hybrid seed, and the development of high yield grains. All of these techniques were enabled by availability of oil. Greater use of agricultural equipment, allowing seeds to be sowed closer together, also helped raise production. By this time, electricity reached farming communities, allowing use of equipment such as milking machines. If we take a longer view of the situation, we find that a “bend” in the world population occurred about the time of Industrial Revolution, and the ramp up of coal use (Figure 4). Increased farming equipment made with metals increased food output, allowing greater world population.
Figure 4. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population. Furthermore, when we look at countries that have seen large drops in energy consumption, we tend to see population declines. For example, following the
24
OilVoice Magazine | MAY 2014
collapse of the Soviet Union, there were drops in energy consumption in a number of countries whose energy was affected (Figure 5).
Figure 6. Population as percent of 1985 population, for selected countries, based on EIA data. Myth 5. It is easy to substitute one type of energy for another. Any changeover from one type of energy to another is likely to be slow and expensive, if it can be accomplished at all. One major issue is the fact that different types of energy have very different uses. When oil production was ramped up, during and following World War II, it added new capabilities, compared to coal. With only coal (and hydroelectric, enabled by coal), we could have battery-powered cars, with limited range. Or ethanol-powered cars, but ethanol required a huge amount of land to grow the necessary crops. We could have trains, but these didn’t go from door to door. With the availability of oil, we were able to have personal transportation vehicles that went from door to door, and trucks that delivered goods from where they were produced to the consumer, or to any other desired location. We were also able to build airplanes. With airplanes, we were able to win World War II. Airplanes also made international business feasible on much greater scale, because it became possible for managers to visit operations abroad in a relatively short time-frame, and because it was possible to bring workers from one country to another for training, if needed. Without air transport, it is doubtful that the current number of internationally integrated businesses could be maintained. The passage of time does not change the inherent differences between different types of fuels. Oil is still the fuel of preference for long-distance travel, because (a) it is energy dense so it fits in a relatively small tank, (b) it is a liquid, so it is easy to
25
OilVoice Magazine | MAY 2014
dispense at refueling stations, and (c) we are now set up for liquid fuel use, with a huge number of cars and trucks on the road which use oil and refueling stations to serve these vehicles. Also, oil works much better than electricity for air transport. Changing to electricity for transportation is likely to be a slow and expensive process. One important point is that the cost of electric vehicles needs to be brought down to where they are affordable for buyers, if we do not want the changeover to have a hugely adverse effect on the economy. This is the case because salaries are not going to rise to pay for high-priced cars, and the government cannot afford large subsidies for everyone. Another issue is that the range of electric vehicles needs to be increased, if vehicle owners are to be able to continue to use their vehicles for long-distance driving. No matter what type of changeover is made, the changeover needs to implemented slowly, over a period of 25 years or more, so that buyers do not lose the trade in value of their oil-powered vehicles. If the changeover is done too quickly, citizens will lose their trade in value of their oil-powered cars, and because of this, will not be able to afford the new vehicles. If a changeover to electric transportation vehicles is to be made, many vehicles other than cars will need to be made electric, as well. These would include long haul trucks, busses, airplanes, construction equipment, and agricultural equipment, all of which would need to be made electric. Costs would need to be brought down, and necessary refueling equipment would need to be installed, further adding to the slowness of the changeover process. Another issue is that even apart from energy uses, oil is used in many applications as a raw material. For example, it is used in making herbicides and pesticides, asphalt roads and asphalt shingles for roofs, medicines, cosmetics, building materials, dyes, and flavoring. There is no possibility that electricity could be adapted to these uses. Coal could perhaps be adapted for these uses, because it is also a fossil fuel. Myth 6. Oil will “run out” because it is limited in supply and non-renewable. This myth is actually closer to the truth than the other myths. The situation is a little different from “running out,” however. The real situation is that oil limits are likely to disrupt the economy in various ways. This economic disruption is likely to be what leads to an abrupt drop in oil supply. One likely possibility is that a lack of debt availability and low wages will keep oil prices from rising to the level that oil producers need for extraction. Under this scenario, oil producers will see little point in investing in new production. There is evidence that this scenario is already starting to happen. There is another version of this myth that is even more incorrect. According to this myth, the situation with oil supply (and other types of fossil fuel supply) is as follows:
26
OilVoice Magazine | MAY 2014
Myth 7. Oil supply (and the supply of other fossil fuels) will start depleting when the supply is 50% exhausted. We can therefore expect a long, slow decline in fossil fuel use. This myth is a favorite of peak oil believers. Indirectly, similar beliefs underly climate change models as well. It is based on what I believe is an incorrect reading of the writings of M. King Hubbert. Hubbert is a geologist and physicist who foretold a decline of US oil production, and eventually world production, in various documents, including Nuclear Energy and the Fossil Fuels, published in 1956. Hubbert observed that under certain circumstances, the production of various fossil fuels tends to follow a rather symmetric curve.
