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Are We Fully Understanding the Consequences of Oil Transit Accidents? | Nick Martyn

Are We Fully Understanding the Consequences of Oil Transit Accidents? | Nick Martyn.

Recent events in Canada’s rail transport network have prompted a much-needed national debate about the risks of energy transport and rail safety. No matter our personal stance regarding climate change, we all live in an oil dependant society and until we find another way to power the global economy and our civil society, oil and gas will have to move from where it is found to where it is used. In Canada that largely means it will move either via pipeline or rail. But when a pipeline leaks or oil tankers derail, the risks of oil transit are thrown into stark relief; especially for the residents of communities in the immediate vicinity and the ecosystems affected.

Broadly speaking, risk is thought of as the “possibility of loss.” It is generally viewed as the combination of the likelihood of loss and the consequences of that loss. Likelihood, otherwise known as the “probability of occurrence”, is the foundation of actuarial science; which underpins the insurance industry. Probability suggests that if historical trends continue and the future cooperates with the past, then the likelihood of something occurring can be calculated to a sufficient degree that insurance against the event could be issued with a reasonable chance that it would not have to be paid. In essence a bet is laid against the event. If the event occurs then the insurer has to pay out. If it does not then the insurer makes money.

The Insurance Bureau of Canada declared 2013 the worst year on record for insurance related payouts, meaning that insurers will pay out a lot of money because the future did not cooperate with the past and the unlikely happened. The object lesson here is that while likelihood is interesting, consequences are costly.

As we seek export markets for Canadian energy products, so the volume of those products in transit increases. Eric Sprott, the renowned Canadian resource investor notes in his January 27, 2014 newsletter that by the end of 2013 Canada’s rail industry was shipping 375,000 barrels of oil per day and that figure is expected to each 900,000 barrels per day by the end of 2014. As for a pipeline, Sprott believes the Energy East pipeline will get the go-ahead and will increase Canada’s export capacity by 800,000 barrels. Since Canada has not added significantly to its pipeline infrastructure in decades, there is little choice but to ship it via the rail network, which coincidentally has not been significantly increased in decades. When both the nature and the volume of rail traffic increases on a network that has not appreciably increased in size or capability the “likelihood” of failure events also increases, as do the consequences.

To date consequence has been considered somewhat subjective and therefore less quantifiable than likelihood, partly because each stakeholder sees consequence differently. For instance the Mayor of a community thinks of the consequence of a train derailment and spill in the community in a much different way than the CEO of the rail company or the owner of the shipment. The cold hard reality is that no matter how small the statistical likelihood that derailments will happen, the consequences when derailments happen are significant. As events increase in frequency and it seems severity, it is clearly time to rethink our evaluation of risk in rail transport.

While the probability that a train-load of inappropriately classified oil products would careen down a hill in rural Quebec and explode, killing 47 people and contaminating a fragile lake ecosystem was so infinitesimally small as to be almost incalculable, the consequences were devastating and will be felt for generations. The policies that drive rail system regulation (or any system for that matter) are driven by the likelihood of a failure not the consequences. In part this is because it is difficult to foresee every event and frame a regulation to prevent it, but also because the risk analysis techniques to quantify consequence in a useful way, to date, have not existed.

Risk analysis techniques have improved markedly in recent years, to the point that networked risk analysis tools can fathom the pathways of exposure to risk in models containing thousands of entities. Given the complexity and importance of the energy transport question in Canada and the severe and sometimes tragic consequences of failure, it seems time to revisit the question of energy transport risk with modern tools so that no matter which side of the energy debate we stand on, we have a safer, cleaner Canada to live in and to pass on to our children.

Are We Fully Understanding the Consequences of Oil Transit Accidents? | Nick Martyn

Are We Fully Understanding the Consequences of Oil Transit Accidents? | Nick Martyn.

Recent events in Canada’s rail transport network have prompted a much-needed national debate about the risks of energy transport and rail safety. No matter our personal stance regarding climate change, we all live in an oil dependant society and until we find another way to power the global economy and our civil society, oil and gas will have to move from where it is found to where it is used. In Canada that largely means it will move either via pipeline or rail. But when a pipeline leaks or oil tankers derail, the risks of oil transit are thrown into stark relief; especially for the residents of communities in the immediate vicinity and the ecosystems affected.

Broadly speaking, risk is thought of as the “possibility of loss.” It is generally viewed as the combination of the likelihood of loss and the consequences of that loss. Likelihood, otherwise known as the “probability of occurrence”, is the foundation of actuarial science; which underpins the insurance industry. Probability suggests that if historical trends continue and the future cooperates with the past, then the likelihood of something occurring can be calculated to a sufficient degree that insurance against the event could be issued with a reasonable chance that it would not have to be paid. In essence a bet is laid against the event. If the event occurs then the insurer has to pay out. If it does not then the insurer makes money.

The Insurance Bureau of Canada declared 2013 the worst year on record for insurance related payouts, meaning that insurers will pay out a lot of money because the future did not cooperate with the past and the unlikely happened. The object lesson here is that while likelihood is interesting, consequences are costly.

As we seek export markets for Canadian energy products, so the volume of those products in transit increases. Eric Sprott, the renowned Canadian resource investor notes in his January 27, 2014 newsletter that by the end of 2013 Canada’s rail industry was shipping 375,000 barrels of oil per day and that figure is expected to each 900,000 barrels per day by the end of 2014. As for a pipeline, Sprott believes the Energy East pipeline will get the go-ahead and will increase Canada’s export capacity by 800,000 barrels. Since Canada has not added significantly to its pipeline infrastructure in decades, there is little choice but to ship it via the rail network, which coincidentally has not been significantly increased in decades. When both the nature and the volume of rail traffic increases on a network that has not appreciably increased in size or capability the “likelihood” of failure events also increases, as do the consequences.

To date consequence has been considered somewhat subjective and therefore less quantifiable than likelihood, partly because each stakeholder sees consequence differently. For instance the Mayor of a community thinks of the consequence of a train derailment and spill in the community in a much different way than the CEO of the rail company or the owner of the shipment. The cold hard reality is that no matter how small the statistical likelihood that derailments will happen, the consequences when derailments happen are significant. As events increase in frequency and it seems severity, it is clearly time to rethink our evaluation of risk in rail transport.

While the probability that a train-load of inappropriately classified oil products would careen down a hill in rural Quebec and explode, killing 47 people and contaminating a fragile lake ecosystem was so infinitesimally small as to be almost incalculable, the consequences were devastating and will be felt for generations. The policies that drive rail system regulation (or any system for that matter) are driven by the likelihood of a failure not the consequences. In part this is because it is difficult to foresee every event and frame a regulation to prevent it, but also because the risk analysis techniques to quantify consequence in a useful way, to date, have not existed.

Risk analysis techniques have improved markedly in recent years, to the point that networked risk analysis tools can fathom the pathways of exposure to risk in models containing thousands of entities. Given the complexity and importance of the energy transport question in Canada and the severe and sometimes tragic consequences of failure, it seems time to revisit the question of energy transport risk with modern tools so that no matter which side of the energy debate we stand on, we have a safer, cleaner Canada to live in and to pass on to our children.

Shale, the Last Oil and Gas Train: Interview with Arthur Berman

Shale, the Last Oil and Gas Train: Interview with Arthur Berman.

How much faith can we put in our ability to decipher all the numbers out there telling us the US is closing in on its cornering of the global oil market? There’s another side to the story of the relentless US shale boom, one that says that some of the numbers are misunderstood, while others are simply preposterous. The truth of the matter is that the industry has to make such a big deal out of shale because it’s all that’s left. There are some good things happening behind the fairy tale numbers, though—it’s just a matter of deciphering them from a sober perspective.

In a second exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman discusses:

•    Why US gas supply growth rests solely on Marcellus
•    When Bakken and Eagle Ford will peak
•    The eyebrow-raising predictions for the Permian Basin
•    Why outrageous claims should have oil lawyers running for cover
•    Why everyone’s making such a big deal about shale
•    The only way to make the shale gas boom sustainable
•    Why some analysts need their math examined
•    Why it’s not just about how much gas we produce
•    Why investors are starting to ask questions
•    Why new industries, not technologies will make the next boom
•    Why we’ll never hit the oil and gas ‘wall’
•    Why companies could use a little supply-and-demand discipline
•    Why ‘fire ice’ makes sense (in Japan)
•    Why the US crude export debate will be ‘silly’

Arthur is a geological consultant with thirty-four years of experience in petroleum exploration and production. He is currently consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences and is interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, Platt’s Energy Week, BNN, Bloomberg, Platt’s, Financial Times, and New York Times. You can find out more about Arthur by visiting his website: http://petroleumtruthreport.blogspot.com

Oilprice.com: Almost on a daily basis we have figures thrown at us to demonstrate how the shale boom is only getting started. Mostly recently, there are statements to the effect that Texas shale formations will produce up to one-third of the global oil supply over the next 10 years. Is there another story behind these figures?

Arthur Berman: First, we have to distinguish between shale gas and liquids plays. On the gas side, all shale gas plays except the Marcellus are in decline or flat. The growth of US supply rests solely on the Marcellus and it is unlikely that its growth can continue at present rates. On the oil side, the Bakken has a considerable commercial area that is perhaps only one-third developed so we see Bakken production continuing for several years before peaking. The Eagle Ford also has significant commercial area but is showing signs that production may be flattening. Nevertheless, we see 5 or so more years of continuing Eagle Ford production activity before peaking. The EIA has is about right for the liquids plays–slower increases until later in the decade, and then decline.

The idea that Texas shales will produce one-third of global oil supply is preposterous. The Eagle Ford and the Bakken comprise 80% of all the US liquids growth. The Permian basin has notable oil reserves left but mostly from very small accumulations and low-rate wells. EOG CEO Bill Thomas said the same thing about 10 days ago on EOG’s earnings call. There have been some truly outrageous claims made by some executives about the Permian basin in recent months that I suspect have their general counsels looking for a defibrillator.

