Time and the latest CERA report

One of the features of many models that are used to predict future events is that they focus on target years. Decadal years are the most common target years, so that whether talking of climate or the amount of oil or natural gas available, models focus on, for example, the amount that will be available in 2030. The problem with this approach is that it leaves the public to think that a problem is not yet serious. For example if the prediction is that the production of oil will only be 75 mbd, in 2030 then there is an implication that until 2030 that the situation will remain fine.

However the world does not reach those levels by continuing in the business as usual mode for the next 21 years, and then suddenly have production drop off a cliff one Friday night. Rather it is a problem that inexorably will grow, year on year, between now and then. I was struck by this thought as I looked through the latest comments from CERA/IHS on their view of the future of oil supply. Their view, as we have come to expect, is an optimistic one, and though we are not still living in the days of $30 oil that they had, at one time predicted, it is worth looking into so as to provide some explanation of the difference between their view and mine.

Let me begin with a reason why I tend not to be immediately and totally swayed by the thinking behind the CERA report, and their conclusion that:

Global oil productive capacity will grow though 2030 with no evidence of a peak of supply before that time.

It has not been that long since we were assured that production of oil from Mexico would be maintained at levels of 4 mbd through 2015. In 2005 we have:

CERA said that oil from non-conventional sources would widen to 35% of capacity in 2015 compared with 10% in 1990. The research points to growth in output from ultra deepwater drilling in the U.S. Gulf of Mexico, Brazil, Angola and Nigeria; 250% more heavy oil production capacity from Canada and Venezuela; and the expansion of condensate and natural gas liquids to 23 million barrels per day from 14 million barrels per day currently.

The EIA is anticipating that Mexico will produce an average of 2.9 mbd in 2009, falling to 2.7 mbd in 2010. And the latest chart from CERA (downloadable at their site) shows a much reduced increase in production of the heavy oils by 2015, for a start.
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CERA has, unfortunately, not only continued to shine an overoptimistic light on future production, but has also tended (as sadly it has also done in the past) to gloss over some of the problems – vide:

Though a peak in global production is not imminent, there are major hurdles above ground to negotiate.”

These surface hurdles no doubt include the minor details as to how to get significantly more production out of Iraq. It is all well and good to read reports such as:

Iraq is planning to increase its production capacity to approximately six million barrels per day within 80 months, following the signing of service contracts with a number of major international oil companies. This is in addition to the other agreements which are expected to be reached by next December, whereby Iraq’s production capacity may be increased to reach around 10 million barrels per day at the end of the next decade, compared to 2.5 million barrels per day at present. The overall cost that will be borne by the international companies investing in developing the Iraqi oil fields will amount to about one hundred billion dollars. Needless to say, these agreements are considered to be a historic event (both economically and politically), not only for Iraq, but also for the oil industry itself in the Middle East, and for the global oil industry.

Adding 7.5 mbd to existing world supplies would certainly go a substantial way toward meeting the existing and well documented declining production from so many of the major fields of the world. But is that target a realistic one – let me sound perhaps a little more cynical than some and raise a slight modicum of doubt. While it is nice to be optimistic, the reality still fills the headlines of too many papers and news reports.

Of course, it is expected that these companies will face some obstacles and delays as a result of terrorist attacks against their employees and sabotage against its installations. Also, the need arises to increase export capacity that can accommodate the ensuing increase in production, in addition to attracting a sufficient number of professionals and technicians to work in Iraq under the current circumstances, and procuring the necessary machinery and equipment on time. Despite all these potential obstacles, the delays in these projects are not expected to be significant, since similar experiences in other oil producing countries have shown that such delays only cost a relatively limited and not long amount of time.

Thus even though there are some big players moving into that game it is a little premature to be optimistic.

In other aspects of the report the average field decline rate, which CERA ties to 4.5% - but includes fields with rising production in the calculation, masks the reality of an increasing level of decline in fields that are past peak. As we saw with Cantarell, post-peak collapse can come more rapidly and severely than earlier forecast.

At the same time the move to produce alternate fuels, such as cellulosic ethanol for vehicles, seems to have hit more technical and economic snags that may well considerably delay the target production that has been anticipated for this alternate fuel, feeding into an overall reduction in “other” fuels beyond the level that CERA still optimistically holds to (raising unconventional liquids, in their view, from 14% of global capacity today to 23% by 2030).