Figure 7. M. King Hubbert’s 1956 image of expected world crude oil production, assuming ultimate recoverable oil of 1,250 billion barrels. A major reason that this type of forecast is wrong is because it is based on a scenario in which some other type of energy supply was able to be ramped up, before oil supply started to decline.
Figure 8. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.
27
OilVoice Magazine | MAY 2014
With this ramp up in energy supply, the economy can continue as in the past without a major financial problem arising relating to the reduced oil supply. Without a ramp up in energy supply of some other type, there would be a problem with too high a population in relationship to the declining energy supply. Per-capita energy supply would drop rapidly, making it increasingly difficult to produce enough goods and services. In particular, maintaining government services is likely to become a problem. Needed taxes are likely to rise too high relative to what citizens can afford, leading to major problems, even collapse, based on the research of Turchin and Nefedov (2009). Myth 8. Renewable energy is available in essentially unlimited supply. The issue with all types of energy supply, from fossil fuels, to nuclear (based on uranium), to geothermal, to hydroelectric, to wind and solar, is diminishing returns. At some point, the cost of producing energy becomes less efficient, and because of this, the cost of production begins to rise. It is the fact wages do not rise to compensate for these higher costs and that cheaper substitutes do not become available that causes financial problems for the economic system. In the case of oil, rising cost of extraction comes because the cheap-to-extract oil is extracted first, leaving only the expensive-to-extract oil. This is the problem we recently have been experiencing. Similar problems arise with natural gas and coal, but the sharp upturn in costs may come later because they are available in somewhat greater supply relative to demand. Uranium and other metals experience the same problem with diminishing returns, as the cheapest to extract portions of these minerals is extracted first, and we must eventually move on to lower-grade ores. Part of the problem with so-called renewables is that they are made of minerals, and these minerals are subject to the same depletion issues as other minerals. This may not be a problem if the minerals are very abundant, such as iron or aluminum. But if minerals are lesser supply, such as rare earth minerals and lithium, depletion may lead to rising costs of extraction, and ultimately higher costs of devices using the minerals. Another issue is choice of sites. When hydroelectric plants are installed, the best locations tend to be chosen first. Gradually, less desirable locations are added. The same holds for wind turbines. Offshore wind turbines tend to be more expensive than onshore turbines. If abundant onshore locations, close to population centers, had been available for recent European construction, it seems likely that these would have been used instead of offshore turbines. When it comes to wood, overuse and deforestation has been a constant problem throughout the ages. As population rises, and other energy resources become less available, the situation is likely to become even worse. Finally, renewables, even if they use less oil, still tend to be dependent on oil. Oil is important for operating mining equipment and for transporting devices from the location where they are made to the location where they are to be put in service.
28
OilVoice Magazine | MAY 2014
Helicopters (requiring oil) are used in maintenance of wind turbines, especially off shore, and in maintenance of electric transmission lines. Even if repairs can be made with trucks, operation of these trucks still generally requires oil. Maintenance of roads also requires oil. Even transporting wood to market requires oil. If there is a true shortage of oil, there will be a huge drop-off in the production of renewables, and maintenance of existing renewables will become more difficult. Solar panels that are used apart from the electric grid may be long-lasting, but batteries, inverters, long distance electric transmission lines, and many other things we now take for granted are likely to disappear. Thus, renewables are not available in unlimited supply. If oil supply is severely constrained, we may even discover that many existing renewables are not even very long lasting.