Recently, the CEO of a major oil company told The Houston Chronicle that the shale revolution is only in the “first inning of a nine-inning game”. I guess he must have lost track of the score while waiting in line for hot dogs because production growth in U.S. shale gas plays excluding the Marcellus is approaching zero; growth in the Bakken and Eagle Ford has fallen from 33% in mid-2011 to 7% in late 2013.

Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let’s face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs.

The majors have shown that they cannot replace reserves. They talk about return on capital employed (ROCE) these days instead of reserve replacement and production growth because there is nothing to talk about there. Shale plays are part of the ROCE story–shale wells can be drilled and brought on production fairly quickly and this masks or smoothes out the non-productive capital languishing in big projects around the world like Kashagan and Gorgon, which are going sideways whilst eating up billions of dollars.

None of this is meant to be negative. I’m all for shale plays but let’s be honest about things, after all!  Production from shale is not a revolution; it’s a retirement party.

OP: Is the shale “boom” sustainable?

Arthur Berman: The shale gas boom is not sustainable except at higher gas prices in the US. There is lots of gas–just not that much that is commercial at current prices. Analysts that say there are trillions of cubic feet of commercial gas at $4 need their cost assumptions audited. If they are not counting overhead (G&A) and many operating costs, then of course things look good. If Walmart were evaluated solely on the difference between wholesale and retail prices, they would look fantastic. But they need stores, employees, gas and electricity, advertising and distribution. So do gas producers. I don’t know where these guys get their reserves either, but that needs to be audited as well.

There was a report recently that said large areas of the Barnett Shale are commercial at $4 gas prices and that the play will continue to produce lots of gas for decades. Some people get so intrigued with how much gas has been produced and could be in the future, that they don’t seem to understand that this is a business. A business must be commercial to be successful over the long term, although many public companies in the US seem to challenge that concept.

Investors have tolerated a lot of cheerleading about shale gas over the years, but I don’t think this is going to last. Investors are starting to ask questions, such as: Where are the earnings and the free cash flow. Shale companies are spending a lot more than they are earning, and that has not changed. They are claiming all sorts of efficiency gains on the drilling side that has distracted inquiring investors for awhile. I was looking through some investor presentations from 2007 and 2008 and the same companies were making the same efficiency claims then as they are now. The problem is that these impressive gains never show up in the balance sheets, so I guess they must not be very important after all.

The reason that the shale gas boom is not sustainable at current prices is that shale gas is not the whole story. Conventional gas accounts for almost 60% of US gas and it is declining at about 20% per year and no one is drilling more wells in these plays. The unconventional gas plays decline at more than 30% each year. Taken together, the US needs to replace 19 billion cubic feet per day each year to maintain production at flat levels. That’s almost four Barnett shale plays at full production each year! So you can see how hard it will be to sustain gas production. Then there are all the efforts to use it up faster–natural gas vehicles, exports to Mexico, LNG exports, closing coal and nuclear plants–so it only gets harder.

This winter, things have begun to unravel. Comparative gas storage inventories are near their 2003 low. Sure, weather is the main factor but that’s always the case. The simple truth is that supply has not been able to adequately meet winter demand this year, period. Say what you will about why but it’s a fact that is inconsistent with the fairy tales we continue to hear about cheap, abundant gas forever.

I sat across the table from industry experts just a year ago or so who were adamant that natural gas prices would never get above $4 again. Prices have been above $4 for almost three months. Maybe “never” has a different meaning for those people that doesn’t include when they are wrong.

OP: Do you foresee any new technology on the shelf in the next 10-20 years that would shape another boom, whether it be fossil fuels or renewables?

Arthur Berman: I get asked about new technology that could make things different all the time. I’m a technology enthusiast but I see the big breakthroughs in new industries, not old extractive businesses like oil and gas. Technology has made many things possible in my lifetime including shale and deep-water production, but it hasn’t made these things cheaper.

That’s my whole point about shale plays–they’re expensive and need high oil and gas prices to work. We’ve got the high prices for oil and the oil plays are fine; we don’t have high prices for the gas plays and they aren’t working. There are some areas of the Marcellus that actually work at $4 gas price and that’s great, but it really takes $6 gas prices before things open up even there.

OP: In Europe, where do you see the most potential for shale gas exploitation, with Ukraine engulfed in political chaos, companies withdrawing from Poland, and a flurry of shale activity in the UK?

Arthur Berman: Shale plays will eventually spread to Europe but it will take a longer time than it did in North America. The biggest reason is the lack of private mineral ownership in most of Europe so there is no incentive for local people to get on board. In fact, there are only the negative factors of industrial development for them to look forward to with no pay check. It’s also a lot more expensive to drill and produce gas in Europe.

There are a few promising shale plays on the international horizon:  the Bazherov in Russia, the Vaca Muerte in Argentina and the Duvernay in Canada look best to me because they are liquid-prone and in countries where acceptable fiscal terms and necessary infrastructure are feasible.  At the same time, we have learned that not all plays work even though they look good on paper, and that the potentially commercial areas are always quite small compared to the total resource.  Also, we know that these plays do not last forever and that once the drilling treadmill starts, it never ends.  Because of high decline rates, new wells must constantly be drilled to maintain production.  Shale plays will last years, not decades.

Recent developments in Poland demonstrate some of the problems with international shale plays.  Everyone got excited a few years ago because resource estimates were enormous.  Later, these estimates were cut but many companies moved forward and wells have been drilled.  Most international companies have abandoned the project including ExxonMobil, ENI, Marathon and Talisman.  Some players exited because they don’t think that the geology is right but the government has created many regulatory obstacles that have caused a lack of confidence in the fiscal environment in Poland.

The UK could really use the gas from the Bowland Shale and, while it’s not a huge play, there is enough there to make a difference. I expect there will be plenty of opposition because people in the UK are very sensitive about the environment and there is just no way to hide the fact that shale development has a big footprint despite pad drilling and industry efforts to make it less invasive.

Let me say a few things about resource estimates while we are on the subject.  The public and politicians do not understand the difference between resources and reserves.  The only think that they have in common is that they both begin with “res.”  Reserves are a tiny subset of resources that can be produced commercially.  Both are always wrong but resource estimates can be hugely misleading because they are guesses and have nothing to do with economics.

Someone recently sent me a new report by the CSIS that said U.S. shale gas resource estimates are too conservative and are much larger than previously believed.  I wrote him back that I think that resource estimates for U.S. shale gas plays are irrelevant because now we have robust production data to work with.  Most of those enormous resources are in plays that we already know are not going to be economic.  Resource estimates have become part of the shale gas cheerleading squad’s standard tricks to drum up enthusiasm for plays that clearly don’t work except at higher gas prices.  It’s really unfortunate when supposedly objective policy organizations and research groups get in on the hype in order to attract funding for their work.

OP: The ban on most US crude exports in place since the Arab oil embargo of 1973 is now being challenged by lobbyists, with media opining that this could be the biggest energy debate of the year in the US. How do you foresee this debate shaping up by the end of this year?

Arthur Berman: The debate over oil and gas exports will be silly.

I do not favor regulation of either oil or gas exports from the US. On the other hand, I think that a little discipline by the E&P companies might be in order so they don’t have to beg the American people to bail them out of the over-production mess that they have created knowingly for themselves. Any business that over-produces whatever it makes has to live with lower prices. Why should oil and gas producers get a pass from the free-market laws of supply and demand?

I expect that by the time all the construction is completed to allow gas export, the domestic price will be high enough not to bother. It amazes me that the geniuses behind gas export assume that the business conditions that resulted in a price benefit overseas will remain static until they finish building export facilities, and that the competition will simply stand by when the awesome Americans bring gas to their markets. Just last week, Ken Medlock described how some schemes to send gas to Asia may find that there will be a lot of price competition in the future because a lot of gas has been discovered elsewhere in the world.

The US acts like we are some kind of natural gas superstar because of shale gas. Has anyone looked at how the US stacks up next to Russia, Iran and Qatar for natural gas reserves?

Whatever outcome results from the debate over petroleum exports, it will result in higher prices for American consumers. There are experts who argue that it won’t increase prices much and that the economic benefits will outweigh higher costs. That may be but I doubt that anyone knows for sure. Everyone agrees that oil and gas will cost more if we allow exports.

OP: Is the US indeed close to hitting the “crude wall”—the point at which production could slow due to infrastructure and regulatory restraints?

Arthur Berman: No matter how much or little regulation there is, people will always argue that it is still either too much or too little. We have one of the most unfriendly administrations toward oil and gas ever and yet production has boomed. I already said that I oppose most regulation so you know where I stand. That said, once a bureaucracy is started, it seldom gets smaller or weaker. I don’t see any walls out there, just uncomfortable price increases because of unnecessary regulations.

We use and need too much oil and gas to hit a wall. I see most of the focus on health care regulation for now. If there is no success at modifying the most objectionable parts of the Affordable Care Act, I don’t suppose there is much hope for fewer oil and gas regulations. The petroleum business isn’t exactly the darling of the people.

OP: What is the realistic future of methane hydrates, or “fire ice”, particularly with regard to Japanese efforts at extraction?

Arthur Berman: Japan is desperate for energy especially since they cut back their nuclear program so maybe hydrates make some sense at least as a science project for them. Their pilot is in thousands of feet of water about 30 miles offshore so it’s going to be very expensive no matter how successful it is.

OP: Globally, where should we look for the next potential “shale boom” from a geological perspective as well as a commercial viability perspective?

Arthur Berman: Not all shale is equal or appropriate for oil and gas development. Once we remove all the shale that is not at or somewhat above peak oil generation today, most of it goes away. Some shale plays that meet these and other criteria didn’t work so we have a lot to learn. But shale development is both inevitable and necessary. It will take a longer time than many believe outside of North America.

OP: We’ve spoken about Japan’s nuclear energy crossroads before, and now we see that issue climaxing, with the country’s nuclear future taking center-stage in an election period. Do you still believe it is too early for Japan to pull the plug on nuclear energy entirely?

