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World crude production 2013 without shale oil is back to 2005 levels

World crude production 2013 without shale oil is back to 2005 levels.

BY 

MATT

– MARCH 13, 2014

Unnoticed by the mainstream media, US shale oil covers up a recent decline of crude oil production of 1.5 mb/d  in the rest of world (using data up to Oct 2013). This means that without US shale oil the world would be in a deep oil crisis similar to the decline phase 2006/07  when oil prices went up. The decline comes from many countries but is also caused by fights over oil and oil-related issues in Iran, Libya and other countries which can be seen on TV every day.

Fig 1: World’s incremental crude oil production Oct 2013

Incremental production for each country is calculated as the difference between total production and the minimum production between Jan 2001 and Oct 2013. The sum of minima is the base production. Countries which had substantial changes in production appear as large areas in the graph. Russia supplied – quite reliably – the largest increment and the North Sea (UK and Norway) had the largest losses. Countries which feature prominently are Venezuela (low production in Jan 2003 due to a strike), Iraq (low production in April 2003 during the Iraq war), Libya (war in 2011), Iran (sanctions) and Saudi Arabia (production increase since 2002 and swing role)

Production is stacked from bottom as follows:

(1) countries with growing production: Kazachstan (recently flat), Russia (only +100 kb/d last year), Colombia (+60 kb/d), China (recently flat) and Canada (+200 kb/d syncrude from tarsands)

(2) Countries flat or in decline like UK and Norway

(3) countries which recently peaked: Brazil and Azerbaijan

Groups (1) to (3) peaked in Nov 2011 (dashed line) and declined by 1.2 mb/ since then

(4) OPEC countries with Iraq, Saudi Arabia, Iran and Libya

(5) US on top to see the impact of shale oil

Fig 2: US shale covers up recent decline in rest of world

The world without shale oil declined after a recent peak in Feb 2012.to an average of 73.4 mb/d in 2013, incidentally the same average seen for the whole period since 2005 when crude production was 73.6 mb/d

Fig 3: Annual crude oil production and US shale oil vs IAE’s WEO projections

The rest of world continues on a bumpy crude oil production plateau. Oil demand and supply projections of the International Energy Agency in 2004 and 2008 did not materialize. Only the 2010 WEO came close but only due to US shale oil which had not been predicted at the time to the extend it actually increased.

Let’s have a look at the main players in the upper part of Fig 1

Fig 4: Incremental crude production of Iraq, Iran, Libya, Saudi Arabia and US

We can see that Saudi Arabia declined in 2006/07 (prices up), pumped more in the Oilympic peak year of 2008, (but not enough and prices skyrocketed), served as a (negative) swing producer during the financial crisis year of 2009 and stepped in (belatedly) when the war in Libya started and continued pumping at record levels when sanctions on Iran started. US shale oil has not brought down oil prices substantially and definitely the US does not act as swing producer. Most shale oil producers would go into receivership if they stopped pumping. Saudi Arabia apparently tries to compensate for Libyan and Iranian production losses but does not seem to reduce crude production to offset US shale oil. Iraq will have to return to OPEC’s quota system. It will be interesting to watch at which production level that will be agreed upon and whether Iraq will adhere to it. In any case, all ME oil producers need to balance their budgets as highlighted in this post:

14/8/2013    OPEC’s average fiscal break-even oil price increases by 7% in 2013
http://crudeoilpeak.info/opec-fiscal-breakeven-oil-price-increases-7-in-2013
.

Fig 5: Middle East only.

Decline in Syria and Yemen was offset by increases in Kuwait, UEA and Qatar. Iraq could not offset Iran’s production drops.

Russia and FSU

Fig 6: Eurasia

Former FSU countries: Azerbaijan declines at 50 kb/d after its peak in 2010. Kazakhstan is flat since 2010.

Fig 7: Russian crude oil production growth is slowing

Russia, producing now at 10 mb/d, is still growing at around 100 kb/d but this growth rate is down from 2010 and 2012 years.

The IEA WEO 2013 writes: “Oil production in Russia is approaching the record levels of the Soviet era, but maintaining this trend will be difficult, given the need to combat declines at the giant western Siberian fields that currently produce the bulk of the country’s oil.”

 http://www.worldenergyoutlook.org/publications/weo-2013/

Europe

Fig 8: The North Sea is in full decline

Africa

Fig 9: Incremental production in Africa

Irrespective of what is happening in Libya, Africa peaked.

Latin America

Fig 10: Latin America

Brazil seems to have peaked while Colombia slowly increased heavy oil production. Venezuela’s data appear sus as they have not been updated since Jan 2011

Summary

Since end 2010, the group of still growing countries (+1.2 mb/d) can’t offset decline elsewhere (-2.4 mb/d), giving a resulting decline of 1.2 mb/d or 400 kb/d p.a. This is mainly oil-geologically determined decline.

OPEC, which is usually called upon to provide for the difference between demand and non-OPEC production, has got its own problems (geopolitical feed-back loops caused by peaking oil production) and was not able to fill that gap. Global crude oil without US shale oil declined by 1.5 mb/d since its most recent peak in Feb 2012.

Conclusion:

While the mainstream media lulls the public into believing that US shale oil is a revolution, peaking oil production in many countries eats like a cancer through the oil supply system. The big problem is that more oil dependent infrastructure is being built which will not be needed when US shale oil peaks and the underlying decline is revealed.

Angolan oil will peak in 2016, IMF says – International | IOL Business | IOL.co.za

Angolan oil will peak in 2016, IMF says – International | IOL Business | IOL.co.za.

March 25 2014 at 08:00am
By Colin McClelland


br angolaBloomberg

A construction crane stands above a building site near the shoreline in Luanda. Angola’s crude oil output will decline from 2017 unless new fields are found, so it must make stronger efforts to diversify its sources of revenue, the International Monetary Fund advises. Photo: Bloomberg

Luanda – Economic growth in Angola will slow in 2017 as oil output declines, according to the International Monetary Fund (IMF).

The economy is forecast to expand by 5.3 percent this year, and by 5.5 percent and 5.9 percent in the following two years before the rate slows to 3.3 percent in 2017, IMF figures show.

