Estimates for recoverable shale gas just keep falling. Last year, the Potential Gas Committee, an industry consortium that focuses on long-term projections, estimated that recoverable natural gas from shale deposits in the United States would amount to 687 trillion cubic feet (tcf). (This optimistic appraisal laid the groundwork for the oft-repeated notion that the United States has 100 years of natural gas supply at current rates of consumption. The estimate was also based on so-called “speculative resources” of another 615 tcf.)

But, in its early release of the Annual Energy Outlook for 2012, the U.S. Energy Information Administration (EIA) cut its estimate of technically recoverable resources of U.S. shale gas from 827 tcf to 482 tcf. (That says little about whether all those resources will be economically recoverable.) Much of the decline in the EIA estimate comes from a downgrading of the Marcellus Shale, by far the largest of the U.S. shale gas deposits spanning vast areas of New York, Pennsylvania, and West Virginia as well as sections of Ohio, Kentucky and Tennessee. The downgrade resulted from extensive drilling results now available as the rush to extract gas from the Marcellus Shale accelerates. The EIA cut its estimated technically recoverable resources from 410 tcf to 141 tcf. This estimate remains well in excess of last year’s estimate from the U.S. Geological Survey which put those resources at 84 tcf.

Despite the revisions, the American Petroleum Institute (API), the oil and gas industry’s trade lobby, finds the 100-year figure so irresistibly round that API resists reducing it to match the official estimates in its recent ad campaign (see “One Million Jobs”). Why let the facts get in the way of good ad copy?

What ought to be acutely troubling is that the history of revisions to oil and gas resources has heretofore been one of increases. For the first time, we are now seeing not just downward revisions in estimated natural gas resources, but drastic downward revisions. That should tell us that the era of unlimited horizons for fossil fuels has come to a close. All the advanced technology that was supposed to bring unending plenty in the form of fossil fuels is now giving us better estimates of what will be available, namely, not nearly so much as we thought.

Meanwhile, in other areas of the world the hype surrounding shale gas is also being deflated. Exxon Mobil Corp. recently announced that two exploratory wells that it drilled in Poland–a country thought to be rich in shale gas–were duds. The company had already abandoned a $75 million investment in Hungary in 2009 after drilling in so-called tight sands yielded more water than gas.

Shale gas drilling in Europe is now revealing what was earlier revealed in the United States. The industry’s so-called “manufacturing model”–the idea that one could sink a well virtually anywhere in a shale gas deposit and get economically viable flows–is being discredited all over again. Former U.S. Speaker of the House Tip O’Neill once said, “All politics is local.” It turns out that all shale gas drilling is local as well. Shale gas fields have sweet spots worth exploiting, but also contain vast areas that will likely never be economical to produce.

As the news about future supply becomes more downbeat, the hype from industry-friendly media only seems to increase. Take climate change denier Patrick J. Michaels of the Cato Institute who recently wrote in The Washington Times: “The discovery of hundreds of years of natural gas in worldwide shale deposits guarantees that solar and wind will never produce much of the world’s power.”

As new wells in the world’s shale gas fields continue to disappoint, prepare for even more outrageous claims about future natural gas supplies–measured perhaps not in centuries, but millennia–and designed to obscure the failure of shale gas exploration results to match the industry’s persistently optimistic forecasts.

Resource Insights

A few more of those annoying facts to keep in mind as we (don’t) prepare for looming energy challenges, courtesy of three recent and excellent articles/interviews well worth the time to review in full [see Sources below for the links]:

Nothing can replace oil as the lifeblood of our culture and there is no domestic supply source which will eliminate or even reduce our dependence upon the 10 million barrels per day we import from foreign countries. There are some hard truths that are purposefully ignored by those who want to mislead the public about the grim consequences of peak cheap oil:
* The earth is finite. The amount of oil within the crust of the earth is finite. As we drain 32 billion barrels of oil from the earth every year, there is less remaining within the earth. We have drained the cheapest and easiest to reach 1.4 trillion barrels from the earth since the mid 1800s. The remaining recoverable 1.4 trillion barrels will be expensive and hard to reach. [1]

While it is critical we invest our current resources to finding solutions to the approaching energy gap, it’s also essential we approach the situation realistically and with as little magical thinking as possible. Currently, the US is consuming 10 million barrels per day more than it produces domestically….The short of it is there is going to be no single fuel source that replaces oil, and the transition to a post-Peak Oil future is going to involve a period of “less energy” for society for an undetermined period of time. [2]

We tend to have self-confidence in our ability to solve any problem. But we have no historical analog to the peak of fossil fuels, without a clear (and superior) replacement on the horizon. As a result of our fossil fuel binge, we have unprecedented problems in population, water, agriculture, fisheries, pollution, climate change, and so on. Our moment in history is rather special. It is dangerous to assume that we’ll gracefully handle problems at this scale, because such assumptions amount to dismissals and concomitant inaction. Unacceptable.
It bothers me that we don’t have a plan. It scares me that we (collectively) don’t think we even need a plan. Faith in the market to solve the problem represents a high-stakes gamble. We can and should do better. [3]

Another in the body of recurring themes of Peak Oil Matters is that we do ourselves no favors by denial and delusion. The psychological purposes they serve are no match for the potential harm we’ll cause ourselves over a much longer period of time by ignoring, hoping, or wishing. Strategies available to us, of course, but their usefulness—such as it may be—is completely useless at this point.

The authors above each discuss similar themes raised in prior posts of mine and by any number of others doing their best to put us all on notice that we need to start thinking about the energy issues at hand, and then thinking differently about how to address the challenges. More importantly, planning should be among our top priorities starting about ten years ago. We’re a wee bit behind.