View more quality content from Our Finite World
Oil & Gas Boom 2014: A Withering Regulatory Assault Written by David Blackmon from FTI Consulting, Inc. While the Obama Administration frequently touts its commitment to an “all of the above� energy policy, its ongoing devotion to handing out massive subsidies (wind, solar) and demand quotas (ethanol, biofuels) to some forms of energy while ramping up taxes and heavy-handed regulations on others reveals this commitment to be highly qualified and selectively applied. Nowhere is the downside of this picking-andchoosing approach to energy policy more evident than as it relates to the oil and gas industry, upon which the Administration’s ongoing withering regulatory assault continued last week on several fronts. First, on March 25, the Environmental Protection Agency (EPA), working in concert
29
OilVoice Magazine | MAY 2014
with the Army Corps of Engineers, issued its new “Waters WAT +0.43% of the United States” proposed regulation, which EPA claims would “clarify” the scope of its regulatory authority under the Clean Water Act (CWA). Naturally, in “clarifying” its authority, EPA – as it invariably does – seeks to vastly expand said authority. The proposed rule would take EPA’s current statutory authority under the CWA to regulate “navigable waters” and “clarify” it in a way that would allow it to regulate any connected or adjacent wetlands, streams, creeks, ditches or ponds, including those that are intermittent, seasonal, man-made or “ephemeral”, whatever that means. EPA protested that concerns expressed by the various industries the rule would impact were “overblown”, which is what EPA always does before going about ensuring that such concerns invariably are either met or exceeded by the ultimate impacts. This is how EPA has functioned since its inception, in administrations of both parties, and no one should expect it to change anytime soon. Or ever, for that matter – it’s the nature of this bureaucracy. EPA Administrator Gina McCarthy quickly moved to reassure the Agricultural industry that their existing exemptions under the CWA would not be impacted, a statement no one really believed. Conversely, no such assurances were forthcoming related to the oil and gas or other energy industries, an omission which surprised no one. This proposed rule is the third effort in recent years to expand EPA authority in this area. There were repeated efforts to pass legislation through congress during the early part of President Obama’s first term, all of which failed. More recently, the EPA issued a guidance document under the statute that it decided to withdraw in response to strong protests by affected industries. So one must assume the agency hopes that this third attempt to regulate your local drainage ditch or stock pond will be the charm. Not to be outdone, on March 28 the U.S. Fish and Wildlife Service announced its decision to list the Lesser Prairie Chicken as “threatened” under the Endangered Species Act. While this designation is a step below the “endangered” status under the ESA, and theoretically provides regulators and affected parties more flexibility in determining ways to go about protecting this bird, the potential negative impacts of the listing on vast swaths of five different states is very significant. The oil and gas industry and other affected parties were naturally disappointed by the decision, given that companies, ranchers and other landowners had already agreed to set aside more than 3 million acres of land as habitat for the chicken under the Five State Conservation Plan that is sponsored by the states of Texas, Oklahoma, Colorado, New Mexico and Kansas. The decision ultimately becomes another victory for radical groups like the Center for Biological Diversity (CBD), which have been allowed to abuse this statute and circumvent the normal regulatory and administrative processes with their “Sue and Settle” racket I detailed for readers in this space last year. In fact, Oklahoma Attorney General Scott Pruitt challenged this spurious and really un-American practice in a lawsuit he filed in federal court earlier in March. If there is any justice remaining in this country’s legal system, he will prevail. Of course, any
30
OilVoice Magazine | MAY 2014
ultimate disposition of that case will come years in the future. In the meantime, CBD will have free reign to continue collecting millions of dollars from the federal government at the expense of taxpayers and consumers. Also on March 28, the White House released an outline of its long-awaited Climate Action Plan Strategy to Reduce Methane Emissions. The strategy would initiate a process whose ultimate goal would be EPA regulation of methane emissions at several points along the upstream, midstream and downstream supply chain for natural gas, as well as the coal industry and landfills. The process would begin with the solicitation of input from affected industries through a series of technical white papers, followed by bureaucratic determination of possible actions that everyone expects would result in heavy-handed regulation of the natural gas industry, which has long been the goal at EPA. The strategy document also includes proposed updated standards under the Bureau of Land Management’s Onshore Order #9, which governs venting and flaring of natural gas in oilfield operations on federal lands. Interestingly, the strategy in no way contemplates mandatory regulation of farm animal flatulence and other agricultural industry emissions, which are the largest single source of methane emissions in the United States. Then again, if EPA were to regulate flatulence from cows and sheep, it might then attempt to extend its authority to similar human emissions, and nobody with any fiber in their diet wants to see that happen. Coincidentally, on April 1, the House Budget Committee under Chairman Paul Ryan issued its proposed 2015 budget. In his statement accompanying the release, Rep. Ryan criticized the Administration for creating nearly $500 billion in additional annual regulatory activity costs associated with compliance since 2009. “The President has installed a heavy-handed compliance culture dependent on regulations, favorable tax treatment and spending on administration-favored constituencies. This administration has proposed more economically significant regulations in four years than previous administrations have in the past 15 years combined,” Ryan said. Mr. Ryan was of course speaking globally about the Administration’s impacts across the economy, but no sector has been more impacted by this unending assault has oil and gas. And almost three more years of this fun still to come.