Crude oil production in Africa’s second-largest producer is set to decline to 1.77 million barrels a day in 2017 from 1.9 million barrels a day in 2016.

“This reflects the expectation that oil production from currently known reserves will peak and then start to fall,” Nicholas Staines, the IMF representative in Angola, said last week.

“The timing of this turnaround could well be pushed back as new reserves are discovered.”

Angola produced 1.69 million barrels of oil a day last month. The country is attempting to diversify its economy away from oil, which accounts for about 80 percent of tax revenue and 45 percent of gross domestic product (GDP).

The government is targeting $4 billion (R43.5bn) a year in foreign investment in areas including mining, agriculture, transport and hotels, but so far it has attracted about half of that amount.

The IMF forecasts economic growth of 6.4 percent this year in non-oil industries as the country boosts spending on infrastructure.

Growth excluding crude oil may reach 6.7 percent next year, followed by 7.1 percent in 2016 and 7.7 percent the year after, IMF data show.

The diversification effort “is behind expectations and a stronger effort is clearly needed”, Staines said.

“This is particularly important in the context of higher government spending, softening oil revenue projections and, now, fiscal deficits.”

IMF forecasts for non-oil growth were lower than the government’s because the bank saw potential difficulties in large capital projects and was more cautious about their spillover effects, Staines said.

For 2015 to 2017, the government forecasts 10.3 percent non-oil growth in GDP, while the IMF projects 7.2 percent.

The government had a budget deficit of 1.5 percent of GDP last year – the first since 2009, when the IMF began a $1.4bn loan programme to help Angola weather an oil price drop. This year’s budget deficit is expected to reach 2 percent and the fiscal balance will not be in surplus until 2019, the IMF believes.

The IMF expressed disappointment over the government’s inaccurate reporting of data on domestic arrears during 2010 and accounts payable the following year, which breached the terms of the loan agreement. The fund said it also regretted continued weaknesses in public financial management and called for decisive efforts to address arrears.

Angola “is very committed to address these difficulties” and passed legislation last year to improve arrears accounting and to give more oversight to the finance ministry, Staines said.

Domestic arrears should not have an effect on plans by the government to issue a $1.5bn eurobond in the third quarter.

“The international financial environment is currently difficult and perhaps not the best of times for Angola to consider a eurobond issue,” Staines said. “The government will presumably seek the advice of its capital market advisers to get a sense of the right timing.”

Economic growth probably slowed to 4.1 percent last year from 5.2 percent in 2012 as a drought slowed agricultural expansion, the IMF said.

“Addressing capital infrastructure constraints in transport, water and electricity will go a long way and should have positive spillover effects on the economy,” Staines said. “But the full benefits will require a much stronger effort to address the structural constraints summarised in Angola’s very low ranking in the World Bank’s cost of doing business index.”

The index ranks Angola 179th of 189 countries benchmarked to June last year.

Angola is estimated to have recoverable oil reserves of 12.7 billion barrels, according to the BP Statistical Review of World Energy published in June.

Drillers including Statoil and ConocoPhillips are testing the Atlantic mirror theory and plan to spend $3bn on more than 32 wells this year in Angola’s largest exploration campaign.

They are searching for structures similar to those off Brazil, where Petrobras is developing the western hemisphere’s largest oil find in three decades, estimated at 20 billion barrels. – Bloomberg

Russia offers India crude oil supplies, stakes in blocks – Economic Times

Russia offers India crude oil supplies, stakes in blocks – Economic Times.

PTI Mar 24, 2014, 09.41PM IST
(Putin’s trusted lieutenant…)

NEW DELHI: As the US and Europe try to isolate Moscow over its action in Crimea, Russian President Vladimir Putin’s trusted lieutenant Igor Sechin today courted top Indian officials, offering to ship its vast crude oil reserves and stakes in oil and gas acreages.

Sechin, who heads Rosneft, Russia’s biggest oil company, led a delegation of about two-dozen officials to meet Oil Secretary Saurabh Chandra seeking to expand ties with New Delhi.

“India is a very important country for Russia. We have a very efficiently run project with ONGC…now we want to expand our cooperation,” Sechin told PTI after the meeting.

The Russian state oil major offered Oil and Natural Gas Corp (ONGC) a stake in nine offshore oil and gasblocks in the Barents Sea and one in the Black Sea.

“We are (also) looking at supplying crude oil to Indian refineries,” he said, adding that Rosneft produces 200 million tons of crude oil a year.

Moscow is courting India to counter moves by the US and Europe to isolate it for annexing Crimea from Ukraine. Sechin was in Tokyo last week to broaden ties with Japan.

India does not have a firm contract to import crude oil from Russia. It gets a small volumes once in a while from ONGC’s Sakhalin-1 project in Far East Russia.

Indian officials said logistics need to be worked out to import oil from Rosneft’s fields.

“We may have to lay some pipelines to transport the crude. We have decided to form a working group to study how this can progress,” an official said.

Of the blocks offered in the Barents Sea, OVL found five were not lucrative. Of the remaining four, it would like to participate in two. It will decide on the other two once Rosneft makes available data by June.

Rosneft had previously offered ONGC a stake in the Magadan 2 and Magadan 3 exploration blocks in the northern part of the Sea of Okhotsk, which the Indian firm is studying.

Why peak oil signals the world’s end, or at least the one we know – Zawya

Why peak oil signals the world’s end, or at least the one we know – Zawya.

