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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Organizing their natural gas gathering systems into master limited partnerships and selling them to investors.

2. Selling producing acreage to foreign investors who, believing the hype, generally overpaid.

3. And when gullible foreign investors got wise, selling land packages at rock bottom prices when many companies were desperate to raise cash to meet their debt obligations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

No post this week

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

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

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

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

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

1. The world’s 507 giant oil fields comprise a little over one percent of all oil fields, but produce 60 percent of current world supply (2005). (A giant field is defined as having more than 500 million barrels of ultimately recoverable resources of conventional crude. Heavy oil deposits are not included in the study.)

2. “[A] majority of the largest giant fields are over 50 years old, and fewer and fewer new giants have been discovered since the decade of the 1960s.” The top 10 fields with their location and the year production began are: Ghawar (Saudi Arabia) 1951, Burgan (Kuwait) 1945, Safaniya (Saudi Arabia) 1957, Rumaila (Iraq) 1955, Bolivar Coastal (Venezuela) 1917, Samotlor (Russia) 1964, Kirkuk (Iraq) 1934, Berri (Saudi Arabia) 1964, Manifa (Saudi Arabia) 1964, and Shaybah (Saudi Arabia) 1998 (discovered 1968). (This list was taken from Fredrik Robelius’s “Giant Oil Fields -The Highway to Oil.”)

3. The 2009 study focused on 331 giant oil fields from a database previously created for the groundbreaking work of Robelius mentioned above. Of those, 261 or 79 percent are considered past their peak and in decline.

4. The average annual production decline for those 261 fields has been 6.5 percent. That means, of course, that the number of barrels coming from these fields on average is 6.5 percent less EACH YEAR.

5. Now, here’s the key insight from the study. An evaluation of giant fields by date of peak shows that new technologies applied to those fields has kept their production higher for longer only to lead to more rapid declines later. As the world’s giant fields continue to age and more start to decline, we can therefore expect the annual decline in their rate of production to worsen. Land-based and offshore giants that went into decline in the last decade showed annual production declines on average above 10 percent.

6. What this means is that it will become progressively more difficult for new discoveries to replace declining production from existing giants. And, though I may sound like a broken record, it is important to remind readers that the world remains on a bumpy production plateau for crude oil including lease condensate (which is the definition of oil), a plateau which began in 2005.

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

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

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

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

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

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

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

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

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

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

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


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


3. Replace all fossil fuel energy with nuclear power.


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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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