It is notable that in the version of the report I got, while CERA lists three scenarios, Asian Phoenix, Global Fissure and Break Point, it only briefly mentions the assumptions and impacts that the different scenarios will have on both demand, and thereafter supply. Given that I noted just recently that China is signing up for another 1 mbd delivery from Saudi Arabia, and that sales of cars in both countries are rising at significant rates, one can anticipate that that market is likely to develop into the Asian Phoenix that one might imagine is presaged by the title of the CERA scenario.

The growth of that new market is recognized with the opening of the new port of Kozmino by Russia with the potential for shipping up to 1 mbd of oil, with China as a major customer. (Which raises a question for another post on which customers will lose out as China gains.)

But to now get to the nub of my point; this is that there is already a changing market and demand for oil and its products that is developing in the short term. The longer term view of potentially available resources that are not yet found, does not address the problem of how big a tap can be made available to meet demand over the next six years. There are serious questions, within that time frame, of the ability of some of the largest fields in the world to sustain production at their current levels.

Longer term forecasts will be forgotten long before they are called to face reality, unfortunately the optimism they project can lead people astray in the shorter terms, where the conditions have been glossed over.

P55. Pick Points

Given the size of a couple of the stories a little less than half-a-dozen stories of interest today:

Redoubt, the volcano in Alaska that was being monitored when I flew over here has now erupted, and though it threw a plume of ash some 60,000 ft into the air, the wind was such that Anchorage, 110 miles away, was not covered. And the heavy snow falls turned into enough water that much of the ash that landed was washed away to a distance of up to 22 miles. By 4:30 am Monday there had been five eruptions, back in 1989 when it last erupted the eruptions lasted for four months. It has since erupted again, and appears now to be building a lava dome.

Source Alaska Volcano Observatory/U.S. Geological Survey


More recently the air had cleared enough to allow planes to be unwrapped and to take off again and resume service.

Source Alaska Volcano Observatory/U.S. Geological Survey

It has been postulated, by Lamb among others, that the fine dust high in the atmosphere can cause a reduction in the Earth temperature, though the effect of one volcano really depends on the size and volume of the ash generated and I suspect this is not producing enough yet to be significant.

Last year, shortly after he was inaugurated President Medvedev travelled to Kazakhstan, Turkmenistan and Uzbekistan with the President of Gazprom to lock up control of the natural gas supplies for those countries. Now the agreement may turn out to be an expensive one for Gazprom. The company has seen its own production drop 25% and so relies on the agreement, but that was at a $409/tcm, and now the price is falling to $260 per tcm.

Gazprom currently buys about 50 billion cubic meters (bcm) of Turkmen gas, 15 bcm of Kazakh gas, and 7 bcm of Uzbek gas, amounting to about 14 percent of the company’s total production in 2008, according to the Nezavisimaya Gazeta report. Rising transit costs and falling consumer demand in Europe and Russia mean that the company’s operating costs in Central Asia are becoming a big burden. The company has already scaled back development plans for the region.

Gazprom officially acknowledged in early March that gas production in 2009 may decrease by 7 percent this year. But analysts say the cut in output could likely to be much higher.

Poland meanwhile, which had an agreement with the “middleman” between Gazprom and the Ukraine (RosUkrEnergo), an entity which has supposedly been kicked out of the deal, is now negotiating directly with Gazprom. The hope is to get the agreement in place so that the Poles can fill their storage tanks before winter comes, when supply becomes more of an issue. Meanwhile Ukraine is reducing the amount of gas that it plans on buying from Gazprom by 17.5%.. However part of this is that Ukraine needs someone to invest in their infrastructure and update it, and the hope is that this will come from Europe which is not sitting too well with the Russians.

And speaking of natural gas, CERA has announced a new analysis which sensibly says:

North American natural gas is entering a new era in which supply is no longer constrained, according to a new Cambridge Energy Research Associates (CERA: undefined, undefined, undefined%) multiclient study, Rising to the Challenge: A Study of North American Gas Supply to 2018. A revolution in technology has unlocked "unconventional" gas resources, dramatically changing the prospects for the market. Demand, rather than supply, will be the challenge for the market going forward, accentuated currently by the economic crisis.

Not wishing to be argumentative, but one wonders if CERA has been monitoring the rates at which drilling rigs are being shut down?