By Joel Guglietta

While global financial markets are still levitating somewhere between the stratosphere and the Kingdom of Asgard, by 60°24′31″ North and 172°43′12″ West, in the middle of nowhere, an isolated island of 137.857 sq-mi holds the key of three major economic developments and risks:

  1. November 2013, Lawrence Summers raised the question whether the “secular stagnation” and the impossibility for the US and other major economies to grow without the help of recurring bubbles was not doomed to become the “new normal”.
  2. March 2014, the Conference Board released a study (figure 1) showing the falling trend in global total factor productivity, i.e. in the share of output not explained by the “accumulation of factors” (more on this economic jargon below).
  3. March 2014 again, the NASA published a research paper answering to “widespread concerns that current trends in resource-used are unsustainable, but possibilities of overshoot/collapse remain controversial”. This study tells us that, based on a well-known prey-predator model to which they add “wealth and economic inequality”, a total collapse is “very difficult to avoid” (figure 2).

w
Source: The Conference Board, January 2014

3
Source: NASA, 2014

1. – The tragic fate of the fat caribou, or why we have to fear the reindeer of St Matthew more than the wolves of Wall-Street

During World War II, the US Coast Guard decided to install long range aids to navigation in St Matthew Island, a remote rock in the Bering Sea in Alaska, and to stock emergency food source there. In August the same year, they released 29 reindeer (known as caribou in North America) on the island as a backup food source for the 19 men stationed there. As World War II drew to an end, the Coast Guard left the island and, by the same token, the population of reindeer growing unchecked as their only predators, the 19 men on duty there, were sent back home. It followed a dramatic boom & burst of population dynamics (figure 1). From 1944 to 1966 the number of these herbivores, which did not have to worry anymore about any predator and ate all the available lichen, increased from 29 to 6,000. In 1957, their body weight was found to exceed that of reindeer in domestic herds by 24.5 percent among females and 46.6 percent among males. Then, the following winter, as they faced a limited food supply to sustain their number and their massive body weight, they underwent a crash die-off, the population falling from 6,000 to 42 (figure 3).

There is a lot of food for thought in this story. First, as the NASA study suggests, when one species (for example the top 1 oercent living in the Galapogos, another rock ,as I put it in a paper issued last year “Why Kings of Galapagos are long equity under (mild) Mugabenomics?”) thrive to the abject detriment of another one (the lichen, or the “bottom” 99%), bad things eventually happen.

2
Source: The Conference Board, TED, January 2014

1
Source: Manicore

Second, and more generally, the point of this story boils down to the mundane fact that resources are everything, and when they vanish, the transition from a given state to another one, namely from unchecked growth and exuberance to complete obliteration, is dramatic most often than not. This holds all the more true for the key resource, i.e. oil, which brings us to the second chapter of our tale.

2. – The peak-oil: a conspiracy theory or a mandatory mathematical truism?

Most of the discussions on oil hover around the question of “reserves”. I am going here to state the obvious but the key argument to keep in mind is that these reserves are meant for one and only purpose: oil production. ….woooh!, that’s new, next please! Okay, but bear with me. Till someone proves me I am wrong, I assume that the volume of Earth is finite, so that oil reserves are finite.Now, for a given stock of non-renewable resource, all production functions obey to the same law: they start from zero, grow to a maximum and decline to zero in a “bell-shape” way (figure 4). Now, the area under this curve is called the integral of the production function and it is strictly equal to the oil reserves. Because oil reserves are finite, the integral is necessarily convergent and because they are non-renewable the production function (the derivative function of the oil reserve) cannot have another form than a bell shape. You can stretch it, you can squeeze it, but the general form is this one and not any other. This is mathematical certainty like 2+2=4. The peak-oil is a mandatory mathematical truism, not a “conspiracy theory”.

Obviously, the key question is: the “peak-oil”, is it for now?

Well, running the risk of stating one obvious thing after another, I assume that we all agree that a compulsory task to perform before extracting oil from the ground is to find it. This has profound implications as this makes us certain that a peak is mandatory given the resource potential of the oil field. It also tells us that the higher the proven reserves and the bigger they are with respect to production, the closer the peak of oil production (remember: the integral is the area under the production curve). If I take the example of the United-States, as evidenced by King Hubbert, there is a 35-year lag between discovery and production (figure 5). If evidence proves Hubert peak was a bit bad on timing, possible production curves, based on the world ultimate reserves. i.e. total extractable petroleum, suggest that the peak is now.

4
Source: Laherrere, 2003

f
Source: Manicore

This is old story and, as the world still goes around, one could dismiss all this analysis. However, what is new is that business conditions are becoming more challenging for the oil majors as figure 7 suggests. Indeed since 2009, the capital expenditures of ExxonMobil, Royal Dutch Shell and Chevron have increased by 39-89 percent while their production has stalled. This is the balance-sheet-based proof that the peak-oil is happening now.

d
Source: Wall Street Journal

Now, the last point on the peak-oil, and this is key to understand the third and last chapter of our tale. We have to keep in mind that when we hear that we still have for 20 or 30 years of oil ahead of us it does not mean that we live the “good life” for the next 2 to 3 decades with constant consumption and then, the year after, we fall straight to zero consumption in a crash die-off as our reindeer herd experienced. Actually, consumption will be following the bell-shaped production function, it will be a slow death, and in the meanwhile, as the oil majors experience, the massive rise of capital expenditure will be weighting on the marginal energy return of energy. Indeed, according to Kopits, total upstream industry spendind since 2005 has been USD 4 trillion (about USD 2.5 trillion spent on legacy crude oil production), and legacy oil production has declined by 1 mmb/d since 2005. By comparison, between 1998 and 2005 the industry spent USD 1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. This declining energy return in energy production, which is nothing but the by-product of declining/exhausting oil reserves and the very fact we are experiencing the peak-oil, drives the whole economy down.

Indeed, though we live in the age of the “information technology” it is worthwhile to remember that the information society is an energy ogre (not mentioning the globalisation mantra which gives a central role to the transport industry which consumes two-third of total oil). For example, according toASU engineer Eric Williams 227 to 270 kilograms (or 500 to 594 pounds) of carbon dioxide are emitted in manufacturing a laptop computer. Mark Mills , the CEO of the Digital Power Group, teaches us that a medium-size refrigerator will use about 322 kW-h a year whereas the average iPhone uses about 361 kW-h a year once the wireless connections, data usage and battery charging are tallied up.

3. – There is something deeply wrong about macro-economic theory

So how all this relates to the “secular stagnation” scenario and all the fall in total factor productivity. Well, this is where things get a little bit technical and where our tale comes (finally!) to an end.