Arthur Berman: Japan and Germany have made certain decisions about nuclear energy that I find remarkable but I don’t live there and, obviously, don’t think like them.

More generally, environmental enthusiasts simply don’t see the obstacles to short-term conversion of a fossil fuel economy to one based on renewable energy. I don’t see that there is a rational basis for dialogue in this arena. I’m all in favor of renewable energy but I don’t see going from a few percent of our primary energy consumption to even 20% in less than a few decades no matter how much we may want to.

OP: What have we learned over the past year about Japan’s alternatives to nuclear energy?

Arthur Berman: We have learned that it takes a lot of coal to replace nuclear energy when countries like Japan and Germany made bold decisions to close nuclear capacity. We also learned that energy got very expensive in a hurry. I say that we learned. I mean that the past year confirmed what many of us anticipated.

OP: Back in the US, we have closely followed the blowback from the Environmental Protection Agency’s (EPA) proposed new carbon emissions standards for power plants, which would make it impossible for new coal-fired plants to be built without the implementation of carbon capture and sequestration technology, or “clean-coal” tech. Is this a feasible strategy in your opinion?

Arthur Berman: I’m not an expert on clean coal technology either but I am confident that almost anything is possible if cost doesn’t matter. This is as true about carbon capture from coal as it is about shale gas production. Energy is an incredibly complex topic and decisions are being made by bureaucrats and politicians with little background in energy or the energy business. I don’t see any possibility of a good outcome under these circumstances.

OP: Is CCS far enough along to serve as a sound basis for a national climate change policy?

Arthur Berman: Climate-change activism is a train that has left the station. If you’ve missed it, too bad. If you’re on board, good luck.

The good news is that the US does not have an energy policy and is equally unlikely to get a climate change policy for all of the same reasons. I fear putting climate change policy in the hands of bureaucrats and politicians more than I fear climate change (which I fear).

See our previous interview with Arthur Berman.

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Recent Cyber Operations Against Actors in the Oil Industry | Analysis Intelligence

Recent Cyber Operations Against Actors in the Oil Industry | Analysis Intelligence.

AnonGhost Hacks National Oil Corporation

The past two weeks have witnessed a series of cyber attacks against several national oil outlets. The oil industry in Angola, Kenya, and Mexico have all been targeted by website defacements in these past few weeks. The names of OpAngola, OpGreenRights, and OpPemex were attached to each, respectively. A timeline view using Recorded Future’s analysis tool provides a keen visualization of these attacks in relation to one another.

Anonymous Goes After Mexico Timeline

By the same token, the data underlying the above visualization provides additional insight into these three separate attacks. And that’s exactly what they are – three distinct hits that, while targeting actors in the same industry, are different in their objectives.

OpAngola, for example, went after the government of Angola, the third largest oil producer in Africa. AnonGhost led the defacement of some seventy government websites, including the Ministry of Oil’s, on December 4. The operation was launched after claims were made that the Angolan government was set to make Islam illegal in the country. Such claims were false.

AnonGhost was also behind the defacement of the website belonging to the National Oil Corporation of Kenya on December 10. The motivation here is less straightforward than in the case of OpAngola, yet the use of the hashtag #OpGreenRights with the attack is a clear association with the larger OpGreenRights campaign initiated by Anonymous.

This cyber campaign was launched after the taking of the so-called “Arctic 30” by Russian security forces on September 18. In a video release, Anonymous stated that OpGreenRights was “designed to target high-level communication assets of the Russian Federation worldwide.” While going after the national oil company of Kenya is a far cry form a “high-level communication asset” of Russia, the OpGreenRights moniker can of course be applied across different targets. The clear connection with oil is close enough.

In addition, Anonymous was behind the most recent cyber attack targeting an oil actor:OpPemex. The attack took down the websites of both the Mexican Senate and the Chamber of Deputies on December 12 in protest over a soon-to-be passed bill that leads to greater privatization of the state oil company, Pemex. The bill has passed the Senate and is slated to pass the Chamber of Deputies in the days ahead.

Malawi Cash-Gate Timeline

As the above data highlights, the targeting of actors in the same industry in this string of cyber attacks is not indicative of a larger industry-wide threat. The rationale behind each attack is not related in the same way that those oil-producing countries targeted byOpPetrol were supposed to be in June of this year.

 

Gas Pipeline Boom Fragmenting Pennsylvania’s Forests – Bloomberg

Gas Pipeline Boom Fragmenting Pennsylvania’s Forests – Bloomberg.

Photographer: Noah Addis/Corbis
View of a natural gas pipeline under construction in Franklin Township, Pennsylvania on May 1, 2012

InsideClimateNews.org — Jerry Skinner stands in his garden, looking into the distance at the edge of a forested mountain. Amid the lush shades of green, a muddy brown strip of earth stands out. It’s the telltale sign of a buried pipeline.

“The pipelines are all around this property,” Skinner said. “When I came here, the county had an allure that it doesn’t have anymore. I’m not sure I want to live here anymore.”

Skinner is the resident naturalist at the Woodbourne Forest and Wildlife Preserve, a 650-acre forestland that runs through parts of northeastern Pennsylvania that are experiencing intensive gas drilling because of a hotly contested method called hydraulic fracturing, or fracking. Around his house, in the town of Dimock, gas wells have sprung up and a vast network of interconnected pipelines transports the gas underground. Skinner worries that as drilling activity heads deeper into forests and pipelines chop up large blocks of land, rare species native to Pennsylvania will be driven out.

In recent years, Pennsylvania has become ground zero for fracking, along with neighboring states that sit atop a large shale reserve known as the Marcellus Formation. Pennsylvania has more than 6,000 active gas wells, and Marcellus-related production has soared to 12 billion cubic feet per day, six times the production rate in 2009.

Gas drilling has long raised concerns about water contamination and air pollution. But until recently, little public attention has been paid to the pipelines that must be built to carry the gas. In Pennsylvania, concerns about these pipelines are growing because many of them are being built in the state’s 16 million acres of forest, which include some of the largest contiguous blocks of forestland east of the Mississippi River. Of the 2.2 million acres the state oversees, nearly 700,000 acres already have been leased for drilling, allowing companies to cut paths through pristine stretches of trees, fragment forests, decrease biodiversity and introduce invasive species.

“In Pennsylvania, the gas companies are working in essentially the most ecologically sensitive area of the commonwealth,” said John Quigley, who served as secretary of the Pennsylvania Department of Conservation and Natural Resources for two years under former Democratic Gov. Ed Rendell. “The scale of this thing is off the charts. It’s unprecedented.”

Of particular concern are gathering lines, the pipes that carry gas from wells to long-distance transmission lines. Although they are often the same size as transmission lines and operate at the same pressure levels, about 90 percent of the nation’s gathering lines aren’t regulated by state or federal authorities.

In fact, regulators don’t even know where many gathering lines are located, even though they sometimes run close to homes and businesses.

Gathering lines are likely to generate even more controversy in the years ahead. The Interstate Natural Gas Association of America, an industry group, estimatedtwo years ago that more than 400,000 new miles of gathering lines will be installed by 2035.

Concerns about forest fragmentation due to industrial activity are not unique to Pennsylvania. In Alberta, Canada, for instance, recent oil and gas projects have reduced core forest area, including habitats for Woodland Caribou. As pipelines, roads and well pads slash across forests in Alberta, the Woodland Caribou, which tends to avoid forest edges, has been driven close to extinction.

Biologists and other forestry experts said curtailing or reversing the trend in Pennsylvania would be difficult because Pennsylvania’s land management system is so fragmented. The state does not own the mineral rights for about 15 percent of the forest it oversees, leaving those areas open to drilling.

The Nature Conservancy released a report three years ago projecting that under a medium-growth scenario, a minimum of 6,000 well pads with 60,000 wells will be drilled in Pennsylvania by 2030—and that two-thirds of them will be in forest areas.

In 2011, in testimony before the Maryland House Environmental Committee as an independent environmental consultant, Quigley warned that the cumulative effect of gas drilling “will dwarf all of Pennsylvania’s previous waves of resource extraction combined,” and that Maryland must avoid the mistakes that Pennsylvania has made.

Industry Dismisses Fears

On average, each well pad requires 8.8 acres to be cleared, according to The Nature Conservancy. About three of these acres are for the well pad itself, while the rest are needed for infrastructure such as roads, pipelines and water impoundments.

In total, the conservancy estimated that 61,000 forest acres in Pennsylvania will be cleared by 2030. The group believes this deforestation will affect an additional 91,000 to 220,000 acres of interior forestland near the developed areas.

The gas industry disagrees with conservationists about the impact of pipeline corridors on wildlife habitats. Right-of-ways with “widths typical of single natural gas pipeline facilities are not likely to present major problems,” said Catherine Landry, communications director for the Interstate Natural Gas Association of America.

John Stoody, director of governmental and public relations for the Association of Oil Pipe Lines, said: “Wildlife is invited to cross our rights-of-way happily and safely anytime they like.”

He also pointed out the tradeoff in using pipelines: When compared to trains and trucks, Stoody said, pipelines are a safer means of transportation with lower greenhouse-gas emissions.

The American Gas Association similarly denied that pipeline corridors cause forest fragmentation. A spokeswoman for the organization said they “can actually enhance habitat by serving to connect fragmented forest, allowing pathways for wildlife and creating forest edge meadowlands.” She cited alternate detrimental factors, contending that roadways, urbanization, agriculture and other human activities are the more likely culprits.

For decades now, ecologists and conservationists have been studying how human activities have disrupted forest ecosystems, including how far the impact extends from the actual site of a pipeline right-of-way. They have confirmed that the reverberations go deep into woodlands.

Recently, for example, researchers in Wyoming concluded that energy development in the state was leading to excessive habitat alteration and accelerating the decline of songbirds.

Scientists abroad have also examined the relationship between forest fragmentation and habitat loss.

Researchers in Australia analyzed several forest areas in India, South America and Indonesia and found that linear clearings like those linked to road and pipeline construction block the movement of some native animals and serve as pathways for invasive species.

