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

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

By Joel Guglietta

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

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

w
Source: The Conference Board, January 2014

3
Source: NASA, 2014

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

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

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

2
Source: The Conference Board, TED, January 2014

1
Source: Manicore

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

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

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

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

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

4
Source: Laherrere, 2003

f
Source: Manicore

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

d
Source: Wall Street Journal

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

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

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

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

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

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

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

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

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

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

v
Source: Joel Guglietta

Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore

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

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

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

By Joel Guglietta

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

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

w
Source: The Conference Board, January 2014

3
Source: NASA, 2014

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

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

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

2
Source: The Conference Board, TED, January 2014

1
Source: Manicore

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

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

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

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

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

4
Source: Laherrere, 2003

f
Source: Manicore

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

d
Source: Wall Street Journal

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

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

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

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

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

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

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

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

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

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

v
Source: Joel Guglietta

Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore

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

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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Oil And Gas Lobbying In Canada Overshadows All Other Pressure Groups: Polaris Study

Oil And Gas Lobbying In Canada Overshadows All Other Pressure Groups: Polaris Study.

OTTAWA – Heavy lobbying by the oil and gas industry has far outstripped any other interest group seeking to influence the Harper government over the last four years, according to a new study that examined the lobbyist registry.

The left-leaning Polaris Institute contends that the more than 2,700 meetings between oil and gas lobbyists and federal office holders since 2008 have helped turn Canada into a “petro state.”

Prime Minister Stephen Harper has been promoting Canada as an emerging “energy super power” since coming to office in 2006.

And in the last 18 months, pipeline politics have become an Ottawa preoccupation as major public policy debates erupted in both Canada and the United States over the proposed TransCanada Keystone XL pipeline to the Gulf Coast and Enbridge’s proposed Northern Gateway pipeline to Kitimat, B.C.

Research by the Polaris Institute suggests that industry lobbying efforts have been gaining steam in lock step.

Using the federal lobbyist registry to track meetings, the study shows that since 2008 oil and gas interests dwarfed contact by other major industry groups, including the mining industry, car makers and the forestry industry.

The 734 contacts by the Canadian Association of Petroleum Producers and the Canadian Energy Pipeline Association almost doubled the 412 communications by two major mining associations, and almost tripled the 245 contacts by the major forest industry groups. Two groups representing auto manufacturers had 157 recorded contacts over the same four-year period.

A spokesman for Natural Resources Minister Joe Oliver made no apologies for meeting with industry lobbyists.

“The minister considers it appropriate to meet with a variety of groups, including those from industry, to keep himself informed on issues related to his ministerial responsibilities,” Chris McCluskey said in an email.

Those lobbying efforts redoubled last year. The Canadian Association of Petroleum Producers (CAPP) had 190 contacts with government officials in 2011, up from 86 in 2010.

“This rapid increase in officially recorded lobbying by CAPP coincides with a major public relations push in print, television and online advertising designed to counter increasing opposition to the tar sands,” says the Polaris report.

In addition to industry advertising, this fall the Conservative government also launched a major television ad campaign, with a budget of $9 million, to pitch Canadians on “responsible resource development.”

Since achieving a majority in the May 2011 election, the Conservative government has been rewriting or repealing laws governing environmental assessments, navigable waterways and other measures it says are an impediment to major resource developments.

The Polaris study contends oil industry lobbyists are behind the policy changes.

“The amount of face time the oil industry gets in Ottawa in personal meetings and other correspondence greatly exceeds the time afforded other major industries in Canada,” Daniel Cayley-Daoust, one of the report’s authors, said in a release.

“No one doubts the hold the oil industry has on this current government, but it is important Canadians are aware that such a high rate of lobbying to federal ministers has strong policy implications.”

The study claims environmental groups have been all but shut out by the Conservative government, judging by lobbyist registry contacts.

That’s not true, said McCluskey, who noted his minister met last week with a coalition of environmental groups representing five different organizations.

He said the Polaris study is based solely on meetings that are reported to the commissioner of lobbying.

“While industry associations report their meetings to the commissioner, in many cases environmental groups do not,” said the government spokesman.

“The minister will continue to assess invitations to meet environmental groups and the natural resources industry — which directly employs 800,000 Canadians and indirectly employs 800,000 more.”

 

 

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

Greenhouse gas reduction called threat 2:09

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.”

 

Keystone XL pipeline threatened by U.S. oil boom – Business – CBC News

Keystone XL pipeline threatened by U.S. oil boom – Business – CBC News.