Echoing proposals I offered several months ago (as have others), Jim Quinn boils it down succinctly:

If our society acted in a far sighted manner, we would be creating communities that could sustain themselves with local produce, local merchants, bike paths, walkable destinations, local light rail commuting, and local energy sources.

And Tom Murphy bolsters that theme, citing the much-discussed and highly-respected The Hirsch Report (a subject I’ve covered in a number of prior posts; see the Category in the sidebar):

The bottom line was that initiating all such crash programs in parallel 20 years ahead of the peak (or more to the point, 20 years before the start of decline) may be sufficient to avoid major hardships. Waiting until 10 years before the decline would result in major disruptions as the efforts struggled to establish a large enough foothold in time for the decline. Initiating the crash program at the moment the decline starts was characterized as having catastrophic repercussions. Not treated was the more politically realistic scenario of waiting until 5 years after the start of decline while we bicker about the fundamental cause of our woes and strategies for mitigation….
Because we will more likely wait until the pain of decline has made itself clear, we may find ourselves handicapped by recession and debt, hampering our ability to act boldly….
… [S]tarting a crash program toward replacement of finite fossil fuels too early has great up-sides and marginal downsides (opportunity cost); but failure to act has enormous downside for marginal upside.

What exactly are we waiting for? For all the happy talk about the “potential possible if only we do X and Y might work” options discussed by others [as I’ve cited ad nauseum in the many “Denial” posts], too many of us have been lulled into a false sense of security that the problems—if any—are being handled.

Jim Quinn wasn’t as “kind” in his assessment (but he’s right) while pointing out a serious consequence of this pattern of deceptions and half-truths offered up by not only politicians but also by many in the oil industry who know better (and, as I’ve also emphasized repeatedly, by our own failure so far to learn more):

American presidents have propagated the Big Lie of energy independence for the last three decades. The Democrats have lied about green energy solutions and the Republicans have lied about domestic sources saving the day. These deceitful politicians put the country at risk as they misinform and mislead the non-thinking American public….
The propaganda blared at the impressionable willfully ignorant American public has worked wonders. The vast majority of Americans have no clue they have entered a world of energy scarcity.

For all the talk about the magic of Technology riding to the rescue, almost all of the research, planning, testing, marketing, etc., etc., etc required before establishing various Plan Bs as solutions require fossil fuels to make the processes happen from A to Z. What gets prioritized in a future with fewer of those resources available to begin with? Just how quickly will these various, successfully-tested and fully-implemented Plan Bs be showing up on our doorsteps?

Does anyone have a full appreciation for just how much and how many (processes, productions, transportation plans, products, etc., etc.) will have to be effectively and efficiently converted/prepared/tested for successful utilization of these Magic Technology Saviors (while fossil fuel reserves continue their steady march down the Depletion Slope)?

As Tom Murphy so nicely summed up: “Even though energy may represent something like 10% of GDP, it’s what makes the other 90% possible.”

Is anyone paying attention to the energy “quality” of all the alternatives being considered/hoped for? There’s not a single unconventional (tar sands, shale) or alternative (wind, solar, etc) energy resource that comes close to matching the energy density and efficiency of the hundreds of billions of barrels of crude oil we’ve consumed in the last century and a half. Hello! One need not be schooled in quantum physics, advanced algebra, or geology to appreciate that replacements which are for starters less efficient and more costly are not going to actually “replace” crude oil’s extensive benefits. They’re at best poor substitutes, and how might the consequences of that fact play themselves out for the billions of people with their trillions of products and demands and needs currently supplied by crude oil? Hello again!

With almost all of the major oil fields now on the downslope of their own production peaks, how much stock should any of us be putting in the still-rosy assessments of ramped-up production from those same fields over the next few decades? How does that math work? (We’re of course blindly assuming that these primary oil exporters will of course continue to serve the needs of Americans before … their own citizens? Seriously? Who gets to deliver that message? Safe to assume there might be a complaint or two?)

The most optimistic, arguably-realistic assessments about production potentials of the various unconventional and alternative resources will barely match current depletion rates. It’s now been several decades since we were finding more oil than was being consumed. Given that these crude oil wannabes aren’t as efficient, what kind of math is     being passed around to make this all seem acceptable and not worth a moment’s worth of concern?

As Tom Murphy again summed up for us:

The geological upshot is that oil is not a lake into which we thrust a straw, slurping as fast as we wish. Rather, oil is a viscous fluid in porous, permeable rock that resists rapid recovery. It’s not a spigot or valve that we can turn at will. Nature has a say in how fast we can claim the oil….
The lesson is that we don’t have full control over oil production. If previous discoveries are in decline, and we are not adding new fields at a replacement rate, we should expect aggregate decline.

Each of the three referenced authors do us all a great service by discussing these and other relevant considerations (economic and geopolitical, for example) which put a bit of a crimp in the blind happy talk which gets far too much airplay … at our expense.

I think I can safely speak for each of them, and almost every other proponent of Peak Oil, when I say that I would LOVE to be wrong about all of this! But the harsher truth is that there are just too many warning signs in too many aspects of fossil fuel exploration, discovery, production, cost, quality, and supply to ignore it all and expect that hope, wishes, good thoughts, and crossed fingers are all we need.