“Pipelines are going in and dissecting forest habitats and creating corridors within (them),” saidMargaret Brittingham, an ecologist at Penn State University who has been studying the impact of gas drilling on forest habitats, concentrating on songbirds in Pennsylvania.

She and others have discovered that right-of-ways enable larger animals to move into parts of the interior forest they had not explored. As a result, interior species become exposed to new predators.

Brittingham and her colleagues predict that as more forest territory is chopped up into smaller pieces, habitat for specialists—species that require a specific set of conditions for survival—will decrease, which may in turn lead to their extinction. Those include the scarlet tanager, the blue-headed vireo and the hooded warbler.

In contrast, animals that tend to do well around people will likely increase in number. Raccoons, deer, crows and blue jays are among them.

“It’s a shift in the competitive advantages that you give species,” Brittingham said. “It’s biotic homogenization.”

Fighting for Rights

In their fight to preserve forests and biodiversity, conservationists and other wildlife advocates in Pennsylvania have confronted another adversary – the state’s property-rights system.

In Pennsylvania, surface and mineral rights are sold separately. That means while the stateDepartment of Conservation and Natural Resources oversees 2.2 million acres of forest, it owns only about 85 percent of the mineral rights in that area. The remaining 15 percent is still controlled by people who once owned parcels of the land—even though they have sold their parcels to the state. Those people can negotiate individual contracts for mineral-exploration leases, including fracking.

In a study of land-usage patterns in Pennsylvania’s interior forests, Brittingham and her colleagues found that development is greater on properties with private ownership of mineral rights. They said the split in private and public management of land will complicate the preservation efforts by agencies and nonprofit groups.

A major test case involves the Allegheny National Forest in Pennsylvania.

In 1923, the federal government purchased that forest, piece by piece, but landowners were given the option to sell surface rights or both surface and mineral rights. As a result, 93 percent of the mineral rights in the 510,000-acre forest are now held by a vast number of private owners.

Citing this surface-mineral rights bifurcation, the gas industry argues that the U.S. Forest Service cannot regulate drilling in the Allegheny because it does not own most of the mineral rights there. Environmental groups such as the Sierra Club and the Allegheny Defense Project insist the Forest Service has such authority as part of its overall mission to protect the forest.

In October, the Third Circuit Court of Appeals ruled in favor of the gas industry.

Meanwhile, Pennsylvania’s Department of Conservation and Natural Resources has logged a mixed record in its forestry-management efforts.

In 2010, the agency released a 48-page presentation on the state’s forestland, mapping ecologically sensitive regions, areas with gas leases and forest patches that had been severely fragmented. The department concluded that it could not lease out any more land for gas drilling without causing significant damage to forest habitats.

A few months before the study was released, the state issued two gas-drilling leases totaling more than 64,000 forest acres. The sale brought in $250 million and has led to approval for construction of 438 shale gas well pads.

After those leases were issued, the administration of Gov. Ed Rendell imposed a moratorium on the leasing of forestland. That measure remains in effect.

However, the current version of the 2010 presentation, which has been revised under the administration of Gov. Tom Corbett, a Republican who strongly supports the drilling industry, is only 12 pages long and no longer contains the strongly worded conclusion that any further leasing would be severely detrimental to forest ecosystems.

“Since the 2010 analysis, many things have changed—including our understanding of the development patterns and impacts, and technology related to horizontal drilling,” said Christina Novak, press secretary for the Department of Conservation and Natural Resources.

Novak also said the agency continues to maintain that the regions referenced in the 2010 presentation “are important areas to protect and consider if additional drilling is contemplated.”

Corbett once declared that he wanted to “make Pennsylvania the Texas of the natural gas boom.”

A month after taking office in 2011, he repealed a policy meant to minimize environmental damage to state parks. The architect of that repeal, Corbett’s former environmental protection commissioner, Michael Krancer, now works at a law firm with clients in the gas industry.

Last year, Corbett signed Act 13, which requires oil and gas companies to pay an impact fee for their projects. In 2012, the state distributed 60 percent of the more than $200 million it collected through that law to counties and municipalities. Themoney was spent on reducing taxes and repairing roads and stormwater drains.

The remaining 40 percent of the impact fee was divided among various state agencies, including the Department of Environmental Protection, Public Utility Commission and Marcellus Legacy Fund, which distributed funds for environmental and infrastructure projects.

Act 13 also requires the state to study the placement of natural gas gathering lines and investigate their environmental impact. The study, conducted last year, recommended that pipeline operators consult with experts to restore vegetation in right-of-ways and identify better ways to assess the environmental footprint of their activities.

The Business Case

Since activists and state regulators have little legal leverage over where gas wells are dug and pipelines laid in Pennsylvania, some environmental groups are looking for other strategies.

Working with the University of Tennessee, the Nature Conservancy has produced Development by Design, a software tool that allows pipeline companies to find routes that minimize ecological damage while also being cost-effective.

“Making the business case for these kinds of sustainability issues is absolutely key,” said Quigley, the former Pennsylvania environmental commissioner.

The conservancy is testing a beta version with four companies. Currently the software can analyze habitat fragmentation, provide information to minimize sediment loss and help evaluate the effect of pipeline crossings on rivers.

“Some companies seem to be very interested, others less so,” said Nels Johnson, the conservancy’s deputy state director for Pennsylvania. “The real question is whether [the companies will] use it in a way that fundamentally changes the way they do planning.”

For residents of Pennsylvania, the software will likely come too late.

One of those residents, Emily Krafjack, is president of the grassroots groupConnection for Oil, Gas & Environment in the Northern Tier. Since 2010, she has been providing property owners with information about pipelines in an effort to balance gas-industry exploration with safeguarding landowners’ rights, the environment and the region’s traditional way of life.

She said the rampant development—the rumbling of construction trucks, the ever-greater intrusion into forests—has caused Pennsylvania to lose its charm.

On a recent drive around some of the forestlands, Krafjack pointed to the pipeline right-of-ways that periodically sliced through the forest. She said she sometimes struggles to recognize her hometown. “I’m over 50 now,” Krafjack said, “and I just can’t catch my breath.”

 

What Happens When The Oil Runs Out? | CollapseNet

What Happens When The Oil Runs Out? | CollapseNet.7-31-2013-king-hubbert

Summary of a lecture by Professor Chris Rhodes to the Conway Hall Ethical Society, Conway Hall, Red Lion Square, London. 11.00 am, Sunday July 28th, 2013.

The world supply of crude oil isn’t going to run out any time soon, and we will be producing oil for decades to come. However, what we won’t be doing is producing crude oil – petroleum – at the present rate of around 30 billion barrels per year. For a global civilization that is based almost entirely on a plentiful supply of cheap, crude oil, this is going to present some considerable challenges. If we look over a 40 year period, from 1965 to 2005, we see that by the end of it, humanity was using two and a half times as much oil, twice as much coal and three times as much natural gas, as at the start, and overall, around three times as much energy: this for a population that had “only” doubled. Hence our individual average carbon footprint had increased substantially – not, of course, that this increase in the use of energy, and all else, was by any means equally distributed across the globe.

 From the latest document that I can find – the B.P. Statistical Review – we see that the majority form of energy used by humans on earth is crude oil, accounting for 33% of our total, closely followed by coal at 30%: a figure that is rapidly catching up with oil, as coal is the principal and increasing source of energy in developing nations such as China and India. Natural gas follows in a close third place, at 24%; nuclear and hydroelectric power at 5-6% each; and the tiny fraction of our overall energy that comes from “renewables”, is just 1.6%. Thus, we are dependent on the fossil fuels for 87% of our energy. Now, such a comparison is almost misleading and naïve, because it tacitly presumes that if our oil supply becomes compromised, we can make a simple substitution for it using some other energy source.

However, this is not so readily done in practice, because oil is a particular and unique substance, having both a high energy content, and that it is readily refined into liquid fuels – effectively by distillation – to provide the petrol and diesel that runs practically all of the world’s transportation. Moreover, everything we depend upon – literally everything: food, materials, clothes, computers, mobile phones, pharmaceuticals etc. – for our daily existence is underpinned by a plentiful supply of cheap crude oil. So, the loss of this provision is going to have a profound, and shattering effect on human civilization.

In the “good old days”, e.g. the Humphrey Jones “Giant Gusher” drilled in Texas in 1922, it was necessary only to drill a hole in the ground to get oil. An oil well contains not only oil, but gas at high pressure, meaning that once the cap-rock that holds it all in place is broken, the oil is forced out in that familiar jet of black gold. The good old days indeed, because then it was necessary only to expend an amount of energy equal to that contained in one barrel of oil to recover a hundred barrels, which is like investing a pound and getting a return of a hundred pounds – a very good net profit. In 2013, the return is maybe twenty pounds or just three for extra-heavy oil, or for “oil” derived from tar sands, once it has been upgraded into liquid fuel.

Of greatest concern is how much oil is remaining. As noted, we currently use 30 billion barrels a year – 84 million barrels a day, or a thousand barrels every second. When it is trumpeted about some new and huge find of oil, e.g. the Tupi field off Brazil, thought to contain 8 billion barrels, in reality this is only enough to run the world for three months. Context should not be lost in these matters. The quality of the oil is also at issue. For example, much of the remaining oil is of the “heavy”, “sour” kind, meaning that it is not necessarily liquid at all, but bitumen, and contains relatively high levels of sulphur, necessitating complex and energy-intensive processing to get the sulphur out – which would otherwise be corrosive toward the steel used in the refinery – and to crack the heavier material into lighter fractions that can be used as fuel, or as feedstocks for industry.

So, it’s not just that we have got through much of our original bestowal of oil, but that what remains is of poorer quality – in other words, we have used-up most of the “good stuff”! Oil shale is not oil at all, but contains a material called “kerogen” which is a solid and needs to be heated to five hundred degrees Centigrade to break it down into a liquid form that in any way resembles what we normally think of as “oil”. So, when it is claimed that there are “three trillion barrels” of oil under America, really this is only to encourage voters and investors, because the actual Energy return on Energy Invested (EROEI) is so poor that there has been no serious commercial exploitation of oil shale to date, and probably there never will be.

