OIL: the final countdown

Mid Atlantic Renewable Energy  Initiative



Past Peak Oil - Why Time Is Now Short

Tyler Durden's picture
Submitted by Tyler Durden on 05/27/2011 12:59 -0400 on ZeroHedge

Note:  With so much going on with Europe's debt crisis, the continuing disaster and economic contraction in Japan, and the potential for a very hard landing in the Chinese growth miracle (which is in the running as my favorite "black swan candidate" for 2011), I am going to return our attention to oil in this report.  The next report will assess the developing and unfolding debt crisis that will drag down most of the developed economies at some point, and this report will provide essential context for understanding why this result is inevitable and when it will occur.

The Next Oil Shock

The only thing that could prevent another oil shock from happening before the end of 2012 would be another major economic contraction.  The emerging oil data continues to tell a tale of ever-tightening supplies that will soon be exceeded by rising global demand.  This time, we will not be able to blame speculators for the steep prices we experience; instead, we will have nothing to blame but geology.

Back in 2009, I wrote a pair of reports in which I calculated that we’d see another price spike in oil by 2010 or 2011, based on some assumptions about global GDP growth rates, rates of decline in existing oil fields, and new projects set to come online.  Given the recent price spike in oil (Brent crude over $126, now at $115) and recent oil supply data, those predictions turned out to be quite solid (for reference, oil was trading in the low $60s at the time). 

One part I whiffed on was in my prediction that the world community would have embraced the idea of Peak Oil by now and begun adjusting accordingly, but that’s not really true except in a few cases (e.g. Sweden).  Perhaps things are being differently and more seriously considered behind closed doors, but out in public the dominant story line concerns reinvigorating consumer demand, not a looming liquid fuel crisis.

How the major economies can continue proceeding with a business-as-usual mindset given the oil data is really quite a mystery to me, but that’s just how things happen to be at the moment.

At any rate, with Brent crude oil having lofted over $100/bbl at the beginning of February and remained above that big, round number for four months now, we are already in the middle of a price shock.  It may not be a perfect repeat of the circumstances of the 2008 oil shock, but it's close enough that the risk of an economic contraction, at least for the weaker economies, is not unthinkable here.  Japan, now in recession and 100% dependent on oil imports, comes to mind.

Looking at the new data and reading even minimally between the lines of recent International Energy Agency (IEA) statements, I am now ready to move my ‘Peak Oil is a statistically unavoidable fact’ event to sometime in 2012, which tightens my prediction from the prior range of 2012-2013.

Upon this recognition, the next shock will drive oil to new heights that are currently unimaginable for most.  First, $200/bbl will be breached, then $300, and then more.  And these are in current dollar terms; any additional dollar weakness will simply be additive to the actual quoted price.  By this I mean that if oil were to trade at $200 but the dollar lost one half of its value along the way, then oil would be priced at $400. 

Stampeding Into a Box Canyon

In 2009, I wrote a special report on oil that explored the interplay between energy and the economy.  At that time, the stock market was in the tank, global growth was in a freefall, and things looked gloomy.

But I knew that thin-air money is not without its charms and that we’d experience a rebound of sorts.  Here’s what I wrote:

I am of the opinion that these trillions and trillions of dollars, which, along with their foreign equivalents, are being applied to “ease the credit crunch,” will eventually find their mark and deliver what feels like a legitimate rebound in activity.  All those trillions have to eventually go somewhere and do something. 

For now, debts are defaulting faster than the various central banks and governments can inject new money and borrowing activity into the system.  Banks aren’t lending because there are very few compelling loans to make, especially if future losses have to actually be carried by the bank making the loan. 

But this won’t be true forever.  Sooner or later, all the trillions of new dollars will trot out of the barn, begin to gallop, and then thunder off, creating the appearance of a healthy advance.

It will be a cruel illusion, though, as this stampeding herd of money is headed straight into a box canyon.

Money is only one component of growth.  As we’ve strenuously proposed, energy is a necessary prerequisite for growth.

(Source)

Well, here we are a couple of years later, with those trillions and trillions out of the barn and stampeding off trying to create some real and lasting economic growth.  As we score these efforts, it appears to us that the amount and type of growth that has been achieved is underwhelming, to say the least. 

Housing remains in a serious slump, wage-based income growth is poor, Europe remains mired in a serious debt crisis, Japan has slumped back into recession, and the US fiscal deficit is a structural nightmare.  Worse, GDP growth is relatively tepid and would be negative, deeply negative, without all the deficit spending and liquidity measures. 

As predicted, all that thin-air money, once released into the wild, had a mind of its own and created a serious bout of commodity inflation, especially in food and fuel, which is now seriously impacting the poor and middle classes. 

So it’s hard to call the trillions and trillions ‘well spent.’  I was hoping for better results.

Yet we can’t call the re-flation efforts a complete failure, as we are not in a serious, destructive deflation, and we’ve all been granted a bit more time to get ourselves prepared in whatever ways make sense. The gift of time has been invaluable, and for that I am grateful.  But in terms of creating a true and lasting economic miracle?  It turns out, once again, that 'printing' money electronically is no more effective than calling in the silver coin of the realm, making each unit slightly smaller, and then re-issuing it.  Real economic growth has not been created.

What has happened is that false demand, spurred on by trillions in thin-air money, has also spurred on renewed demand for oil, hastening the day that a geologically inspired supply/demand mismatch will finally arrive. 

We are driving at a high rate of speed into a box canyon.

World Crude Supply

Before we get into the specifics of where I think the immediate trouble lies in the world oil data, let's take a moment to look at the big picture.

There are a number of ways to look at the petroleum data.  The one I prefer to look at is something called 'crude + condensate' (C+C), which leaves out things like ethanol and natural gas liquids, both of which are converted to 'barrel of oil equivalents' (BOE) and added to the C+C to yield total liquid fuels.  The reason I like to focus on C+C is that this is mainly conventional oil, the cheap and easy stuff, and it gives us a better idea of where we are in the Peak Oil story.

Note:  This next cluster of charts comes from data from the U. S. Energy Information Administration (EIA) that I am, frankly, uncomfortable with, so take them all with a grain of salt.  The EIA upwardly revised the data for 2010 and added between 750,000 and 800,000 barrels per day of production to each month.  This is the largest upward revision of which I am aware, and it's not yet clear to me why this occurred.  Further, the EIA obtained some of that data from IHS, which is the parent company of CERA, the organization that best qualifies for the 'influential Peak Oil deniers of the decade' award. 

And somewhat ominously, as suspect as the data may be, it has been an important source for decades for analysts, myself among them.  Quite recently, the EIA has announced that, due to budget cutbacks, it will immediately terminate the collection and distribution of international energy statistics -- right at the exact moment they are needed most.  Ugh.  Very disappointing, and all due to a $15 million budget cut. (Source). This echoes the loss of the M3 monetary statistic, which turned out to be a perfect gold-buying signal.  If this is a parallel event, it means that now is a great time to take Peak Oil more seriously.

A chart of C+C reveals that the world has been bouncing along in a channel roughly between 72 and 74 mbd since 2005:

Yes, a new high was made in December 2010 and was exceeded in January 2011, offering hope that the world could break out of this limiting band of production, but then production fell back in February due to the Libyan conflict.  I have added a purple dotted line to reflect where the data will most likely be for March after subtracting out the Libyan losses and the Saudi cutbacks.  As you can see, we will be right back in the 72-74 channel.  

Some will be tempted to write this off to a temporary setback due to the unrest in North Africa, but such unrest has always been part of the equation: Iraq, Nigeria, Kuwait, and many other countries have experienced supply disruptions along the way due to war and/or civil unrest.

Note also in this chart that oil production fell off by more than 2 mbd as a consequence of the global recession between 2008 and 2009.  From the lows in August 2009, it has since climbed more than 2.4 mbd to its current level.

Where did those gains come from?  Can we expect more? 

There's a very interesting story in here if we dig down one more layer. This next pie chart shows each region's relative contribution to the gains of 2.4 mbd that happened between August 2009 and February 2011: 

In the above chart, I had to include negative percentages for two regions, which is an odd way to display things (how does one draw a negative pie wedge?), but it still all sums to 100%.  I've included the negatives for comparison purposes and because they are important to keep in view.  It's clear that the Middle East is the most important region; no surprise there. North America is about evenly split in gains between the US (Bakken) and Canada (tar sands), and Russia and China are the major players in their respective regions.

Taking the analysis one level deeper, here are the seven major countries that contributed 88% of the August 2009 to February 2011 gains (in thousands of barrels per day): 

Saudi Arabia is the hands-down leader, being responsible for 700,000 barrels per day, or 29%, of the entire gains logged in that period.

There is a variety of interesting sub-stories that could be told across each of the other countries, but it's time to focus on the big fish.

Saudi Arabia – Where There's Smoke, There's Fire

Something is seriously wrong with the signals coming from the Kingdom of Saudi Arabia (KSA), and I am of the opinion that KSA is having geological difficulties that are preventing it from pumping more oil.  Said plainly, I am of the mind that the KSA is already at peak.

One troubling bit of information is that Saudi Arabia justified its lowered oil output for March by claiming that the oil markets are oversupplied, even as Brent crude was perched above $120/bbl. There are several possibilities here:

  1. There really is an oil glut, and the KSA is being truthful.
  2. There is an oversupply, but only of the heavier, poorer grades of oil that the KSA has in relative abundance.
  3. The KSA can produce more, but doesn’t want to, preferring to withhold oil production in the interest of receiving higher prices.
  4. The KSA is already past peak and cannot pump more, despite its best efforts, and the oversupply issue is really just a cover story for the fact that the KSA cannot pump more even if it wanted to. 

Let’s start at the beginning of this odd tale.  Early in May, the KSA said this:

Saudi lifts April oil output to 8.5 mln bpd-sources

May 01, 2011

DUBAI/KHOBAR, Saudi Arabia, May 1 (Reuters) - Saudi Arabia's crude oil output edged back up in April to around 8.5 million barrels per day (bpd) from roughly 8.3 million bpd in March as demand picks up, Saudi-based industry sources said on Sunday.

The kingdom slashed output by 800,000 bpd in March, due to oversupply, oil minister Ali al-Naimi said last month, adding that he expected production in April to be a little higher than March's level. 

So the story here is that the KSA claims to have 12.5 mbd of total capacity.  Therefore, meeting the Libyan shortfalls of 1.3 mbd should be simple enough; just open the taps and let it flow.  Yet the KSA barely cracked the 9 mbd mark, briefly, before falling back to 8.3 – 8.5 mbd, telling the world that this was a purposeful response to markets that were oversupplied.  That's one possibility.

Several analysts thought that perhaps the KSA was simply gaming the markets and trying to obtain the best possible prices:

Saudi unlikely to lift oil output quickly

May 3, 2011

WASHINGTON — Saudi Arabia is unlikely to boost oil production quickly to ease the rise of crude prices, because it needs high prices for its own increased spending, analysts at an international banking think tank said Tuesday. 

After producing 8.6 million barrels a day in 2010, the world's leading oil supplier will only kick up production to about 8.9 million barrels this year, said analysts at the Washington-based Institute of International Finance. 