The potential exists, therefore, for major disruption to our accustomed ways of life. We will become viscerally aware of how fundamentally important oil is to all that we do.. It’s not just another commodity like sneakers or widgets. Curtail transportation and watch the grocery store shelves struggle to stay full. See food prices escalate and cause immediate hardships around the world. Find out how far-flung about the globe the material resources are that comprise a cell phone. [Tom Murphy]

So, assuming the Peak Oil camp is on to something, what’s the likelihood for a disruption-free transition to another energy source that can replace the energy output we currently enjoy from oil? … How realistic are these hopes?
Not very. [Martenson and Rapier]

Shouldn’t we at least be having broader and more meaningful discussions starting right about now?

Peak Oil Matters

Something quite momentous happened on 26 January 2012. While most Australians were distracted with celebrating their national day, the world’s leading scientific journal, Nature, published its first serious commentary on peak oil. That’s right, peak oil took its final step from “extremist fringe conspiracy theory” to general acceptance by the world’s scientific community. The authors of the Nature article were David King, a former chief scientific advisor to the UK government and James Murray, founding director of the University of Washington’s Program on Climate Change. In their article we learned how “there is a potentially more persuasive argument for lowering global emissions [than climate change]: the impact of dwindling oil supplies on the economy“. Indeed, writing about rising oil prices have affected Europe’s second biggest debtor nation, Italy, they said, “Italy now spends about $55 billion a year on imported oil, up from $12 billion in 1999. That difference is close to the current annual trade deficit“. King and Murray are quite blunt about the implications of peak oil for future economic growth (the same growth that the USA and Europe are counting on to drag them slowly out of their debt woes),

“Historically, there has been a tight link between oil production and global economic growth. If oil production can’t grow, the implication is that the economy can’t grow either. This is such a frightening prospect that many have simply avoided considering it.”

Despite its length, there were many topics that King and Murray’s article did not cover. For example, declining oil supplies threaten the world’s food supply. Until recently, the “green revolution” allowed us to expand food production in tack with the world’s expanding population but this was underpinned by the mechanization of agriculture and the increased use of fertilizers and pesticides. Therefore, peak oil and food security are absolutely and intimately linked. King and Murray also failed to mention how the volume of oil available on the world’s export market has been in decline since 2006 as the rate of global oil production stagnates and the expanding populations and economies of oil exporting nations consume a greater proportion of those nations’ production.

Australia is a net importer of oil so an important question is what our government has been doing to prepare for the decline phase of the oil era. Unfortunately the answer is worse than nothing, In fact, both of Australia’s major political parties have been actively suppressing investigation of the issue. On two occasions Labor and Liberal have joined forces in the Senate to vote against developing a plan to address the peak oil issue. Amazingly, it recently became known that a very detailed 470+ page report on peak oil was produced as long ago as 2009 by the Commonwealth’s Bureau of Infrastructure, Transport and Regional Economics (BITRE) but was subsequently suppressed. The leaked report is now available on a number of national and international websites and is vastly superior in its data analysis to any other governmental report I have seen. One fascinating part of the report is the analysis of why its conclusions (supporting declining world production within a few years) differ so markedly from those of the International Energy Agency (IEA). It found that the IEA was assuming that new discoveries of oil would be brought into production far more rapidly than has previously been possible. The same conclusion was arrived at by other independent researchers and has since been published in the peer-reviewed scientific literature. This testifies to the quality of the BITRE analysis.

So where does South Australia stand in this brave new world of declining oil? Our position is precarious since we much of our liquid fuel arrives in almost just-in-time fashion from Singapore. In fact, shipping delays in 2005 caused our reserves to fall to just 3 days supply before any alarm was raised. How does one ration three day’s worth of fuel? Declining world oil production will drive increased conflict over oil, erratic prices and, probably, disruptions to shipments. For example, conflict involving Iran would disrupt the flow of crude oil to Singapore from the Middle East and this would affect their ability to supply us with fuel.

 online opinion

Cartoon: Otherwords.org

In Episode #192 of the Kunstlercast which aired February 2nd, James Howard Kunstler and Duncan Crary have done us all a great favor by interviewing noted petroleum geologist, Arthur Berman.

Berman’s popular in the peak oil world. In addition to his day job as a petroleum geologist and consultant, he’s on the board of the Association for the Study of Peak Oil and an editorial board member of the Oil Drum. He occasionally makes appearances on CNN and maintains his own blog at Petroleum Truth Report.

Recently, Berman gave a series of presentations called US Shale Gas: Magical Thinking and the Denial of Uncertainty, and that’s what Kunstler wanted to talk to him about.

What’s at stake

This interview comes at a critical point in our public debate on energy. Berman offers a reality check that questions claims repeated by industry insiders, economists, financial analysts and even politicians that the US has 100 years worth of fossil fuel energy left. According to pundits, new technology is allowing us to frack deposits of shale to release natural gas and trapped in the sedimentary rock.

Berman’s take is that this is likely a mass delusion morphing into a bubble. He says the idea that we can become energy independent from the rest of the world is simply a “fairy tale.” His own experience and analysis of the data suggests that it’s “absolutely preposterous” that domestic reserves of natural gas will allow the US to become energy independent.

Madison Avenue gas bags

Intrigued, Kunstler asks Berman to talk about the propaganda being fed to US consumers and investors on the natural gas story. Berman offers two reasons why this campaign has been so successful.

First, the fracking of shale is considered a manufacturing process; simply apply the technology and produce gas that might otherwise be left in the ground. It sounds whiz bang and like so much other technotopia, reads as convincing simply or being a technological solution.

Second, fracking proponents claim these large deposits of shale will produce for decades. The decline rates on shale gas wells were touted as nearly defying the laws of physics; meaning high production rates at first with only a very slow tapering off rate over an extended period of time. (This might be a good time to brush up on your trigonometry.)

