Tech Talk - The Price of Power, and its consequences

The changing colors of the leaves carry the message that winter will soon be here, and so it is time to stock the yard with wood to carry us through until spring. In Missouri I just found wood, cut to the length I need, and stacked, for $110 a cord and (since it has to be cut) it will arrive next week. Only the chimney then needs a quick sweep, and we’ll be ready for another season. (We burn just under a cord of wood a month, and this keeps the electricity bill sensible).

At one time the wood was insurance, in case of an extended power outage (and we had one that lasted three days, one winter) but we enjoy the heat from the tile stove, and so it is now part of our life. And with the continued risk of a loss of power, the insurance remains comforting.

Driving back from Maine a couple of weeks ago, gas prices fell over $0.25 a gallon along the 1,300 mile trip, another benefit of living in the Mid-West. But at both ends of the drive, the impact of fuel prices continues to slow economic growth, as it does nationally. Gail Tverberg has written of the inter-relation between the economy and fuel prices, most recently on Monday. However we disagree on one point, since she anticipates a potential significant drop in oil prices, which I do not.

In the early days of The Oil Drum I remember walking through the streets of Denver to a meeting with two other contributors, and suddenly realizing that I, the more technically based of the three, was by far the most pessimistic. Increasingly I am realizing that while this pessimism has not ameliorated, the current relative abundance of oil and gas in the United States has given many folk an undeservedly complacent view of the next few years.

Ron Patterson recently pointed out that if one discounts US production, the rest of the world has seen a decline in production, with non-US production now down around 2 mbd from its all-time peak. (If one also removes Saudi Arabian and Russian production from the mix, the decline gets closer to 3 mbd). Now to assume that this is totally due to a loss in production capacity would be a mistake. Saudi Arabia continues to adjust the volume of their production to try and keep global prices relatively stable, dropping production by 400 kbd in August. In the immediate short-term that was not enough for their purpose, and they are now lowering price a little, perhaps in order to sustain their market share. The cuts were in the range of $0.20 to $1.20 a barrel). Although it could also be a way of trying to sustain global growth at a time of weakness.

Figure 1. Global Production without including the United States – as plotted by Ron Patterson. I added the trend line at the end of the top plot.

These flutterings at the margin however don’t help my concerns, because they are focused only on the short-term, and don’t consider the overall situation. If the production from the rest of the world is declining at around 700 kbd, and Saudi Arabia will only produce to a maximum of 10 mbd, and Russia appears to be in that plateau that precedes decline, even without the loss in funding that recent US Government mandates will impose, then that leaves the growth in US production as being the only source to match both the decline in global production, and the continuing demand for more oil which together total around 1.7 mbd. And US production projections, even at their most optimistic can’t do this, even for one more year.

Figure 2. Projected Growth in US production (EIA)

The mathematics are, of course, not absolute numbers but remain somewhat flexible. There could be a sudden cessation of conflict in Libya and full production might return; all conflict might end in Iraq and production development might surge at the investment opportunity; and sanctions might disappear against Iran – but somehow I don’t see any of these happening.

The argument of the Cornucopians, that one can either find a substitute for the fuel in some other resource, or that technology will suddenly become available to allow unanticipated levels of production from the existing reserves and resources is, perhaps why I – knowing a fair bit about the technology – am more of a pessimist than many others.

The analogy that I use may be a little crude – but you can’t have a baby in a month by making nine women pregnant. You can’t create new technology out of thin air by suddenly investing a few billion in a bunch of scientists pulled from lists on the Internet either. There are not that many folk who are sufficiently expert to be useful, particularly in the fields that relate to the production of fossil fuels. Many of those who do exist are, like me, coming to the end of their professional lives, so that the skill sets and knowledge bases that they have built are disappearing. Many of the doctorates that we see today are based more on computer modeling than on hands-on experimentation and engineering. And unfortunately the knowledge that we have about the nature of the rocks at depth, their behavior and how to change the way in which they yield their fluids still leaves a lot to be desired, when it comes to validating the models that are produced.

But even if such new technology were developed it would take decades to see it adopted in sufficient volume across the world that it would have a significant impact on global fuel production. It was for this reason that, back in 2005, the Hirsh Report discussed the need for a twenty-year lead-time to develop new technology that could replace our needs for fuel. The time that they suggested that we had available now is beginning to seem very optimistic, while the moves to ameliorate the problem have been judged less critical and thus no longer receive the attention and funding that the have in the past.

And so, when the crisis comes, and this is increasingly likely to come in the next two years, there will be no good answers, just tightening supplies and rising prices. This is perhaps why I am beginning to think that the next President of the United States still may well be, despite all the gaffs, Brian Schweitzer.