"So far the production of crude oil in Saudi Arabia for the first quarter was around 8.7, 8.8 (million barrels a day). And recently someunconfirmed reports said that production dropped in March," said Garbis Iradian, the IIF's deputy director for Africa and the Middle East. 

"So we don't expect crude oil production in Saudi Arabia will rise over nine million barrels a day," he said.

While it's possible that the KSA production limitations are a matter of trying to engineer higher prices, one person I trust is Sadad Al-Husseini.  The former Aramco engineer, who has a lot of credibility in these matters, thinks that the production limits have more to do with the grades of available oil rather than any mercenary market tactics on the part of KSA.

Saudi Sweet Oil Supply Too Low to Offset Libya, al-Husseini Says

May 17, 2011

Saudi Arabia, the world’s biggest crude exporter, won’t be able to produce enough low-sulfur blends to replace lost Libyan output for refiners in Europe, said Sadad al-Husseini, a former Saudi Aramco executive. 

The country doesn’t have enough Arab Super Light to create sufficient amounts of low-sulfur, or sweet, oil similar to Libya’s grades, al-Husseini, Aramco’s former executive vice president for exploration and development, said today by e-mail.

The basic problem is that each refinery is geared for a specific and relatively narrow band of crude oil feedstocks, with the specific gravity and sulfur content being the most critical factors.  So it is not as simple as the KSA pumping more heavy sour crude to offset the lost Libyan production.  This is yet another possible explanation, and it is far more believable to me than either oversupplied markets or a pricing strategy.

The somewhat shocking news that followed just a few days after the above article was the begging by the IEA for OPEC to lift production.  Such a frank admission or plea has never been made before.  Reading between the lines, we can suspect that a serious supply shortage is looming if more oil does not find its way to market soon.

International Energy Agency Urges Oil Producers to Lift Output

May 19, 2011

PARIS — Expressing “serious concern” about elevated crude prices, the International Energy Agency on Thursday called for an increase in world oil production. It was an unusual move that highlighted consumer countries’ frustration at the failure of oil-producing nations to lift output in the face of rising demand and tighter supply.

(...)

The agency’s monthly Oil Market Report, respected by industry practitioners, has recently been warning about tightening market conditions as supply has not caught up with strong demand.

Despite commitments from Saudi Arabia, the biggest producer, to use its spare capacity to increase output and replace the supplies lost because of the uprising in Libya, the cartel’s production is now running 1.3 million barrels a day below the level seen before the crisis, according to the I.E.A.

Although the New York Times has positioned this unusual call by the IEA as perhaps a bit of political maneuvering, I feel they missed the real picture by not spending more time characterizing the mismatch between supply and demand.  If that's true, then we have a near-perfect repeat of the 2008 situation, where, in the six quarters preceding the oil price spike, demand exceeded supply in five of those quarters.

Confirming this view recently was Goldman Sachs' energy division, which said:

While near-term downside risk remains as the oil market negotiates the slowdown in the pace of world economic growth, we believe that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand.

Events in the Middle East and North Africa are having a persistent impact, which leads us to increase our oil price targets. We expect that the ongoing loss of Libyan production and disappointing non-OPEC production will continue to tighten the oil market to critically tight levels in early 2012, with rising industry cost pressures likely to be felt this year.

We are now embedding in our forecasts that Libyan production losses will lead to the effective exhaustion of OPEC spare capacity by early 2012. Consequently, we are raising our Brent crude oil price forecast to $115/bbl, $120/bbl, and $130/bbl on a 3, 6, and 12 month horizon.

(Source)

There’s a lot in there, including the idea that the unrest in the Middle East will be persistent, that non-OPEC production will continue to disappoint (which it should, as nearly every non-OPEC country is past peak), and that the more globally relevant Brent contract is the right one to quote now when discussing oil, not the US-centric WTIC contract.

So count Goldman Sachs among those that are now calculating an imminent supply-demand mismatch.

The End of Easy Oil

The really big news is that the Wall Street Journal finally ran an oil piece (on the front page, no less) acknowledging the difficulties involved in Saudi Arabia regarding oil production and the extraordinary efforts that are now underway to boost production by unlocking their remaining heavy oil reserves. 

The critical parts in this story revolve around the costs of getting this oil out of the ground (in terms of both energy and money), the decades it will take to get the oil out, and the clear implication that going after such oil tells us everything we need to know about where we are in the Peak Oil story in general (and specifically in Saudi Arabia).  All the better, easier, cheaper grades are already drilled and in production.  This is what's left:

Facing Up to End of 'Easy Oil'

WAFRA, Kuwait—The Arabian Peninsula has fueled the global economy with oil for five decades. How long it can continue to do so hinges on projects like one unfolding here in the desert sands along the Saudi Arabia-Kuwait border.

Saudi Arabia became the world's top oil producer by tapping its vast reserves of easy-to-drill, high-quality light oil. But as demand for energy grows and fields of "easy oil" around the world start to dry up, the Saudis are turning to a much tougher source: the billions of barrels of heavy oil trapped beneath the desert.

Heavy oil, which can be as thick as molasses, is harder to get out of the ground than light oil and costs more to refine into gasoline. Nevertheless, Saudi Arabia and Kuwait have embarked on an ambitious experiment to coax it out of the Wafra oil field, located in a sparsely populated expanse of desert shared by the two nations.

That the Saudis are even considering such a project shows how difficult and costly it is becoming to slake the world's thirst for oil. It also suggests that even the Saudis may not be able to boost production quickly in the future if demand rises unexpectedly. Neither issue bodes well for the return of cheap oil over the long term.

The whole story is worth a read.  I’ve excerpted quite a bit because there’s so much important information in there that I wanted you to see.  Most importantly, the mainstream media in the US is finally waking up to the idea that all of the cheap and easy oil is gone.

They’ve not yet gotten to the appreciation of the idea of Net Energy, which is the real key to understanding why the future will not resemble the past, but they are edging ever closer. And they are beginning to circle around the idea that depletion in the fields that have driven the world’s economy for the past 50 years is a critical reality.

It’s not much of a hop, skip, and a jump from there to seeing it finally named for what it is:  Peak Oil, otherwise known as the geological reality that will resist all efforts at human ingenuity and technology because it is a matter of finite limits, not of willpower or optimism.

One thing I thought the article did an especially good job of was actually delving into the engineering realities involved in the project.  The article continues:

The Wafra project, however, is far more of a challenge than traditional steam projects. As in most of the Middle East, the oil at Wafra is trapped in a thick layer of limestone that also contains minerals that can build up inside pipes and corrode equipment.

An even bigger challenge is getting the two crucial elements for generating steam: water and a source of energy to boil it. Most successful steam projects are in places with easy access to relatively pure water and a cheap fuel source, usually natural gas. Saudi Arabia and Kuwait have little of either.

With no fresh-water sources in the Arabian desert, Chevron has been forced to use salt water found in the same underground reservoirs as the oil. That water is full of contaminants that must be removed before it can be boiled and injected into the ground.

Finding the energy to boil the water will be even tougher. Chevron could use oil instead of natural gas—literally burning oil to produce oil—but that would burn profits, too. So the company likely will be forced to import natural gas from overseas, an expensive process that involves chilling it to turn it into a liquid, then shipping it thousands of miles.

Some experts are shaking their heads.

The hurdles include mineral buildups, corrosion, water impurities, and the energy costs of heating all that water into steam.  In short, getting this stuff out of the ground is going to be far more difficult and costly than prior efforts.  End of story.

The reality involved in getting at the non-conventional oil is really just a story of declining net energy; the red curtain will extend down into the luscious green space that represents the surplus energy available to society. Less net energy means less economic activity and complexity.  It means less growth.  Below a certain level, it means no growth at all.  And eventually it means persistent negative growth, a possibility not yet priced into any financial markets.

In some cases I have my concerns about whether these heroic efforts are worth the trouble at all.  Perhaps we should invest the same amount of energy, talent, and expertise in energy conservation efforts and technological development.

At this point in the timeline, it's imperative for each of us to ask ourselves: how well prepared are we for this post-Peak Oil future? Part II of this report: How To Position for the Next Oil Shock explores the probable impact the next energy crisis will have on key asset classes, employment, and society in general. As we've shown above, we likely have little time left. Use it wisely.

Click here to access Part II: How To Position for the Next Oil Shock (free executive summary; paid enrollment required to access).

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Update on OIL  Mai 2011




ASPO: by 2020 crude oil production down by around 8 mb/d

(Nota Bene: there is no mention how this translates into real, exportabes quantities to importing countries...)

If everything goes well, that is. Armed conflicts in oil producing countries, socio economic unrest and other unforeseen events impacting on oil supplies are not included in this estimate. The production curves shown here (whether ASPO or IEA) are upper (oil-geological) bounds.

In the Catalyst show “Oil crunch” the President of ASPO (Association for the Study of Peak Oil and Gas), Prof. Aleklett from the Uppsala University in Sweden, mentioned that the IEA’s extraction rates in their WEO 2010 are too high.

In a November 2010 lecture at Sydney Uni, he explained:

“In contrast [to the IEA], the Uppsala group has shown, using the same IEA data on existing reserves and expected future discoveries, that global oil production will fall, not rise. This is because the IEA has assumed unrealistically high rates of production from the oilfields remaining to be developed.”

http://sydney.edu.au/sydney_ideas/lectures/2010/professor_kjell_aleklett.shtml

Let’s have a look what that means for crude oil production from 3 types of oil fields: existing, new and yet-to-find.

We superimpose Prof. Aleklett’s Uppsala model (left) on the WEO 2010 – New Policies Scenario (right) for each type.

Aleklett_Uppsala_WEO_2008IEA_WEO_2010_Crude_Oil_Plateau

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In the following graphs, the solid fill areas are from the WEO 2010, the vertical columns from Aleklett’s projection (only available up to 2030).

(1)   Crude oil from existing fields

Comparison_WEO_2010_Aleklett_fields_in_production

The decline in Aleklett’s estimate is initially steeper, 4% pa compared to the IEA’s 2% to 4% pa until 2020.  The difference is around – 9 mb/d  by 2015 and – 6 mb/d by 2020. Only after 2025 enhanced oil recovery (EOR) gives higher production figures than the IEA.

(2)   New crude oil fields

Comparison_WEO_2010_Aleklett_new_fields

Up to 2020 the estimates are not much different but then diverge considerably.

(3)   Oil fields yet to be found

Comparison_WEO_2010_Aleklett_fields_yet_to_be_found

Aleklett’s estimate for 2020 is 2 mb/d less and then trends towards half of the IEA WEO 2010 figure.

Subtotal crude oil:

Comparison_WEO_2010_Aleklett_crude_oil

The gap between the WEO 2010 and ASPO is shown in red: – 6.8 mb/d by 2015, -7.5 mb/d by 2020 and – 13.3 mb/d by 2030. As data have been taken from the graphs, the geometric accuracy would not be better than 0.5 mb/d.

An overall decline of around 8 mb/d by 2020 is equivalent to – 1.1% pa, although decline rates up to 2015 seem to be higher. This suggests we could approach the IMF scenario 2 in the next years with oil prices increasing by up to 200%. This would mean another recession and subsequent drop in oil prices as has happened already after the 2008 oil price shock.