Not only are we entirely dependent on crude oil for all our fuel and materials, but without cheap crude oil, and natural gas to make nitrogen fertilizers, we could grow no food. If we look at a field of soya beans being harvested in Brazil, we see a number of features. For one, those beans are not consumed at source, but are transported around Brazil and around the world. So, oil-derived fuels are necessary not only to run the tractors and combine harvesters, but the trucks, ships and planes to move the crop onto the world markets. In addition, we see the vast clouds of dust being thrown up behind the marching array of mighty machines – combine harvesters – which represents the loss of top-soil.

Even if we could solve all our energy problems, we are consuming the living and fragile portion of the earth’s surface that is our soil, and upon which we are utterly dependent to grow any food at all. We have “lost” around one third of our soil in the past half century – much of this through unsound and unsustainable agricultural practices – which does not bode well for the survival of a burgeoning human population. Another feature is that this land was once rain forest, which has been cleared to use the land for farming.

This is done either simply by setting fire to the forest, or by more exquisite means, such as taking a ship’s anchor chain, four hundred feet long – and if it is two inches in diameter, weighing five tonnes – then stringing it between two one hundred tonne tractors and simply driving over the terrain, so that the chain rips through everything that is there, tearing the trees out by their roots and destroying the structure of the soil in the process. The upshot is that the soil becomes unproductive within only a few years and so it is necessary to move on and do the same thing elsewhere.

In Britain we import about 40% of what we eat, and we use around 7 million tonnes of crude oil each year to fuel our food-chain. It can be said that we literally “eat oil”.

The concept of “Peak Oil” is due to Marion King Hubbert, a petroleum geologist working for the Shell Development Company in Texas, who predicted that oil production in America would peak in 1970. At that time, Texas was “awash” with oil – America being the world’s major oil-exporting nation then – and so no one took him seriously: but when in 1970, he was proved correct, Hubbert’s Peak entered the realm both of hard science and folklore. According to Hubbert, there is a 40 year lag between the year of peak discovery and that of peak production. If we apply this to the world situation, where global oil discovery peaked in 1965, we expect a global production in 2005. Indeed world production of oil has been on a flat line since 2005, and it is thought that we are at the production limit.

The price of oil has quadrupled in the past 10 years, reflecting the more strenuous efforts that are necessary to maintain production: deepwater drilling, fracking, tar sands, all of which have much lower energy returns than for conventional crude oil. Indeed, oil that is recovered from fracking costs about $105 a barrel to produce which until recently was more than it could be sold for. However, the price of oil is creeping up, and the industry is prepared to bear the loss for now, because it knows that the price of a barrel of oil will shortly rocket, and having cornered this “new” portion of the industry, will make big profits. Oil companies are not charities, after all. I emphasis the word “new” because fracking – properly called hydraulic fracturing – has been around since 1947: what is new is the combination of this technique with horizontal drilling, meaning that porous but impermeable rocks can be drilled-out laterally, then “fracked” to break them open thus releasing the oil or gas that they contain.

Fracking is a controversial matter, and there are grave concerns about groundwater contamination from the process. It is not only the fear that the chemicals that were originally present in the fracking fluid might migrate upward into the water table, but that other toxic materials, e.g. radon, that were confined safely within the natural prevailing geology, might be exhumed too. The Royal Society (U.K. equivalent of a national academy of sciences) has concluded that the procedure is safe, so long as it is strictly regulated, but how can this be guaranteed, when profits are the order of the day, and if the technology is to be employed across the world?

What too will become of the millions of gallons of contaminated water, injected under great pressure into the wells to fracture the rock, that remains? Will this be disposed of safely or simply left behind, potentially to leak into and contaminate the groundwater and the soil? This would be a tragic and cruel legacy for future generations.

Analyses made by both the International Energy Administration (IEA; effectively part of the U.S. Department of Energy) and its counterpart organisation, the Paris-based Energy Information Agency (EIA), concur that we will have lost around half our production of conventional crude oil by 2030. This is equivalent to four times the present output of Saudi Arabia, and it seems highly unlikely that this gap in supply can be filled from unconventional sources. Since we are entirely dependent on crude oil to fuel the world’s transportation, and looking at the amount of oil we are likely to be left with, we may conclude that it will be necessary to curb transportation by about 70% over the next 20 years.

This means the loss mainly of personalized transport and it is unfeasible that there will be 34 million electric cars in the U.K. (the current number of oil-fuelled cars) any time soon, and in reality, never. The only sensible means to move people around using electric power is by light rail and tramways, i.e. mass-transit systems.

If we can’t address the problem from the supply side we have to curb our demand. In the absence of cheap and widely accessible transport we will need to produce far more of our food and materials at the local level. Such a metamorphosis of human civilization from the global to the local, will be underpinned by building strong, resilient communities in which people share their skills and knowledge, to provide as much as possible at the local, grass-roots level. This is the underpinning philosophy of the growing network of Transition Towns. Frightening though all of this is, we may evolve into a happier and more fulfilling state of living than a perceived status quo, that in truth is all too rapidly running through our fingers.

By. Professor Chris Rhodes

 

Peak Oil responds, “The report of my death was an exaggeration.”

Peak Oil responds, “The report of my death was an exaggeration.”

my_tombstone

A recent post entitled The Welcome Death of Peak Oil by George Koch on the Ludwig von Mises Institute of Canada website begins with the following optimistic comment: “Improved technology and more efficiency mean North America could eventually become an oil exporter.” [i]   The author goes on to argue that technology has placed the theory of Peak Oil in its grave and that energy independence for North America is just around the corner. That Peak Oil is a mistaken and buried theory has been argued recently elsewhere,[ii] and the idea of North American energy independence is one that has been and continues to be widely disseminated by the corporate media, the oil industry, and investment firms.[iii] There is one significant problem, however. The statement is based on an unsound foundation.

The notion that hydraulic fracturing will result in American energy independence appears to have been debunked.[iv] In fact, just recently Faith Birol, president of the International Energy Administration, has stated that the increase in American oil production is simply a surge, not a revolution.[v]  To put it simply: the bold assertion of energy independence is predicated on early production numbers of shale oil wells; unfortunately, these production rates cannot be sustained for very long except through an exponential increase in the number of wells drilled.[vi] This only serves, however, to increase the speed at which the resource deposit is drawn-down, quickening the arrival of the day that the wells will no longer be economically viable. It is interesting to note that a number of companies have already lost money investing in shale oil and others are actively looking to get out of the business.[vii]

If an argument’s underlying foundation is faulty, then it is axiomatic that the conclusion drawn from it is also flawed. To paraphrase that classic movie, Monty Python and The Holy Grail, Peak Oil is ‘not quite dead yet’. In fact, I would argue that it is alive and as pertinent as ever, perhaps more so. I offer the following evidence to support that view.

While the American government was not interested in the topic of Peak Oil when Marion King Hubbert first proposed the model for petroleum resource depletion in 1948, by 1974, shortly after his prediction of US oil production peaking became reality, Hubbert was asked to provide written testimony to a Congressional committee writing the National Energy Conservation Policy Act as to the impact of Peak Oil on the monetary system.[viii] Jimmy Carter’s administration was driven by the concept of finite resources, creating the Department of Energy and prompting the president to present the issues in a televised speech in 1977.[ix]

More recently, the secretive National Energy Policy Development Group (NEPDG)–that was created only ten days after George Bush defeated Al Gore for the 2001 presidency and placed under the direct authority of Vice President Dick Cheney–brainstormed for ten meetings over an nine week period from January to May 2001 about Peak Oil and other energy security issues; issues that would significantly shape American government policies for the next few years. Although agendas and minutes of the meetings have been classified, seven pages were released after two lawsuits. These pages show that the group was reviewing how much oil remained in the world, where it was located, and who controlled it.[x] The public report from the NEPDG made dozens of recommendations based on the underlying belief that oil resources were finite and securing them were in the national interest of the United States.[xi]

The picture has not changed. The shale oil ‘boom’ is a short-term blip in a long-term trend that has been known to the American government for decades. The fact is the previous American administration perceived the issue of energy security as one requiring immediate response by all levels of government. I think most would acknowledge that the geopolitical tensions and military interactions in the Middle East over the last several decades have been centred upon one main objective: control of the oil and gas in the region. The idea of Peak Oil was very much driving American policy, especially foreign policy, less than a decade ago and it’s naïve to believe it is no longer a driving force in the current administration’s geopolitical strategising. Despite assurances and rhetoric, the current administration has not drawn down the number of military personnel in the Middle East and has actually become involved in additional conflicts in the region (e.g. Libya, Syria).[xii]

Leaving North America for the moment. It was only three years ago that the Future Analysis Branch of the Bundeswher Transformation Centre, a branch of the German military,[xiii] carried out its initial study for the German government’s Federal Ministry of Defence on the impact of Peak Oil.[xiv] As taken from the report’s Forward: “…the purpose of security-related future analysis is to acquire knowledge precociously and scientifically based in order to refine conceptual specifications and objectives without making predictions…[and] to enable the Federal Ministry of Defence to identify long-term issues with relevance to security policy at an early stage...” That Germany focused this branch’s first research on the topic of Peak Oil and its security implications speaks volumes as to the seriousness of finite oil resources and how they will impact the globe.

But back to the idea that Peak Oil is dead and buried. Here is what the report has to say: “It is a fact, however, that oil is finite and that there is a peak oil. Since this study is mainly focused on understanding cause-effect relations following such a peak oil situation, it is not necessary to specify a precise point in time…. Depending on the development of globally relevant factors, we cannot rule out that peak oil could have serious security policy implications within the review period of the 30-year investigation perspective” (emphasis added). So, the German military and the German Federal Defence Department not only believe that Peak Oil exists, but that the country must begin to prepare for the implications of Peak Oil sooner rather than later.