In other words, the natural gas industry is claiming that fracking is a proven technology that will reap financial benefits at a low risk for decades.

The devil’s in the details

The idea that poor quality deposits of natural gas can provide a century of energy is based on a study conducted by the Colorado School of Mines in 2009. By their own admission, the report notes that their “assessment assumes neither a time schedule nor a specific market price for the discovery and production of future gas supply.” Meaning, their estimate is based on resources they consider technically recoverable. It doesn’t matter where it’s located (ie: under the Statue of Liberty), how deep the deposit is, or if the field is too small to be commercially viable.

This is where Berman defines the semantic difference between of a reserve and a resource.

Paraphrasing, “a reserve is a subset of technically recoverable resources” that is commercially viable. This subset typically amounts to only 20-25% of the total technically recoverable resource. In order to prove the reserve exists, the producer must drill an actual well. Even if the reserve of shale gas amounts to a very generous 50% percent, this equals approximately 12 years of natural gas at current rates of consumption.

An aside

Stepping aside for a moment, let’s remember that our financial system is based on compounded debt that requires growth in the economy to keep the wheels of finance spinning. Therefore, current rates of consumption is an inadequate function in our economy.

Doing the math

Berman goes on to include the natural gas the industry anticipates to be extracted from reserves using conventional, non-shale gas deposits and comes up with a combined total of just 20-25 years worth of natural gas.

The optimistic scenario laid out by Berman is decades less than what the American public is being told.

At this point in the interview, Kunstler shifts the discussion to a brief history of the gas shale plays in the US in order to segue to the more important topic of depletion rates.

You’ll want to have map handy for this part of the discussion, but the bottom line is the assumptions of production that were based on models didn’t pan out very well at all. Shale gas concentrations aren’t uniform; there are sweet spots where wells produce significantly better than in other areas.

By Berman’s account, only a stunning 10-15% of the total area in which thousands of wells have been drilled turned out to be economically viable business ventures.

In the words of a famous auto mechanic turned US Marine: “Sur-prise, sur-prise sur-prise!”

Off the cliff

With half a decade or more of production data, the plotted depletion rates are not likely to keep on keeping on in a slow and gentle decline; they more closely resemble a linear drop in output.

Here Kunstler presses the point and asks Berman if the older fields, such as the Barnett in Texas, have peaked.

It’s too soon to tell according to Berman. But yes, we could be at the peak right now in some of these fields. The key factor is whether or not the natural gas companies are willing to drill more wells, even if they do so at a financial loss.

Show me the money

The costs are staggering. Leased land prices can go for $15k to $30k per acre. Horizontal drilling and multi-staged fracks are several times the cost of vertical wells adding another $5 to $6 million dollars per well. Kunstler points out that all this temporary infrastructure means a moveable feast of tons of additional steel pipe and convoys of trucks to bring in the water required for the fracking process in places where water is insufficient for the operation.

Current overproduction caused by initial excitement in the marketplace, as well as unintended natural gas coming as a by-product from oil fields has produced a glut in the natural gas market. This accounts for the declining price of natural gas while production costs are going up.

All of this leads Berman to remark that, “Nobody is making money at $2.”

So if they aren’t making money, will the companies cut back on production or go out of business? Taking this question a bit further, Kunstler asks if these fluctuations of production and price will wreak havoc on middle class consumers.

Here Kunstler is making a connection to the oil market. When the price of WTI petroleum goes above $85-90 a barrel there’s strong evidence to suggest that the American economy slows down and heads into recession. If the pattern of supply and demand for natural gas follows suit, we might expect to experience similar events of demand destruction in our economy.

Berman believes that the producers are well aware that a 100 year supply does not exist. By reducing their drilling and holding on to land leases, they hope to dry up the glut and reward shareholders on a longer term basis.

Robbing Peter to pay Paul

To speed up this process, the industry is lobbying the US government to switch over vehicle fleets and outdated power plants to natural gas which is cleaner burning than coal. The current price of natural gas and the promise of lower emissions make such investments look enticing. Of course, converting portions of our infrastructure to run on natural gas is risky strategy if we only have 20-25 years of domestic supply available. It’s important to remember that this conversion will be done using oil as a fuel source, take years if not decades, and require vast amounts of investment capital.

Kunstler, already a sharp critic of the money fantasies of the investor class, is particularly interested in knowing where the capital for such a shift would come from.

Berman describes how private investors, as well as countries such as Norway, France, China and India have all entered the market. The other major source for fresh capital comes from petroleum companies such as BP and Exxon.

Now, here’s where the interview gets really interesting.

The big oil companies, which abandoned the US decades ago to pursue more profitable ventures overseas, are back. Why? Because in order for companies like Exxon to maintain their stock value, they need to replace their reserves each year. With worldwide gas and petroleum depletion rates over 5%, the search for new reserve sources is forcing companies to invest in lower quality deposits.

Not only do additional reserves boost their stock prices, speculative companies in need of cash are able to use these claimed assets in the ground as collateral. (It would very be interesting to know what percentage of our 100 year supply has been used as collateral?)

Fools rush in

Kunstler sums this up nicely when he likens today’s natural gas delusion to the 1849 gold rush. Berman concurs, but notes that the cost of entry into natural gas, already in the billions of dollars, is significantly higher.

Where does this leave us?

Berman predicts another five years or so of good production from the shale gas fields. However, the industry must contend with a growing disenchantment from the public due to environmental contamination of aquifers and shallow earthquakes caused by the fracking process. This may result in additional time to conduct environmental assessments and implement new safety procedures, which will add cost. But will it change the actual recovery picture?