For completeness:

(4)   Natural gas liquids

Comparison_WEO_2010_Aleklett_NGLs

(5)   Unconventional oil

Comparison_WEO_2010_Aleklett_Unconventional_Oil

All together now: crude oil and natural gas liquids

Comparison_WEO_2010_Aleklett

Conclusion: Previous ASPO warnings about a peak of oil production have materialized as confirmed by the IEA’s chief economist Fatih Birol in the Catalyst show “Oil crunch”. Therefore, get used to it: global crude oil production will decline. Global oil exports will go down even faster because oil demand in oil producing countries will increase. Business as usual with oil dependent infrastructure must be immediately stopped.

Previous related posts:

28/4/2011    IEA oil crunch warning: governments should have worked on it 10 years ago
http://www.crudeoilpeak.com/?p=3130

20/4/2011    IMF warns of oil scarcity and a 60% oil price increase within a year
http://www.crudeoilpeak.com/?p=3054

Other links:

What dwindling oil supplies mean for the world   http://www.usyd.edu.au/news/84.html?newsstoryid=5934

Web site Global Energy Systems    http://www.fysast.uu.se/ges/

Canada’s Oil Sands Resources and Its Future Impact on Global Oil Supply

www.tsl.uu.se/uhdsg/Publications/Soderbergh_Thesis.pdf

IEA’s World Energy Outlook    http://www.iea.org/weo/

Catalyst show “Oil Crunch”   http://www.abc.net.au/catalyst/oilcrunch/

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May 17th, 2011 | Tags: , , , ,  | Category: Research





Update on Oil 2011 




 The JODI-EIA Divergence (from the OILDRUM)


Posted by Sam Foucher on May 23, 2011 - 9:31am
Topic: Supply/Production
Tags: eia, joint oil data initiative [list all tags]

This is a follow-up on a discussion started by Darwinian (Ron) in theDrumbeat that I think is significant and deserving more eyes. Lately, looking at the EIA data we have seen new production records in all the categories (see post by Gail here for a discussion):

This graph looks awfully suspicious:


Figure 1. World production (EIA data). Blue lines and pentagrams are indicating monthly maximum. Monthly data for CO from the EIA. Annual data for NGPL and Other Liquids from 1980 to 2001 have been upsampled to get monthly estimates.

The public database JODI contains monthly data from more than 90 countries (90% of world production) but does not give a world production estimate, some countries are also missing or incomplete (about 20 countries), it gives something like this:


Figure 2. Production data from the JODI database (crude oil and condensate). The black dotted line is the EIA estimates. The color is a function of the current production as a % of maximum level observed since 2002.

We can get the missing data from the EIA energy database, more precisely:

  1. Incomplete series: Iraq and Kazakhstan.
  2. Some Non-OPEC countries are not in the JODI database, we then get the data from the EIA (in total 124 small producing countries).

Once completed, we get the following chart:

Figure 3. Production for crude oil and condensates from JODI (colored areas) completed for missing countries. The black dotted line is the EIA estimate.

There is clearly a divergence since 2009 and also before 2005. The difference seems to originate both from OPEC and Non OPEC countries, OPEC production is significantly lower for JODI than for the EIA:

Figure 4. Same as Figure 3 but for OPEC members. The black dotted line is the EIA estimate.
Figure 5. Same as Figure 4 but for Non-OPEC members. The black dotted line is the EIA estimate.

The chart below summarizes the difference between the two databases. We can see that even when adding the missing countries (the red area), we are not able to account for the difference with the EIA data.

Figure 6. Production data from JODI with missing countries component (in red). The three lines are the corresponding EIA estimates.

We then add the EIA monthly estimates for NGL and other liquids to the JODI data past 2005 and we get a new version of Figure 1 shown below. The records for monthly supply are now back to 2006 for C+C and C+C+NGL.

Figure 7. Same as Figure 1 but crude oil and condensates past 2005 is from JODI (see Figure 3). Blue lines and pentagrams are indicating monthly maximum.

This is a significant divergence, in particular the drop in supply following the financial crisis in mid-2008 is more acute (~2 Mb/d lower) as shown on Figure 8 below. When looking at the EIA data only we can see that production levels have strongly increased since 2009 and are now close to the population based model (the magenta area) and the EIA 2008 forecast. However, this is not the case when using JODI estimate (shown as a green line), supply is much lower and it is following closely the average peak oil forecast (the red line).

Figure 8. Average of 13 forecasts for crude oil + NGL, the magenta area represents a population based forecast whereas the yellow area represents the average domain for peak oil forecasts (see this post for details). The green line is the JODI estimate from Figure 3 and the back dotted line is the EIA data.

I was struck by the fact that the JODI estimate is following the median forecast for crude oil and NGL whereas the EIA trajectory came back in the business as usual domain. The new production data based on JODI seems to follow closely most peak oil forecasts:

Figure 9. Peak oil forecasts based on Curve fitting.

It remains to be seen what will happen in the next few months with respect to updates and corrections for both JODI and the EIA. Production levels were lower before 2005 and were never corrected to match the EIA data. If anything, it shows the large uncertainty surrounding production data coming from OPEC, the reason why OPEC members would report lower production data to JODI is unclear.

The way the production data is collected vastly differ between the EIA and JODI, for JODI the data is collected using a 42 key oil data points questionnaire. The data is then revised twice a year:

Jodi is a voluntary activity. Participating countries complete a standard data table (see table on page 2) every month for the two most recent months (M-1 and M-2) and submit it to the Jodi partner organisation(s) of which it is a member. The respective organisation compiles the data and forwards it to the IEF Secretariat which is responsible for the JodiOil World Database.

The EIA does not collect international production data but apparently paysIHS for the data (at least until the recent budget cuts).


Asking one of the less comfortable questions


Posted by Heading Out on July 10, 2008 - 10:00am
Topic: Supply/Production
Tags: cantarell, decline rate, north sea, schlumberger, yibal [list all tags]


In my last post I talked a little about the media’s normal pre-disposition to ask relatively comfortable questions about the state of oil (and natural gas) supply, with the consequence that some of the more difficult questions and those with more painful answers don’t get asked very often. The painful questions take one beyond the current concerns on the ability of supply to match demand at a reasonable price, to the point where oil production can longer increase in absolute volume, and then on to the point where overall production starts to decline. It is an issue that Euan and the TOD Europe group are beginning to ably document, as they outline the problems that Europe will face. It is a point that is illustrated in the recent post on the Megaproject update by Khebab, and more specifically in the comments on that post. But what I would add to that, and ask, as a painful question, is as to whether the projection is overly optimistic.

Ken Deffeyes, who did so much to bring this current situation to our attention with his writing and books, who has said that he is no longer a prophet, but has become a historian. His remark implies that the much of the debate over peak oil is perhaps over. And there I would disagree with him, because I remain critically concerned, as Euan is, that the world does not really understand the size of the problem that is approaching, and the speed of that arrival. Further the information that controls the shape of the production curve, post peak is usually derived relating to the pattern of the peak in the United States. To anticipate that the world curve will look the same, overlooks the critical difference that, at the present time, there is no satisfactory alternative fuel to satisfy demand. Thus the market imperatives to extract more oil in the immediate short term to meet needs may over-ride more rational concerns about achieving maximum ultimate recovery by producing the oil more slowly. This is a different situation than that which held over the time that the American production plot was developed, and alternate supplies of oil were available from abroad.

One of the significant concerns relates to the rate at which production decreases in mature fields. The average value has been assumed to lie at around 4 – 4.5%, and it is initially disquieting to note the comment that the Wall Street Journal recently quoted from the IEA.

Project delays averaging 12 months, coupled with global average decline of 5.2% - up from 4% last year – are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady. “Our findings highlight again the need for sustained, and indeed, increased investment both upstream and downstream — to assure that the market is adequately supplied,” stated [IEA Executive Director Nabuo] Tanaka.

The acceleration in the decline rate is likely to continue as more horizontal wells become the norm in oil fields and as these become spent and drop out of production.

To explain why this is one should understand the difference between the behavior of vertical and horizontal well production, particularly in the way that they behave as the oil in the reservoir declines under the driving waterfloods that push oil to the well and how they interact with the well. With a vertical well the water level rises slowly in the well, reducing the overall extraction length, but making that change slowly, over time. (Oil production is a function of the length of well exposure, among other things). With the horizontal well production remains relatively stable, until water reaches the horizon where the wells have been located, and then the entire well can become flooded, with an immediate and rapid drop in production.

In fields where these wells dominate, production declines of 10 – 14% have been observed, and, as horizontal wells become more common, it is towards that value that decline rates are heading in the future. These decline rates are not used in the conventional models that look at what the oil supply situation will look like over the next few years. Discussions that I have had, informally, with several people that talk about the peak oil situation have found them somewhat defensive about using the lower values of around 4.5%. It is as though, having grasped the nettle required to face the reality that oil production is peaking, that they then hesitate to look at the abyss that higher decline rates are going to bring.

That decline rates will increase is not itself news, Andrew Gould of Schlumberger was talking of 8% declines as long ago as 2005.

Secondly, the industry is dealing with a phenomenon that is exaggerated by the lack of investment over the past 18 years. This phenomenon is the decline rate for the older reservoirs that form the backbone of the world’s oil production, both in and out of OPEC. An accurate average decline rate is hard to estimate, but an overall figure of 8% is not an unreasonable assumption. The maintenance required to slow the rate of decline, and increase the overall recovery, is a key element of the supply picture going forward.

While I don’t think he was alluding in any way to the increasing use of horizontal wells, his number, and his position giving him more than most the sense of accuracy of the number is a recognition of the change to come.

Unfortunately, as the example of Cantarell is demonstrating when production starts to drop at around 14% it does not take long for the entire export situation for a country to markedly change, which in turn will have a significant effect on those that import that oil. And yet while individual fields such as Cantarell, Yibal, and the North Sea have shown these higher decline rates are not uncommon, their impact on total world production declines has not been widely remarked. Stuart and Khebab wrote about this in complimentary pieces last November, in analyses more detailed than this. I don’t agree with some of their conclusions, but do believe that this is a critical question that requires some more detailed consideration than it is currently getting,

The evidence seems to be pointing to an overall increase in the global decline rate for existing wells. What this means is that, if world production is around 86 million barrels a day, then to replace existing declines next year, an additional new production of 4.47 mbd at 5.2% decline, instead of the 3.87 mbd required at 4.5% decline, will be needed just to stabilize supply at a fixed level. If the rate is accelerating this difference of 600,000 bd will increase and drop the top line of the curves such as those that Khebab and others have so carefully assembled.

This increased decline rate is already being reported, and thus the potential peak in 2010 that the graph shows is already at risk and we may struggle to get much above the numbers that we are at today. Bear in mind that decline rates are cumulative over the years, and that outyear production must be that much greater to sustain supply, relative to today’s production.

At present there is still considerable complacency about how the oil supply situation will play out. There is an implication that this is just a difficult period to get through, and that, in a relatively short time the situation will get better. Sadly I would suggest that even our current thinking here is largely overly optimistic, and that instead it is going to be much more difficult, faster than we expect. But also, in light of peoples’ expectations about oil really being there at a reasonable price, the greater the dangers of civil unrest, as it occurs without proper public education as to the reason that “there is no more” signs start to spring up at gas stations.