OGPSS - Cutting back on supply in the presence of optimism

We have reached, I would suppose, a period of complacency in the perception of the coming of Peak Oil. We are in a period where, as recent posts have shown, the promises of bountiful supply are built on increasingly tenuous propositions. Unfortunately the evolving story of the mess that we are heading into is at a point where the critical aspects of the problem rate minor paragraphs in articles that largely talk about something else. And the potential of the fossil fuels that lie within shale have commentators drooling over the benefits that will come from this abundant resource. Unfortunately within this euphoria there are sufficient concerns that need airing, since, overall, the situation has not changed that much since the Hirsch Report was published, just over eight years ago.

One of the points that was made in that report was that it would take some twenty years for new technologies to mitigate the foreseen shortages of liquid fossil fuels, made when gasoline prices averaged some $2 a gallon. Driven by concerns over climate change, there has been a significant effort to find alternate fuel options that can provide a renewable option. And the hopes for these producers lead to predictions of a different future.

The British Department of Energy and Climate Change (DECC) has just released a report on the future of coal-fired power plants in Germany, Spain and the Netherlands. It notes that, although Germany will open more coal-fired power plants this year than at any time within the past twenty years, the future for coal is not that promising. In rough numbers Germany has a peak demand of 85 GW of electricity with coal and lignite capacity of around 47.6 GW in 2011. From then until 2015 an additional 10.7 GW of coal-fired plant will come on line. The DECC report notes that while an additional 2.7 GW of plant are in development they have not advanced and, it is suggested, they will likely be cancelled. Some 22 coal-fired projects have been cancelled, and four postponed in recent years. New plant does not spring, like corn, fresh out of the ground within months of planting. Rather there are years of effort, and millions of investment, before power starts to flow. The report brings these views to the following:

We conclude that further new projects to build coal-fired generation in Germany, the Netherlands, and Spain are all very unlikely.

The three major oil companies each had different technologies on which they hung their hats to ease any fears of the future – including the widespread development of either methane hydrates of the oil shales of Colorado. (Neither of which can be realistically expected to come to pass in the next twenty years). The British National Grid in their view of the future seems to put is faith more in the widespread use of high-efficiency heat pumps.


Figure 1. Projected growth of heat pumps in the UK, under three future scenarios (National Grid)

The also anticipate considerable growth in future sales of electric vehicles, though admitting that their earlier projections for these numbers were overly optimistic.


Figure 2. Projected growth in electric vehicle usage in the UK (National Grid)

As a result they anticipate significant reduction in the needs for fossil fuels, although the least optimistic of the scenarios (the Slow Progress one) means that:

In the Slow Progression scenario developments in renewable and low carbon energy are comparatively slow, and the renewable energy target for 2020 is not met until some time between 2020 and 2025. The carbon reduction target for 2020 is achieved but not the indicative target for 2030.

The concern with these optimistic projections, is that it also impacts the investment strategies of those who will need to supply those fuels in the future. Just as it takes time and money to build a power station, so it also takes time to permit and build a coal mine, or an oil or gas well, and the infrastructure to support it.

The current situation in the United States has proponents of the natural gas boom urging the development of export terminals to ship LNG to a global market at a very competitive price. By last December there were plans for a dozen such terminals in the works.


Figure 3. Proposed new LNG Export terminals in the United States (Oil and Gas Journal)

This additional supply, and the likely impact of cheaper natural gas into the European market, has already caused Gazprom to rethink its strategy for natural gas development over the next few years.

The major Russian current development is taking place in the Yamal Peninsula, where the Bovanenkovo field, which came on stream last October had been projected to yield 4 Tcf by 2017, increasing 5 Tcf in the out years. Other adjacent fields, Kharasaveyskoye, Kruzensternskoye, Tambey and Nonoportskoye, were scheduled to follow in order to meet anticipated demand.

But those plans are now being scaled back. Russia has already lost some of their Chinese natural gas market to Turkmenistan, and now it can see that the US might take some of the European market. It cost $41 billion to develop Bovanenkovo, which made it “one of the most expensive industrial projects in the world.” Gazprom is cutting production by to around 83% of capacity this year, and expects it may have to go lower. The natural follow-on to this will be a slowing of investment and development in Yamal, which also produces oil.

At present Russia is closing in on a record post-Soviet oil production () reaching a level of 10.49 mbd (the Soviet peak was 11.48 mbd in 1987). Rembrandt recently noted that it is going to take a significant and ongoing investment in order to have any hope of sustaining those numbers.

My concern is that, in the current Western euphoria, those who must invest to build the alternative infrastructure that will provide sufficient fuel, if all the current plans and projections for alternative supplies and conservation fail, will not b motivated to make those investments in a timely manner. If they do not, or have not, then we will still need the 20-years that Robert Hirsch and his committee projected, when we run out of that time. (That clock is ticking). Unfortunately those who, like Cassandra, sing this song are less likely to be heard in this interval.