Berman also predicts a return to the gasoline lines we saw in the 1970’s in the next couple of years. Noting that our electric grid is already stressed, he suggests that brown-outs will become a part of daily life. Despite the dire prognostications, Berman doesn’t consider himself a “doomster.” Rather, he believes this is “what the future looks like based on a rational approach to supply and cost.”

Kunstler quips that “doomsters are realists who makes you feel bad.”

The interview wraps with a warning that all of our technology and chest thumping can’t produce an infinite supply of cheap fossil fuels from declining reservoirs. The hype and spin in the media may benefit oil companies and their political supporters during an election year, but they do an injustice to our welfare.

As Berman notes, pretending that there are no risks associated with shale gas is a form of magical thinking.

Based on this interview, you might conclude that our current domestic energy policy amounts to a poking a lot of holes in the ground while crossing our fingers.

–JB Sties, Transition Voice

Shale gas fever has overtaken America, but we have seen this sort of mania before.

In 2003 and 2004, a “hydrogen economy” was touted as the Next Big Thing. The United States was poised to run its 240 million cars and trucks on it some day, and wean itself off of oil. California would lead the way, putting half a million hydrogen vehicles on the road and building 200 fueling stations by 2010. Today, after the expenditure of around $2 billion of public funds, the U.S. has just two-dozen fueling stations and 500 hydrogen vehicles, plus only modest progress in fuels cells. There is no longer mainstream discussion of a hydrogen economy.

Then Americans became drunk on ethanol. More than $20 billion in subsidies was spent over a three-decade period ending Dec. 31 that ultimately turned nearly 40 percent of the U.S. corn crop into less than 10 percent of the country’s fuel needs by volume, and less than 7 percent by energy content. In 2009, the U.S. taxpayer subsidized 75 percent of the price of each gallon of gasoline replaced with ethanol.

Now the U.S. has gone batty for natural gas. President Barack Obama and key members of Congress have cited a humongous estimate for the natural gas supply supposedly possessed by the United States — nearly 2,200 trillion cubic feet of the fuel, the equivalent of 379 billion barrels of oil, which if accurate would exceed the crude oil reserves of Saudi Arabia, and satisfy U.S. gas demand at current levels for around a century. Only, that widely published figure represents what are called “possible” reserves, not the more certain categories known as “proved” and “probable” — gas that is more likely to be producible under current technological and market conditions. When discussing proved reserves, the U.S. Energy Information Administration says the U.S. possesses just one-twelfth of that volume, or 273 trillion cubic feet of gas, the equivalent of 47 billion barrels of oil. That is still a lot but, at the country’s 2010 rate of consumption of 24 trillion cubic feet a year, it’s just an 11-year supply. Even if we assume a very optimistic 50 percent recovery factor for the estimated 550 trillion cubic feet of probable gas, we would still have just a 31-year supply.

A lack of good data, in addition to an apparent bias toward optimistic data, underlies this perception gap. Consider a new, well-by-well analysis by Houston-based petroleum geologist Arthur Berman. Berman, a long-time doubter of mainstream gas estimates, writes that, contrary to popular belief, gas production is not growing under current conditions; instead, 80 percent of the country’s shale gas production (pictured above, shale gas operation in Springville, Pa.) has flattened out or declined over the past year. Total U.S. gas production has been on an “undulating plateau” since the beginning of 2009, Berman says, as new shale gas output struggles to compensate for a 32 percent-per-year decline in conventional gas production. This picture is missing from the EIA’s data because the U.S. agency bases its reporting on shale gas data only for 2008 and 2009, and does not do well-by-well sampling.

The main factor behind the flattening-out of production is that, with gas selling for well under $3 per thousand cubic feet, nearly all shale gas production has become unprofitable. Analyses by Range Resources, Berman and others finds that nearly all operators need at least $4 per thousand cubic feet to break even while drilling new wells in existing plays, and at least $8 when one includes all costs, including leasing of gas fields, overhead and debt service. Berman finds that the fully burdened break-even point for the top-producing play, the Haynesville Shale in Louisiana, is around $9 per thousand cubic feet. Recent research from Louisiana State University, featured in the Oil and Gas Journal, reached a similar conclusion: “The probability of incurring a negative [net present value] for Haynesville wells is real and significant.”

In short, there is much reason to disbelieve the sustainability of shale gas production at current prices. Perhaps this is why all the EIA’s multiple forecast scenarios in its 2011 Annual Energy Outlook assume a gas price of at least $5 per thousand cubic feet. The agency wholly disregards the economics of producing sub-$3-per-cubic-foot gas.

Accordingly, a growing parade of drillers has been sharply curtailing work on the gas patch, and shifting to the production of natural gas liquids, which might permit them to eke out a bit of profit. The result will be further declines in gas production, despite forecasts suggesting the opposite.

The public discussion one hears contemplates as much as a 40 percent increase in domestic natural gas demand, including the retrofitting of transport trucks and power generation to gas, and the export of up to a fifth of U.S. supply as liquefied natural gas.

While such export enthusiasm has prevailed, the EIA has undermined the idea: Three weeks ago, the agency reduced its estimate of U.S. gas resources by 42 percent, to 482 trillion cubic feet, which equates with a 20-year supply of unproved reserves. To illustrate what that means, an earlier EIA analysis had concluded that, with a slightly lower resource base of 423 trillion cubic feet, the U.S. could turn into a net natural gas importer by 2035.