View more quality content from FTI Consulting, Inc.
Upcoming Events and Training Courses
Events
Training Courses
Upstream Tech 2014 ...holding a tin cup below a Niagara Falls of data! London, 23 May 2014
Political & Security Risks and Forecasts for the Oil & Gas Sector in the Middle East and North Africa (MENA) London, 26 Jun 2014 £500 per place
Peformance Excellence ....remains a challenge in our industry London, 12 Jun 2014 Deepwater Fields optimising their Finding, Development and Production London, 24 Sep 2014
Introduction to Seismic Data Acquisition & Processing London, 22 Sep 2014 £500 per place An Introduction to Shale Gas (& oil) for NonGeoscientists London, 29 Sep 2014 £500 per place
Reserve your place at FindingPetroleum.com
32
OilVoice Magazine | MAY 2014
Is drilling in the Gulf safer? Regulators beg for an answer Written by Loren Steffy from 30 Point Strategies Federal regulators have a new approach for improving safety in the Gulf of Mexico: beg the industry to cooperate. Maybe even say “pretty please.” The Bureau of Safety and Environmental Enforcement unveiled a plan this week in which it will set up a series of meetings with offshore operators and pitch them on the idea of providing the regulator with data on “near-miss” incidents. BSEE wants to use the information to build a database that could show patterns for potential safety problems. In other words, it wants to track telltale signs of another Macondo disaster so companies can avert the next catastrophe. We are approaching the fourth anniversary of BP's Deepwater Horizon disaster, and BSEE, the regulator born of that accident, still finds itself begging for the industry’s help in making offshore operations safer. Compiling a clearinghouse of near-miss data is crucial to improving offshore safety. Participation shouldn’t be voluntary. It should be required – as it is in some other countries — and the results should be transparent. In U.S., the industry has fought such efforts, getting them removed from rules proposed in 2006. Companies claimed the reporting requirements would be too burdensome. That, of course, was before the Macondo blowout. The industry now should be asking itself whether reporting near-miss data would be more burdensome than another Macondo-scale accident. The dearth of data remains a significant problem in the gulf. Rather than rely on accurate information about safety rates, the industry too often continues to cling to comfortable myths. One of the most prevalent is that some 50,000 wells have been drilled in the gulf with only been one major accident. That statement, repeated almost weekly to me by someone in the industry, ignores two important points. The first is that the industry didn’t drill 50,000 wells like Macondo before the accident. At the time, only 43 wells of similar complexity had been drilled. More important, we don’t know how many times a Macondo-like disaster was narrowly averted in some six decades of offshore drilling.
33
OilVoice Magazine | MAY 2014
Currently, BSSE compiles reports of hydrocarbon releases that result in a shutdown of operations. That doesn’t produce enough data points to offer meaningful insights into performance trends. What’s needed is data on all hydrocarbon releases. That would enable BSEE to track performance. Are potentially dangerous incidents increasing in frequency, and if so why? What can be done to correct the problem? Or are they decreasing, in which case what is being done to effectively make the Gulf safer? This is vital information, but four years after Macondo, we don’t know enough to even answer the question of whether drilling safety has improved in the Gulf. Late last year, when BSEE’s new chief, Brian Salerno, first called for a near-miss database, I had hoped he would finally address the problem of a lack of drilling data. But BSEE, like its predecessor the Mineral Management Service, has a soft touch for the industry it purports to regulate. Instead of requiring data, it’s pleading. Instead of making the data transparent, as it is for aviation accidents and workplace safety, BSEE is promising the industry it will keep the information confidential. Part of the benefit of a near-miss database would be for all companies in the gulf to see how their operations compare with others. The public, too, should know the safest operators. Hiding the numbers behind a veil of secrecy undermines the benefits of the initiative. It caters to the long-standing industry practice of coddling, rather than calling out, its weakest performers. The industry claims it has an excellent safety record, and if that’s true, it should be confident that compiling near-miss data would prove the point. Instead, it prefers to wrap itself in the blanket of self-delusion, as if the absence of disaster is a synonym for safety.