______________________________
 

The IEA raised there estimate of the decline rate in there latest Medium Term Oil Market Report:

Since the 2007 MTOMR, significant downward revisions have been made to both non-OPEC supplies and OPEC capacity forecasts. Project delays averaging 12 months, coupled with global average decline of 5.2% - up from 4% last year – are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady.
 

According to the red line in the chart below, the recent average discovery rate has dropped to about 6 Gb/year since 2001. If an optimistic depletion rate of 6%/year is applied to this discovery rate of 6 Gb/yr, this implies that new project capacities should be 0.36 Gb/yr or about 1 mbd/yr for regular oil.

Source of original discovery graph is from Colin Campbell's monthly newsletter
http://www.aspo-ireland.org/index.cfm/page/newsletter

It is further assumed that by the year 2022, almost all of the discoveries prior to 2001 will have been turned into production. This means that only 1 mbd/yr will be the gross annual capacity additions for regular oil. Being optimistic, another 0.25 mbd/yr could be added for tar sands and NGLs. This gives a forecast capacity addition of 1.25 mbd for 2022 shown in the chart below.

As there will probably be more project delays, some of the capacity additions for 2010 to 2012 will be pushed into 2013 and beyond. Consequently, an estimated forecast supply addition profile, shown by black line below, is a likely outcome. This profile includes yet to be sanctioned projects based on the discovery profile in the chart above.

What is happening with oil prices ?

Posted by Big Gav on July 7, 2008 - 9:00pm in TOD: Australia/New Zealand
Topic: Economics/Finance
Tags: oil prices, original, peak oil [list all tags]

This is a guest post from anawhata.

"Oil is an incredible, irreplaceable gift of nature which packs energy in a dense, easily transportable form." - Jérôme Guillet – Energy Industry Investment Banker 

The hard facts

  • The world price of oil in US dollars has doubled in the last year (June 2007 to June 2008) from US$67/barrel to over US$135/barrel
  • The world price has gone up by 6 times in 6 years, from US$20/barrel in 2002 to over US$135/barrel by mid 2008
  • With hindsight we can see that the great cheap oil era lasted 16 years from 1986 to 2002 when the price was mostly in the range $15 – 25/barrel, coming off a $39 peak during the "oil shock" of 1980 (equivalent to about US$95/barrel in 2008 money). The short sharp spike seen at the end of 1990 was due to the first Gulf War.

Within Australia we have been somewhat insulated from the latest sequence of price rises by the falling value of the US$, so our petrol and diesel prices have risen by comparatively less as the A$ has climbed to around US95 cents, as shown in the chart below.

In Australian dollar terms we have seen the price of oil rise by "only" 3½ times in 6 years.

Obvious questions raised by the price rises are:

1. What has caused the startling rise over the last 12 months?
2. Why has the price risen steadily for the past 6 years?
3. Why shouldn't we get back to the $20/barrel we enjoyed in the 1990's?
4. What caused the noticeable dip in price from mid 2006 to early 2007?
5. Why does the oil price seem to be going up at an accelerating rate since the dip in 2007?
6. Has the price stopped going up yet?
7. What prices might we expect over the next 1, 3 or even 5 years to come?

Source: 1986 onwards - EIA monthly WTI spot price in money-of-the-day
http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_m.htm

Pre 1986 EIA Refiner Acquisition Cost of Imported Crude Oil in money-of-the-day
http://www.eia.doe.gov/emeu/cabs/AOMC/Overview.html

Starting with Questions 1 and 2, the accelerating curve of recent price rises is due to the growth in oil supply not keeping up with steadily growing demand around the world.

Oil is getting more expensive because surplus production capacity has diminished and continues to diminish, as shown in the chart on the next page. Oil industry volumes are of enormous scale (86 million barrels per day – a barrel is 159 litres), and the costs of supply infrastructure are in the billions and trillions of dollars.

Lead times for new industry infrastructure are typically 3 to 10 years. All new mega-projects on the production side are well known out as far as 2012, and few seem likely to boost global supply by enough to overcome declines in old oil fields. See the comprehensive listing of oil megaprojects at http://en.wikipedia.org/wiki/Oil_Megaprojects/2008. Note that major oil projects are developing a history of running late, often years late, as they encounter challenging technical difficulties operating in extreme environments like deep ocean or freezing Arctic conditions.

Rapid demand growth is often blamed for rising prices – demand growth in developing countries, particularly China and India, and in key oil supplying nations such as Saudi Arabia and Russia. But the decline of mature oil fields throughout the world is an even greater source of demand for new oil supplies than the growth of end user demand. Declining fields are losing 5.2% of total oil production per year thus requiring about 3.5 million barrels/day of new oil each year for the global oil supply to stay the same. (Nobuo Tanaka, International Energy Agency) http://www.iea.org/Textbase/press/pressdetail.asp?PRESS_REL_ID=267. Recent annual growth in end user demand, on the other hand has not exceeded 1.5 million barrels/day.

The balance between growing capacity from new infrastructure investments and declining output from old infrastructure has seen global production capacity climb at a slower rate than consumption for the past 25 years, as shown in the following chart. 

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Source: Goldman Sachs based on EIA data 

Convergence of the two curves shown above indicates serious supply tightness over the last 2 years which explains much of the recent price surge, with perhaps $5 – 10 per barrel in volatility added by an influx of investment funds seeking a safe haven from the falling US$.

The analysis by Goldman Sachs in the next chart below suggests that price rises to date have already destroyed demand amounting to about 5 million barrels/day or 6% of current world consumption. Any further price rises may be expected to cause further demand destruction and consequent hardship for those being priced out of the fuel market. 

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This brings us to Question 3 – Why shouldn't we get back to the $20/barrel we enjoyed in the 1990's?

It's simple – the world has used up practically all the easy "light sweet" crude oil that used to pour out of desert sands for $3 – 4/barrel and be easily refined into saleable products. Discovery of oil peaked more than 40 years ago – see the chart below.  

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Not only is it costing much, much more to find and extract each new barrel of oil (typically $60/barrel for new deep offshore wells) but most of the oil we can now get is shifting towards "heavy" and/or "sour" grades that require billions of dollars of new investment in refineries to process them.

"The oil is getting harder to extract. Most oil comes from ageing, waning giant fields discovered long ago. There are no more giant fields to find, only lots of small ones, difficult ones or fields deep under the ocean. The remaining crude oil is heavier, thicker, dirtier, quite simply cruder! It's difficult to get out, expensive to get out, slower to get out. So, the rate of oil extraction will decrease." Michael Lardelli on Perspective, ABC Radio National, 26 June 2008

There is no going back to $20/barrel short of a world recession that shuts down demand for oil, and for everything else. 

Now let's look at recent price volatility. Question 4 – What caused the noticeable dip in price from mid 2006 to early 2007?

Prices climbed during 2005 due to Hurricane Katrina and fears of war with Iran, then kept on climbing until August 2006.

"Oil was in a bit of a bubble in July 2006. The way you could tell it was in a bit of a bubble was that speculators were net long by a large number of contracts (115,000) and inventories were high. . . . The oil situation now is very different. Speculators are now net short. Inventories are very low of the products and types of oil in demand." http://www.theoildrum.com/node/4227#comment-370311 – 26th June 2008

When the 2006 hurricane season passed without incident and oil supplies remained marginally ahead of demand the market appeared to decide that risks had been over-priced, and prices fell by $10 - $15/barrel for the start of 2007. Then they began rising again. 

Is our situation getting worse? Question 5 - Why does the oil price seem to be going up at an accelerating rate since mid 2007?

Actual oil prices are set by refiners bidding to buy tanker-loads. Recent media fuss about speculators refers largely to oil futures prices rather than actual spot prices for which a buyer and a seller have to actually exchange funds for a tanker-load of crude oil costing between US$100 and US$400 million. Not many speculators have this sort of cash or know what to do with a 250,000 tonne tanker.

This year many refineries have been finding it harder to buy oil of a grade they can economically refine, especially the 50% of US refineries located in the Gulf of Mexico who are suffering steep declines in overseas supply from their nearby sources in Mexico, Venezuela and Nigeria.

Mexico is in oil-induced political and financial turmoil because its one massive oilfield Cantarell has gone into rapid decline for geological reasons while Mexico's (subsidised) domestic oil consumption is growing. Mexico is seeing its largest single source of foreign income decline every month, while domestic demand for oil is growing at a pace that will see Mexico become an oil importer by 2014 according to some estimates. (http://www.theoildrum.com/node/4092)

Mexico’s Oil Production is Collapsing

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At the same time

  • Venezuela's output is declining, partly due to Hugo Chavez's ejection of foreign oil companies.
  • Nigeria's output has been reduced to its lowest level in 25 years by terrorist attacks from local guerrillas
  • Russia's output (which is only exceeded by Saudi Arabia's) has unexpectedly declined by 0.9% this year
  • Britain's North Sea oil peaked in 1999 and is declining at 5% - 8% per year.

The table on the following page shows, for oil exporting nations, net export declines accelerating from 2006 to 2007. Monthly data for 2008 shows that the overall downward trend is continuing. It is the declining volume of tradeable oil on global markets that is causing steep price rises this year when we are seeing only moderate abatement of growth in global demand.

More buyers are pursuing a tightening supply of exported oil, so small variations in availability are all that is needed to push deal prices upward. For example, on 28th June Bangladesh, hard-hit by energy shortages, was reported to have struck a deal with Kuwait for supply "at a premium price".

If declines in the supply of tradeable oil were not enough to create a tight market, buyers are reacting nervously to talk of attacks on Iran by Israel or the USA, and it only takes a rumour to send oil prices on another upward jump.

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Source: datamunger at http://www.theoildrum.com/node/4082/353705 using EIA data 
Units – thousands of barrels per day
 

Critically, Saudi Arabia appears now unable to perform the role of market stabiliser that it played from the 1980's until the 2000's on the basis of its known ability to pump up to 20% extra volume at short notice. Depletion of Saudi Arabia's giant oil fields appears to have taken away its ability to help the world in this way, though the Saudis will not directly admit they no longer have this power.

It seems likely that since 2007 OPEC has lost effective cartel power because few of its members have the ability to pump more oil. This means the cartel as a whole can do practically nothing to bring down prices even though key members like Saudi Arabia have much of their wealth tied up in Western economies and are clearly concerned about damage to their own interests if oil prices go any higher – thus the Saudi conference held on the 22nd of June 2008. 

So what happens next? Questions 6 and 7 – Has the price stopped rising and what prices might we expect over short-term and medium-term planning horizons?

Price rises did indeed pause in mid-June after an astonishing $11 run-up on Friday 6th June. Traders may have been waiting for an outcome from the Saudi conference on 22nd June, which was soon seen to have provided little new knowledge or cause for optimism.

Game on. Futures topped $140 for the first time on 26th June. 

So what will next week, next month and next year bring?

"Predictions are always difficult, especially about the future." Niels Bohr 

There are essentially two patterns of oil price prediction being made by informed pundits:

  1. Ongoing steady price rises driven by the continuing supply-demand squeeze
  2. A big discontinuity caused by demand destruction of a major sort, followed by a short period of lower prices then a resumption of ongoing steady price rises driven by the continuing supply-demand squeeze.
 