I think one has to take a step back in temporal perspective to get a good view of Peak Oil and to understand it and its implications for our global, industrial world. After about 200,000 years of low energy existence, humans happened upon a one-time windfall of energy-intensive resources and it has taken us less than two centuries to reach the production peak of this resource bonanza. On the way up the curve we have used the easy-to-retrieve and highest energy-return-on-energy-invested (EROEI) resources first, leaving us the less energy efficient (lower EROEI) and much more difficult-to-retrieve and expensive dregs; much of which may never get extracted.

Small ‘successes’, such as that of the American shale oil industry’s, are seen as minor deviations or perturbations in the long-term picture that emerges. For example, discoveries at Prudhoe Bay, Alaska, bumped up American oil production for a few years in the late 1970s and early 1980s but by the mid- to late-1980s the country resumed its journey down the Hubbert curve that began in 1970. The same pattern seems to be emerging with the ‘shale boom;’ a slight blip in the production numbers for a couple of years beginning in late 2009 and then it will be back to the downward slide of Hubbert’s Peak in the not-too-distant future.

alaska and shale

This is not just true of the U.S.. It is true of every oil-producing country. Peak Oil is factual and based upon geologic patterns observed in every finite resource extracted to date. In fact, M.K. Hubbert predated his work on petroleum resources by studying extraction rates for various minerals that mimic the Hubbert curve.[xv]

The implications of Peak Oil are sure to be extremely upsetting to many. They range from James Howard Kunstler and John Michael Greer’s argument that the transition from fossil fuels will be a rather gradual fall from grace that will take generations, with possible spits and spurts of crises[xvi], to Michael Ruppert’s more apocalyptic and quick-moving collapse scenario. The reality of it, however, cannot be denied. But denial, of course, is the first stage of the Kubler-Ross model, also known as the five stages of grief, that psychiatrist Elisabeth Kubler-Ross uses to argue that when faced with impending death or some other horrible fate, a person will experience a series of emotional stages: denial, anger, bargaining, depression and acceptance.[xvii]

We won’t know when we’ve actually passed the peak of the Hubbert Curve with respect to oil production except in retrospect, and there are not likely to be any apocalyptic scenarios emerging as a result when we do; the truth is we may have already passed the point–global production rates of conventional oil have not moved above the levels reached in 2005/06.[xviii] There are many who have learned to accept it as inevitable but there are also a great many people still in the denial stage about Peak Oil.

Until more people arrive at the last stage of acceptance, we are destined to hear and read more stories with the theme reflected in Koch’s post. That Peak Oil is dead, technology will continue to save the day, and it’s time to move along, there’s nothing to see here. Unfortunately, I believe that the longer we maintain policies based on a denial of its existence, the less likely we will be able to prepare ourselves adequately and the more dire of the consequences will emerge.

What will befall an energy-dependent society as it begins its trip down the global, post-peak curve of Hubbert’s model can only be imagined. Will it reflect the brutal world of the television show Revolution where the power grid has failed due to wayward nanites?[xix] While failure of the grid in this science fiction series is not the result of Peak Oil, grid failure is a real possibility in a post-Peak Oil world, as pointed out by Richard Duncan in his Olduvai Theory.[xx] Will there be a massive die-off of humans as some predict?[xxi] Nobody knows.

One thing is sure though.

Peak Oil is dead, long live Peak Oil.


[i] G. Koch. The Welcome Death of Peak Oil. http://mises.ca/posts/blog/the-welcome-death-of-peak-oil/. November 9, 2013.

[ii] R. Wile. Peak Oil is Dead. http://www.businessinsider.com/death-of-peak-oil-2013-3. March 29, 2013.

B. Walsh. The IEA Says Peak Oil is Dead. That’s Bad News for Climate Policy.

http://science.time.com/2013/05/15/the-iea-says-peak-oil-is-dead-thats-bad-news-for-climate-policy/. May 15, 2013.

D. Blockman. As Fracking Rises, Peak Oil Theory Slowly Dies. http://www.forbes.com/sites/davidblackmon/2013/07/16/as-fracking-rises-peak-oil-theory-slowly-dies/. July 16, 2013.

K. Smith. No Peak Oil Really is Dead.

http://www.forbes.com/sites/modeledbehavior/2013/07/17/no-peak-oil-really-is-dead/. July 17, 2013.

[iii] G. Smith. U.S. to Be Top Oil Producer by 2015 on Shale, IEA says.

http://www.bloomberg.com/news/2013-11-12/u-s-nears-energy-independence-by-2035-on-shale-boom-iea-says.html. November 12, 2013.

P. Domm. Ship, baby, ship! Calls come for U.S. to export oil. http://www.cnbc.com/id/101087815. October 4, 2013.

R. Plank. North American Energy Independence Now Possible. http://www.chron.com/business/energy/article/North-American-energy-independence-now-possible-4007354.php. November 4, 2012.

D. Burney and F.O. Hanson. Pipelines are the ticket to North American energy independence. http://www.theglobeandmail.com/globe-debate/pipelines-are-the-ticket-to-north-american-energy-independence/article8952216/. February 22, 2013.

C. Assis. North America energy independent by 2020, but still tied to markets: report. http://blogs.marketwatch.com/energy-ticker/2013/09/27/north-america-energy-independent-by-2020-but-still-tied-to-markets-report/. September 27, 2013

Wood Mackenzie Press Release. Wood Mackenzie: Global Geopolitics Reshaped by North American Energy Independence. http://www.woodmacresearch.com/cgi-bin/wmprod/portal/corp/corpPressDetail.jsp?oid=11572576. September 26, 2013.

S. Arsenault. U.S. could reclaim role as net energy exporter. http://www.aljazeera.com/indepth/features/2013/08/2013831142514713250.html. August 31, 2013.

[iv] W. Koch. Could fracking boom peter out sooner that DOE expects? http://www.usatoday.com/story/news/nation/2013/11/03/fracking-boom-bust-us-energy-independence/3328561/. November 3, 2013.

T. Whipple. The Peak Oil Crisis: The Shale Oil Bubble. http://www.resilience.org/stories/2013-10-30/the-peak-oil-crisis-the-shale-oil-bubble. October 30, 2013.

R. Heinberg. America’s natural gas revolution isn’t all it’s ‘fracked’ up to be. http://www.csmonitor.com/Commentary/Opinion/2013/1023/America-s-natural-gas-revolution-isn-t-all-it-s-fracked-up-to-be. October 23, 2013.

M. Mushalik. The U.S. will always remain a crude oil importer. http://www.resilience.org/stories/2013-10-31/us-will-always-remain-crude-oil-importer. October 31, 2013.

S. Kelly. Could California’s Shall Oil Boom Be Just a Mirage? http://www.desmogblog.com/2013/11/07/could-california-s-shale-oil-be-just-mirage. November 7, 2013.

M. Lardelli. The propaganda campaign against peaking fossil fuel production. http://www.resilience.org/stories/2013-11-05/the-propaganda-campaign-against-peaking-fossil-fuel-production. November 5, 2013.

J.D. Hughes. Drill, Baby, Drill: Can unconventional fuels usher in a new era of energy abundance? http://www.postcarbon.org/reports/DBD-report-FINAL.pdf. February 2013.

[v] K. Cobb. Will the real International Energy Agency please stand up? http://resourceinsights.blogspot.ca/2013/11/will-real-international-energy-agency.html/ November 16, 2013.

[vi] SRSrocco. The coming bust of the great Bakken Oil Field. http://srsroccoreport.com/the-coming-bust-of-the-great-bakken-oil-field/the-coming-bust-of-the-great-bakken-oil-field/. November 16, 2013.

M. Katusa. U.S. #1 in Oil: So Why Isn’t Gasoline $0.80 per Gallon? http://www.caseyresearch.com/cdd/us-1-in-oil-so-why-isnt-gasoline-0.80-per-gallon. October 29, 2013.

[vii] K. Sloan. What’s next for oil shale? http://thebusinesstimes.com/whats-next-for-oil-shale/. October 8, 2013.

G. Chazan. Shell write-down bad new for US shale.

http://www.ft.com/intl/cms/s/0/cf41cc36-fab2-11e2-87b9-00144feabdc0.html#axzz2jdcgNfoR. August 1, 2013.

G. Chazan. Peter Voser says he regrets Shell’s huge bet on US shale.

http://www.ft.com/intl/cms/s/0/e964a8a6-2c38-11e3-8b20-00144feab7de.html?siteedition=intl. October 6, 2013.

[viii] M. King Hubbert. On the Nature of Growth. http://www.hubbertpeak.com/hubbert/OnTheNatureOfGrowth.pdf. 1974.

[ix] J. Carter. Primary Resources: Proposed Energy Policy. http://www.pbs.org/wgbh/americanexperience/features/primary-resources/carter-energy/. April 18, 1977.

Miller Center, University of Virginia. Jimmy Carter. http://millercenter.org/president/carter/essays/biography/print.

[x] M. Ruppert. Collapse. http://www.imdb.com/title/tt1503769/. 2009.

Wikipedia. Energy Task Force. http://en.wikipedia.org/wiki/Energy_Task_Force

On the Issues. Dick Cheney on Energy and Oil. http://www.ontheissues.org/celeb/Dick_Cheney_Energy_+_Oil.htm.

Haliburton Watch. Energy Task Force. http://www.halliburtonwatch.org/about_hal/energytf.html.

Sourcewatch. Cheney Energy Task Force. http://www.sourcewatch.org/index.php?title=Cheney_Energy_Task_Force.

[xi] Report of the National Energy Policy Development Group: Reliable, Affordable, and Environmentally Sound Energy for America’s Future. http://www.gcrio.org/OnLnDoc/pdf/nep.pdf. May 2001.

[xii] T. Dokoupil. Who’s the War President? http://www.thedailybeast.com/articles/2011/08/05/president-obama-president-bush-and-the-march-of-u-s-soldiers-abroad-where-they-are-and-why.html. August 5, 2011.

D. Degraw. Obama Far Outdoes Bush in Escalating War–The Numbers Will Surprise You. http://www.alternet.org/story/144449/obama_far_outdoes_bush_in_escalating_war_–_the_numbers_will_surprise_you. December 8, 2009.

