Looking back at 2009

This has been an interesting year to look back on. The change in the Administration and the difference in outlook that they bring to many of the concerns that I write about have altered the way in which the future will evolve. That evolution is still continuing, but there can be no doubt that the key committees in the Congress are now led by folk that do not look particularly kindly on the historic producers of fossil fuels. Yet the path forward for the alternatives, power from renewable energy, is not necessarily going to be that certain either. That was brought home just recently with the move by Senator Feinstein to protect portions of the Mohave Desert from future construction. This limits some of the areas in which solar farms had been planned, though clearing some of the legislative hurdles for others. But the legislation (which would apparently affect some 19 applications) is a sign of the debates to come, as the land needed for renewable energy is discovered to have other potential uses or benefits, that will make the search for available space that much more difficult.

And it is not just in California, there are debates in other states, including Wyoming.

As a result, 23 percent of Wyoming's winds that are class 4 or higher -- and about half or more of developable class 6 and 7 winds -- are in core areas. And in July, the state put those winds off-limits by essentially banning big wind farms in core areas. Many in the wind industry see it as devastating. The Interwest Energy Alliance -- a trade group -- said the ban could have "a deleterious effect on renewable energy development" across the West, and that it could kill the development of 10,000 megawatts of wind in Wyoming.

Though there are some sites that appear less controversial than others.

He takes me on a tour in a big white truck, making me wear a hardhat because turbine blades can throw chunks of ice. From the top of a hill, as a bunch of antelope amble nearby, Anderson points southward through the forest of windmills to a huge plume of steam that marks the Dave Johnston power plant. Then he motions to the earth all around where we stand. The wind farm sits on the reclaimed remnants of an old, giant coal mine; all this land was once torn up, gouged by draglines, its carboniferous bounty burned in the plant down below. "We wanted to take a coal mine," says Anderson. "And make it useful."

Yet as these debates continue, there seems to be little recognition of the needs that the future will bring, that are not being prepared for. Nor is there much recognition of the problems in getting power from where wind can generate electricity to the places where it is needed (particularly those states that have mandated high levels of renewable energy into their mix in the nearer future). For while wind turbines can generate money for the landowner, there is much less for the farmer who lets a transmission line across his land, who only gets a single payment.

The cap-and-trade legislation may not, in the end, make it through the Senate, and thus may die for this Congress, but it has made it difficult to justify investment in coal-fired power stations, when the rules that will govern their use are not clear. And while the EPA has adjudged carbon dioxide to be a pollutant , it has yet to write the rules under which plants that produce carbon dioxide will operate. (Remembering of course that each of us is also a generator). As a consequence some 100 or more power plants have been put on hold until the situation becomes clearer. But given the challenges that will likely come to the legislation (there is some question, for example as to whether they can limit the application of legislation to plants that produce more than 25,000 tons for example), the delays in planning for construction of future power plants are likely to continue, and perhaps grow worse.

The new Administration does not see much in the short-term that will cause energy supply, whether crude oil or electricity, to be a problem. The Secretary of Energy, through the research and funding that they have produced over the past year, is looking at more distant options for generating power than meeting any proximate needs. Unfortunately, coming from California, where it was easy to mandate a reduction in coal-burning in the state when the power could be generated alternately from coal-burning plants in Utah, does not work as well when the entire country becomes subject to the legislation, and such an alternative no longer exists.

Among other news of the past year that make my list of major stories I would count two more. They don’t seem to have caught as much attention of folks such as Robert Rapier who has a different list, but one of them is listed in the page that Platts had for their survey. The first (and that listed by Platts) is the continued collapse of the oil production in Mexico. While this has significant impact to the United States (which is now going to have to find alternate sources for the Mexican oil it was importing from fields that are now running dry, particularly Cantarell) the impact on Mexico’s deficit has been to drop the deficit off a cliff. For the USA it is going to be increasingly difficult to find that alternate supplier. China has increased their purchases from Saudi Arabia by more than 12% this year (to 800,000bd) and has signed agreements to take this over 1 mbd next year. With non-OPEC production having peaked, it is only the surplus production in the OPEC countries that keeps the world in balance, and the size of that “cushion” is something that we debate. (I am less optimistic than some others).

The other event was the opening of the gas pipeline from Turkmenistan to China. Again it is feeding fuels that were, at one stage, available to the West, to a new customer, itself growing in demand, and with a considerable scope to increase market purchases in the years to come. The glut in natural gas that we currently see will not I suspect, last as long as it is currently projected, and that will open a different can of worms.

