OGPSS - Happy New Year, or perhaps not!

It is the beginning of a New Year, and, belatedly, I hope that all readers find this new period to be one of prosperity, health and happiness. It would be encouraging if the portents for our Energy future would point in that direction, but unfortunately I can’t see nearly as much optimism in that regard as do others who are similarly reviewing where the global energy supply numbers are going. This week the EIA's ”The Week in Petroleum” is illustrative of the optimistic vision.

Figure 1. Recent projection from the EIA on American Oil Production (EIA TWIP Jan 9, 2013)

This plot is from the new Short-Term Energy Outlook from the EIA, which projects the numbers through to 2014, at which time: the Agency anticipates that US domestic production will rise to 7.9 mbd, the highest since 1988. Growth is expected to extend beyond just the Bakken:

In particular, drilling in tight oil plays in the Williston (which includes the Bakken formation), Western Gulf (which includes the Eagle Ford formation), and Permian basins are expected to account for the bulk of growth through 2014. Williston Basin production is expected to rise from an estimated December 2012 level of 0.8 million bbl/d to 1.2 million bbl/d in December 2014. Western Gulf Basin production rises from an estimated December 2012 level of 1.1 million bbl/d to 1.8 million bbl/d in December 2014. Within the Western Gulf Basin, roughly 0.4 million bbl/d of the oil production is outside of the Eagle Ford formation. The Western Gulf Basin accounts for more than half of the onshore domestic liquids production growth due to a comparatively large amount of liquids coming from both oil and gas wells compared with the other key production basins. The Permian Basin in West Texas, which includes plays such as Spraberry, Bonespring, and Wolfcamp, is a third key growth area. EIA estimates that crude oil production from the Permian Basin reached 1.2 million bbl/d in December 2012. Permian Basin production is projected to increase to 1.4 million bbl/d in December 2014.

The overall global concerns for production include a relatively small potential for production growth from the larger oil producers in the world (with the possible exception of Iraq), while there remains an increasing turmoil that began with the “Arab Spring” and continues to spread with ongoing and growing impacts that are likely on Middle Eastern oil production. But it is the story of American production that continues to gnaw at my worry bead string.

In context it should be remembered that, when The Oil Drum was first produced in 2005, national attention was briefly caught by the TV movie “Oil Storm” in which a plausible series of events – a hurricane in the Gulf, a ship collision in the Houston Ship Canal, and a terrorist attack on the Saudi oil terminal at Ras Tanura combined to raise the price of oil to a peak of $130 a barrel, and gas reached a final price of over $7 a gallon, with all sorts of terrible consequences. The day was finally saved when Russia shipped the US a few tanker loads of oil, after the US outbid the Chinese for that oil.

Since then there have been pundits who tell us that these things would never happen. During the real price rise to $147 a barrel (without the disastrous causes) we were reassured that prices would fall again to the $20-$30 a barrel range, though they have not – and those same pundits are now again parading before the media as they reassure us that the US can soon cast off the shackles of oil price control by foreign oil interests. Of the roughly 10 million bd that the US imported in October, some 4.2 mbd came from OPEC, Saudi Arabia sending 1.25 mbd, and Venezuela 0.95 mbd. Outside OPEC Canada supplied 2.68 mbd, Mexico 1.06 mbd and Russia 0.55 mbd. KSA has shown itself adept and willing to adjust flows to ensure that OPEC oil prices remain adequate, and there is no indication that they need or intend to change their approach. Any global increase in supply is likely to be more than offset by increases in demand from China and India, though the reality will be that as US demand declines (if it does) that displaced supply will transfer to meet Asian growth – and it will not then be available were the US projections to fall short, and the country have to increase imports again.

There are some troubling signs on the horizon that suggest the future US supply is not as robust as has been proposed. Chesapeake Energy, who have been a flagship for the development of natural gas, is in sufficient trouble that Aubrey McClendon, the CEO, will not get a bonus this year, amid a number of changes. Shares have dropped nearly 30% and as Art and others have noted, the economics are not as encouraging as the pundits would suggest.

The news from the Arctic is somewhat worse. Shell have been able to recover their drillship, which ran aground after losing its tow in a 70-knot storm with 40-ft waves, and it has now been moved to a safe harbor. The vessel must now be assessed and the program will be delayed. (This is particularly true as the investigations begin to line up, first was the Coast Guard, and now Interior.) The Alaskan Pipeline flows were averaging just under 583 kbd in November (December numbers are late), and that is up from the overall yearly average of 544 kbd, but is running at a 6% decline rate bringing problems in as little as 8-years. Although with monthly flow changing to improve conditions in the winter months, there may be more of a problem than is currently discernable, particularly if future supplies to keep the pipeline flowing are now threatened by the future losses of potential production from the Chukchi and Beaufort seas.

And speaking of pipelines the cancelling of plans for the Bakken Crude Express Pipeline for lack of customers tells more about the anticipated future demand than all the predictions from Dr. Yergin at Cambridge. Energy Research Associates. This also foretells that the Adelman prediction that technology will always return us to cheap oil, as touted by Phil Verleger is likely to continue to be proven false – not that these real events stop those who survive by predicting the future. Fortune tellers have been a facet of society throughout history, only the shape of their crystal balls has changed with time, and the size of their credulous audience.

Whether real or overly optimistic, the US potential increases in fossil fuel production is likely to impact to the potential for US renewable and bio-generated fuels, where the future production levels seem also to be losing their lustre. There is some talk of Dr. Chu leaving the Department of Energy in part perhaps because of this change in focus. However, among the names being floated are those of John Podesta, the founder of the Center for American Progress, who have just ranked their top ten Energy and Environmental Priorities for the first four years of President Obama’s time in office, as follows:

Figure 2. Priorities as quoted by the Center for American Progress.

And most recently the Secretary has been encouraging women and minorities to look at the wind energy industry as an opportunity for employment.

One other candidate is apparently Bill Ritter, the past Governor of Colorado, although the list, at this point, seems to be growing rather than shrinking.

Whether under either individual, or some alternate choice, the next four years of President Obama’s Administration will likely see many more changes than anticipated as occurred during the first term. It is, however, discouraging that there are so few possibilities for realistic optimism for that future.