I would normally not take up this much space in a Pick Points, but the report goes on to say

Given the increased productivity of unconventional wells, the study concludes that it is not necessary to increase drilling activity to maintain - or increase - production. After years of developing unconventional gas with its long-lived production, in the aggregate, the average decline rate will fall. This means, the study says, that a smaller quantity of new production is required to offset natural production declines. CERA does expect production to increase, with dry gas productive capacity growing from an average of 53.5 Bcf/d in 2009 to 60.6 Bcf/d in 2018 in the lower 48 United States, and from 15.8 Bcf/d in 2009 to 19.6 Bcf/d in 2018 in Canada.

Sometimes I wonder what reports they are reading, the average life of an unconventional (read gas shale) well is less than 3 years. The average well is depleting 60% in the first year. I have posted on this before and these are not my numbers. Well, as they say, the next eighteen months will see which of us is correct. And LNG imports may change the picture a little, Wood Mackenzie are expecting them to rise. On the other hand the steps by the Indiana Governor to allow synthetic natural gas from coal won’t likely make much of a difference.

Coal (and California)

The New York Times had a story on Sunday about the fight it perceives that the coal industry is in with regard to future power generation ,

As a result, utilities’ plans for new coal plants are being turned down left and right. In the last two-and-a-half years, plans for 83 plants in the United States have either been voluntarily withdrawn or denied permits by state regulators. The roughly 600 coal-fired power plants in the United States are responsible for almost one-third of the country’s total carbon emissions, but they are distinctly at odds with a growing outlook that embraces clean energy.

Initial plans had been that the aging power plants in the country would be changed to more modern, cleaner facilities and there were over one hundred new plants in some form of planning or another. Obviously there are additional constraints at the moment because of the fiscal condition of the country and the lack of a clear picture of demand change in the next few years. But there is also a recognition of the increasing hostility (that the article refers to) from Environmentalists, and the new power that they have with the current Congress and Administration. One should not, however, forget the statement made (about another fuel) by the Saudi Oil Minister last week

“A nightmare scenario would be created if alternative energy supplies fail to meet overly optimistic expectations while traditional energy suppliers scale back investment due to expectations of declining demand for their products,” he said.

And the industry itself feels it is healthy. One of the last panels at the CERA meeting last week in Houston considered coal.

Jone-Lin Wang, CERA managing director, said there is 17,000 MW of new coal capacity currently under construction in the US, the highest level in the last 20 years.

"New builds in coal have been attacked on two fronts -- capital-cost escalation and [carbon dioxide] emissions," Wang said. "Despite these problems, we have seen a surge in new coal plants. Coal is resilient." She said, however, that there are still hurdles for building new coal projects.

A weak economy has hurt the demand for coal, said Anna Belova, vice-CEO of strategy and corporate development for Russian energy company SUEK. Lower natural gas prices are also making that fuel option more attractive for builders, she said, adding that increased energy efficiency and a strong push for renewable energy have made the future of coal seem uncertain.

But with the focus on the environment, and the increasingly strident tones of James Hansen, who seems bent on continually raising the rhetoric, as he seeks to lead the world away from coal, many utilities are having second thoughts about their current plans. Yet the reality remains.

The states that currently use coal do not all have the option of switching to the immediately available alternatives of wind and solar. Reference to a wind map shows a swath of states from Arkansas to Pennsylvania that have few and limited sites for siting wind turbines where they would do any good. Similarly solar power availability is less where states see high precipitation and snow in winter. So what are they supposed to use instead? The retort seems to be that they should rely on the above alternatives where they can, and where they are not available then the use of energy efficient appliances and conservation and gas-fired plants will be the answer.

In times where the economy is not strong expecting or mandating folk to change appliances, other than when the old ones wear out, will require a considerable incentive. So will expecting them to undertake considerable investment in insulation and changing doors and windows to reduce power loss through the walls.

And without that drop in demand, when the economy seeks to rebound, then it will be calling on additional power from the existing utility base. Reducing the size of that base, means only that power will not be available, given the lack of alternate supplies. It is also interesting to go back and look at some numbers. California is required to list, each year, where its power comes from. This it does through an annual Commission Report (pdf). When they did this survey in 2005 they initially came up with this table:
Which was an interesting change from the same table from 2001 (pdf).
And which has now led the individual power suppliers in CA to have to list from where they get their power.

The latest labels include the 2007 CA Power Mix (this particular table comes from the City of Palo Alto Utilities)

California power demand can rise as high as 50,000 megawatts , but at that level the utilities start to look for “volunteers” to cut their power demand.

