The Oil Drum: Australia/New Zealand

This is the post where I try and draw my own conclusions from the Conference. And not recognizing many of the papers in this does not mean that they weren’t important, but rather that from my own perspective that this is what I got most from.

The recurrent word that cropped up, again and again, was Scale. It was an attempt by the speakers to try and convey to their audience the size of the problem that is coming at us, increasingly rapidly. That one word encapsulates the difference between those who talk of the world energy problem in Quads (quadrillion Btu’s), as opposed to those that talk of the solution in terms of kilowatts and Megawatts. (The handy Dashboard on my Mac tells me that a Megawatt is 56,869 Btus/min. A Quad is 1,000,000,000,000,000 Btu.) The current shortages of gasoline are largely brought about by a transient closure of refineries that affects around 1 mbd of oil supply. The time is not far distant when such shortages will become more regular as we compete for supply in a more competitive global market.

The tipping point that seemed still a comfortable distance away three years ago when the American ASPO meetings began in Denver, is now just about here. And the solutions that have been discussed do not approach, as yet, the millions of barrels a day (mbd) of fuel replacement that we may need before long. At the same time, to return to the theme of my own paper, we do not have the educated human resource that we need. Data from my Dean of Enrollment shows that ACT report national high school student interest in engineering was at 14% in 1982. By 1992 it had dropped to 9%. By 2005 it was down to 5%, and has fallen below that since.

The credit crunch is already having an impact on energy markets. New projects are harder to fund. Highly leveraged companies are sometimes finding it necessary to shed assets. Some players are finding themselves to be the indirect casualties of other players, like Lehman, that have already failed. Long term, we will probably see consolidation and lower production than would have been the case without the credit crunch. Of course, if there is a major recession, it is possible that we won't need as high production.

In this post, I have tried to bring together some of the impacts of the credit crunch on the energy industry that are already being felt. If you are seeing other impacts, please make note of them in the comments.

Note: This is an updated version of a post from earlier this week. Some more recent quotes have been added at the end of this post.

Despite recent optimistic news on new shale gas reserves, the totality of North American natural gas production remains on a treadmill, as the grim EROI reaper has relentlessly raised the marginal cost of producing- to currently above the price of natural gas futures. While shutting in production is not easy to do once wells are drilled, low prices with rising cost structures can put the crimp on future expansion. Chesapeake (CHK), the largest US natural gas producer and operator of land rigs, announced last evening they will be curtailing production, cutting their rig count and reducing capital expenditures. (Of course, it is possible that this is the first example of an energy production casualty due to the credit crisis if the reason for this capex drop is lack of easy funds...)

In recent years, each time Chesapeake Chairman Aubrey McClendon announces some production or capex decreases, it has marked a bottom in the commodity (see graphic below fold). As this will surely be followed with similar announcements by other E&Ps in the near future (I expect Sanridge Energy and Petrohawk Energy soon), there will soon be a drop in monthly gas production--perhaps as much as 5%.

Gail’s recent post on the fragility of the US distribution system and the shortages that will be imposed by refinery outages, is a reminder of our dependence on pipelines for supply. The dependence is not just in the US, though the debate over the reality of a new gas pipeline from Alaska to the lower 48 rumbles along as a part of the election debate.

Most of Europe also depends on pipelines, particularly natural gas ones, and it is because of that that I am going to take a somewhat nervous stance and disagree with a recent article by Jerome. Some considerable time ago we swopped comments about the likelihood of different pipelines being laid to exploit the natural gas in Turkmenistan, and so from that point, this post is an admission that his opinion at the time (that many of these pipes wouldn't happen) was correct. However part of the reason for this is the less than benevolent role that I see Russia is playing, and this is my disagreement with him.

My concern is emphasized by the difference in objectives of two recent trips around the periphery of Russia. First there was the trip by the Russian President, who, with Gazprom CEO Alexei Miller, toured oil and gas supplying countries such as Turkmenistan, Azerbaijan and Kazahkstan in July. Out of that came both an agreement for Russia to buy Turkmen gas but also for Gazprom to invest in the Turkmen gas infrastructure. (Quotes under fold)

Every few years the UK Department of Trade and Industry, now Department of Business Enterprise & Regulatory Reform, publish a chart of the nation's energy flows. Here's the most recently published chart based on 2007 data:

Click for .pdf

It's a nice, high level overview of energy in the UK illustrating the flow of primary fuels from the point at which they become available from home production or imports (on the left) to their eventual final uses (on the right). Flows at the bottom represent exports, conversion losses and energy industry and non-energy use. The yellow blocks represent transformation (power stations and refineries).