P. Woodward. More US troops deployed overseas under Obama than Bush. http://warincontext.org/2009/10/13/more-us-troops-deployed-overseas-under-obama-than-bush/. October 13, 2009.

[xiv] Future Analysis Branch, Bundeswher Transformation Centre. Peak Oil: Security policy implications of scarce resources. http://www.jpods.com/JPods/004Studies/PeakOil_StudyEN_GermanArmy.pdf. November 2010.

[xv] M. King Hubbert. Future Ore Supply and Geophysical Prospecting: Mineral Properties Now Entering a  New Epoch. http://www.hubbertpeak.com/hubbert/FutureOreSupply.pdf. January 1934.

[xvi] J.M. Greer. The Long Descent: A User’s Guide to the End of the Industrial Age. http://www.newsociety.com/Books/L/The-Long-Descent. 2008.

J.H. Kunstler. The Long Emergency: Surviving the Converging Catastrophes of the Twenty-First Century. http://www.amazon.ca/The-Long-Emergency-Catastrophes-Twenty-First/dp/0802142494. 2005.

[xviii] M. McDermott. IEA chart says conventional oil production peaked in 2006. http://www.treehugger.com/corporate-responsibility/iea-chart-says-conventional-oil-production-peaked-in-2006.html. November 11, 2010.

D. Biello. Has Petroleum Production Peaked, Ending the Era of Easy Oil?  http://www.scientificamerican.com/article.cfm?id=has-peak-oil-already-happened. January 25, 2012.

[xix] Wikipedia. Revolution (TV Series). http://en.wikipedia.org/wiki/Revolution_(TV_series).

[xx] R. Duncan. The Olduvai Theory. http://www.thesocialcontract.com/artman2/publish/tsc1602/article_1362.shtml. Winter 2005/06.

The Olduvai Theory: Terminal Decline Imminent. http://www.thesocialcontract.com/artman2/publish/tsc1602/article_1362.shtml. Spring 2007.

America: A Frog in the Kettle Slowly Coming to a Boil.

http://www.thesocialcontract.com/artman2/publish/tsc1602/article_1362.shtml. Fall 2007.

The Olduvai Theory: Towards Re-Equalizing the World Standard of Living. http://www.thesocialcontract.com/artman2/publish/tsc1602/article_1362.shtml. Summer 2009.

[xxi] M. Savinar. The Peak Oil and Die-Off. http://www.unicamp.br/fea/ortega/eco/traducao-DieOff.pdf

J. Siman. Speaking very gently about die-off. http://www.resilience.org/stories/2006-10-10/speaking-very-gently-about-die. October 10, 2006.

N. Hagens. Jay Hansen and Dieoff.org. http://www.theoildrum.com/story/2006/7/13/21018/2121. July 24, 2006.

The Coming Bust of the Great Bakken Oil Field : SRSrocco Report

The Coming Bust of the Great Bakken Oil Field : SRSrocco Report.

The Coming Bust of the Great Bakken Oil Field

Filed in Energy by  on November 16, 2013

There has been a lot of Fanfare on the huge increase of oil production coming from the Bakken Field located in North Dakota.  There are many stories of people moving to the state to take advantage of the new OIL BOOM.  It seems like everyone is going there to start a new life and make it rich in one of the coldest areas in the United States.

However, with all BOOMS, comes the inevitable BUST.  This was true shown by the famous example of the 1800′s California gold rush:

California_Gold_Production

According to the article, “The Bakken Boom: The Modern Day Gold Rush”:

Despite the low productivity of the labor-intensive process of gold panning, annual production grew from just over 1,400 ounces in 1848 to more than 3.9 million ounces by 1852. To put this into perspective, prior to 1848, cumulative U.S. gold production amounted to just over 1 million ounces.

Of course nuggets are easier to find than flakes, and the great majority were discovered in the first few years. By 1852, only four years after gold was first discovered, California gold production began a rapid descent. Production declined 50% by 1862 and 80% by 1872.

The decline was only barely checked by the adoption of ‘hydraulic mining’ – a process by which massive amounts of water under intense pressure is used to disintegrate entire hillsides. At the North Bloomfield mine, for example, 60 million gallons of water per day eroded more than 41 million cubic yards of debris between 1866 and 1884. (http://www.sierranevadavirtualmuseum.com/docs/galleries/history/mining/hydraulic.htm)

Typical of all BOOMS, production increases exponentially, peaks and then declines in the same fashion.  However, Even with high-tech hydraulic water mining techniques, the industry could never produce more gold than it did in 1852 when it reached nearly 4 million ounces.

BAD NEWS FOR THE BAKKEN:  Decline Rate of 63,000 Barrels A Day

The EIA – U.S. Energy Information Agency is now putting out data on the individual shale oil and gas plays in the country.  While the American public and world have been made aware of the huge increase in oil production coming from the Bakken, few are privy to the dark side of the equation.  The Bakken’s daily decline rate from their existing oil wells has reached a staggering 63,000 barrels a day.

Bakken 63000 Oil Decline Chart

This means, that every day the Bakken pumps oil, its existing wells are now declining 63,000 (bd) barrels a day.   As you can see from the chart above, the rate really started to decline in a big way after 2011 when the average daily decline was only 20,000 bd.  In less than 3 years, this rate has increased more than 3 times (63,000 bd).

This next chart gives us the total as well as net oil production increases month over month:

Bakken Legacy Decline

The EIA is showing what is indicated to take place in December over November.  If we look at the actual data that comes out of the North Dakota Department of Mineral Resources, Bakken oil field production in September hit 867,123 bd.  The difference to reach that 1 million barrels a day is coming from the Montana portion of the Bakken.

Here is an actual screenshot of the ND DMR’s monthly report released November 5th:

ND Directors Cut

Moreover, if we look at total production, again using the North Dakota DMR’s data, their total oil production data for the state in September was 931,940 bd.  This includes oil production outside the Bakken and Three Forks (data for Bakken in the EIA charts includes Three Forks).

Astonishingly, 93% of North Dakota’s oil production comes from the Bakken region alone.

The Bakken Drilling Frenzy Gives The Illusion of Sustainable Growth

The typical American believes the United States has all this hidden oil and gas resources that we can easily tap into.  I just had a conversation with a neighbor yesterday who told me that he couldn’t understand why we weren’t “ENERGY INDEPENDENT.”  Gosh, if I had a dollar for every time someone said that…

Again, the public is only told about all the huge increases in production, but for some strange reason, MSM tends to omit the negative side.  The only way oil production is increasing in the Bakken is due to the massive amount of new wells that have been added.  The chart below reveals the illusion of this sustainable growth:

Bakken Production & Producing Wells

First, the figures in white represent North Dakota’s total wells producing for their production of the Bakken.  Even though the graph includes Montana’s production, it still gives us a good idea of the huge increase in oil wells it takes to grow production.

Second, in 2008, the Bakken in North Dakota only had 479 producing wells, however at last count in September when then Bakken was producing 867,123 barrels of oil a day, it took 6,447 wells to do so.  Thus, the energy companies drilling and producing oil in the Bakken have to keep increasing wells each month (and year) to offset the huge 63,000 bd decline.

For example, there were an additional 135 new wells (ND) producing in Sept. over Aug. which added 20,589 bd of production.  If there were only say 100-105 new wells added that month, production would have remained flat or possibly declined for Sept.

Lastly, the best and most productive wells are exploited first leaving the dead-beats for last.  This will make things even more fun as the peak and subsequent bust finally arrives.

The Coming Bust of The Great Bakken Field

As with all oil fields, there are only so many sweet spots and areas to drill.  The 63,000 bd decline rate at the Bakken only has one way to go — and that’s higher.   If the present trend continues (highly likely) then we are going to see a daily decline rate of 75-85,000 barrels a day by the end of 2014.

Thus, the shale oil players are going to have to make those drilling hamsters work even harder as they will need to increase more wells each month just to grow production.  At some point in time (sooner rather than later), the daily decline rate will reach a figure that these companies will be unable to offset.

There are only so many drilling locations available and once they run out, the Great Bakken Field will become a BUST as the high decline rates will push overall oil production down the very same way it came up.

Those who moved to the frigid state of North Dakota with Dollar signs in their eyes and images of sugar-plums dancing in their heads will realize firsthand the negative ramifications of all BOOM & BUST cycles.  At this time, the word “Cold” will have more than one meaning.

Once the Bakken and Ealge Ford oil fields peak and decline, the United States has no other “ENERGY RABBIT” in its hat.  This is precisely why investors need to understand energy and why its important to own physical assets such as gold and silver.

Check back for more updates at the SRSrocco Report.

 

Greenhouse gas reduction called threat to oil industry – Politics – CBC News

Greenhouse gas reduction called threat to oil industry – Politics – CBC News.

Greenhouse gas reduction called threat

Alberta’s proposed oil and gas regulations are too ambitious and will hobble the Canadian industry’s ability to compete, says the industry association in Alberta government documents obtained through provincial freedom of information laws.

The industry group says the proposed regulations won’t buy any goodwill and the government should delay their introduction.

The 200-page trove of memos, correspondence and reports offers a rare glimpse behind boardroom doors at the negotiations between industry and government to craft rules to reduce greenhouse gas emissions.

The Canadian Association of Petroleum Producers offers blunt assessments of Alberta’s plan to introduce rules that would demand industry reduce greenhouse gases by 40 per cent per barrel and charge $40 per tonne of CO2 above that level.

David DalyDavid Daly, the Canadian Association of Petroleum Producers’ manager of fiscal policy, penned the file titled CAPP Concerns and Questions for Alberta and Consultants. It was made public under Alberta’s freedom of information legislation. (LinkedIn Photo)

Alberta already has a carbon pricing scheme that costs CAPP members about 10 cents per barrel of oil. The new plan could cost industry up to 94 cents per barrel.