The shale gas phenomenon is so new, and the data so thin, that one wonders at the wisdom of making long-term export decisions with perhaps irreversible consequences. The last two energy manias lived and died without a wisp of a memory. This one, if it goes wrong, may not be so benign.

The Oil and the Glory, Foreign Policy

In this edition of the show Max interviews Dmitry Orlov from ClubOrlov.blogspot.com.

He talks about how the American collapse will be the result of huge military budgets, government deficits, an unresponsive political system and declining oil production.

Dmitry Orlov is a Russian-American engineer and a writer on subjects related to “potential economic, ecological and political decline and collapse in the US,” something he has called “permanent crisis”.

In the past month, three major peer-reviewed journals have published articles relating to limited world oil supply:

1. In Science, Technology is Turning U. S. Oil Around But Not the World’s, by Richard A. Kerr;
2. In Nature, Climate Policy: Oil’s Tipping Point has Passed, by James Murray and David King; and
3. In Energy, Oil Supply Limits and the Continuing Financial Crisis, by Gail Tverberg.

The fact that these articles have been published is significant, because articles in the  mainstream press, such as Bloomberg’s recent article, Peak Oil Scare Fades as Shale Deepwater Wells Gush Crude, seem to suggest that our oil problems are past. While the US oil supply situation may be a little better, the world supply situation is still very bad, and oil prices are still very high around the world.

Furthermore, high oil prices tend to have a recessionary effect, and can lead to debt defaults. These issues are described in both the second and third articles above. Thus, there is a substantial chance that high oil prices are contributing to the debt default problem in Europe, and to forecast low world economic growth.

In this post, I briefly describe these articles.

In Science, Technology is Turning U. S. Oil Around But Not the World’s, by Richard A. Kerr

This article points out that even the optimistic estimates, such as BP’s recent Energy Outlook to 2030, see little growth in non-OPEC conventional oil production between now and 2030 (Figure 1).

Figure 1. BP oil forecast to 2030, from BP Energy Outlook to 2030

We are thus dependent on growth in OPEC crude oil and in OPEC natural gas liquids, neither of which is assured, given political uncertainties in the Middle East. While technology advances are making possible some new US oil production, this growth is needed to offset declines in existing fields around the world. There is a great temptation by those using new technology to make forecasts using an “overabundance of optimism.” History shows that US oil production has mostly fallen since 1970 (Figure 2).

Figure 2. History of US production of crude oil, in figure created by EIA (similar to, but not the same as, figure shown Science article).

In Nature, Climate Policy: Oil’s Tipping Point has Passed, by James Murray and David King

According to the authors:

There is less fossil-fuel production available to us than many people believe. From 2005 onwards, conventional crude-oil production has not risen to match increasing demand. We argue that the oil market has tipped into a new state, similar to a phase transition in physics: production is now ‘inelastic’, unable to respond to rising demand, and this is leading to wild price swings. Other fossil-fuel resources don’t seem capable of making up the difference.

Such major spikes in fuel price can cause economic crises, and contributed to the one the world is recovering from now. The future economy is unlikely to be able to bear what oil prices have in store. Only by moving away from fossil fuels can we both ensure a more robust economic outlook and address the challenges of climate change. This will be a decades-long transformation that needs to start immediately.

The article talks about how high oil prices erode family budgets, and points out that it seems likely that it wasn’t just the ‘credit crunch’ that triggered the 2008 recession. The oil price crunch was also involved.

A call-out from the article summarizes a current problem:

The price of oil is likely to have been a contributor to the euro crisis in southern Europe.

In Energy, Oil Supply Limits and the Continuing Financial Crisis, by Gail Tverberg

This is an article I wrote in early 2011, that wasn’t officially published until January 2012. The article can temporarily be downloaded free, as the fifth item down on this list of articles from the January issue.

In this article, I explain why one would expect high oil prices to cause economic disruptions of many types. If consumers are spending more on high-priced oil (and high-priced food, because both costs tend to rise together), they will cut back on discretionary  expenditures, such as going out to restaurants and taking vacations and buying new cars. Workers in affected industries will be laid off.

There will also be indirect impacts. People who have been laid off from work will tend to default on their loans, as will people who are living paycheck to paycheck and find that the cost of commuting has rising, and the cost of food has also risen. Holders of sub-prime mortgages will be disproportionately represented in the group of those with defaults, since they were among the least qualified loan applicants.

High oil prices can also be expect to affect housing prices. In part, this occurs because people who spend more on necessities (commuting and food) are less likely to want to buy a move-up home. As a result, there will be a cut-back in demand for homes, and thus in resale prices. Also, at the time that oil prices rose in the 2004-2006 period, the Federal Reserve raised interest rates in an attempt to try to bring oil prices back down. These higher interest rates also tended to reduce demand for move-up homes. I also show that the timing in the drop in US home values matches with what a person would expect, if it were high oil prices, and actions taken by the Federal Reserve in response to high oil prices, that were really behind the drop in home prices.

Our Finite World

With the publication of a prominent article on “Nature” in January 2012, the concept of “Peak Oil” has made another step forward in the debate on resource depletion. This article has made me rethink of the past ten years of work that I did as a member of ASPO, the association for the study of peak oil. Were we right with our prediction of impending peak oil? In a sense, yes, but the crystal ball is always foggy and it cannot be otherwise. The ASPO predictions were basically right but, as all predictions, they were approximate.

Working with a simplified model based on Hubbert’s early work of the 1950s, the founders of ASPO, Colin Campbell and Jean Laherrere, proposed in 1998 that the future of oil production would have followed a curve that was to peak at some moment between 2005 and 2010, to decline afterwards. Embedded within the Hubbert model was the concept that the gradually increasing costs of extraction would reduce the profits of the industry and force it to reduce investments.