"The Myth of the Oil Crisis" - Part 2

Well if yesterday was all misty ice, today was the snow cover that makes getting out of the drive a real challenge. So back to the book, and, today a little Welsh folk (music that is). If you remember yesterday I had got about half-way through “The Myth of the Oil Crisis,” the book by Robin Mills – which gives a petroleum economist’s view of the industry. But we had reached the point yesterday that I was bemoaning his inability to include either a realistic decline rate or depletion of reserve in his discussion of some of the major oil fields.

At the same time, while the book has significant value as a source for the different areas of the world from which we can anticipate getting the second half of the world’s conventional oil production, the factors of time and practicality in getting these reserves to the refinery are not mentioned. The $5 million it may cost to drive a slick-water fracked horizontal well to recover gas from a shale deposit is not given any consideration in the determination of what is still available out there, and that, for an economist is a bit of a lapse.

The second half of the book deals more with the unconventional sources of oil, with the nod given to the heavy oils and tar sands of the world. The book implies that these can be brought into massive production with relative ease, if only the Canadians would run a decent railroad up to Fort McMurray. Well yes they do need one, and a high speed commuter rail would solve a lot of the issues that the town has now with limited space and too many folk with lots of money. But that is not the only reason that production from that large hydrocarbon deposit hasn’t swamped the rest of the world with oil over the past five years. Getting parts for 400-ton trucks up to the site is not something that rail can always achieve, but the greater constraints involve things such as refinery capacity and adequate return on investment, as well as a very conscious effort to work on the environment. And this is a pity, because there is a case to be made for the increasing production that we will need to start seeing from these heavy oils, and from the oil shales of the world. This is not unrecognized (Total just made such an investment this month) but again progress and production is likely, at any significant level to be decades away. Listing and summing up the volumes of oil that might be produced from all these deposits is a useful catalog, but does not really give an honest perception of the volumes that will come into play in the next decade.

Production of biofuels is a whole aspect of fuel production that is likely to have some impact in the future, witness the mention of support that it is getting from the members of the new Administration, and so I cannot resist another quote from the book on this.

Much of biofuels policy revolves less around technology and more on providing sensible incentives that do not distort the market excessively or lead to negative social and environmental impacts.

One of the major factors constraining the advance of the biofuels industry is a current lack of technology that will yield an adequate return on investment, whether in terms of energy or cash. Cellulosic ethanol (as you will likely tire of hearing me explain) is a long way from being an economic or practical fuel source in volume.

Biodiesels are not advancing at the rate that they should, and while I consider algae, for example, to be a very likely future source, the reality is, as Robert Rapier has also concluded, that it remains for the moment more of a research initiative and set of projects. The biofuels industry still needs the heavy investment in development of new technology that the government and industry are making, in order to find viable answers. To project, as he does, a biofuel production rate of 4 mbd by 2020 is, as I have explained in an earlier post not realistic, given that date is only 11 years away. His planned excuse when we reach that time and the fuel isn’t there, will be that we did not make the required investment. This is the same excuse that we have been hearing from CERA for years as their forecasts fell flat, and it is disappointing to find that this book also falls into that mantra.

And yet he looks at the Hirsch Report, and finds that it is too conservative, feeling that it is possible to reduce the lead time for change by at least five years, from the twenty of that report. Unfortunately while this may well work as a theoretical exercise, as I have said before, the practical realities, the steps that must be gone through before, for example, there is a large switch from gasoline powered to diesel powered cars in this country will delay the program back to the more realistic time-frame that the report suggests.

And as a mischievous point I do note that he says

Norway maintains its environmental virtue by importing electricity from its Nordic neighbors to satisfy the shortfall of hydropower rather than building “polluting” gas-fired plants, but this imported electricity is generated largely by Danish coal plants.

Thus while recognizing the demands of those seeking to arrest global warming, he also adds some reality to that discussion. He does provide an estimate of CCS costs, which, at this stage, may be a bit more of a guess than reality, since we arre still waiting for more definite regulation, but the options are outlined.

So, in the end, if you are a cornucopian then this is definitely a book you would appreciate. It provides all the information to justify that position, and discusses the energy situation from that point of view in a way that, were this the only book you read on the subject, would leave you very comfortable about the future.

Unfortunately to do so it has had to gloss over the real problems with that approach. It does not really address the factor of time as it relates to when declining field production combines to swamp the increases in production from new fields. And many of the problems that those of us who anticipate the peaking of oil production can see happening already, the politics, the delays in starting production, the lack of new employees as the older ones retire, and the disappearance of the industrial memory not to mention the myriad others that impose practical limits, have been barely recognized. Had they been otherwise, then this book could not have come to the conclusions that it has.