View more quality content from 30 Point Strategies
34
OilVoice Magazine | MAY 2014
The absurdity of US natural gas exports Written by Gail Tverberg from Our Finite World Quiz: 1. How much natural gas is the United States currently extracting? (a) Barely enough to meet its own needs (b) Enough to allow lots of exports (c) Enough to allow a bit of exports (d) The United States is a natural gas importer Answer: (d) The United States is a natural gas importer, and has been for many years. The EIA is forecasting that by 2017, we will finally be able to meet our own natural gas needs.
Figure 1. US Natural Gas recent history and forecast, based on EIA’s Annual Energy Outlook 2014 Early Release Overview In fact, this last year, with a cold winter, we have had a problem with excessively drawing down amounts in storage.
35
OilVoice Magazine | MAY 2014
Figure 2. US EIA’s chart showing natural gas in storage, compared to the five year average, from Weekly Natural Gas Storage Report. There is even discussion that at the low level in storage and current rates of production, it may not be possible to fully replace the natural gas in storage before next fall. 2. How much natural gas is the United States talking about exporting? (a) A tiny amount, less than 5% of what it is currently producing. (b) About 20% of what it is currently producing. (c) About 40% of what it is currently producing. (d) Over 60% of what it is currently producing. The correct answer is (d) Over 60% what it is currently producing. If we look at the applications for natural gas exports found on the Energy.Gov website, we find that applications for exports total 42 billion cubic feet a day, most of which has already been approved.* This compares to US 2013 natural gas production of 67 billion cubic feet a day. In fact, if companies applying for exports build the facilities in, say, 3 years, and little additional natural gas production is ramped up, we could be left with less than half of current natural gas production for our own use. *This is my calculation of the sum, equal to 38.51 billion cubic feet a day for Free Trade Association applications (and combined applications), and 3.25 for Non-Free Trade applications.
36
OilVoice Magazine | MAY 2014
3. How much are the United States’ own natural gas needs projected to grow by 2030? a. No growth b. 12% c. 50% d. 150% If we believe the US Energy Information Administration, US natural gas needs are expected to grow by only 12% between 2013 and 2030 (answer (b)). By 2040, natural gas consumption is expected to be 23% higher than in 2013. This is a little surprising for several reasons. For one, we are talking about scaling back coal use for making electricity, and we use almost as much coal as natural gas. Natural gas is an alternative to coal for this purpose. Furthermore, the EIA expects US oil production to start dropping by 2020 (Figure 3, below), so logically we might want to use natural gas as a transportation fuel too.
Figure 3. US Annual Energy Outlook 2014 Early Release Oil Forecast for the United States. We currently use more oil than natural gas, so this change could in theory lead to a 100% or more increase in natural gas use. Many nuclear plants we now have in service will need to be replaced in the next 20 years. If we substitute natural gas in this area as well, it would further send US
37
OilVoice Magazine | MAY 2014
natural gas usage up. So the EIA’s forecast of US natural gas needs definitely seem on the “light” side. 4. How does natural gas’s production growth fit in with the growth of other US fuels according to the EIA? (a) Natural gas is the only fuel showing much growth (b) Renewables grow by a lot more than natural gas (c) All fuels are growing The answer is (a). Natural gas is the only fuel showing much growth in production between now and 2040. Figure 4 below shows the EIA’s figure from its Annual Energy Outlook 2014 Early Releaseshowing expected production of all types of fuels.
Figure 4. Forecast US Energy Production by source, from US EIA’s Annual Energy Outlook 2014 Early Release. $&spl1t&% Natural gas is pretty much the only growth area, growing from 31% of total energy production in 2012 to 38% of total US energy production in 2040. Renewables are expected to grow from 11% to 12% of total US energy production (probably because the majority is hydroelectric, and this doesn’t grow much). All of the others fuels, including oil, are expected to shrink as percentages of total energy production between 2012 and 2040.