Navigant Consulting Inc (NCI) recently prepared a report called North American Natural Gas Supply Assessment on behalf of a natural gas organization called the American Clean Skies Foundation. In this report, NCI estimates the amounts shale gas and tight gas production can be increased in the next decade. These estimates suggest that US natural gas production can be ramped up by nearly 50% by 2020. How reasonable are these estimates? What obstacles are there to such a big ramp up?

Figure 1. Approximate future US natural gas production, based on Navigant Consulting estimates of shale gas and tight gas production.

Hurricane Gustav is now past, and we are finally starting to discover what the damage really is. One of the big problems is electricity. There are other issues, including those about infrastructure, that we are only discovering. Let us know what you are finding out.

Darkness and Frustration Replace Fear

The state's power grid sustained massive damage from Hurricane Gustav, officials say, and it could be weeks before all of it is repaired. Frustrated motorists poured back into the state hoping to return home, only to be turned back at checkpoints on all the major highways. Many grew frustrated as they roamed the state like gypsies or sat in motels they could scarcely afford, their cash running low and no way to get more.

"No power, no tissue, no phone, and the lady just came to collect the rent," said elementary school teacher Shondrelle Paul, who with her 11-month-old baby and sister were holed up at the Budget Inn in Gonzales, La. "Money is getting thin."

Across the state, more than 1 million people were without electricity, which meant gas stations were unable to pump fuel, ATMs could not dispense money and restaurants could not open to feed people still unable to return home. Communication was made difficult by spotty cellular and Internet service.

Dozens of hospitals were still running on generator power, several without air conditioning, and there were fears that hundreds of patients might have to be evacuated in the next few days. Only one hospital in New Orleans had the capacity to provide dialysis — though all but one were up and running — and two in the Alexandria area were running low on drinking water.

In the past week, the energy markets have sold off steeply, even in the face of as-still-unknown damage from (a weaker than expected) Hurricane Gustav. If you were reading theoildrum.com of late, you have seen Kinetic Analysis Corp periodic updates on modeled damage/shut in production to Americas oil and gas facilities. We are also continuing to accumulate stories, data, and observations about the effects of Gustav on oil, natural gas, and gasoline production in another thread below.

Tonight another hurricane (of sorts) was announced in the financial press when CNBC reported that Ospraie, a $4 billion hedge fund partially owned by Lehman Brothers (and a major energy player), is closing it's doors after being down nearly 40% in 2008 following a -26% August. While this example is possibly unrelated to the current energy market meltdown, it serves as a good example of what may be a continued theme in natural resource markets - their small size in relation to the nominal amount of dollars seeking financial returns.

It seems to me that there is likely to be a very short path from petroleum shortages to electricity shortages. There are a lot of issues involved, from the fact that the fuels used in electricity production are themselves dependent on petroleum for their extraction and transportation, to the current state of the US electricity infrastructure, to the impact of peak oil on debt financing. I have written about most of these issues before, but since the petroleum/electricity link is such an important one, I thought I would devote an article to putting the pieces together.

Fuels used for electricity generation

In the United States, the primary fuel used for electricity generation is coal, at 49% of electricity production. Natural gas follows at 22%; nuclear at 19%; hydroelectric at 6%, and petroleum at 1.6%. The newer renewables are all quite small: wood at 0.93%; wind at .77%; waste at .41%; and solar (for electricity generation) at 0.01%.

Figure 1. Distribution of fuel supplies used in US electricity generation, based on EIA data.

M. King Hubbert made his views about peak oil known in 1956, at a meeting of the American Petroleum Institute. Many people don't know that only a year later, in 1957, Admiral Hyman Rickover started trying to publicize the fact that fossil fuels are finite, and were likely to peak in the first half of the 21st century. Many of the things he said then are words we wish people had listened to years ago:

Fossil fuels resemble capital in the bank. A prudent and responsible parent will use his capital sparingly in order to pass on to his children as much as possible of his inheritance. A selfish and irresponsible parent will squander it in riotous living and care not one whit how his offspring will fare.

Today the automobile is the most uneconomical user of energy. Its efficiency is 5% compared with 23% for the Diesel-electric railway. It is the most ravenous devourer of fossil fuels, accounting for over half of the total oil consumption in this country.

I suggest that this is a good time to think soberly about our responsibilities to our descendants--those who will ring out the Fossil Fuel Age.