Most economists are big fan of more or less complex equations designed to explain everything in a highly stylised fashion. In this quest, in order to explain the origin of economic growth, they use the so-called Cobb-Douglas production function which states that GDP (Y) is a function of technology (A), capital (K) and labour (L). More precisely, the Holy Grail equation takes this form: Y = A * Ka * Lb, with “a” and “b” the elasticity of production to capital and labour. Total factor productivity is for instance derived from this equation.

Now, as the purpose of this equation is to explain the origin of economic growth, let’s put ourselves in the shoes of the Neanderthals. While we are planning to go in the wild to bring back some proteins to the tribe, we look around us. We do find sturdy arms, sturdy legs and few well-functioning brains. In a word, we find “labour”. Do we find “capital”? A broad and outstanding No! However, as the time goes by, our species is evolving. We will find primal energy in the form of fire, and then, at a very latter stage fossil energy and we will understand how to use it. “Capital” will appear at a much latter stage based on accumulated labour (whatever it is “inspiration”, aka knowledge, or “transpiration”, aka sweat and hard work) and the use of energy around us.

The point is very simple: the central equation explaining economic growth is plain wrong and we need to transform it in order to make capital an inner feedback loop to the system as it is mentioned in the Report to the Club of Rome (2003) or suggested by Jean-Marc Jancovici . How to do this?

Well in order to make things simple, let’s assume that returns to scale are constant (if I multiply resources by 2, output will be increased by 2, which fares as a reasonable assumption) so that we get b = 1-a, and therefore Y = A * Ka * L1-a. Now, let’s make the capital K dependent on energy (E) and labor (L) (or accumulated labor, (integral of L), so that K = c * E * L (with “c” a constant and simply labour which does not change the qualitative properties of the model). Our equation becomes: Y = A * ba * Ea * L.

Add to this new equation a reasonable assumption about the dynamics of labour (I assume a logistic function for the dynamics of the population with a sharp increase followed by an asymptotic rise) and the knowledge we have gained over the shape of the oil production function and thus of the dynamics of how available reserves evolve, we can build a toy-model and easily simulate the path of the economy (figure 8) on an oil(energy)-dependent computer. This toy-model clearly shows how sensitive an economy can be to the downward shift in oil-production during and after the peak-oil.

Do not get me wrong here. I do not believe that the Stone Age ended because we were short of stones. My point comes down to say that we are smack in the middle of an energetic transition, that this transition has a much more profound current negative effect that many can believe and that the world as we know is coming to an end, evolving towards “something else”. The hope here is that, flawed economic models, lack of political will to manage this energetic transition or ideological foolishness from the Talibans of the “all-green” regarding the nuclear energy as “evil”, will not drive us toward the tragic fate of the reindeer herd of St Matthew Island and other unfortunate raging bulls (figure 9). Indeed, the NASA research suggests that high wealth inequality is sufficient to create a total collapse. Add inequality regarding access to energy, water and food (agriculture is oil-dependent too) on the top of that, and we have a Mad-Max-Moment ahead of us. In this state of urgency, do we attend a rise in global capex in renewable energy that could make us more optimistic? Well, unfortunately not. Global investment in renewable energy fell 11 percent in 2013 to USD 254 billion according to Bloomberg New energy Finance. This is the second decline in renewable investments since 2001. So, yes the crash die-off of our fat caribous is unfortunately still a scenario.

v
Source: Joel Guglietta

Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore

Author Steen Jakobsen, Chief Economist & CIO, Saxo Bank
Saxo Bank provides an execution-only service. The material on this website does not contain (and should not be construed as containing) investment advice or an investment recommendation, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Saxo Bank accepts no responsibility for any use that may be made of these comments and for any consequences that result.

Why peak oil signals the world's end, or at least the one we know – Zawya

Why peak oil signals the world’s end, or at least the one we know – Zawya.

By Joel Guglietta

While global financial markets are still levitating somewhere between the stratosphere and the Kingdom of Asgard, by 60°24′31″ North and 172°43′12″ West, in the middle of nowhere, an isolated island of 137.857 sq-mi holds the key of three major economic developments and risks:

  1. November 2013, Lawrence Summers raised the question whether the “secular stagnation” and the impossibility for the US and other major economies to grow without the help of recurring bubbles was not doomed to become the “new normal”.
  2. March 2014, the Conference Board released a study (figure 1) showing the falling trend in global total factor productivity, i.e. in the share of output not explained by the “accumulation of factors” (more on this economic jargon below).
  3. March 2014 again, the NASA published a research paper answering to “widespread concerns that current trends in resource-used are unsustainable, but possibilities of overshoot/collapse remain controversial”. This study tells us that, based on a well-known prey-predator model to which they add “wealth and economic inequality”, a total collapse is “very difficult to avoid” (figure 2).

w
Source: The Conference Board, January 2014

3
Source: NASA, 2014

1. – The tragic fate of the fat caribou, or why we have to fear the reindeer of St Matthew more than the wolves of Wall-Street

During World War II, the US Coast Guard decided to install long range aids to navigation in St Matthew Island, a remote rock in the Bering Sea in Alaska, and to stock emergency food source there. In August the same year, they released 29 reindeer (known as caribou in North America) on the island as a backup food source for the 19 men stationed there. As World War II drew to an end, the Coast Guard left the island and, by the same token, the population of reindeer growing unchecked as their only predators, the 19 men on duty there, were sent back home. It followed a dramatic boom & burst of population dynamics (figure 1). From 1944 to 1966 the number of these herbivores, which did not have to worry anymore about any predator and ate all the available lichen, increased from 29 to 6,000. In 1957, their body weight was found to exceed that of reindeer in domestic herds by 24.5 percent among females and 46.6 percent among males. Then, the following winter, as they faced a limited food supply to sustain their number and their massive body weight, they underwent a crash die-off, the population falling from 6,000 to 42 (figure 3).

There is a lot of food for thought in this story. First, as the NASA study suggests, when one species (for example the top 1 oercent living in the Galapogos, another rock ,as I put it in a paper issued last year “Why Kings of Galapagos are long equity under (mild) Mugabenomics?”) thrive to the abject detriment of another one (the lichen, or the “bottom” 99%), bad things eventually happen.