If the droughts reduce the ability to produce hydro-electric power, and they don’t want to use coal, seems to me someone had better start building solar panels fast, since wind is starting to have a little more problem growing in that state.

California was the early leader in wind power — it installed several big projects in the 1980s (one of which, Altamont Pass, has been criticized for harming birds). Not much has happened since, however, and the fact that California moved early “means that the easy projects are already in,” said Mr. White.

Other projects run into significant transmission constraints, Mr. White said, and an intensive permitting process has also proved an obstacle to growth in California.

There are other recent posts that suggest that coal generation is in trouble. But, without a suitable alternative at a reasonable cost, at the scale required and in a timely replacement strategy, I rather suspect that someone will remember the Oil Ministers words before it is too late, and change may be a little longer in coming than is sometimes anticipated.

As the NYT article concluded

"You cannot solve the climate change problem without dealing with coal," said Howard Herzog, principal research engineer at the Massachusetts Institute of Technology. "Killing coal is not a real option. Carbon capture and sequestration is the only real alternative."

P33. Pick Points

Half-a-dozen or so stories of interest:

Checking in on CERAweek first –IHS Director of Political Risk Terry Hallmark is predicting that crude oil will average $43 a barrel in 2009. (IHS purchased CERA in 2004) . The meeting was opened with Representative Edward Markey telling delegates that $147 a barrel oil was a cause of the current global recession. He is the new chairman of the House Energy and Commerce Subcommittee on Energy and Environment, and the legislation on the Administration program will have to go through him.

Legislators are bent on pushing though greenhouse gas legislation, promoting a cap-and-trade system for limiting carbon dioxide emissions, and looking at ways to diversify away from imported oil wherever possible.

Turns out he is a T. Boone Pickens fan.

OPEC, recognizing the impact of the fall in oil prices is delaying 35 of the 150 planned oil drilling projects by at least 4 years. Dates for the others may also well slip, as OPEC anticipates a 50% cut in income this year. However with oil now apparently stabilized at around $40 a barrel the likelihood of further cuts is growing less. It did however drop below $40 today. If the price drops further Saudi Arabia may lead the move to lower production. Algeria thinks the price will rebound to $60 this year, though Angola would like the price to rise to $75. In the meanwhile Venezuela has been making cuts of around 210,000 b/d (Bloomberg estimate) or 364,000 bd (Venezuela claim) as part of the OPEC cuts. Cuts have now reached around 4.2 mbd and these collective moves make it unlikely that the OPEC will be able to increase capacity by 5 mbd by 2012. However the current cuts have swelled the unproduced capacity of OPEC to an eight-year high.

The cuts in oil company profits will also impact their charitable giving, even to prestigious places such as the Bolshoi. And just as Germany has subsidized car loans to improve their economy, Russia is now moving to try the same, even though sales in Germany have yet to pick up, though they are expected to do so, with the incentive being to replace cars older than 9 years. The Russian economy is still growing, albeit now at only 1.1%. Russia will get into the LNG business next month when the first cargo leaves Sakhalin Island for Japan. Incidentally there is an extensive review of the Nord Stream pipeline project.

Platts is taking a closer look at wind energy since this energy source is looming larger and larger as the renewable energy source. To meet EU requirements the industry will need another roughly 125 GW installed (or more than double current capacity) by 2020. But there are problems since the larger the industry grows the less economic the necessary base load and backup power generation becomes. Jerome argues that the route forward should include wind, though there may be some problems this year.

One of the problems has been in transmission of power from the wind site to the user and ITC is now addressing this with a planned “Green Power Express” to carry 12,000 MW of power from the Dakotas to the MidWest. Texas remains on schedule with the installation of new transmission lines to feed future sites. But as wind farms grow, there are concerns over their impact on wild life, particularly in the East.

While CERA meets in Houston, in Europe it is Sustainable Energy Week, introduced by the Commissioner. Registration for the meeting is now closed, but there are video recordings and live internet broadcasts, which can be reached through the Website. The opening speech has already been posted. The Danes have provided a wind map for Europe. It is slightly different in format to that of the Department of Energy for the USA.

As more drilling occurs in the Arctic regions, there will be a need for more collaboration with the indigenous peoples, one such agreement just having been signed in Russia. Yet there is likely to be more strain between the countries seeking the energy. Russia is looking into adding a new refinery in the region.

For more stories see The Energy Bulletin or Drumbeat at The Oil Drum