The Keystone XL pipeline would ship Canadian oilsands oil across 1,800 kilometres to U.S. refineries on the Gulf Coast. (Eric Hylden/Associated Press)

A sudden surge in U.S. oil output could derail plans to build the massive Keystone XL pipeline to ship Canadian oil from Alberta to refineries on the American Gulf Coast, Canada’s U.S. ambassador was warned in internal emails.

In a series of emails unearthed by an access to information request from energy think tank Pembina Institute and provided to CBC News, Canadian energy counsellor Paul Connors warned ambassador Gary Doer in the summer that America’s current oil boom could alter the viability of cross-border pipeline plans.

Many options

Keystone XL is a proposed 1,900-kilometre pipeline being pitched by Calgary-based TransCanada that aims to bring Canadian oilsands oil from Hardisty, Alta., south through five U.S. states to oil refineries on the Gulf Coast in Texas.

The plan is an ambitious one, coming with a price tag of more than $7 billion, and has faced numerous regulatory hurdles over several years while various governments and companies try to negotiate the final details.

Broadly, Canada lacks the refining capacity to adequately process the billions of barrels of oil that are contained in the Athabasca oilsands. America, meanwhile, has more than enough refineries operating at less than full capacity, so the plan has been pitched as an economic bonanza for both sides.

‘Our customers remain extremely supportive of Keystone XL.’– TransCanada statement

But recent events may have changed those economics somewhat. A series of oil discoveries in the Bakken, Eagle Ford and Permianbasins scattered across the continental U.S. have increased America’s possible oil output to a far higher level than previously believed.

The U.S. now has so much recoverable oil that it’s now expected to surpass Saudi Arabia as the world’s largest oil producer at some point in the next 10 to 20 years.

Refineries are configured to process different types of crude — heavy crude goes to heavy refineries, light crude to light ones. Currently, heavy oilsands oil from Alberta goes to heavy oil refineries predominantly on the U.S. Gulf Coast.

“The significant increase in U.S. domestic production in recent years is light sweet crude which has lower [greenhouse gases] than heavy crude,” Connors wrote in an email to Doer in June.

The best way for America to profit from its current oil boom could be to export its new sources of light crude, because that’s what’s most in demand internationally and that’s what fetches the higher prices.

“However, if reducing U.S. [greenhouse gas] emissions is the goal, the U.S. could decline to export its light sweet crude surplus [and] domestic light sweet crude would begin to [replace] heavy oil imports.”

Environmental concerns

U.S. President Barack Obama has repeatedly said that his government would only approve the Keystone XL project if it would not materially alter America’s greenhouse gas emissions. So a suddenly plentiful energy alternative with a smaller environmental footprint could change the lay of the land.

For its part, TransCanada says it remains fully committed to the plan — as are its customers.

“TransCanada does not build pipeline projects and then hope we can fill them. Our Keystone XL customers have signed 20-year, binding commercial agreements because they needed to connect oil supplies in Canada and the U.S. to refineries,” the company said in an email to CBC News.

“Our customers remain extremely supportive of Keystone XL, and the markets understand that you need to have the right infrastructure in place to move product at the right time.”

Natural Resources Minister Joe Oliver agrees with that statement, telling CBC News that even with the conventional oil boom, “the U.S. Energy Information Administration projects that the U.S. will need to import 7.4 million barrels of oil per day in 2035.”

“Therefore, Keystone XL will displace an unstable source of heavy oil from Venezuela, with the same or higher greenhouse gas emissions, with a friendly, stable and reliable source of Canadian oil,” Oliver’s statement reads.

Indeed, if the project doesn’t go ahead, the U.S. State Department acknowledges that alternative modes of oil transport (such as rail) that emit as much as eight per cent more greenhouse gases will likely deliver the oil that Keystone XL would have.

Ottawa backs plan

 

“Our government supports the Keystone XL pipeline because it would enhance national security, create tens of thousands of jobs and generate billions of dollars in economic activity in both Canada and the U.S.,” the spokesperson said.

Still, any indication that the Americans have less of an appetite for Keystone could be bad economic news for Canada, which mainly produces heavy oil, almost all of which currently goes to the U.S.

If America chooses to use more of its own lighter oil domestically and needs less heavy Canadian oil, there is little Canadian oil producers could do in the short term to maintain a market for their product.

Canadian oil, known as Western Canada Select, already trades at a discount of about $30 compared to the American benchmark, West Texas Intermediate or WTI, mainly because it’s heavier and therefore more expensive to refine, which limits the number of refineries willing to take it.

“While this is economically sub-optimal for the heavy oil refineries, it would make the mix of U.S. crude oil lighter and less [greenhouse gas] intensive,” Connors wrote.

 

 

 

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Commentary: Is it only a question of when the US once again becomes a net oil exporter?

Commentary: Is it only a question of when the US once again becomes a net oil exporter?.

 

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