Thursday, September 24, 2009

The Future of Oil - or a gentle Cough at the NYT

The Mining Community is not a really large one, and in our meeting tonight I met folk that have worked on projects that were, for their time, world shattering. But we began the day by remembering, with a moment of silence, the miners that died this past week in Lower Silesia. In a small enough community there were those not present today because of that incident, and we paused to remember that supplying the world with the energy that it needs comes at a certain cost.

And then, after a day of presentations that ranged from presented material that will be in my lectures next week, to promotions that were little more than reading the Web adverts for company products, tonight we had, again, a miners picnic – only this time there was the European tradition of induction for us foreigners into the Brotherhood (except in that – as a ninth generation miner – I think I’m already there, and have done this before) – yet we were led into the assembly in green hoods, leapt the apron and were suitably entered into the community (each country has a slightly different tradition).

A coleague ready to "leap the apron"

I gave a keynote address before lunch today on the problems that the world will face as the economies of the nations resurrect. In a way the talk was “set up” by the CEO of the Polish company KGHM who are running this first Copper Congress here in Lubin. He pointed out that in running a company that uses some 3% of the energy demand for Poland, they have, as a company, to become energy independent since without that security they will become increasingly vulnerable to outside influence.

In the talk that I gave (which was written more for the local audience than as a global message) I tried to walk though the evolving energy changes, and what they would lead into.

Having tied my talk to some 23 slides, obviously I am not going to try and post the entire talk, but perhaps if I go through the theme, you might get the gist of what I was trying to say.

I began with a slide that shows the current top crude oil producers in the world (based in EIA May figures) and noted that, at the moment Russia is at the top. (Note please that since it is late and I still have my “answer” presentation to prepare for the morning, I am not going to give my references tonight). (And if you want to consider that this is a rebuttal to today’s optimistic report in the New York Times feel free to do so).

Then I showed a slide of a well in Samotlor and noted that the Russian historic large fields are running out. Samotlor has declined from 3.2 mbd to 750,000 bd and is pumping, in some wells, 90% water. The Russian strategy has been to find and produce a region until exhausted, and then move East to find the next major depost. That has worked fine as a strategy until now when they have reached Sakhalin Island – on the far East of the country – the next logical place to look is . . . . .

Alaska, and sorry folks, that is already in play, and in fact rather played out.
Which is a good point to introduce the Export Land Model and so I talked just a little about the fact that as a country’s oil peaks and starts to fall, domestic consumption becomes more important and exports suffer a much greater decline than the actual fall in production. Then I showed how this was already happening to Russia, and the impact that this would have on Poland.

To make life even more complicated in terms of those in Eastern Europe with a reliance on Russian oil, I put up a slide showing that the United States is now importing some 840,000 bd of Russian oil, in order to meet its needs, and thus Europe is now competing in the global market for that oil.

Why must America compete in that market – I used a graph showing the collapse of Cantarell (not to mention the other fields in Mexico) and the 100,000 bd fall every three months to show that America has to go to the world market to find the oil that it now needs.

Non-OPEC crude oil production has peaked and is in decline (I used a TOD graph showing the fall since 2004) and so when one looks at countries that have a surplus of production over current supply (comparing IEA and EIA data) the stand-out is Saudi Arabia at either 3.3 or 2.5 mbd (depending on who you believe) with the next largest being the UAE at somewhere between 0.3 and 0.6 mbd.

(And here let me briefly digress to point out that those who wave the NYT story have little clue of the time that it takes between discovery and full field production – nor do they understand oil field depletion, or that just because we have passed peak production does not mean that there is not a whole lot of oil out there that is still waiting to be discovered – only that it is going to be less than the huge volumes that we have already found and exploited).

The problem, as I pointed out, is that the Saudi number includes, among other fields, Manifa, and Yes! we know it is there; Yes! we know that it can produce 1 million bd; but we also have to recognize that until a refinery is built to process that oil (which will not now come on line until after 2013) the use of that production number is a fiction. And thus there is less than 4 mbd available as a current world reserve.

So what else do we need to worry about? Well it was time to introduce oilfield depletion and so I put up the two contrasting graphs that I use from TOD that show decline in current fields when you use 4.5% depletion and then 5.25% (the significant point I indicated was the transition of peak oil from 2011 to 2008).

I then showed a slide with the FT quote that the oilfields in the North Sea were depleting at 9%, and followed it with Dr Fatih Birol’s comment that the depletion rate is 6.7%.

I tied the whole issue together by showing the need that the Western world will have as their economies rebound (about 3 mbd) with the increases in demand from China and India (already 1 mbd and rising) to show that by 2011 we will need some 5 mbd of additional oil over today, but at best have only enough on line to get 4 mbd. (The first Oops Moment).

So now I turned to the second fuel – natural gas – (time was now running a bit tight so this got a little less intense treatment, but also focused on the Polish need).

I began with a slide showing that, over time, natural gas fields were lasting a shorter period of time before they ran out, but then followed this with a slide of Turkmenistan, who has been supplying some 40 bcm to Russia (or thereabouts) for transfer (at a profit) to Ukraine, Poland and Western Europe. To ensure that supply last year (and there were posts on this at the time) Gazprom signed an agreement to pay the prevailing Western price for natural gas to Turkmenistan. Since when there was a collapse in the world price of natural gas and an “accident” to the pipeline between Turkmenistan and Russia means that Russia has not had to accept expensive NG that it has to sell at a loss, since then.

However, just as Russia pressures Turkmenistan to accept a new agreement to sell the gas at a cheaper price, the new pipeline from Turkmenistan to China will open in a couple of months (and I showed the map) meaning that, as China has been willing to pay the higher price (about $8 per kcf as I posted earlier in the week) they have underwritten a cost increase for NG to Western Europe and beyond that is unlikely to go away.

I then quickly put up a map showing the gas shale deposits in the United States and commented that this might at first appear to indicate that we are entering the “Age of Natural gas”, but then I followed this with Swindell’s graph showing that the new wells suffer 60% decline in the first year, and commented that with the high cost of wells, and the current low cost of NG in America (I tried converting prices to zloty per thousand cu m., but may have got a number wrong – we passed a gas station that was selling NG at 2 zloty per liter) the new wells that we need for next year are not being built. Thus we may be competing with Poland for LNG from Qatar.

What is left? I turned to coal (Poland currently gets around 85% of its electrical energy from this source) and I put up my final slide, showing 5 micron coal – which when mixed with 50% water will run a diesel locomotive (and I added a picture of one) as GE have demonstrated.

Which barely gave me time to note that for many countries in the world coal is the only available, viable and economically practical fuel (vide Vietnam and Botswana) at a time when (with a map from “energy shortages”) - which I contrasted with comments from the G-20 Summit - the world is already having serious problems and it was time for me to conclude.

There were no questions (but I was later told that this was due to the format of the session) but I did field comments during the rest of the day.

And so, tomorrow, I have to explain one of the ways they should change to cope with this situation. Excuse me! But I need to put those slides together.

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