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It's official - cheap oil era is over
« on: 2009-06-16 05:31:53 » |
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It's official - cheap oil era is over
Source: GlobalEconomy, tomdispatch
Author/s: Michael T Klare
Dated: Jun 16, 2009
Every summer, the Energy Information Administration of the US Department of Energy issues its International Energy Outlook (IEO), a jam-packed compendium of data and analysis on the evolving world energy equation. For those with the background to interpret its key statistical findings, the release of the IEO can provide a unique opportunity to gauge important shifts in global energy trends, much as reports of routine communist party functions in the party journal Pravda once provided America's Kremlin watchers with insights into changes in the Soviet Union's top leadership circle.
As it happens, the recent release of the 2009 IEO has provided energy watchers with a feast of significant revelations. By far the most significant disclosure: the IEO predicts a sharp drop in projected future world oil output (compared with previous expectations) and a corresponding increase in reliance on what
are called "unconventional fuels" - oil sands, ultra-deep oil, shale oil and biofuels.
So here's the headline for you: for the first time, the well-respected EIA appears to be joining with those experts who have long argued that the era of cheap and plentiful oil is drawing to a close. Almost as notable, when it comes to news, the 2009 report highlights Asia's growing demand for energy and suggests that China is moving ever closer to the point at which it will overtake the United States as the world's number one energy consumer. Clearly, a new era of cutthroat energy competition is on us.
Peak Oil becomes the new norm
As recently as 2007, the IEO projected that the global production of conventional oil (the stuff that comes gushing out of the ground in liquid form) would reach 107.2 million barrels per day in 2030, a substantial increase from the 81.5 million barrels produced in 2006.
Now, in 2009, the latest edition of the report has grimly dropped that projected 2030 figure to just 93.1 million barrels per day - in future-output terms, an eye-popping decline of 14.1 million expected barrels per day.
Even when you add in the 2009 report's projection of a larger increase than once expected in the output of unconventional fuels, you still end up with a net projected decline of 11.1 million barrels per day in the global supply of liquid fuels (when compared with the IEO's soaring 2007 projected figures). What does this decline signify - other than growing pessimism by energy experts when it comes to the international supply of petroleum liquids?
Very simply, it indicates that the usually optimistic analysts at the Department of Energy now believe global fuel supplies will simply not be able to keep pace with rising world energy demands. For years now, assorted petroleum geologists and other energy types have been warning that world oil output is approaching a maximum sustainable daily level - a peak - and will subsequently go into decline, possibly producing global economic chaos. Whatever the timing of the arrival of peak oil's actual peak, there is growing agreement that we have, at last, made it into peak-oil territory, if not yet to the moment of irreversible decline.
Until recently, Energy Information Administration officials scoffed at the notion that a peak in global oil output was imminent or that we should anticipate a contraction in the future availability of petroleum any time soon. "[We] expect conventional oil to peak closer to the middle than to the beginning of the 21st century," the 2004 IEO report stated emphatically.
Consistent with this view, the Energy Information Administration reported one year later that global production would reach a staggering 122.2 million barrels per day in 2025, more than 50% above the 2002 level of 80.0 million barrels per day. This was about as close to an explicit rejection of peak oil that you could get from the Energy Information Administration's experts.
Where did all the oil go?
Now, let's turn back to the 2009 edition. In 2025, according to this new report, world liquids output, conventional and unconventional, will reach only a relatively dismal 101.1 million barrels per day. Worse yet, conventional oil output will be just 89.6 million barrels per day. In Energy Information Administration terms, this is pure gloom and doom, about as deeply pessimistic when it comes to the world's future oil output capacity as you're likely to get.
The agency's experts claim, however, that this will not prove quite the challenge it might seem because they have also revised downward their projections of future energy demand. Back in 2005, they were projecting world oil consumption in 2025 at 119.2 million barrels per day, just below anticipated output at that time. This year - and we should all theoretically breathe a deep sigh of relief - the report projects that 2025 figure at only 101.1 million barrels per day, conveniently just what the world is expected to produce at that time. If this actually proves the case, then oil prices will presumably remain within a manageable range.
