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.

Tech Talk - Here we go again, again

A couple of posts or so ago I mentioned that there are three major problems sitting relatively un-noticed as we head into the mess of Peak Oil. Of these, perhaps the one that gets the least attention is the steady decline in production from existing wells. We are just about at the point where the Alaskan Pipeline will tip over into feeding less than half-a-million barrels a day down from the North Slope. (It sent 501 kbd down the pipe in June with a 98.6% reliability factor). At the same time those in control of the oilfields in the Russia are reporting that Russian exports have fallen to the lowest level in 6 years. This brings back the relatively unrecognized reality of the Export Land Model which Jeffrey Brown first introduced on The Oil Drum back in 2007.

It is worth resurrecting that thinking (which time has proven to be only too true) as we look at the continued declines in production from the UK, as an example. It is not easily discernable from the official Department of Energy and Climate Change, which plots oil production on a monthly basis (with different months having a variety of days):

Figure 1. Monthly production of oil from the fields of the UK continental shelf (DECC ).

Euan Mearns has, however, done the necessary arithmetic and clearly shows the reality of the situation once one converts it back to barrels per day:

Figure 2. UK production of oil and natural gas over the past decade (Euan Mearns)

The steady decline has also been noted by the EIA who commented that UK production fell by 9% from 2012 to 2013. There was a time, back in the days of The Oil Drum, where we debated whether an estimate of 5% for field decline rates was or was not too high. Obviously those days are now behind us, and reality is starting to show numbers that far exceed the rates that, at the time, some thought rather pessimistic. To continue the UK numbers, as OPEC recently anticipated, the decline this year will take the total down to 800 kbd with an 8% decline expected for this year.

The Export Land Model, in its simplest form, can be illustrated with the following plot:

Figure 3. A simplified illustration of the changing production, internal use and exports for an oil producing country, once it reaches a peak in production (Sam Foucher )

The argument that produces the above plot goes along the lines that, as an oil producer (think for a moment of Russia for eg) produces larger volumes of oil, so the economy of that country starts to grow. As that growth continues it demands an increasing amount of energy to sustain the increased internal demand (the green line). However, once production stabilizes or starts to decline (the blue line above) so the amount available for export becomes reduced (the red line).

The three top producers of petroleum products in the world are the United States, Russia and the Kingdom of Saudi Arabia. The United States consumes far more than it produces, and thus is already a net importer of petroleum products, although in the short term, as I noted earlier production gains from the Bakken and Eagle Ford are hiding the problems of decline rate. It is increasingly unlikely that any significant volume of US oil will make it onto the world market.

Saudi Arabia has, for years, controlled the amount of oil that it puts on the market, based on the anticipated global demand, and the supply available from the rest of the world - so that the global price remains at a level to sustain OPEC economies. That has been illustrated over the past couple of years by the increase in production from the KSA to cover the decline from Libya as about a million barrels a day disappeared from the global market. The gains in production from the US helped in meeting global demand and the strain in supply was thus relatively easily hidden. But the KSA has an imminent problem that has largely disappeared from public view now that the eyes of The Oil Drum correspondents have lost that focus.

The major oilfields of the Kingdom are old, and to sustain production perimeter wells were located around the oilfields that injected millions of barrels of seawater a day, to drive the oil towards the center of the fields, where it could be relatively easily recovered from Maximum Reservoir Contact wells drilled along the very top of the reservoirs. But as folk such as JoulesBurn have noted, those wells slowly change in nature, over time, as the oil migration continues, and water injection must move inwards to ensure continued production.

Figure 4. Layout of initial wells at the Haradh III development in the Ghawar oilfield in Saudi Arabia (JoulesBurn at The Oil Drum)

He noted, in the original post, that Aramco had to drill some 52 wells, rather than the estimated 32, to get the production they needed, and that was back in 2010. Since then Ghawar has continued to produce for the Kingdom, but with daily levels of up around 10 mbd, the volumes in the crests of the anticlines along which the oil wells sit within the Ghawar field have been steadily contracting, and although they have carried out some of the most advanced oilwell engineering to sustain production from the attic oil in the older parts of the fields, there are only so many ways you can squeeze a rock before you get out all the oil that you will – and those days are approaching fast.

At the same time (relating back to the ELM) while Saudi production has remained at just under 10 mbd for the past few years, internal demand has been rising at a steadily more rapid rate.

Figure 5. Internal consumption of oil in Saudi Arabia (Index Mundi ).

Hoping to transition some of the current internal demands to natural gas, the KSA has been looking for internal resources to allow it to move away from oil. However the search has not been as successful as hoped, particularly with the search for natural gas, Shell having backed out of the program as a result of the poor results to date.

With internal consumption continuing to rise at more than twice the rate anticipated by the ELM shown in Figure 3, and, at best, stable production, global exports from the Kingdom are of increasing concern.

Which brings us back to Russia, where the new fields that must be exploited to sustain production are in remote parts of Eastern Siberia and the Yamal Peninsula – if not offshore in the Arctic.

Russian oil production has been peaking for some time (falling from 3.4% growth in 2012 to 1.3% in 2013) and is now reported to likely fall by 6.3% over the next two years. Since this implies that Russia is now at peak, the decline in overall production initially will fall below that of Figure 3, though likely only for a year or so, before the rate will be, at minimum, that shown. (The reason for this conclusion comes from the lack of enough investment in the fields where growth can be expected). At the same time internal demand is rising at around 100 kbd or 3% pa slightly above the value assumed for Figure 3.

If none of the three largest producers can even sustain exports, and the ELM explains why they can’t, and world demand continues to rise at the rates projected, then, in even the short-term, something is going to have to give. The logical weakest link is price, with the consequence, that invalidates a lot of the other arguments, of a significant impact on global economic health. As we have seen before, significant increases in price lowers the demand for oil, and thus demand from the various nations will become even more skewed.

The only problem, with this next iteration, is that there isn’t another Bakken or Eagle Ford conveniently sitting waiting to be tapped.