But all these stories from the past aside, I do wish you all a Successful and Prosperous Year, that brings you Happiness and Joy, and not too many snow storms.

If we can't get oil from Mexico . . . .?

The news from Mexico just continues to get worse with bad news from all three of their biggest oil fields, even as our perennial cornucopian talks of “a Mexican surprise.” As Gregor noted recently (h/t ft energysource) at the beginning of the year Cantarell was producing 862,000 bd and at the end of July this was down to 588,000 bd. The graph plotting decline continues to show a linear decent at the rate of 35,000 bd per month or roughly 100,000 bd every three months – giving it just 17-months at that rate (ending right at the end of next year) until there is nothing left. Somewhere in there the drop is likely to stabilize, but suddenly and soon the questions as to where the replacement hundreds of thousands of barrels are going to come from is going to stop being an almost academic exercise.

The peak and decline of Cantarell – where Mexico once got most of its oil.

But they aren’t the only ones in trouble. Consider U.S. imports from Mexico over the same period. That decline also looks pretty linear, with a projected intersection with zero in 2017, depending on where you draw the line.

Imports From Mexico (EIA)

Mexico itself is not likely to be able to come up with much of an answer.

The President just changed the head of Petroleos Mexicanos (Pemex) as the revenues that the state gets from sale of its oil (making up nearly 40% of the federal budget) dropped 30% in the first half of the year. Current Mexican Government predictions that overall Mexican production will stabilize at 2.5 mbd over next year don’t reflect the collapse of Cantarell, and also fail to recognize that the promised increases in production from other fields are not reaching the goals set. It is only a few days since the production at Chicontepec was “evaluated” after falling some 12,000 bd short of target. This field is still in development, with ultimate production targeted at 550,000 to 700,000 bd by 2017, but as it is already 16% behind the mark that does not augur well for that future.

As Euan Mearns pointed out the fields at Ku-Maloob-Zaap (KMZ) which lie adjacent to Cantarell are being produced in the same way as Cantarell, and thus production has recently risen dramatically.

Ku Maloob Zaap (KMZ) adjacent to Cantarell in the Gulf of Campeche is the largest source of new production growth. It recently overtook Cantarell as Mexico’s biggest producer, with record output of 814,000 b/d in April. The KMZ complex produced 740,000 b/d of crude in 2008, up from 550,700 b/d in 2007. Production has doubled in the last 3 years with a nitrogen reinjection program similar to one at Cantarell. Pemex expects KMZ production to peak at 820,000 b/d before declining to 810,000 b/d next year.

Read that last sentence again! Now the oil in KMZ is proving to be much heavier than that from Cantarell and so may not decline at quite the same rate, but given the very rapid increase in production, and that the peak is already here, this does not bode well for sustaining Mexican production using that region for any great period into the future. Rather it might increase the already precipitate drop in total production levels going into 2011.

Mexican exports of heavy crude (that from Cantarell and KMZ) had fallen, by July to 1.06 mbd from 1.22 mbd in January. Pemex had domestic sales of 1.8 mbd in July which is up some 45,000 bd from January, largely due to increases in sales of motor gasoline. The country imports some 550,000 bd of refined products.

If we go back to the Export Land Model, if internal demand continues to grow, and if Chicontepec proves to consistently fail to produce the needed production by as much as 20% or more (assuming that they are now working the best prospects first) and if we start to see the decline in KMZ next year . . . . . .

And to quote an “expert” on the subject:

Michael C. Lynch, president, Strategic Energy & Economic Research Inc., differs from the generally pessimistic consensus on Mexico. “I think Mexico will probably surprise many,” he said.

Lynch said, “[Pemex’s] first need has been capital; the government has a long tendency to starve them of money, and only recently has this been reversed. Mexican drilling activity is twice what it was a couple of years ago, and they have a lot of medium-sized fields that could make a serious contribution. (The decline in rigs rates has helped them, but the peso decline offset that somewhat). Deregulation and outside investment would certainly help, but capital is the main thing.”

Perhaps somebody could explain to Michael that when one uses the word “surprise” it generally means you’re going to hear good news – none of this is!

P59. Pick Points

Some of the oil that is being held in tanks near the Mt Redoubt volcano is to be removed by a tanker this weekend The tanks are protected by an earthen dam, that is still holding, but the tanker will remove about 840,000 gallons of the 3.1 million gallons that is held in each of the two storage tanks.