In fact, the consumption part of this equation seems like the less reliable calculation, especially if economic growth continues at anything like its recent pace in China and India. Indeed, all evidence suggests that growth in these countries will resume its pre-crisis pace by the end of 2009 or early 2010. Under those circumstances, global oil demand will eventually outpace supply, driving up prices again and threatening recurring and potentially disastrous economic disorders - possibly on the scale of the present global economic meltdown.
To have the slightest chance of averting such disasters means seeing a sharp rise in unconventional fuel output. Such fuels include Canadian oil sands, Venezuelan extra-heavy oil, deep-offshore oil, Arctic oil, shale oil, liquids derived from coal (coal-to-liquids or CTL), and biofuels. At present, these cumulatively constitute only about 4% of the world's liquid fuel supply but are expected to reach nearly 13% by 2030. All told, according to estimates in the new IEO report, unconventional liquid production will reach an estimated 13.4 million barrels per day in 2030, up from a projected 9.7 million barrels in the 2008 edition.
But for an expansion on this scale to occur, whole new industries will have to be created to manufacture such fuels at a cost of several trillion dollars. This undertaking, in turn, is provoking a wide-ranging debate over the environmental consequences of producing such fuels.
For example, any significant increase in biofuels use - assuming such fuels were produced by chemical means rather than, as now, by cooking - could substantially reduce emissions of carbon dioxide and other greenhouse gases, actually slowing the tempo of future climate change. On the other hand, any increase in the production of Canadian oil sands, Venezuelan extra-heavy oil, and Rocky Mountain shale oil will entail energy-intensive activities at staggering levels, sure to emit vast amounts of CO2, which might more than cancel out any gains from the biofuels.
In addition, increased biofuels production risks the diversion of vast tracts of arable land from the crucial cultivation of basic food staples to the manufacture of transportation fuel. If, as is likely, oil prices continue to rise, expect it to be ever more attractive for farmers to grow more corn and other crops for eventual conversion to transportation fuels, which means rises in food costs that could price basics out of the range of the very poor, while stretching working families to the limit. As in May and June of 2008, when food riots spread across the planet in response to high food prices - caused, in part, by the diversion of vast amounts of corn acreage to biofuel production - this could well lead to mass unrest and mass starvation.
A heavy energy footprint
The geopolitical implications of this transformation could well be striking. Among other developments, the global clout of Canada, Venezuela, and Brazil - all key producers of unconventional fuels - is bound to be strengthened.
Canada is becoming increasingly important as the world's leading producer of oil sands, or bitumen - a thick, gooey, viscous material that must be dug out of the ground and treated in various energy-intensive ways before it can be converted into synthetic petroleum fuel (synfuel). According to the IEO report, oil sands production, now at 1.3 million barrels a day and barely profitable, could hit the 4.4 million barrel mark (or even, according to the most optimistic scenarios, 6.5 million barrels) by 2030.
Given the IEA's new projections, this would represent an extraordinary addition to global energy supplies just when key sources of conventional oil in places like Mexico and the North Sea are expected to suffer severe declines. The extraction of oil sands, however, could prove a pollution disaster of the first order. For one thing, remarkable infusions of old-style energy are needed to extract this new energy, huge forest tracts would have to be cleared, and vast quantities of water used for the steam necessary to dislodge the buried goo (just as the equivalent of "peak water" may be arriving).
What this means is that the accelerated production of oil sands is sure to be linked to environmental despoliation, pollution, and global warming. There is considerable doubt that Canadian officials and the general public will, in the end, be willing to pay the economic and environmental price involved. In other words, whatever the IEA may project now, no one can know whether synfuels will really be available in the necessary quantities 15 or 20 years down the road.
Venezuela has long been an important source of crude oil for the United States, generating much of the revenue used by President Hugo Chavez to sustain his social experiments at home and an ambitious anti-American political agenda abroad. In the coming years, however, its production of conventional petroleum is expected to fall, leaving the country increasingly reliant on the exploitation of large deposits of bitumen in the eastern Orinoco River basin.
Just to develop these "extra-heavy oil" deposits will require significant financial and energy investments and, as with Canadian oil sands, the environmental impact could be devastating. Nevertheless, successful development of these deposits could prove an economic bonanza for Venezuela.
The big winner in these grim energy sweepstakes, however, is likely to be Brazil. Already a major producer of ethanol, it is expected to see a huge increase in unconventional oil output once its new ultra-deep fields in the "subsalt" Campos and Santos basins come on-line. These are massive offshore oil deposits buried beneath thick layers of salt some 160 kilometers off the coast of Rio de Janeiro and several kilometers beneath the ocean's surface.