2
Source: The Conference Board, TED, January 2014

1
Source: Manicore

Second, and more generally, the point of this story boils down to the mundane fact that resources are everything, and when they vanish, the transition from a given state to another one, namely from unchecked growth and exuberance to complete obliteration, is dramatic most often than not. This holds all the more true for the key resource, i.e. oil, which brings us to the second chapter of our tale.

2. – The peak-oil: a conspiracy theory or a mandatory mathematical truism?

Most of the discussions on oil hover around the question of “reserves”. I am going here to state the obvious but the key argument to keep in mind is that these reserves are meant for one and only purpose: oil production. ….woooh!, that’s new, next please! Okay, but bear with me. Till someone proves me I am wrong, I assume that the volume of Earth is finite, so that oil reserves are finite.Now, for a given stock of non-renewable resource, all production functions obey to the same law: they start from zero, grow to a maximum and decline to zero in a “bell-shape” way (figure 4). Now, the area under this curve is called the integral of the production function and it is strictly equal to the oil reserves. Because oil reserves are finite, the integral is necessarily convergent and because they are non-renewable the production function (the derivative function of the oil reserve) cannot have another form than a bell shape. You can stretch it, you can squeeze it, but the general form is this one and not any other. This is mathematical certainty like 2+2=4. The peak-oil is a mandatory mathematical truism, not a “conspiracy theory”.

Obviously, the key question is: the “peak-oil”, is it for now?

Well, running the risk of stating one obvious thing after another, I assume that we all agree that a compulsory task to perform before extracting oil from the ground is to find it. This has profound implications as this makes us certain that a peak is mandatory given the resource potential of the oil field. It also tells us that the higher the proven reserves and the bigger they are with respect to production, the closer the peak of oil production (remember: the integral is the area under the production curve). If I take the example of the United-States, as evidenced by King Hubbert, there is a 35-year lag between discovery and production (figure 5). If evidence proves Hubert peak was a bit bad on timing, possible production curves, based on the world ultimate reserves. i.e. total extractable petroleum, suggest that the peak is now.

4
Source: Laherrere, 2003

f
Source: Manicore

This is old story and, as the world still goes around, one could dismiss all this analysis. However, what is new is that business conditions are becoming more challenging for the oil majors as figure 7 suggests. Indeed since 2009, the capital expenditures of ExxonMobil, Royal Dutch Shell and Chevron have increased by 39-89 percent while their production has stalled. This is the balance-sheet-based proof that the peak-oil is happening now.

d
Source: Wall Street Journal

Now, the last point on the peak-oil, and this is key to understand the third and last chapter of our tale. We have to keep in mind that when we hear that we still have for 20 or 30 years of oil ahead of us it does not mean that we live the “good life” for the next 2 to 3 decades with constant consumption and then, the year after, we fall straight to zero consumption in a crash die-off as our reindeer herd experienced. Actually, consumption will be following the bell-shaped production function, it will be a slow death, and in the meanwhile, as the oil majors experience, the massive rise of capital expenditure will be weighting on the marginal energy return of energy. Indeed, according to Kopits, total upstream industry spendind since 2005 has been USD 4 trillion (about USD 2.5 trillion spent on legacy crude oil production), and legacy oil production has declined by 1 mmb/d since 2005. By comparison, between 1998 and 2005 the industry spent USD 1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. This declining energy return in energy production, which is nothing but the by-product of declining/exhausting oil reserves and the very fact we are experiencing the peak-oil, drives the whole economy down.

Indeed, though we live in the age of the “information technology” it is worthwhile to remember that the information society is an energy ogre (not mentioning the globalisation mantra which gives a central role to the transport industry which consumes two-third of total oil). For example, according toASU engineer Eric Williams 227 to 270 kilograms (or 500 to 594 pounds) of carbon dioxide are emitted in manufacturing a laptop computer. Mark Mills , the CEO of the Digital Power Group, teaches us that a medium-size refrigerator will use about 322 kW-h a year whereas the average iPhone uses about 361 kW-h a year once the wireless connections, data usage and battery charging are tallied up.

3. – There is something deeply wrong about macro-economic theory

So how all this relates to the “secular stagnation” scenario and all the fall in total factor productivity. Well, this is where things get a little bit technical and where our tale comes (finally!) to an end.

Most economists are big fan of more or less complex equations designed to explain everything in a highly stylised fashion. In this quest, in order to explain the origin of economic growth, they use the so-called Cobb-Douglas production function which states that GDP (Y) is a function of technology (A), capital (K) and labour (L). More precisely, the Holy Grail equation takes this form: Y = A * Ka * Lb, with “a” and “b” the elasticity of production to capital and labour. Total factor productivity is for instance derived from this equation.

Now, as the purpose of this equation is to explain the origin of economic growth, let’s put ourselves in the shoes of the Neanderthals. While we are planning to go in the wild to bring back some proteins to the tribe, we look around us. We do find sturdy arms, sturdy legs and few well-functioning brains. In a word, we find “labour”. Do we find “capital”? A broad and outstanding No! However, as the time goes by, our species is evolving. We will find primal energy in the form of fire, and then, at a very latter stage fossil energy and we will understand how to use it. “Capital” will appear at a much latter stage based on accumulated labour (whatever it is “inspiration”, aka knowledge, or “transpiration”, aka sweat and hard work) and the use of energy around us.

The point is very simple: the central equation explaining economic growth is plain wrong and we need to transform it in order to make capital an inner feedback loop to the system as it is mentioned in the Report to the Club of Rome (2003) or suggested by Jean-Marc Jancovici . How to do this?

Well in order to make things simple, let’s assume that returns to scale are constant (if I multiply resources by 2, output will be increased by 2, which fares as a reasonable assumption) so that we get b = 1-a, and therefore Y = A * Ka * L1-a. Now, let’s make the capital K dependent on energy (E) and labor (L) (or accumulated labor, (integral of L), so that K = c * E * L (with “c” a constant and simply labour which does not change the qualitative properties of the model). Our equation becomes: Y = A * ba * Ea * L.