“Proposed 40/40 is 9 fold increase over current. Why such a dramatic step?” writes David Daly, CAPP’s manager of fiscal policy. The average price that a barrel of western Canadian bitumen fetched in 2013 was about $75, so the carbon-pricing increase would represent about a one per cent increase in the cost of a barrel oil.

That is just one quote from a file titled, CAPP Concerns and Questions for Alberta and Consultants. It tells the tale of an industry afraid that strong oil and gas regulations will rob it of what little competitive edge it has.

Strikingly candid comments

The candour is striking:

  • “Will higher stringency requirements impact production and revenue? Very likely.”
  • “GHG policies should be done in concert with other jurisdictions. US has no carbon tax. Why be so far out in front of them? What is that based on?”
  • “Will higher stringency requirements [oil and gas regulations] deliver greater GHG reductions? Unlikely. The challenge with the oil sands is that current technology is not yet available for deployment.”

In the end, the industry’s prescription is to delay putting the regulations into effect.

“Major policies like this one should not be fast-tracked. Adequate time is required for study analysis and consultation,” writes Daly.

That suggestion irks environmentalists, who point out that negotiations over oil and gas regulations between industry and the federal and provincial governments have been going on for over two years.

“This is not a case where we need more research. We need more action and that’s what hasn’t been happening,” argued Clare Demerse of the Pembina Institute, an environmental think-tank.

The industry defends itself by pointing out that the documents provide just a snapshot in the middle of negotiations and that nothing is final yet.

“What we want to ensure is that we’ve got a competitive industry in Canada that can continue to grow, but also, very importantly, can continue to invest in the technologies that are going to be extremely important in driving down greenhouse gas emissions,” said David Collyer, CAPP’s president, in an interview with CBC News.

In the documents, the CAPP plan calls for a 20 per cent intensity reduction and $20 per tonne of CO2.

That is half of what the Alberta government’s plan is and only marginally stronger than the regulations now — 12 per cent and $15, said Demerse.

But the CAPP document explains the association’s approach.

“Will higher stringency requirements ‘secure’ social license [public support] and forestall negative policy action elsewhere? Unlikely,” writes Daly.

Demerse, on the other hand, believes that weak regulations are just going to make doing business harder for the oil and gas industry.

“The customers of the oilsands are asking very tough questions. Right now, the sector does not have good answers to give. When they continue to ask for what is essentially the weakest possible regulation, I don’t think that is working for their real best interest.”

 

US #1 in Oil: So Why Isn’t Gasoline $0.80 per Gallon? | Casey Research

US #1 in Oil: So Why Isn’t Gasoline $0.80 per Gallon? | Casey Research. (source)

While the White House spied on Frau Merkel and Obamacare developed into a slow-moving train wreck, while Syria was saved from all-out war by the Russian bell and the Republicrats fought bitterly about the debt ceiling… something monumental happened that went unnoticed by most of the globe.

The US quietly surpassed Saudi Arabia as the biggest oil producer in the world.

You read that correctly: “The jump in output from shale plays has led to the second biggest oil boom in history,” stated Reuters on October 15. “U.S. output, which includes natural gas liquids and biofuels, has swelled 3.2 million barrels per day (bpd) since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia’s output from 1970-1974.”

After the initial moment of awe, pragmatic readers will surely wonder: Then why isn’t gasoline dirt-cheap in the US?

There’s indeed a good explanation why most Americans don’t drive up to the gas pump whistling a happy tune (and it has nothing to do with evil speculators). Let’s start with the demand side of this equation.

Crude oil consists of very long chains of carbon atoms. The refineries take the crude and essentially “crack” those long chains of carbon atoms into shorter chains of carbon atoms to make various petroleum products. Some of the products that are made from petroleum may surprise you.

Top 10 Things You Didn’t Know
Use Compounds Made from Crude Oil

  1. Golf balls
  2. Toothpaste
  3. Soap
  4. Aspirin
  5. Life jackets
  6. Louis Vuitton knock-offs
  7. Guitar strings
  8. Shoes
  9. Soccer balls
  10. Pantyhose

 

The United States has the largest refining capacity in the world and is still by far the largest consumer of oil in the world (though China is beginning to catch up), and its refineries require 15 million barrels of oil a day. That means even though, due to the shale revolution, domestic production has dramatically increased to about 8 million barrels, the US still has to import between 7 and 8 million barrels of expensive foreign oil a day.

Let’s take a look at who the US buys the imported oil from. (Now that I finally figured out my way around the new Windows 8—which, by the way, really sucks—I can even add some color to my tables.)

Country
Millions of barrels
exported to US per day
Canada
2.5–3
Saudi Arabia
1.2–1.5
Mexico
0.8–1.0
Venezuela
0.8
Kuwait
0.3–0.5

 

Canada is blue because it is not only friendly with the US, but also has the ability to increase oil production. The other countries are red because they either have decreasing oil production, or the country is not on good terms with the US government, or the production may be at risk for various reasons. The “red countries” all sell oil to the US at higher prices than does Canada.

As I said, the US imports about 7 million barrels of oil a day, and our top 5 exporters make up between 5.6 and 6.8 million barrels while the rest is split among other countries.

This means that even though the US has significantly increased its oil production in the past five years, a good chunk of oil has to be imported at much higher prices. And higher crude oil prices for refineries means higher prices at the gas pump.

But that’s not the only issue: The “new oil” produced from the shale oil fields in the Bakken and Eagle Ford formations isn’t cheap. Both the Bakken and Eagle Ford have been hugely successful, and an average well in either region can produce over 400 barrels of oil per day.

That may sound like a lot, but drilling thousands of meters into the ground (both vertically and horizontally), then casing and fracking the well, costs millions of dollars. And the trouble doesn’t end once the well has been drilled: oil and gas production can drop as much as 50% in the first year.

Think of it as running on a treadmill—but the incline gets steeper and steeper the longer you run. That’s the current reality of America’s oil production.

Now, these areas also have to deal with declining legacy oil production (“legacy” meaning older oil wells that produced before fracking became popular) due to depletion rates. Freeze-offs, and even hurricane season can affect the legacy oil wells’ production decline.

As the old wells begin to deplete, they need to be replaced by unconventional wells with horizontal drilling and hydraulic fracturing. Even though these new wells provide an initial burst of production, they decline very quickly. That means you need to drill even more wells just to keep up—and the vicious cycle continues.

The costs, as you can imagine, are forbiddingly high. Even in known oil-rich regions like the Bakken and Eagle Ford, the all-in cost of extracting a barrel of oil from the ground can cost as much as US$75 per barrel (for comparison, Saudi Arabia can produce oil for as low as US$1 per barrel). To put it in simple terms: cheap oil in North America is a thing of the past.

So, the US produces expensive oil and relies on imports of even more expensive oil. And since the refiners need to make money as well, this means higher prices at the pumps. Who loses? The US consumer, of course.

What would help lower gas prices? Building more pipelines to deliver cheaper Canadian oil to refineries in the US and decreasing the refineries’ dependence on expensive foreign oil. Until these new and much safer pipelines are built, rail has to pick up the slack. Almost 400,000 railcars full of oil are expected to be shipped in 2013, compared with just 9,500 railcars in 2008, a whopping 41-fold increase.

But rail is not the answer. In fact, transporting oil by rail is much more dangerous than transporting it by pipeline. Just last week, we wrote about two recent accidents, one of which claimed 47 lives.

Federal and state taxes at every step of the gasoline-making progress make the pain at the pump even worse. The US government already takes more than 60% of the divisible income from every barrel of oil produced… and another 50 cents per gallon at the pump.

Then there’s the matter of Obama’s supposed “Green Revolution” and how America would be saved through the use of alternative energies. Obama wrote massive checks to different renewable energy firms that went belly-up, the most famous of them all being solar panel manufacturer Solyndra, whose bankruptcy cost American taxpayers more than $500 million. Obama is also a heavy supporter of ethanol (his home state of Illinois, after all, is the third-largest ethanol-producing state) and has increased the targets for the use of ethanol in transportation.

Someone has to pay for all of these subsidies, so why not get the dirty, evil oil companies to pay for them? Keep in mind, though, that the oil companies have enough lobbyists and lawyers to keep the government at bay—so the higher prices will be passed on to the consumers.

To sum up why the price of gasoline is so high even though the US is producing so much more oil than before:

  1. The high cost of American oil production
  2. Even higher costs due to imported (non-Canadian) oil
  3. Obama not allowing cheaper Canadian oil to flow to the refineries via pipelines such as the Keystone XL
  4. The taxes on crude are used to fund Obama’s green dream—his green-energy “legacy”—and his love for ethanol and the taxes at the pump will not decrease

So what does this mean for you, the consumer?

You have two options: You can gripe about high gas prices… or you can choose to profit from the situation, no matter how dire. If you’re the former type, so long, and I hope you enjoyed my missive today. If you’re the latter, let’s talk money.

Who am I? Well, I kinda look like this guy…

Good day in the markets Bad day in the markets

 

But really, I’ve had a pretty good run. Here is my audited return since January 1, 2012 (green column on the left).

I stand by my performance and offer anyone reading this article a guarantee: if you try the Casey Energy Reporttoday and do not think that it’s the absolute best energy newsletter in the business, you get all your money back, no questions asked.

I’m not saying I’m perfect (my wife reminds me daily that I’m not ), but I’m willing to put myself out there and offer you a challenge to expand your knowledge and become a better investor. All of my past newsletters, going back to 2006, are up on the Casey website, and I want you to check them out.

I have lost money on investments (anyone who says they haven’t is a liar), but I made sure I learned something from every harsh experience. And overall, I’ve made much more than I’ve lost. Our energy portfolio has been delivering +50% gains since January 1, 2012.

Right now, I’m the first to publish on what I think is going to send my track record to the moon. I’m on to an investment theme that I believe has the potential to make 10-fold returns for investors who play it right. That theme is the European Energy Renaissance.

Doug Casey and I are convinced that new technologies applied in the Old World will bring huge New World profits. But don’t take my word for it—I challenge you to try out my research. Click here to take me up on my 100% money-back guarantee.

 

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