As a “first order” model, the Hubbert one is not bad and the ASPO models caught very well the problems that the oil industry was going to face. From 2004 onward, prices have shot up a levels that have changed forever the oil market. But oil production, intended as “all liquids” (that is, including oil from tar sands, biofuels, etc) didn’t show a well defined peak, nor the decline that the Hubbert model predicted. Stubbornly, production has refused to decline and it may even be showing a modest increase in recent times. That doesn’t make the model wrong: as all models, it is an approximation of reality.

The “peak oil” concept has been often criticized on the basis of a classic idea in economic science: that prices mediate between demand and offer. Hence, oil prices should define what should be counted as “reserves”, intended as something that can, and will be, extracted. High prices should lead to more reserves and we would never run out of anything. It turns out that this criticism was not wrong, although not right, either, and its consequences were perhaps unexpected even for those who proposed it. When scarcity started to be felt in the oil market, the price correction mechanism kicked in. Prices rose and, according to the standard economic theory, that should have stimulated production. It did, in part, but with crude oil the mechanism has become a rat race. The more high prices made production profitable, the more production costs rose. That’s where we hit the ceiling.

This mechanism is very nicely caught by Murray and King in their article in Nature. The figure reported at the beginning of this post shows it very clearly. Over a certain price, production doesn’t respond any more. It becomes “inelastic”. The graph has to be read taking into account the temporal evolution of both prices and production: very high prices are a recent phenomenon and what we see is what I called the rat race. Even with increasing oil prices, the best that the industry can do is to keep constant the production of combustible liquids.

So, we are seeing that the price mechanism may slow down the expected production decline, but at the price of causing all sorts of problems. With high prices, the world’s economy must allocate more and more resources to oil extraction and these resources must come from somewhere. Since the economy doesn’t grow any more, keeping oil production constant means that some sectors must shrink and that is not without pain. Much of the present political turmoil in poor countries, for instance, is due to the high prices of food, in turn related to the high cost of oil. And, with prices so high, we see the perverse effect that producers can afford to consume more but, as a result, less oil is left for importers. In a sense, many importing countries have already passed their peak oil.

As Thomas Huxley said long ago, it is the customary fate of new truths to begin as heresies and to end as superstitions. Peak oil surely began as a superstition and it is still considered as such in some circles. But, with the events of the past few years, it is also attaining the status of truth, as shown by the article by Murray and King, who have clearly understood what lies at the basis of the idea. In some sense, however, peak oil is also taking some elements of a superstition, since it fails to take into account the price mechanism. In the end, reality might be better described by something like the “Seneca model” which takes into account second order effects and that predicts a production plateau followed by a sharp decline. Also this model may be a heresy, right now, but one day may become truth and later on a superstition. As always, the future is never what it used to be.

By Ugo Bardi

Counter Currents

Recorded at People Music Studios in Toronto by my boy Brett Kibbler

The United States has long been seen as a nation in its twilight as an oil producer, facing a relentless decline that began when President Richard Nixon was in the White House. He and every president since pledged to halt the U.S. slide into greater dependence on foreign oil, but the trend seemed irreversible—until now. Forty-one years later, U.S. oil production is on the rise.

U.S. oil fields yielded an estimated 5.68 million barrels per day in 2011—their highest output since 2003, thanks largely to a surge of new production from shale oil that lies beneath the Great Plains. The rush so far is centered in North Dakota, where oil production has quadrupled since 2005, but drilling is set to spread across the prairie and beyond.

(Related: “Shale Oil Boom Takes Hold on the Plains“)

“A ‘great revival’ in U.S. oil production is taking shape,” said Jim Burkhard, managing director of the energy consultancy IHS Cambridge Energy Research Associates in testimony last month before a U.S. Senate committee. The resurgence provides the United States a welcome measure of energy security at a time of global economic uncertainty and geopolitical risk, he said.

Yet the U.S. government’s own energy analysts and many experts see a limit to this new gusher. The technological advances that have driven the revival—high-volume hydraulic fracturing combined with horizontal drilling—can only squeeze so much more crude out of the U.S. landscape, they say. Projections are that U.S. oil production will never again reach the lofty heights of the 1960s, even without environmental concerns slowing development or hampering industry with new costs.

 

But most importantly for U.S. consumers, the new supply is not expected to provide relief at the pump. The price of gasoline, still governed by global geopolitical factors like Middle East conflict, burgeoning economic growth in Asia, and constraints on supply around the globe, is projected to increase at a rate of nearly 2 percent per year. In the United States and elsewhere, the only way to escape the ever-higher price of oil in the future, the experts agree, will be to use less of it.

A Surprising Surge

U.S. crude oil production has dropped by more than a third since its peak in 1970, and as Burkhard said in his Senate testimony, “The long decline . . . was never supposed to end.” But instead, since 2008, the United States has seen a greater gain than any other nation in its “total liquid fuels” supply, taking into account the ramp-up of oil alternatives such as ethanol. In a single year, from 2009 to 2010, oil and gas industry spending on U.S. prospects increased 37 percent, to $69.4 billion, he said. The investment reflects high hopes for the future. “The scale of the opportunity to boost oil production in the United States is larger than in most other countries over the next decade,” he said.

President Barack Obama highlighted the new oil development in his State of the Union address, saying, “Last year, we relied less on foreign oil than in any of the past 16 years.” Indeed, imports have fallen to about 50 percent of U.S. liquid fuel supply, down from 60 percent as recently as 2005, according to the U.S. Energy Information Administration (EIA). EIA’s new analysis released last month says that imports are on track to fall to just 37 percent of supply by 2035, significantly less than the agency’s projection only a year ago.