The amount of oil that is held (as kerogen) in the oil shale of the Piceance Basin in Colorado may be more than 50% greater than at first thought, according to the latest U.S. G. S. figures. However it is still not that easy to extract, and while the Department of the Interior is encouraging research and development of concepts for extraction, they are not encouraging development of the leases, as yet. Shell, for example, is now testing the freeze wall concept for keeping water from the refractory zone during the heating of shale in place to convert and extract the oil. General Synfuels International have announced a breakthrough in extracting the energy through gasification they have also secured a parcel of land, and are acquiring the components to build a production prototype with testing next year.

Predictive production numbers from Mexico have been dropped an additional 30,000 bd, down to 2.72 mbd. This will, in turn force a cut in exports, which cut may reach 18% next year with overall production falling below 2.5 mbd, and exports falling below 1.125 mbd. This implies a drop of 245,000 bd and the question, since most of that comes to the United States, is where will the volume come from to make up the loss? Export levels for this year are already below prediction. In order to raise money for more investment in production Pemex has sold $712 million in new bonds. And while the company promises more investment, and new wells for Cantarell the overall prognosis does not look good, as the company continues to fail to meet targets.

In the continuing saga of the wind farm projected to be built where Senator Kennedy sails, the Interior Department is promising a ruling on Cape Wind. The project has seen numerous challenges as it has moved forward, which led to publication of a book, (which I reviewed over on TOD). The ruling is anticipated to come about in a couple of months, with the implication of the Secretary’s remarks being that the project may be allowed to move ahead. In the UK there are plans for a new wind farm off Norfolk, capable of generating 315 MW. Construction is slated to start early this summer, with production from the 88 turbines anticipated to start coming ashore in 2011. British plans do not, however, seem to be keeping up with earlier predictions in terms of the volume of renewable energy that will be available to meet targets. And there has been some heated debate in Dekalb county, outside Chicago about plans for a 133 turbine farm to be installed near the Windy City.

The predictions for Hurricane activity in the Gulf have been lowered to only 13 named storms this year. Only 3 – 4 of these should reach major strength.

P47. Pick Points

Half-a-dozen or so stories of interest:

Up in Canada Suncor expects to produce around 300,000 bd of crude from its operations in Alberta. But all is not well in those operations. The rise and then fall in petroleum prices has had a significant impact on the oil sands industry.

Companies financing oil sands projects out of cash flow have been relatively unscathed, besides suffering substantially lower stock prices and having to delay projects due to lower revenue. Companies financing oil sands projects on credit are up for sale at bargain basement prices. The most likely buyers of those credit-short companies are supermajors and sovereign wealth funds.

The Canadian and Albertan governments have lost substantial tax revenue because of rapidly rising project costs eating into corporate profits. Relatively more upgrader projects being delayed or cancelled compared to mining and in-situ projects contributes to less value-added in Canada and a lower tax base for those governments.

The article goes on to discuss the significant costs of a cap and trade rule for the oil sands, and the potential serious consequences to the industry if it chooses to ignore that coming freight train. The report anticipates a cost of $80 a ton for carbon from operations on the scale of the oil sands.

In order to help the industry the Alberta Government is slashing royalty rates. The Alberta Government has also set aside $2 billion for work on carbon capture and storage for the oil sands and coal. There are however some doubts that the effort will result in any significant benefit. The current article in National Geographic has stimulated debate on the issue. But it has also brought a note that, if America does not want oil sand crude, (or makes it difficult to buy through CCS legislation) then China is ready to move in and take the oil instead. In Australia, meanwhile, a company has suspended its work on underground sequestration due to the plunging prices of permits (the problem that Europe also has).

While wandering around the various websites looking for comment on the demonstration at the Capitol Power Plant yesterday (which was a lot less dramatic that the organizers had intended I suspect, and a lot less well attended, I came on a couple of other folk that had been watching the video feed. One of them was OpenMarket who quoted a couple of interesting reports about some of the downside of moving from coal to other renewable fuels. The Reports were: M. Harvey Brenner, Ph.D., “Health Benefits of Low-Cost Energy: An Econometric Case Study,” AWMA Environmental Manager, November 2005, and Adam Z. Rose, Ph.D., and Dan Wei, “Economic Impacts of Coal Utilization and Displacement in the Continental U.S., 2015” (Penn State University, supported by a grant from CEED, July 2006). These looked at the conditions that would occur with different coal future production levels. The results were along the lines of

An econometric model was applied to a hypothetical regulatory case study, whereby U.S. coal was replaced by alternative higher-cost fuels such as natural gas for the purpose of electricity generation. The model was used to estimate the premature mortality associated with increased unemployment and reduced personal income. The adverse impacts on household income and unemployment due to the substitution of higher-cost energy sources were estimated to result in 195,000 additional premature deaths annually.