When the substantial technical challenges to exploiting these undersea fields are overcome, Brazil's output could soar by as much as three million barrels per day. By 2030, Brazil should be a major player in the world energy equation, having succeeded Venezuela as South America's leading petroleum producer.
New powers, new problems
The IEO report hints at other geopolitical changes occurring in the global energy landscape, especially an expected stunning increase in the share of the global energy supply consumed in Asia and a corresponding decline by the United States, Japan, and other "First World" powers. In 1990, the developing nations of Asia and the Middle East accounted for only 17% of world energy consumption; by 2030, that number, the report suggests, should reach 41%, matching that of the major First World powers.
All recent editions of the report have predicted that China would eventually overtake the United States as number one energy consumer. What's notable is how quickly the 2009 edition expects that to happen. The 2006 report had China assuming the leadership position in a 2026-2030 timeframe; in 2007, it was 2021-2024; in 2008, it was 2016-2020. This year, the Energy Information Administration is projecting that China will overtake the United States between 2010 and 2014.
It's easy enough to overlook these shifting estimates, since the reports don't emphasize how they have changed from year to year. What they suggest, however, is that the US will face ever fiercer competition from China in the global struggle to secure adequate supplies of energy to meet national needs.
Given what we have learned about the dwindling prospects for adequate future oil supplies, we are sure to face increased geopolitical competition and strife between the two countries in those few areas that are capable of producing additional quantities of oil (and undoubtedly genuine desperation among many other countries with far less resources and power).
And much else follows: as the world's leading energy consumer, Beijing will undoubtedly play a far more critical role in setting international energy policies and prices, undercutting the pivotal role long played by Washington. It is not hard to imagine, then, that major oil producers in the Middle East and Africa will see it as in their interest to deepen political and economic ties with China at the expense of the United States. China can also be expected to maintain close ties with oil providers like Iran and Sudan, no matter how this clashes with American foreign policy objectives.
At first glance, the IEO for 2009 hardly looks different from previous editions: a tedious compendium of tables and text on global energy trends. Looked at another way, however, it trumpets the headlines of the future - and their news is not comforting.
The global energy equation is changing rapidly, and with it is likely to come great power competition, economic peril, rising starvation, growing unrest, environmental disaster, and shrinking energy supplies, no matter what steps are taken. No doubt the 2010 edition of the report and those that follow will reveal far more, but the new trends in energy on the planet are already increasingly evident - and unsettling.
Michael T Klare is a professor of peace and world security studies at Hampshire College in Amherst, Massachusetts, and the author, most recently, of Rising Powers, Shrinking Planet: The New Geopolitics of Energy (Henry Holt).
(Copyright 2009 Michael T Klare.)
(Used by permission of Tomdispatch.
[Blunderov] It seems clear to me that he world will go massively nuclear. (Ever pragmatic, the French already produce 80% of their electricity with nuclear reactors.) Of course there is the issue of nuclear waste disposal* but I seriously doubt that this argument will get much shrift at the prospect of the imminent decline of the Western lifestyle. And I say "Western", I think, advisedly.
Apart from the issue of nuclear waste disposal, there is also the already prominent issue of 'proliferation'. Non Western bloc countries are going to be no more immune to the economic pressure to go nuclear than anyone else, as witness Iran, and, more obliquely, the panic in Pakistan. It seems reasonable to suppose that as peak oil bites the proliferation problem, if problem it be, will become intractable. Add to this the flailing death throes of the American imperial juggernaut and the conclusion seems inevitable that there is a great deal of trouble ahead. This is not going to be pretty.
*http://en.wikipedia.org/wiki/Nuclear_waste_disposal
<snip>Claims exist that the problems of nuclear waste do not come anywhere close to approaching the problems of fossil fuel waste. A 2004 article from the BBC states: "The World Health Organization (WHO) says 3 million people are killed worldwide by outdoor air pollution annually from vehicles and industrial emissions, and 1.6 million indoors through using solid fuel." In the U.S. alone, fossil fuel waste kills 20,000 people each year. A coal power plant releases 100 times as much radiation as a nuclear power plant of the same wattage. It is estimated that during 1982, US coal burning released 155 times as much radioactivity into the atmosphere as the Three Mile Island accident. </snip>
<snip>Radioactivity by definition reduces over time, so in principle the waste needs to be isolated for a particular period of time until its components have decayed such that it no longer poses a threat. In practice this can mean periods of hundreds of thousands of years, depending on the nature of the waste involved.