Pattern A – Ongoing steady price rises

Proponents of ongoing price rises are betting on geopolitical and economic stability and the ability of a resilient world to keep steadily adjusting to rising oil prices, as we have done for the past six years.

Typical projections of this type are from Jeff Rubin, Chief Economist at Canada's CIBC World Markets. The following table is from Jeff Rubin's April 2008 report http://research.cibcwm.com/economic_public/download/sapr08.pdf

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Two months later Rubin has revised his April price projections drastically upwards in CIBC WM's June 2008 report http://research.cibcwm.com/economic_public/download/sjun08.pdf . 

He explains "We are compelled to once again raise our target prices for oil. We are lifting our target for West Texas Intermediate by $20 per barrel to an average price of $150 next year and by $50 per barrel to an average price of $200 per barrel by 2010." 

Pattern B – Price moves down then up on a rising trend

The other school of oil price projections makes the common-sense point that serious demand reduction and perhaps economic recession in some countries will be triggered when oil prices reach a critical level – when "demand destruction" becomes really destructive. Proponents suggest that such a free-fall in demand from one or more larger consuming countries such as the USA will be dramatic enough to drop price back to, say, US$100/barrel for a period of time.

Some writers guess that the critical price point to cause such sudden and significant demand destruction may be US$200 - 300/barrel, based on percentages of world GDP, but the accompanying analysis is weak and the arguments published to date do not convincingly pinpoint a critical price for oil above which it cannot go. 

A graphic example of the "dramatic recession" school of price projections is shown below. Given the great variety of geopolitical events and economic factors that could influence actual supply, demand and price there is little hope for more precise forecasting of price and timing than the indicative story set out below.  

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Conclusion:

Stay awake, expect oil prices to be in dynamic movement.

Conservatively, plan for US$200/barrel by 2010, but don't be surprised if a recession somewhere drops price back to US$100, for a short while, or sudden war in the Middle East sends prices skyrocketing.

Expect the fundamentals of fading supply growth and growing demand to push prices ever higher in the 5 year horizon, perhaps well beyond US$300/barrel.  

The implications in terms of Australian pump prices in A$/litre are shown in the table below. These pump price estimates are made on the basis of some reasonable assumptions:

  • Current excise and GST rules stay the same, keeping Australia's fuel taxes significantly lower than any other OECD country except the USA, Canada and Mexico
  • Australia's prices continue to be driven by average Singapore refined product prices. Singapore product prices are most influenced by the price of Malaysian Tapis crude which normally sells for a few dollars more than US West Texas Intermediate
  • Freight, insurance, wharfage and wholesale and retail margins rise only moderately with world oil price
  • A$/US$ exchange rate moves up from the current 95 cents to parity due to continued weakness in the US$ compared with commodity-driven support for the A$
  • No net impacts from the Emissions Trading Scheme which starts in 2010 and might add another 10 cents/litre.
 

Indicative Estimates of Pump Price

    Tapis price

    US$/barrel

    Australian capital city pump price A$/litre
    $140 (today) $1.68
    $200 $2.07
    $250 $2.45
    $300 $2.80
    $500 $4.30
 

"When you think a litre of petrol costs too much, ask yourself how much you would have to pay someone to push your car 10 kilometres." 

Finally, let's look on the bright side. There is plenty to like about moderately higher oil prices, if communities, businesses and economies take heed and get time and help to adjust.

Less traffic, less congestion and less pollution would be a big plus for most of us.

New business opportunities should spring up in areas such as energy conservation, Natural Gas conversions, cleantech industries, electric vehicles and freight optimisation.

Having the world place a higher value on energy from oil will change a lot of business decisions, improving our resource efficiency and enhancing sustainability.

Anawhata comments: The above is my effort to explain the recent history and possible outlook for oil prices to non-TOD audiences who lack awareness or understanding of peak oil. I think all of us know how tricky it is to explain these big issues to intelligent people who simply lack the basic knowledge we take for granted about peak oil. I have chosen to focus this piece specifically on prices, with the minimum possible mention of related causes like oil field reserves, depletion rates, the export land model and so on. Most of these topics underlie my argument, but are not highlighted because I will lose the audience if I stray too far away from the central topic of prices. I have anchored the whole argument around the undeniable facts of recent oil price history.

You will see TOD contributors' fingerprints and exact words throughout, and I hope I have credited key people correctly and sufficiently. In any case, TOD thought leaders, you know who you are. Thank you for educating and informing me and so many others. I welcome suggestions to clarify and improve the story, remembering that I have to keep it as simple as possible for a lay audience. In particular please help me correct any errors of fact or understanding on my part.

Oil Megaproject Update (July 2008)

Posted by Khebab on July 2, 2008 - 5:55pm in The Oil Drum: Canada
Topic: Supply/Production
Tags: megaprojects, original, supply, wikipedia [list all tags]


This is an update on the Wikipedia Oil Megaproject Database maintained by  the Oil Megaprojects task force  (Ace, Stuart Staniford, myself and many others). The database contains now more than 425 separate entries and is growing everyday. Despite the database growth, the outcome seems to become more pessimistic with time. The derived net new capacity (i.e. once depletion from existing production is included) is around 1 mbpd until 2010 with a jump at 2 mbpd in 2008 then depletion may dominate.

Possible future supply capacity scenario for crude oil and NGL based on the Wikipedia Oil Megaproject database. The resource base post-2002 decline rate is a linearly increasing rate from 0% to 4.5% between 2003 and  2008 then constant at 4.5% afterward. The decline rate for each annual addition is 4.5% after first year.




Below is the evolution of  the new supply additions since the beginning of the project compiled by year of first oil:


December 2007

January 2008

February 2008

March 2008

May 2008

June 2008

We can clearly see the initial 2008 and 2009 peaks wearing out with time due mainly to delays. Now the situation does not look so good:


Possible new gross and net new supply additions compiled by year of first oil. Crude oil + NGL monthly production from the EIA. The resource base post-2002 decline is a linearly increasing rate from 0% to 4.5% between 2003 and  2008 then constant at 4,5% afterward. The decline rate for each annual addition is 4.5% after first year.

Below is a possible scenario for future supply assuming a 4.5% decline rate.


Possible future supply scenario for crude oil and NGL based on the Wikipedia Oil Megaproject database. The resource base post-2002 decline is a linearly increasing decline rate from 0% to 4.5% between 2003 and  2008 then constant at 4.5% afterward. The decline rate for each annual addition is 4.5% after first year.

This scenario seems to agree with this recent statement from Ray Leonard:

“By 2010, the production of the fuel that has driven the world’s economy will start to rapidly decline. This will conflict with the steadily increasing demand for oil. The collision of these two trends will lead to shortages and increased prices, providing a strong incentive to shift to alternative fuel resources…Due to unequal distribution through the world of oil and gas supply and consumption, [the upcoming] transition will result in significant shifts in global power and wealth.”

Many thanks to Ace who has diligently updated the data and put more than 500 separate contributions.

Finally, maintaining this database is a lot of work and it is crucial to track delays, project final approval, etc., so I'd like to repeat our appeal: the more folks in the TOD community head over to the Wikipage and help, the faster we'll know what's really going on here.

Countdown to $200 oil: International Energy Agency says current prices justified...

Posted by Jerome a Paris on July 2, 2008 - 11:04am in The Oil Drum: Europe
Topic: Supply/Production
Tags: $100 oil, $200 oil, eia, iea, jeddah, Khursaniyah, mexico, opec, original, saudi arabia [list all tags]


It is oddly fitting that we touched $100 oil on 31 December and got halfway from $100 to $200 oil on 30 June - so we're on track to reach $200 oil by 31 December this year (in case you're wondering: +42% and again +42% from that level = +100% from the initial level).

It is also fitting that on that same date, the International Energy Agency published one of its gloomiest ever analyses of the oil markets, asserting that oil prices are justified by fundamentals

It said: “Like alchemists looking for a way to turn basic elements into gold, everyone wants a simplistic explanation for high prices,” bluntly adding: “Often it is a case of political expediency to find a scapegoat for higher prices rather than undertake serious analysis or perhaps confront difficult decisions.”

I have been told by a reliable source that the IEA has been forbidden by the US administration from updating their absurdly cornucopian oil supply and demand scenarios until the report that comes out late this year (after the election); that report, which will publish the result of a "bottom-up" analysis (ie a summary of all existing oil fields, their production and/or prospects) is expected to show that oil production is unlikely to reach the levels that so many have blithely assumed - notably on the basis of previous optimistic IEA reports. The IEA, which was deeply unhappy about the current lies to was supposed to present and support, has been leaking word of the expected content of that new report for many weeks now, including an increasingly alarmist tone in its official reports, such as today's Medium Term Market Outlook:

“Structural demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture over the medium-term,” the IEA said in its Medium-Term Oil Market Report, released on Tuesday in Madrid.

“Poor supply-side performance since 2004, in the face of strong demand pressures from developing countries, has forced oil prices up sharply to curb demand,” the watchdog added.

Strong demand, disappointing supply. Hmm, where have I read this already?

The IEA said that despite billions of dollars of investment, the challenge of pumping ever more oil out of their aging fields is proving so great that non-Opec countries will in the next five years have to rely on biofuels, such as corn-based ethanol, for 50 per cent of their growth in overall fuels.

The fast decline of fields – especially in the North Sea and Mexico where production is shrinking by more than 20 per cent each year – means that 14.8m of the 16m barrels of new supply from non-Opec countries over the next five years will go to making up for losses from old fields producing less and less each year.

This is one of the most important trends in current oil markets: the depletion of existing fields, and the decline in their production. It's long been discussed in specialised sites like this one but it's been ignored in the "serious" media for too long. and yet, discussions of new fields coming into production cannot paint a correct picture of future production trends if these declines are not deducted to get net production increases.

And the stark truth is that in most of the world, the declines are bigger than the new capacity additions. This is particularly true in "friendly" production zones like the North Sea, Mexico or even Russia, where overall decline rates are dizzying and actually impact global production numbers significantly.

But Opec is also struggling, with project delays impacting its ability to add new capacity. The IEA substantially downgraded its expectations for Opec crude capacity from 2008-2013, cutting earlier forecasts by 1.2m b/d.

The IEA said it believed Saudi Arabia was having bigger problems than the kingdom, the world’s largest exporter, was willing to admit to, despite its national oil company having gone to great lengths last month to reassure energy ministers gathered in Jeddah that, except for Khursaniyah, its capacity editions were running on schedule.

Now the IEA is getting close to heresy territory, noting that Saudi claims about its ability to maintain or increase its production should be met with increasing skepticism.

Of course, none of that is news  for readers of this site or even of my Countdown to $200 oil series, but, as we know, we're not Serious People - but the IEA is the ultimate in Seriousness, so this is big news. And I say that quite seriously (pun intended):  many governments, and countless businesses, not to mention pundits, use the IEA numbers religiously when preparing scenarios, business plans or pontificating. Changing these underlying numbers will have MAJOR impact on public discourse on energy.

It's maybe not too late yet.

Countdown to $200 oil: $140 oil and speculation

Posted by Jerome a Paris on June 28, 2008 - 11:00pm in The Oil Drum: Europe
Topic: Economics/Finance
Tags: $100 oil, $200 oil, speculation [list all tags]

As you may have heard, oil prices have reached a new high above $140. I can already hear the outcry against speculators and their out-of-control games to enrich themselves at our expense.