Somehow I doubt if we will hear much of those findings.

Pemex is sticking to its target of 756,000 bd from Cantarell this year, even though apparently their own figures are showing production is dropping at 7% pa. They are having some success with the Tsimin-1 exploratory well that came in with 4,400 bd of oil, while the Cali-1 well in the Burgos project is producing at 9 mcf/d.

Russia is signing energy deals with Spain that include renewable energy collaboration. This might bring the Spanish oil company Repsol into working on the Yamal fields. Given that investors have been lukewarm to the latest news of Gazprom profits this agreement, and the promise of some Shtokman gas for Spain supplied as LNG starting in 2014, may be helpful, since it may bring in Spanish investors.

And a quick note on the coal situation in Bangladesh. Apparently the Chinese company that has been working on the Barapukuria coal mine has told the authorities that if the mine does not start this week, they would pull out. The operation is tied up in compensation claims.

More stories can be found at The Energy Bulletin and Drumbeat at The Oil Drum.

P42. Pick Points

Half-a-dozen or so stories of interest:

Back in March Switzerland signed a deal with Iran for a 25-year supply of natural gas it appears that this will bring a fourth gas corridor though Turkey, that will provide an additional connection to Europe, and it remains under criticism. Iran sees it as the start of a new relationship with Europe, and a possible model for others. The gas will come from Assalouyeh and require a new pipeline that will be built by the Turks. Germany has taken the hint, and Gerhard Schroeder is now in Tehran to see what sort of a deal they can cut. The pipeline will also provide a pathway for Turkmenistan gas to get into Europe without going through Russia. Iran, meanwhile still considers the discussions ongoing with Bahrein, even though the latter cut them off when some Iranians claimed the kingdom belonged to them. Iran is discounting those statements.

Russia, meanwhile has apparently not been sending the agreed amount of natural gas to Poland. So far it has only got 75% of the agreed amount, and now Gazprom wants a new deal. The Council on Foreign Relations has just released a special report on Eurasian Energy Security that calls, among other things for a better network of interconnections and integrating Russia more into the energy picture in Western Europe. It also calls for a common regulatory framework. Rune’s work on whether the UK will get through the winter without problems, suggests it will be close.

Iceland is looking to exploit its Geothermal power in the face of major financial problems. Of the three natural resources the country has, fish, hydro and geothermal, the first two are in some trouble, and with an increasing amount of geothermal due to come on line in the next few years all they need are investors. For those in the US looking at using geothermal, the more likely domestic source will be ground-source heat pumps, and the cap of $2,000 for a tax credit which would otherwise be 30% of the cost, has been removed. In an earlier post at TOD I heard that the going price was in the $20,000 to $30,000 range, and so this is a significant change (but not enough to justify my doing it yet).

The numbers for oil production from Mexico, of which I have written in an earlier post, are growing worse quite quickly. Country production fell 9.2% in January , with Cantarell now down to 772,000 bd. Pemex claim they can keep it to an average of 700,000 bd this year, but this may be doubtful, and will hurt exports. That did not help oil and gas futures (the latter at $4 per million btu). There is a new documentary on the oil situation now out called Blind Spot which has got a favorable review at TOD but since they were out of copies when I tried to order one, it will be a wee while before I can do a review.

Last week China was tying up loans with Russia to ensure long-term delivery, and then with Brazil. This week it is Australia’s turn with Exxon Mobil signing a long term agreement for LNG from the Gorgon project that will send 2 million tons a year of gas north for 20-25 years. Projections for the LNG plants being put into Gladstone in Australia have slipped from 2011 to 2012 for the first LNG plant, which will liquefy coalbed methane, and the customer has not been defined. (Though as I noted last week I wouldn’t be surprised if they had a South Asian accent).

The current low prices for energy, taken with flooding from the fire-fighting last year, means that the historic Barentsburg coal mine in Norway may not reopen.

More stories can be found at The Energy Bulletin and Drumbeat at The Oil Drum.