38
OilVoice Magazine | MAY 2014
5. What is the projected path of natural gas prices: (a) Growing slowly (b) Ramping up quickly (c) It depends on who you ask It depends on who you ask: Answer (c). According to the EIA, natural gas prices are expected to remain quite low. The EIA provides a forecast of natural gas prices for electricity producers, from which we can estimate expected wellhead prices (Figure 5).
Figure 5. EIA Forecast of Natural Gas prices for electricity use from AEO 2014 Advance Release, together with my forecast of corresponding wellhead prices. (2011 and 2012 are actual amounts, not forecasts.) In this forecast, wellhead prices remain below $5.00 until 2028. Electricity companies look at these low price forecasts and assume that they should plan on ramping up electricity production from natural gas. The catch–and the reason for all of the natural gas exports–is that most shale gas producers cannot produce natural gas at recent price levels. They need much higher price levels in order to make money on natural gas. We see one article after another on this subject: From Oil and Gas Journal; from Bloomberg; from the Financial Times. The Wall Street Journal quoted Exxon’s Rex Tillerson as saying, “We are all losing our shirts today. We’re making no money. It’s all in the red.” Why all of the natural gas exports, if we don’t have very much natural gas, and the shale gas portion (which is the only portion with much potential for growth) is so unprofitable?The reason for all of the exports is too pump up the prices shale gas producers can get for their gas. This comes partly by engineering higher US prices (by shipping an excessive portion overseas) and partly by trying to take advantage of
39
OilVoice Magazine | MAY 2014
higher prices in Europe and Japan.
Figure 6. Comparison of natural gas prices based on World Bank “Pink Sheet” data. Also includes Pink Sheet world oil price on similar basis. There are several catches in all of this. Dumping huge amounts of natural gas on world export markets is likely to sink the selling price of natural gas overseas, just as dumping shale gas on US markets sank US natural gas prices here (and misled some people, by making it look as if shale gas production is cheap). The amount of natural gas export capacity that is in the approval process is huge: 42 billion cubic feet per day. The European Union imports only about 30 billion cubic feet a day from all sources. This amount hasn’t increased since 2005, even though EU natural gas production has dropped. Japan’s imports amounted to 12 billion cubic feet of natural gas a day in 2012; China’s amounted to about 4 billion cubic feet. So in theory, if we try hard enough, there might be a place for the 42 billion cubic feet per day of natural gas to go–but it would take a huge amount of effort. There are other issues involved, as well. The countries that are importing huge amounts of high-priced natural gas are not doing well financially. They aren’t going to be able to afford to import a whole lot more high-priced natural gas. In fact, a big part of the reason that they are not doing well financially is because they are paying so much for imported natural gas (and oil). If the US has to pay these high prices for natural gas (even if we produce it ourselves), we won’t be doing very well financially either. In particular, companies who manufacture goods with electricity from high-priced natural gas will find that the goods they make are not competitive with goods made with cheaper fuels (coal, nuclear, or hydroelectric) in the world marketplace. This is a problem, whether the country produces the high-priced natural gas itself or imports it. So the issue is not an imported fuel problem; it is a high-priced fuel problem.
40
OilVoice Magazine | MAY 2014
Another issue is that with shale gas, we are the high cost producer. There is a lot of natural gas production around the world, particularly in the Middle East, that is cheaper. If we add our high cost of shale gas to the high cost of shipping LNG longdistance across the Atlantic or Pacific, we will most definitely be the high cost producer. Other producers with lower costs (even local shale gas producers) can undercut our prices. So at best those shipping LNG overseas are likely to make mediocre profits. And there would seem to be great temptation to stir up trouble, to encourage Europe to buy our natural gas exports, rather than Russia’s. Of course, our ability to provide this natural gas is not entirely clear. It makes a good story, with lots of “ifs” involved: “If we can really extract this natural gas. If the price can really go up and stay up. If you can wait long enough.” The story makes the US look more rich and powerful than it really is. We can even pretend to offer help to the Ukraine. Perhaps the best outcome would be if virtually none of this natural gas export capacity ever gets built–approval or no approval. If it is really possible to get the natural gas out, we need it here instead. Or leave it in the ground.
View more quality content from Our Finite World