Add to this new equation a reasonable assumption about the dynamics of labour (I assume a logistic function for the dynamics of the population with a sharp increase followed by an asymptotic rise) and the knowledge we have gained over the shape of the oil production function and thus of the dynamics of how available reserves evolve, we can build a toy-model and easily simulate the path of the economy (figure 8) on an oil(energy)-dependent computer. This toy-model clearly shows how sensitive an economy can be to the downward shift in oil-production during and after the peak-oil.

Do not get me wrong here. I do not believe that the Stone Age ended because we were short of stones. My point comes down to say that we are smack in the middle of an energetic transition, that this transition has a much more profound current negative effect that many can believe and that the world as we know is coming to an end, evolving towards “something else”. The hope here is that, flawed economic models, lack of political will to manage this energetic transition or ideological foolishness from the Talibans of the “all-green” regarding the nuclear energy as “evil”, will not drive us toward the tragic fate of the reindeer herd of St Matthew Island and other unfortunate raging bulls (figure 9). Indeed, the NASA research suggests that high wealth inequality is sufficient to create a total collapse. Add inequality regarding access to energy, water and food (agriculture is oil-dependent too) on the top of that, and we have a Mad-Max-Moment ahead of us. In this state of urgency, do we attend a rise in global capex in renewable energy that could make us more optimistic? Well, unfortunately not. Global investment in renewable energy fell 11 percent in 2013 to USD 254 billion according to Bloomberg New energy Finance. This is the second decline in renewable investments since 2001. So, yes the crash die-off of our fat caribous is unfortunately still a scenario.

v
Source: Joel Guglietta

Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore

Author Steen Jakobsen, Chief Economist & CIO, Saxo Bank
Saxo Bank provides an execution-only service. The material on this website does not contain (and should not be construed as containing) investment advice or an investment recommendation, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Saxo Bank accepts no responsibility for any use that may be made of these comments and for any consequences that result.

Resource Insights: Ukraine, Russia and the nonexistent U.S. oil and natural gas “weapon”

Resource Insights: Ukraine, Russia and the nonexistent U.S. oil and natural gas “weapon”.

Commentators were falling all over themselves last week to announce that far from being impotent in the Ukraine crisis, the United States had a very important weapon: growing oil and natural gas production which could compete on the world market and challenge Russian dominance over Ukrainian and European energy supplies–if only the U.S. government would change the laws and allow this bounty to be exported.

But, there’s one very big problem with this view. The United States is still a net importer of both oil and natural gas. The economics of natural gas exports beyond Mexico and Canada–which are both integrated into a North American pipeline system–suggest that such exports will be very limited if they ever come at all. And, there is no reasonable prospect that the United States will ever become a net exporter of oil.

U.S. net imports of crude oil and petroleum products are approximately 6.4 million barrels per day (mbpd). (This estimate sits between the official U.S. Energy Information Administration (EIA) numbers of 5.5 mbpd of net petroleum liquids imports and 7.5 mbpd of net crude oil imports. And so, to understand my calculations, please see two comments I made in a previous piece here and here. My number is for December 2013, the latest month for which the complete statistics needed to make my more accurate calculation are available.)

The EIA in its own forecast predicts that U.S. crude oil production (defined as crude including lease condensate) will experience a tertiary peak in 2016 around 9.5 mbpd just below the all-time 1970 peak and then decline starting in 2020. This level is far below 2013 U.S. consumption of about 13.2 mbpd of actual petroleum-derived liquid fuels. (This number excludes natural gas-derived liquids which can only be substituted for petroleum-derived liquids on a very limited basis.)

So, when exactly is the United States going to drown the world market in oil and thereby challenge the Russian oil export machine? The most plausible answer is never. And, the expected 2016 peak in U.S. production is only about 1.5 mbpd higher than production today. That’s really quite small compared to worldwide oil production of about 76 mbpd. And, there’s no guarantee that the rest of the world isn’t going to see a decline in oil production between now and then. So much for the supposed U.S. oil “weapon” taming the Russian bear.

But what about natural gas? Surely, America’s great bounty of natural gas from shale could challenge the Russians. Well, not really. It’s true that U.S. natural gas production trended up significantly from its post-Katrina nadir in 2005. But the trend has now stalled. U.S. dry natural gas production has been almost flat since January 2012. The EIA reports total production of 24.06 trillion cubic feet (tcf) for 2012 and 24.28 tcf for 2013, a rise of only 0.9 percent year over year.

Not mentioned by any of the commentators touting the U.S. natural gas “weapon” is that U.S. natural gas imports for 2013 were about 2.88 tcf or about 11 percent of U.S. consumption. So, let me see if I understand this: The plan seems to be to import more so we can export more. And this would change exactly what in the worldwide supply picture?

Certainly, it is true that low U.S. natural gas prices have reduced drilling and exploration dramatically. But prices will likely have to rise above $6 and trend higher as time passes as the easy-to-get shale gas is used up and only the more costly and difficult reservoirs remain. Drillers don’t keep drilling unless they can make money and that will require significantly higher prices.

And, here’s the kicker. In order to ship U.S. natural gas to Europe or Asia, it has to be liquefied at -260 degrees F, shipped on special tankers and then regasified. The cost of doing this is about $6 per thousand cubic feet (mcf). So, the total cost of delivering $6 U.S. natural gas to Europe is around $12 per mcf. With European liquefied natural gas (LNG) prices mostly below this level for the last five years, it’s hard to see Europe as a logical market. Japan would be a better target for such exports with prices moving between $15 and $18 per mcf in the last five years. But a U.S. entry into the LNG market could conceivably depress world prices and make even Japan a doubtful destination for U.S. LNG. And, what if U.S. prices rise significantly above $6?

But all this presupposes that the United States will have excess natural gas to export. As my colleague Jeffrey Brown has pointed out, “Citi Research [an arm of Citigroup] puts the decline rate for existing U.S. natural gas production at about 24%/year, which would require the industry to replace about 100% of current U.S. natural gas production in four years, just to maintain current production.”

It seems that U.S. drillers are going to be very, very busy just keeping domestic natural gas production from dipping, let alone expanding it to allow exports. And remember, we are still importing the stuff today!