Never mind that speculators have been caught shortselling oil (ie betting on a fall in prices) more than a few times in recent months. Never mind that spot oil prices, which require actual physical deliveries of oil at the end of each month, have behaved the same way as paper futures. Never mind that oil storage seems to not be increasing.

Nope, it is just too convenient, too irresistible and, let's say it, too comfortable an excuse that speculators are to blame. It's not our fault, we have our scapegoat. Our price increases are temporary, we'll soon be back to "normal" lower prices, as soon as (take your pick) speculators have been punished/oil companies are taxed for their profiteering/"fundamentals" are left to set prices.

This is just denial

There are A LOT of good reasons why oil prices are going up. Let me show you just a few.

A Countdown to $200 oil diary

1) The George W. Bush War Risk Premium

One you've probably heard by now is the "risk premium", linked to the prospect of a war with Iran. Let me explain how that works.

Say that the market price for oil, if there were no prospect of war with Iran whatsoever, were $100 per barrel.
Say that the market price for oil, should there be an attack on Iran, is estimated at $400/bl (because of production disruption in Iran itself, possibly a blockade of the Straits of Hormuz, etc...)
Say that the probability of such an attack is estimated, by markets, at 10% this year.
In that case, the price for oil will be 90%x100+10%x400 = 130$

A 10% probability of war with Iran which would tentatively quadruple oil prices increases the market price by 30%. Now you may quibble with the estimates I've provided here - but the point is, the market will sum up all the various hypotheses made by all players in that game into a single price, which will reflect the combination of war premium, and war probability that the market, as a whole, includes in the price.

So it is very much possible that 20-40$ in the current price are linked to worries about war. But speculators, here, are actually providing a valuable service: by betting on oil prices (in both directions), they allow all players to hedge that risk of war. Those that think war is more likely will be happy to buy oil futures at prices they think are very low; those that think that war is unlikely and that there is too much of a premium will be happy to sell futures into that market.

While this may create an increase in prices, it would only reflect the reality that a war with Iran would have consequences, and that it's not completely unlikely yet. However, I'd note that futures do not seem to change much in 2009 compared to 2008: so either the markets don't actually think that Obama will be elected, or they don't seem to think that it will have a material impact on the probability for war. Or there is no war premium now, and we're back to square one.

2) Chinese growth

This one has also been widely discussed, so I presume most of you are familiar with it. Still, a few graphs are worth showing here:

As discussed on Casey Research, China is enjoying staggering growth rates for car ownership.


Assuming that the 7.3 million new car owners in 2008 each drive 5,000 miles a year, and they achieve 40 miles per gallon, the result would be an additional 45.6 million barrels of crude demand, equivalent to 125,000 bbl/day. In other words, new Chinese drivers will devour 25-30% of the recently promised Saudi production increase in a single year.

Looking at this over a few years (from the International Energy Agency (pdf):

The lighter blue bit is mostly diesel. Note that 2007 consumption was 347 million tons, ie 7mb/d.

To put this in another perspective again (from Net Oil Exports):

Chinese growth in consumption dwarfs by far the declines noted in rich world countries like Japan, Germany and, yes, the USA (note that the decline in the US is still a lot smaller in absolute terms than those in much smaller economies in Europe or Japan).

So: Chinese demand growth is very real, it's very large, it's highly likely to continue for a number of years (when people finally reach the car affordability stage, they're not going to be stopped by the cost of fuel - not for a while anyway. The difference between no car and a car is so massive that the price of gas is a minor consideration - especially when gas prices are still subsidized...). and it certainly has an impact on oil prices by its sheer size, given the current stagnation of oil production.

3) Saudi numbers

The previous two graphs, and this one above (from the IEA again (pdf), provide interesting information regarding oil producers: not only is their production stagnant, but their consumption is going up massively. And it's no wonder: they're flush with money, gas is heavily subsidized at home, so people drive more and more. Thus, the biggest increases in oil demand, beyond the "usual suspects" of China and India are almost all big oil producers: Saudi Arabia, Brazil, Russia, UAE. If you look over a slightly longer period, you'll also find Iran and Canada in there.

Which means that volumes available for export, and thus volumes available on the global oil market, are shrinking (from Net Oil Exports again):

The numbers don't lie (from westexas):

The only major producers which have increased exports lately are Angola and Russia, and Russian production is now declining (while consumption is booming). The conclusion is simple: there is less and less oil on the market for us.

4) Production declines

Beyond Russia, it is striking to note how many regions we have been relying on are experiencing absolute production declines. All mature fields have a natural decline rate, and whole provinces are seeing absolute declines in their production.

This is nowhere as spectacular - and worrisome - as in Mexico, where the supergiant Cantarell field has lost close to half its production capacity in the very recent past, thus threatening exports to the US from a (relatively) friendly neighbor: (from here)

Just like the decline of the North Sea seems to have caught the UK government unaware, and is leading to quasi-panicky behavior by the UK government (which one day blames the Russians, one day wants to go all nuclear, one day wants to go all-wind, and generally blames "uncompetitive" continental Europe for its plight rather than its own policies, or lack thereof), the brutal decline of the Cantarell field, and of overall Mexian production is likely to have brutal consequences, as the country loses its main source of exports and the Mexican government its main source of tax income. Social unrest, and massive migration toward the North could be one outcome...

5) Lack of spare capacity

But let's come back to the oil market for a second: you have a combination of still strong demand growth (in particular in oil producing countries) and stagnant production combining into shrinking export capacity and, more importantly, into a quasi-permanent lack of spare capacity (from this comment by SamuM in a recent thread):

The significance of such tightness of supply cannot be overstated. In normal times, when demand varies, market equilibrium is reached by adjusting production to such demand, which is a relatively easy and cheap process. But when supply is constrained, as it is now, any brutal change in the market (whether on the demand side, for instance through a cold spell in winter requiring more heating, or a hot spell in summer requiring more AC, or on the supply side, for instance guerilla attacks in Nigeria, a refinery strike in Scotland, or a pipeline accident anywhere) will require market equilibrium to be reached by demand destruction, which is a lot harder and triggers much more substantial price movements: prices need to move high enough for some users of oil to renounce such use and "take their demand out of the market", whether by not doing what they wanted to, or by finding a substitute. In the US, people travelling less for vacations, or carpooling, have barely managed a couple percent demand destruction. Imagine that the Saudis and Venezualeans, with their subsidized prices, are immune fro msuch pressure, and that several percent need to be cut off demand abruptly: it will require much higher price hikes than have been experimented yet.

It's simple really: price will go high enough for the pain to translate into lower oil use in price-sensitive countries, the list of which is topped by the US, where consumption is high, oil price variations are not dampened by massive taxes (prices going from $3.50 to $4 is more painful than prices going from $8.50 to $9).

The lack of spare capacity certainly explains why very small variations in output or demand can have disproportionate impacts on prices: when you are right on the edge of the knife, any movement can make you fall off.

6) Refining issues

I thought I'd add just a few words on refining capacity in the US, as it is often blamed for gas prices as well.

Energy information Agency data shows that refining capacity has gone up in recent years even though no refineries were built, with refinery capacity use very stable at high levels. This has not changed much in the past 2 years, even as Katrina took its toll for a while.

And as the tables that are provided on a monthly basis by Californian authorities show (see 2008 numbers and 2007 numbers), refining margins are actually a lot lower this year than last (roughly down from a dollar per gallon to half a dollar per gallon) and have helped lower the impact of oil price increases in the past few months. So you certainly can't blame refiners this year, even though global capacity is tightening:

Altogether, it appears that they are a number of factors explain oil price increases perfectly well, with no need to go into conspiracy theories or market manipulations.

 

Energy Transitions Past and Future

Posted by Prof. Goose on July 1, 2008 - 10:40am
Topic: Alternative energy
Tags: cutler cleveland, energy density, energy transition, environment, intermittancy, net energy, power density, spatial distribution [list all tags]


This is a guest post from Cutler Cleveland. It provides an excellent big picture overview of what variables we need to consider as we transition away from fossil fuels. Professor Cleveland previously wrote "Energy From Wind - A Discussion of the EROI Research", and "Ten Fundamental Principles of Net Energy" posted on theoildrum.com. Cutler Cleveland is a Professor at Boston University and has been researching and writing on energy issues for over 20 years. He is Editor-in-Chief of the Encyclopedia of Earth, Editor-in-Chief of the Encyclopedia of Energy, the Dictionary of Energy and the Journal of Ecological Economics.

Prometheus chained to Mount Caucasus. Source: Pieter Paul Rubens: ''Prometheus Bound,'' 1611-1612, Oil on canvas, 95 7/8" x 82 1/2". (Philadelphia Museum of Art: The W.P. Wilstach Collection) Click to Enlarge

INTRODUCTION

In Greek mythology, Prometheus defied the will of Zeus by stealing fire and giving it to the mortal race of men in their dark caves. Zeus was enraged by Prometheus' deceit, so he had Prometheus carried to Mount Caucasus, where an eagle would pick at his liver; it would grow back each day and the eagle would eat it again. Fire transformed mortal life by providing light, warmth, cooking, healing and ultimately the ability to smelt and forge metals, and to bake bricks, ceramics, and lime. Fire became the basis for the Greek culture and ultimately all Western culture. It is no wonder, therefore, that the Greeks attributed fire not to a mortal origin, but to a Titan, one of the godlike giants who were considered to be the personifications of the forces of nature.

If fire was the first Promethean energy technology, then Promethean II was the heat engine, powered first by wood and coal, and then by oil and natural gas. Like fire, heat engines achieve a qualitative conversion of energy (heat into mechanical work), and they sustain a chain reaction process by supplying surplus energy. Surplus energy or (net energy) is the gross energy extracted less the energy used in the extraction process itself. The Promethean nature of fossil fuels is due to the much larger surplus they deliver compared to animate energy converters such as draft animals and human labor.

The changes wrought by fossil fuels exceeded even those produced by the introduction of fire. The rapid expansion of the human population and its material living standard over the past 200 years could not have been produced by direct solar energy and wood being converted by plants, humans and draft animals. Advances in every human sphere — commerce, agriculture, transportation, the military, science and technology, household life, health care, public utilities—were driven directly or indirectly by the changes in society's underlying energy systems.

In the coming decades, world oil production will peak and then begin to decline, followed by natural gas and eventually coal production. There is considerable debate about when these peaks will occur because such information would greatly aid energy companies, policy makers, and the general public. But at another level, the timing of peak fossil fuel production doesn't really matter. A more fundamental issue is the magnitude and nature of the energy transition that will eventually occur. The next energy transition undoubtedly will have far reaching impacts just as fire and fossil fuels did. However, the next energy transition will occur under a very different set of conditions, which are the subject of the rest of this discussion.

The Magnitude of the Shift

Figure 2. Composition of U.S. energy use. (Source: Cutler Cleveland) Click to Enlarge


The last major transition occurred in the late 19th century when coal replaced wood as the dominant fuel. Figure 2 illustrates this transition for the United States, a period often referred to as the second Industrial Revolution (the first being the widespread replacement of manual labor by machines that began in Britain in the 18th century, and the resultant shift from a largely rural and agrarian population to a town-centered society engaged increasingly in factory manufacture). Wood and animal feed suppled more than 95% of the energy used in the United States in 1800. The population of the nation stood at just 5.3 million people, per capita GDP was about $1,200 (in real US$2000), dominant energy converters were human labor and draft animals (horses), and the population was overwhelmingly rural and concentrated near the eastern seaboard.