A persistent drop in consumption—nearly two million barrels a day since its high point in 2005 due to a slowing economy, efficiency improvement, and consumer scaling back on travel due to high prices-has contributed equally to the decrease in imports.

(Related: “Driving the Limit: Wealthy Nations Maxed Out on Travel?“)

When the new oil is considered along with the new natural gas production spurred by the same technology—fracking—some experts have claimed that the United States, the nation that was the birthplace of the oil industry, could become the world’s top liquid fuels producer again, surpassing Saudi Arabia and Russia.

(See interactive on fracking technology: “Breaking Fuel From Rock“)

But projections by the EIA and the Paris-based International Energy Agency indicate that is unlikely. They expect the U.S. resurgence to hit a ceiling much sooner. EIA projects that the U.S. oil industry will add about 1 million barrels per day to production over the next decade, an increase of about 18 percent. But that’s still 30 percent below the 1970 peak, and its forecast to fall slowly after 2020, back down to just over 6 million barrels per day, about 7 percent above today’s level.

“It’s a modest increase—not a huge increase,” said Richard Nehring, founder of the energy consulting firm Nehring Associates in Colorado Springs, Colorado. “The reason is a lot of the new production just replaces old production that’s declining.” Oil production in California and Alaska, the second and third largest-producing states behind Texas, has been in decline for more than 20 years, he noted.

North Dakota now is fourth in oil production, thanks to the booming development in the Bakken Shale, which sits beneath the western half of the state and neighboring Montana, extending north into Saskatchewan, Canada. The same hydraulic fracturing technology that has unlocked huge new supplies of natural gas across the United States has opened the door to unanticipated production of shale oil, sometimes known as “tight” oil. The oil industry is already leasing land for drilling in a similar formation, the Niobara Shale, beneath Colorado, Wyoming, Nebraska and Kansas. Production in the Eagle Ford shale, in South Texas, is increasing rapidly.

Limits and Doubts

But uncertainties abound regarding this newfound oil supply.  New regulations are expected due to concerns that the water-intensive process, which results in a large amount of polluted “flowback” water rising to the surface, is a threat to groundwater and land. In his State of the Union Address, Obama said he wants companies that drill on public lands to disclose the chemicals they use.

(Related: “A Dream Dashed By the Rush on Gas“)

And there are other issues. When first tapped, oil shale wells start off strong, but their production typically declines some 50 percent in the first year, and in later years drops further. “These wells have a pretty steep decline in their first year,” said oil analyst John Staub of the EIA. “It requires a high rate of drilling to maintain production,” let alone make it grow.

Indeed, the pace of oil drilling in the United States is now at a 25-year high, and EIA projects the rate will rise even higher, pushing oil shale production to nearly 1.5 million barrels a day, or 20 percent of U.S. production. The oil shale boom is expected to max out around 2030.

“Tight oil is a pretty new resource,” Staub cautioned, “so there’s definitely uncertainty about how widespread it might be. Production could be lower or it could be higher.”

To be sure, the EIA expects to see other sources of new oil production in the United States. Although conventional onshore oil production is expected to continue to slide, more oil may be squeezed out of old oil fields, mainly by pumping in carbon dioxide and other newer “enhanced oil recovery” techniques to flush out recalcitrant fluids.

Offshore development, particularly in deepwater, is expected to continue apace after the lifting of the moratorium imposed after BP’s 2010 Deepwater Horizon disaster, which resulted in the largest U.S. oil spill ever, in the Gulf of Mexico. The EIA expects some offshore projects to proceed in the Arctic, but these would not be enough to reverse Alaska’s decline in production, and its production would fall from 560,000 barrels a day now to less than half that, 270,000 barrels a day, by 2035.

But even with the United States hoping to produce a larger share of the oil it uses, consumers won’t pay less. The price per barrel of crude oil, which was between $85 and $110 per barrel in the United States in 2011, is expected to be $120 by 2016 and $145 by 2035, in today’s dollars, EIA projects. (That means a whopping nominal price of $230 per barrel by 2035.) In today’s dollars, a gallon of gasoline would cost $4.49 by 2035, an average increase of 1.6 percent per year.

Demand for gasoline is soaring in China and India, lifting the price of the globally traded commodity. And outside of OPEC members, the rest of the world’s production has reached a peak or plateau, which a boost in U.S. production would do little to change, said David Greene of the U.S. Department of Energy’s Oak Ridge National Laboratory in Tennessee.

In the words of International Energy Agency chief economist Fatih Birol, “The age of cheap oil is over.” (See: “Has the World Already Passed Peak Oil?“)

Looking ahead, the U.S. won’t be able to eliminate the cost of oil dependence just by boosting production alone, Greene said. Improvements to cars’ gas mileage and other efforts to use energy more wisely would make a big difference. “It doesn’t mean that we’ll get rid of imports,” he said. But if the United States makes efforts both to increase production while decreasing demand, the country could “shrink imports down to a manageable size.”

(See: “Iran’s Undisputed Weapon: Power to Block the Strait of Hormuz“)

Daniel Kammen, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, said the new drilling boom should not blind the nation to the need to tap other energy resources that don’t carry oil’s costs.

“The energy mix we have now is heavily domestic due to the expansion of North American fossil resources,” Kammen said. “But an arguably larger energy efficiency and renewable energy resource exists in North America.” He said that would do more to create jobs and build industry over the long term.

National Geographic