How many companies will actually risk the billions needed to build U.S. natural gas export terminals to liquefy and load exports that may never appear? I doubt that very many will actually go through with their plans.

What is truly puzzling is that all the information I’ve just adduced–except the cost of liquefying, transporting and regasifying natural gas–is available with a few clicks of a mouse and a little arithmetic performed on tables of data. I got the cost information on LNG from a money manager specializing in energy investments. And yet, commentators, reporters, and editorial writers don’t even bother to check the internet or call their sources in the investment business.

Perhaps the facts have become irrelevant. Only that would explain the current hoopla over the nonexistent U.S. oil and natural gas “weapon” in the face of the all-too-obvious and readily available evidence.

Kurt Cobb is an authorspeaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog calledResource Insights and can be contacted at kurtcobb2001@yahoo.com.

Resource Insights: Ukraine, Russia and the nonexistent U.S. oil and natural gas "weapon"

Resource Insights: Ukraine, Russia and the nonexistent U.S. oil and natural gas “weapon”.

Commentators were falling all over themselves last week to announce that far from being impotent in the Ukraine crisis, the United States had a very important weapon: growing oil and natural gas production which could compete on the world market and challenge Russian dominance over Ukrainian and European energy supplies–if only the U.S. government would change the laws and allow this bounty to be exported.

But, there’s one very big problem with this view. The United States is still a net importer of both oil and natural gas. The economics of natural gas exports beyond Mexico and Canada–which are both integrated into a North American pipeline system–suggest that such exports will be very limited if they ever come at all. And, there is no reasonable prospect that the United States will ever become a net exporter of oil.

U.S. net imports of crude oil and petroleum products are approximately 6.4 million barrels per day (mbpd). (This estimate sits between the official U.S. Energy Information Administration (EIA) numbers of 5.5 mbpd of net petroleum liquids imports and 7.5 mbpd of net crude oil imports. And so, to understand my calculations, please see two comments I made in a previous piece here and here. My number is for December 2013, the latest month for which the complete statistics needed to make my more accurate calculation are available.)

The EIA in its own forecast predicts that U.S. crude oil production (defined as crude including lease condensate) will experience a tertiary peak in 2016 around 9.5 mbpd just below the all-time 1970 peak and then decline starting in 2020. This level is far below 2013 U.S. consumption of about 13.2 mbpd of actual petroleum-derived liquid fuels. (This number excludes natural gas-derived liquids which can only be substituted for petroleum-derived liquids on a very limited basis.)

So, when exactly is the United States going to drown the world market in oil and thereby challenge the Russian oil export machine? The most plausible answer is never. And, the expected 2016 peak in U.S. production is only about 1.5 mbpd higher than production today. That’s really quite small compared to worldwide oil production of about 76 mbpd. And, there’s no guarantee that the rest of the world isn’t going to see a decline in oil production between now and then. So much for the supposed U.S. oil “weapon” taming the Russian bear.

But what about natural gas? Surely, America’s great bounty of natural gas from shale could challenge the Russians. Well, not really. It’s true that U.S. natural gas production trended up significantly from its post-Katrina nadir in 2005. But the trend has now stalled. U.S. dry natural gas production has been almost flat since January 2012. The EIA reports total production of 24.06 trillion cubic feet (tcf) for 2012 and 24.28 tcf for 2013, a rise of only 0.9 percent year over year.

Not mentioned by any of the commentators touting the U.S. natural gas “weapon” is that U.S. natural gas imports for 2013 were about 2.88 tcf or about 11 percent of U.S. consumption. So, let me see if I understand this: The plan seems to be to import more so we can export more. And this would change exactly what in the worldwide supply picture?

Certainly, it is true that low U.S. natural gas prices have reduced drilling and exploration dramatically. But prices will likely have to rise above $6 and trend higher as time passes as the easy-to-get shale gas is used up and only the more costly and difficult reservoirs remain. Drillers don’t keep drilling unless they can make money and that will require significantly higher prices.

And, here’s the kicker. In order to ship U.S. natural gas to Europe or Asia, it has to be liquefied at -260 degrees F, shipped on special tankers and then regasified. The cost of doing this is about $6 per thousand cubic feet (mcf). So, the total cost of delivering $6 U.S. natural gas to Europe is around $12 per mcf. With European liquefied natural gas (LNG) prices mostly below this level for the last five years, it’s hard to see Europe as a logical market. Japan would be a better target for such exports with prices moving between $15 and $18 per mcf in the last five years. But a U.S. entry into the LNG market could conceivably depress world prices and make even Japan a doubtful destination for U.S. LNG. And, what if U.S. prices rise significantly above $6?

But all this presupposes that the United States will have excess natural gas to export. As my colleague Jeffrey Brown has pointed out, “Citi Research [an arm of Citigroup] puts the decline rate for existing U.S. natural gas production at about 24%/year, which would require the industry to replace about 100% of current U.S. natural gas production in four years, just to maintain current production.”

It seems that U.S. drillers are going to be very, very busy just keeping domestic natural gas production from dipping, let alone expanding it to allow exports. And remember, we are still importing the stuff today!

How many companies will actually risk the billions needed to build U.S. natural gas export terminals to liquefy and load exports that may never appear? I doubt that very many will actually go through with their plans.

What is truly puzzling is that all the information I’ve just adduced–except the cost of liquefying, transporting and regasifying natural gas–is available with a few clicks of a mouse and a little arithmetic performed on tables of data. I got the cost information on LNG from a money manager specializing in energy investments. And yet, commentators, reporters, and editorial writers don’t even bother to check the internet or call their sources in the investment business.

Perhaps the facts have become irrelevant. Only that would explain the current hoopla over the nonexistent U.S. oil and natural gas “weapon” in the face of the all-too-obvious and readily available evidence.

Kurt Cobb is an authorspeaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog calledResource Insights and can be contacted at kurtcobb2001@yahoo.com.

Long Crude Oil Speculative Bets Rise To All Time High | Zero Hedge

Long Crude Oil Speculative Bets Rise To All Time High | Zero Hedge.