Figure 3. The global flux of fossil and renewable fuels. (Source: Smil, V. 2006. "21st century energy: Some sobering thoughts.'' OECD Observer 258/59: 22-23.) Click to Enlarge

The nation was completely transformed by World War I. Coal had replaced wood as the dominant fuel, meeting 70% of the nation's energy needs, with hydropower and newcomers oil and natural gas combining for an additional 15%. Steam engines and turbines had replaced people and draft animals as the dominant energy converters. The population had soared to more than 100 million, per capita GDP had increased by a factor of five to $6,000, more than half of the nation's population lived in cities, and manufacturing and services accounted for most of the nation's economic output. Thus, the transition from wood to fossil fuels, and its associated shift in the energy-using capital stock, produced as fundamental a transition in human existence as did the transition from hunting and gathering to agriculture.

How much renewable energy is needed if it were to replace fossil fuels in the same pattern as coal replaced wood? The United States first consumed as much coal as wood in about 1885. Total energy use then was about 5.6 quadrillion BTU (1 quadrillion = 1015), equal to about 0.19 TW (Terawatts or 1012> watts). Consider what it would take today to replace even just one-half of U.S. fossil fuel use with renewable energy: we would need to displace coal and petroleum energy flows of 2.9 TW, or 32 times the amount of coal used in 1885. Current global fossil fuel use is about 13 TW, so we need more than 6 TW of renewable energies to replace 50% of all fossil fuels. This is a staggering shift.

Is renewable energy up to this challenge? There are physical, economic, technical, environmental, and social components to this question. Figure 3 depicts one slice of the picture: pure physical availability as measured by the global annual flow of various energies. The only renewable energy that exceeds annual global fossil fuel use is direct solar radiation, which is several orders of magnitudes larger than fossil fuel use. To date however, the delivery of electricity (photovoltaics) or heat (solar thermal) directly from solar energy represents a tiny fraction of our energy portfolio due to economic and technical constraints. Most other renewable energy flows could not meet current energy needs even if they were fully utilized. More importantly, there are important qualitative aspects to solar, wind, and biomass energy that pose unique challenges to their widespread utilization.


ENERGY QUALITY

Most discussions of energy require the aggregation of different forms and types of energy. The notion of "total energy use" in Figures 2 and 3 indicates that various physical amounts of energy—coal, oil, gas, uranium, kilowatt-hours (kWh), radiation—are added together. The simplest and most common form form of aggregation is to add up the individual variables according to their thermal equivalents (BTUs, joules, etc.). For example, 1 kWh is equal to 3.6x106 joules, 1 barrel of oil is equal to 6.1x109 joules, and so on.

Despite its widespread use, aggregation by heat content ignores the fact that not all joules are equal. For example, a joule of electricity can perform tasks such as illumination and spinning a CD-ROM that other forms of energy cannot do, or could do in a much more cumbersome and expensive fashion (Imagine trying to power your laptop directly with coal).

These differences among types of energy are described by the concept of energy quality, which is the difference in the ability of a unit of energy to produce goods and services for people. Energy quality is determined by a complex combination of physical, chemical, technical, economic, environmental and social attributes that are unique to each form of energy. These attributes include gravimetric and volumetric energy density, power density, emissions, cost and efficiency of conversion, financial risk, amenability to storage, risk to human health, spatial distribution, intermittency, and ease of transport.

Energy Density

Figure 4. Energy densities for various fuels and forms of energy. (Source: Cutler Cleveland) Click to Enlarge

Energy density refers to the quantity of energy contained in a form of energy per unit mass or volume. The units of energy density are megajoules per kilogram (MJ/kg) or megajoules per liter (MJ/l). Figure 4 illustrates a fundamental driver behind earlier energy transitions: the substitution of coal for biomass and then petroleum for coal were shifts to more concentrated forms of energy. Solid and liquid fossil fuels have much larger mass densities than biomass fuels, and and an even greater advantage in terms of volumetric densities. The preeminent position of liquid fuels derived from crude oil in terms of its combined densities is one reason why it transformed the availability, nature and impact of personal and commercial transport in society. The lower energy density of biomass (12-15 MJ/kg) compared to crude oil (42 MJ/kg) means that replacing the latter with the former will require a significantly larger infrastructure (labor, capital, materials, energy) to produce an equivalent quantity of energy.

The concept of energy density underlies many of the challenges facing the large scale utilization of hydrogen as a fuel. Hydrogen has the highest energy to weight ratio of all fuels. One kg of hydrogen contains the same amount of energy as 2.1 kg of natural gas or 2.8 kg of gasoline. The high gravimetric density of hydrogen is one reason why it is used for a fuel in the space program to power the engines that lift objects against gravity. However, hydrogen has an extremely low amount of energy per unit volume (methane has nearly 4 times more energy per liter than hydrogen). Hydrogen's low volumetric energy density poses significant technical and economic challenges to the large-scale production, transport and storage for commercial amounts of the fuel.


Power Density

Figure 5. Power densities for fossil and renewable fuels. (Source: Smil, V. 2006. ''21st century energy: Some sobering thoughts.'' OECD Observer 258/59: 22-23.) Click to Enlarge

Power density is the rate of energy production per unit of the earth’s area, and is usually expressed in watts per square meter (W/m2). The environmental scientist Vaclav Smil has documented the important differences between fossil and renewable energies, and their implications for the next energy transition. Due to the enormous amount of geologic energy invested in their formation, fossil fuel deposits are an extraordinarily concentrated source of high-quality energy, commonly extracted with power densities of 102 or 103 W/m2 of coal or hydrocarbon fields. This means that very small land areas are needed to supply enormous energy flows. In contrast, biomass energy production has densities well below 1 W/m2, while densities of electricity produced by water and wind are commonly below 10 W/m2. Only photovoltaic generation, a technique not yet ready for mass utilization, can deliver more than 20 W/m2 of peak power.

The high power densities of energy systems has enabled the increasing concentration of human activity. About 50% of the world's population occupies less than 3% of the inhabited land area; economic activity is similarly concentrated. Buildings, factories and cities currently use energy at power densities of one to three orders of magnitude lower than the power densities of the fuels and thermal electricity that support them. Smil observes that in order to energize the existing residential, industrial and transportation infrastructures inherited from the fossil-fueled era, a solar-based society would have to concentrate diffuse flows to bridge these large power density gaps. Mismatch between the inherently low power densities of renewable energy flows and relatively high power densities of modern final energy uses means that a solar-based system will require a profound spatial restructuring with major environmental and socioeconomic consequences. Most notably according to Smil, there would be vastly increased fixed land requirements for primary conversions, especially with all conversions relying on inherently inefficient photosynthesis whose power densities of are minuscule: the mean is about 450 mW/m2 of ice-free land, and even the most productive fuel crops or tree plantations have gross yields of less than 1 W/m2 and subsequent conversions to electricity and liquid fuels prorate to less than 0.5 W/m2.


Energy Surplus


Figure 6. The energy return on investment (EROI) for various fuel sources in the U.S. (Source: Cutler Cleveland) Click to Enlarge

Energy return on investment (EROI) is the ratio of the energy extracted or delivered by a process to the energy used directly and indirectly in that process. A common related term is energy surplus, which is the gross amount of energy extracted or delivered, minus the energy used directly and indirectly in that process. The unprecedented expansion of the human population, the global economy, and per capita living standards of the last 200 years was powered by high EROI, high energy surplus fossil fuels. The penultimate position of fossil fuels in the energy hierarchy stems from the fact that they have a high EROI and a very large energy surplus. The largest oil and gas fields, which are found early in the exploration process due to their sheer physical size, delivered energy surpluses that dwarfed any previous source (and any source developed since then). That surplus, in combination with other attributes, is what makes conventional fossil fuels unique. The long-run challenge society faces is to replace the current system with a combination of alternatives with similar attributes and a much lower carbon intensity.

Most alternatives to conventional liquid fuels have very low or unknown EROIs (Figure 6). The EROI for ethanol derived from corn grown in the U.S. is about 1.5:1, well below that for conventional motor gasoline. Ethanol from sugarcane grown in Brazil apparently has a higher EROI, perhaps as high as 8:1, due to higher yields of sugarcane compared to corn, the use of bagasse as an energy input, and significant cost reductions in ethanol production technology. Shale oil and coal liquefaction have low EROIs and high carbon intensities, although little work has been done in this area in more than 20 years. The Alberta oil sands remain an enigma from a net energy perspective. Anecdotal evidence suggests an EROI of 3:1, but these reports lack veracity. Certainly oil sands will have a lower EROI than conventional crude oil due to the more diffuse nature of the resource base and associated increase in direct and indirect processing energy costs.


Intermittency

Figure 7. A typical 24 hour load profile for a residence in San Jose, CA. (Source: NREL) Click to Enlarge


Intermittency refers to the fraction of time that an energy source is available to society. It is an essential feature of electricity generation systems that must combine power generated from multiple sources and locations to supply electricity "24/7." The wind does not blow all the time and the sun does not shine all the time, so a wind turbine and PV array sometimes stand idle. One aspect of intermittency is the load factor or capacity factor, which is the ratio of the output of a power plant compared to the maximum output it could produce. Due to the more or less continuous nature of fossil fuel extraction, thermal power plants have capacity factors of 75 to 90 percent. Typical annual average load factors for wind power are in the range of 20 to 35 percent, depending primarily on wind climate, but also wind turbine design.

Figure 8. The variability of wind energy over a 1y day period. The figure compares the hourly output of 500 MW wind power capacity in two situations, calculated from observed data in Denmark. The red line shows the output of a single site; the blue line shows the multiple site output. Source: European Wind Energy Association, ''Large scale integration of wind energy in the European power supply: analysis, issues and recommendations'' (December 2005) Click to enlarge

Load profiles show characteristic daily and seasonal patterns (Figure 7). For example, most hourly profiles for commercial and institutional facilities rise in the middle of the day and then taper off during early morning and late evening hours. Wind and solar energy availability frequently do not match typical load profiles (Figure 8).

Such intermittency means that wind and solar power are really not “dispatchable”—you can’t necessarily start them up when you most need them. Thus, when wind or solar power is first added to a region’s grid, they do not replace an equivalent amount of existing generating capacity—i.e. the thermal generators that already existed will not immediately be shut down. This is measured by capacity credit, which is the reduction of installed power capacity at thermal power stations enabled by the addition of wind or solar power in such a way that the probability of loss of load a peak times is not increased. So, for example, 1000 MW of installed wind power with a capacity credit of 30% can avoid a 300 MW investment in conventional dispatchable power. A recent survey of U.S. utilities reveals capacity credits given to wind power in the range of 3 to 40 percent of rated wind capacity, with many falling in the 20 to 30 percent range. A large geographical spread of wind or solar power is needed to reduce variability, increase predictability and decrease the occurrences of near zero or peak output.

These and other "ancillary costs" associated with wind and solar power are small at low levels of utilization, but rise as those sources further penetrate the market. In the longer run, the impacts of these additional costs on the the deployment of wind and solar power must be compared with the effective costs of other low-carbon power sources such as nuclear power, or the costs of fossil thermal generation under strong carbon constraints (i.e., carbon capture and storage).

Spatial distribution

Figure 9. The distribution of wind speeds at 80 meters, the hub height of a modern turbine. (Source: Cristina L. Archer and Mark Z. Jacobson, Evaluation of global wind power) Click to Enlarge

All natural resources show distinct geographical gradients. In the case of oil and natural gas for example, the ten largest geologic provinces contain more than 60 percent of known volumes, and half of those are in the Persian Gulf. Coal and uranium deposits also are distributed in distinct, concentrated distributions. The pattern of occurrence imposes transportation and transaction costs, and in the case of oil and strategic minerals, also imposes risk associated with economic and national security.

Figure 10. The distribution of solar energy exhibits a strong geographical gradient. (Source: NREL) Click to Enlarge

Of course, renewable energy flows exhibit their own characteristic distributions (Figures 9 and 10), producing mismatches between areas of high-quality supply and demand centers. Many large urban areas are far from a high-quality source of geothermal energy, do not have high wind power potential, or have low annual rates of solar insolation. Indeed, many of the windiest and sunny regions in the world are virtually uninhabited. The spatial distribution of renewable energy flows means that significant new infrastructures will be needed to collect, concentrate and deliver useful amounts of power and energy to demand centers.


THE ENVIRONMENTAL FRONTIER IS CLOSED


The transition from wood to coal occurred when the human population was small, its affluence was modest, and its technologies were much less powerful than today. As a result, environmental impacts associated with energy had negligible global impact, although local impacts were at times quite significant. Any future energy transition will operate under a new set of environmental constraints. Environmental change has significantly impaired the health of people, economics and ecosystems at local, regional and global scales. Future energy systems must be designed and deployed with environmental constraints that were absent from the minds of the inventors of the steam engine and internal combustion engines.


Air Pollution and Climate Change


Figure 11. The Mauna Loa curve showing the rise in atmospheric carbon dioxide concentrations (Source: Keeling, C.D. and T.P. Whorf. 2005. Atmospheric CO2 records from sites in the SIO air sampling network. In Trends: A Compendium of Data on Global Change. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A.)Click to Enlarge

Atmospheric releases from fossil fuel energy systems comprise 64 percent of global anthropogenic carbon dioxide emissions from 1850-1990 (Figure 11), 89 percent of global anthropogenic sulfur emissions from 1850 to 1990, and 17 percent of global anthropogenic methane emissions from 1860-1994. Fossil energy combustion also releases significant quantities of nitrogen oxide; in the United States, 23 percent of such emissions are from energy use. Power generation using fossil fuels, especially coal, is a principal source of trace heavy metals such as mercury, selenium, and arsenic.

These emissions drive a range of global and regional environmental changes, including global climate change, acid deposition, and urban smog, and they pose a major health risk. According to the Health Effects Institute, the global annual burden of outdoor air pollution amounts to about 0.8 million premature deaths and 6.4 million years of life lost. This burden occurs predominantly in developing countries; 65% in Asia alone. According to the World Health Organization, in the year 2000, indoor air pollution from solid fuel use was responsible for more than 1.6 million annual deaths and 2.7% of the global burden of disease. This makes this risk factor the second biggest environmental contributor to ill health, behind unsafe water and sanitation.

Climate change may be the most far-reaching impact associated with fossil fuel use. According to the Intergovernmental Panel on Climate Change (IPCC), the global atmospheric concentration of carbon dioxide has increased from a pre-industrial value of about 280 parts per million (ppm) to 379 ppm in 2005 (Figure 6). The atmospheric concentration of carbon dioxide in 2005 exceeds by far the natural range over the last 650,000 years (180 to 300 ppm) as determined from ice cores. The primary source of the increased atmospheric concentration of carbon dioxide since the pre-industrial period results from fossil fuel use, with land use change providing another significant but smaller contribution. The increase in carbon dioxide concentrations are a principal driving force behind the observed increase in globally averaged temperatures since the mid-20th century.


Carbon intensity is an increasingly important attribute of fuel and power systems. Social and political forces to address climate change may produce another distinguishing feature of the next energy transition: environmental considerations may be a key important driver, rather then the inherent advantages of energy systems as measured by energy density, power density, net energy, and so on.


Appropriation of the products of the biosphere

Figure 12. Human appropriation of net primary production (NPP) as a percentage of the local NPP. (Source: Imhoff, Marc L., Lahouari Bounoua, Taylor Ricketts, Colby Loucks, Robert Harriss, and William T. Lawrence. 2004. Global patterns in human consumption of net primary production. ''Nature'', 429, 24 June 2004: 870-873. Image retrieved from NASA) Click to Enlarge

The low energy and power density of most renewable alternatives collides with a second global environmental imperative: human use of the Earth's plant life for food, fiber, wood and fuelwood. Satellite measurements have been used to calculate the annual net primary production (NPP)—the net amount of solar energy converted to plant organic matter through photosynthesis—on land, and then combined with models to estimate the annual percentage of NPP humans consume (Figure 12). Humans in sparsely populated areas, like the Amazon, consume a very small percentage of locally generated NPP. Large urban areas consume 300 times more than the local area produced. North Americans use almost 24 percent of the region's NPP. On a global scale, humans annually require 20 percent of global NPP.

Human appropriation of NPP, apart from leaving less for other species to use, alters the composition of the atmosphere, levels of biodiversity, energy flows within food webs, and the provision of important ecosystem services. There is strong evidence from the Millennium Ecosystem Assessment and other research that our use of NPP has seriously compromised many of the planet's basic ecosystem services. Replacing energy-dense liquid fuels from crude oil with less energy dense biomass fuels will require 1,000- to 10,000-fold increase in land area relative to the existing energy infrastructure, and thus place additional significant pressure on the planet's life support systems.


The rise of energy markets


When coal replaced wood, most energy markets were local or regional in scale, and many were informal. Energy prices were based on local economic and political forces. Most energy today is traded in formal markets, and prices often are influenced by global events. Crude oil prices drive the trends in price for most other forms of energy, and they are formed by a complex, dynamic, and often unpredictable array of economic, geologic, technological, weather, political, and strategic forces. The rise of commodity and futures markets for energy not only added volatility to energy markets, and hence energy prices, but also helped elevate energy as to a key strategic financial commodity. The sheer volume of energy bought and sold today combined with high energy prices has transformed energy corporations into powerful multinational forces. In 2006, five of the world's largest corporations were energy suppliers (Exxon Mobil, Royal Dutch Shell, BP, Chevron, and ConocoPhillips). The privatization of state-owned energy industries is also a development of historic dimensions that is transforming the global markets for oil, gas, coal and electric power.

Global market forces will thus be an important driving force behind the next energy transition. There is considerable debate about the extent to which markets can and should be relied upon to guide the choice of our future energy mix. Externalities and subsidies are pervasive across all energy systems in every nation. The external cost of greenhouse gas emissions from energy use looms as a critical aspect of energy markets and environmental policy. The distortion of market signals by subsidies and externalities suggests that government policy intervention is needed to produce the socially desirable mix of energy. The effort to regulate greenhouse gas emissions at the international level is the penultimate example of government intervention in energy markets. The political and social debate about the nature and degree of government energy policy will intensify when global crude oil supply visibly declines and as pressure mounts to act on climate change.


Energy and poverty

Figure 14. Energy and basic human needs. The international relationship between energy use (kilograms of oil equivalent per capita) and the Human Development Index (2000). (Source: UNDP, 2002, WRI, 2002) Click to Enlarge

The energy transition that powered the Industrial Revolution helped create a new economic and social class by raising the incomes and changing the occupations of a large fraction of society who were then employed in rural, agrarian economies. The next energy transition will occur under fundamentally different socioeconomic conditions. Future energy systems must supply adequate energy to support the high and still growing living standards in wealthy nations, and they must supply energy sufficient to relieve the abject poverty of the world's poorest. The scale of the world's underclass is unprecedented in human history. According to the World Bank, about 1.2 billion people still live on less than $1 per day, and almost 3 billion on less than $2 per day. Nearly 110 million primary school age children are out of school, 60 percent of them girls. 31 million people are infected with HIV/AIDS. And many more live without adequate food, shelter, safe water, and sanitation.

Energy use and economic development go hand-in-hand (Figure 14), so poverty has an important energy dimension: the lack of access to high quality forms of energy. Energy poverty has been defined as the absence of sufficient choice in accessing adequate, affordable, reliable, high quality, safe and environmentally benign energy services to support economic and human development. Nearly 1.6 billion people have no access to electricity and some 2.4 billion people rely on traditional biomass—wood, agricultural residues and dung—for cooking and heating. The combustion of those traditional fuels has profound human health impacts, especially for woman and children. Access to liquid and gaseous fuels and electricity is a necessary condition for poverty reduction and improvements in human health.


CONCLUSIONS


The debate about "peak oil" aside, there are relatively abundant remaining supplies of fossil fuels. Their quality is declining, but not yet to the extent that increasing scarcity will help trigger a major energy transition like wood scarcity did in the 19th century. The costs of wind, solar and biomass have declined due to steady technical advances, but in key areas of energy quality—density, net energy, intermittancy, flexibility, and so on—they remain inferior to conventional fuels. Thus, alternative energy sources are not likely to supplant fossil fuels in the short term without substantial and concerted policy intervention. The need to restrain carbon emissions may provide the political and social pressure to accelerate the transition to wind, biomass and solar, as this is one area where they clearly trump fossil fuels. Electricity from wind and solar sources may face competition from nuclear power, the sole established low-carbon power source with significant potential for expansion. If concerns about climate change drive a transition to renewable sources, it will be the first time in human history that energetic imperatives, especially the the economic advantages of higher-quality fuels, were not the principal impetus.

FURTHER READING

* Dimitri, Carolyn, Anne Effland, and Neilson Conklin, The 20th Century Transformation of U.S. Agriculture and Farm Policy. Electronic Information Bulletin Number 3, June 2005, Economic Research Service, U.S. Department of Agriculture.


* European Wind Energy Association, Large scale integration of wind energy in the European power supply: analysis, issues and recommendations (December 2005).


* Intergovernmental Panel on Climate Change, Climate Change 2007: The Physical Science Basis. Summary for Policymakers, February 2007.


* Johnston, Louis D. and Samuel H. Williamson, The Annual Real and Nominal GDP for the United States, 1790 - Present. Economic History Services, retrieved April 1, 2006.


* Milligan, M. and K. Porter, Determining the Capacity Value of Wind: A Survey of Methods and Implementation, Conference Paper NREL/CP-500-38062 May 2005.


* Reddy, A.K.N., Energy and social issues, in World Energy Assessment: the challenge of sustainability, UNDP/UNDESA/WEC, New York, 2000.


* Smil, V. 2006. "21st century energy: Some sobering thoughts". OECD Observer 258/59: 22-23.


* World Bank PovertyNet.


Citation Cleveland, Cutler (Lead Author); Peter Saundry (Topic Editor). 2007. "Energy transitions past and future." In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). [First published April 11, 2007; Last revised May 3, 2007; Retrieved August 7, 2007]. Source here.