Whether or not institutional investors, read large speculators, decided to invest alongside Putin in the one trade that is most critical to the future prosperity and positive cash flow balance of Russia, namely keeping the price of Crude high, and rising, is unknown, however, as the following chart the net position in crude oil futures as of the week of March 4, just hit an all time high of $44.0 billion up from $42.4 billion the week prior, surpassing all prior peaks, and certainly any set during the summer of 2008 when oil was threatening to make a run on $150, and was set to hit $200 if one believes Goldman (which nobody does).

Needless to say, any de-escalation in the Crimea – which has certainly been the key catalyst for the full court press to bet on rising crude prices in recent weeks – will have a substantial knock on effect of forcing open call positions to close, and in the process lower the price of crude further beyond just fundamentals, assuming those still exist.

Long Crude Oil Speculative Bets Rise To All Time High | Zero Hedge

Long Crude Oil Speculative Bets Rise To All Time High | Zero Hedge.

Whether or not institutional investors, read large speculators, decided to invest alongside Putin in the one trade that is most critical to the future prosperity and positive cash flow balance of Russia, namely keeping the price of Crude high, and rising, is unknown, however, as the following chart the net position in crude oil futures as of the week of March 4, just hit an all time high of $44.0 billion up from $42.4 billion the week prior, surpassing all prior peaks, and certainly any set during the summer of 2008 when oil was threatening to make a run on $150, and was set to hit $200 if one believes Goldman (which nobody does).

Needless to say, any de-escalation in the Crimea – which has certainly been the key catalyst for the full court press to bet on rising crude prices in recent weeks – will have a substantial knock on effect of forcing open call positions to close, and in the process lower the price of crude further beyond just fundamentals, assuming those still exist.

Peak Oil: Facts Annoy – Peak Oil Matters

Peak Oil: Facts Annoy – Peak Oil Matters.

IMG_4756_Watermarked

TRUTH BE TOLD

 

Crude oil production is heavily concentrated in a small number of countries and a small number of giant  fields….Future global production is therefore heavily dependent on the future prospects of the giant fields, but this remains uncertain—in part because the required field-level data are either unavailable or unreliable. (links/citations in original) [1]

Those of us who’ve been paying more attention to fossil fuel production information than most citizens are well aware of the fact that precise information about remaining crude oil supplies—notably in the petro-states of the Middle East—is all but impossible to come by.

What’s more important than whether we have accurate information is letting most others know that what oil industry spokesman offer as definite responses to any peak oil concerns isn’t exactly iron-clad, either. A lot of it is also the end result of some careful massaging and specific extraction of the “best” parts of their stories, with most of the factual content and context intentionally omitted. It’s helpful, but only to them and their interests. Consumers are left high and dry.

This is a nice summary of some of those other inconvenient facts left out of the conversation:

In interpreting these numbers, it is essential to recognize that large quantities of resources within the Earth’s crust provide no guarantee that these can be produced at particular rates and/or at reasonable cost. There are huge variations both within and between resource types in terms of size of accumulation, depth, accessibility, chemical composition, energy content, extraction cost, net energy yield (i.e. the energy obtained from the resource minus the energy required to find, extract and process it), local and global environmental impacts and, most importantly, the feasible rate of extraction—to say nothing of the geopolitics of access. Higher quality resources tend to be found and developed first, and as production shifts down the ‘resource pyramid’, increasing reliance must be placed upon less accessible, poorer quality and more expensive resources that have a progressively lower net energy yield and are increasingly difficult to produce at high rates. [2]

None of that is off-the-charts complex. We’ve been relying on a select group of genuinely bountiful conventional crude oil fields to supply our ever-growing needs for decades now. The ride has been a marvelous one, and the technologies developed and creativity let loose have been nothing short of incredibly impressive.

 

BUT….

 

Those conventional crude oil fields are finite resources. Despite the nonsense uttered by a handful of nitwits who proclaim (based on the solo work by a Russian more than half a century ago), oil is not self-replenishing. There’s no hose in Earth’s center filling those fields once the tanks run low.

So we’re now turning to fossil fuel supplies whose primary drawbacks are set forth above. That’s a problem. It’s an even bigger problem because instead of offering up those realities to both officials to whom we turn for solutions and to us lowly consumers who ought to know that what we rely upon may not be so reliable for much longer, the standard MO is to offer up feel-good messages.

One big potential challenge gets crossed off the consumer’s list; oil industry continues to insist on high prices (which—shockingly!—turn into enormous profits, not that that’s always such a bad thing, but….), and another day passes with all of us losing another opportunity to engage in meaningful conversations about what to do when the Happy Talk stories run their course. Reality won’t bend to half-truths. Production rate declines and oil field depletions will continue on their not-so-merry path notwithstanding.

Another part of this same story which should get much more airplay than it does:

This is not simply an issue of the steeply rising production costs of poorer quality resources because technical and net energy constraints may make some resources inaccessible and some production rates unachievable regardless of cost. Kerogen oil is especially constrained in rate and net energy terms and may never become economic to produce, yet it accounts for 19% of the IEA estimate of remaining recoverable resources. Hence, a critical evaluation of future supply prospects must go beyond appraisals of aggregate resource size and examine the technical, economic and political feasibility of accessing different resources at different rates over different periods of time. (links/citations in original) [3]

And for all the ongoing talk about our recent energy bonanza/boom/you pick the descriptive phrase, the basic realities about fracking and tight oil production increases aren’t changing to accommodate the industry cheerleading efforts:

The production cycle for tight oil resources is driven by a slightly different set of mechanisms since this resource is located in continuous formations rather than discrete fields. Nevertheless, the outcome is similar to that for conventional oil. With exceptionally high decline rates for individual wells), regional tight oil production can only be maintained through the continuous drilling of closely spaced wells. But tight oil plays are heterogeneous, with much higher well productivity in the ‘sweet spots’ than elsewhere. So when the sweet spots become exhausted, it becomes increasingly difficult to maintain regional production. (links/citations in original) [4]

So much for good news! How about we find room in the narrative for some truth-telling and planning?

~ My Photo: Quebec City skyline – 09.19.09

 

 I invite you to view my other work at richardturcotte.com

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