Though an affirmative answer is often taken for granted, the question as to whether or not we should endeavor to avoid causing harm to remote future generations, perhaps thousands upon thousands of years hence, is essentially one which must be dealt with by philosophy**.</snip>
**[Bl.] It's an ill wind etc. Who knew that philosophy would find a niche in industry? Perhaps the age of the impecunious philosopher is over? Hmm...
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Walter Watts
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Re:It's official - cheap oil era is over
« Reply #1 on: 2009-06-16 21:24:14 » |
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Hear, Hear Blunderov!
Kunstler's latest from Clusterfuck Nation:
--Walter
PS--I left a comment on this one (see bottom).
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Too Stupid To Survive
By James Howard Kunstler
on June 15, 2009 6:16 AM
Coming home from the annual meet-up of the New Urbanists, I was already agitated from the shenanigans of United Airlines -- two-hour delay, blown connection -- when I waded into this week's New York Times Sunday Magazine for further evidence that our ruling elites are too stupid to survive (and perhaps the US with them). Exhibit A was the magazine's lead article about California's proposed high-speed rail project by Jon Gertner.
The article began with a description of California's current rail service between the Bay Area and Los Angeles. A commission of nine-year-olds in a place like Germany could run a better system, of course. It's never on schedule. The equipment breaks down incessantly. A substantial leg of the trip requires a transfer to a bus (along with everybody's luggage) with no working toilet. You get the picture: Kazakhstan without the basic competence.
The proposed solution to this is the most expensive public works program in the history of the world, at a time when both the state of California and the US federal government are effectively bankrupt. By the way, I wouldn't argue that California shouldn't have high-speed rail. It might have been nice if, say, in the late 20th century, some far-seeing governor had noticed what was going on in France, Germany, and Spain but, alas.... It would have been nice, too, if the doltish George W. Bush, when addressing extreme airport congestion in 2003, had considered serious upgrades in normal train service between the many US cities 500 miles or so apart. The idea never entered his walnut brain.
The sad truth is it's too late now. But the additional sad truth, at this point, is that Californians (and US public in general) would benefit tremendously from normal rail service on a par with the standards of 1927, when speeds of 100 miles-per-hour were common and the trains ran absolutely on time (and frequently, too) without computers (imagine that !). The tracks are still there, waiting to be fixed. In our current condition of psychotic techno-grandiosity, this is all too hopelessly quaint, not cutting edge enough, pathetically un-"hot." The fact that it is not even considered by the editors of The New York Times, not to mention the governor of California, the President of the United States, and all the agency heads and departmental chiefs and think tank gurus and university engineering professors, is something that will have historians of the future rolling their eyes. But for the moment all it shows is that we are collectively too stupid to survive as an advanced society.
Ironically (if you go for gallows irony) a sidebar in the same issue of The NY Times Sunday Magazine featured the latest architect's wet dream of an airport-of-the-future (p.35). Note to the editors and architects: commercial aviation is toast (we just don't know it yet). We're back in the $70-plus a barrel-of-oil aviation death-zone for airlines.
Also ironically proving that America is not alone in techno-triumphalist mental illness was another big article in the same magazine featuring French President Nicolas Sarkozy's neo-Modernist fantasies for vast new construction projects in Paris. Note to Sarko: the developed world's metroplexes are headed for shocking contraction, not further expansion. I know this is counter-intuitive, but a little applied prayerful research will bear it out. And, by the way, the last thing any city on earth needs is more skyscrapers -- i.e. buildings that have no chance of ever being renovated when they reach the senility stage of their design-life. For really mind-blowing statements, this one from that article is a standout: "Paris's current problems as a city can be traced to the very thing that makes it most delightful -- its beauty." Right. So, the solution will be to make it more like Houston.
Actually, I doubt the French people consider these schemes anymore plausible than ur-Modernist Le Corbusier's 1924 proposal to bulldoze half of the Right Bank and replace it with dozens of identical skyscrapers. The French people laughed at Corbu, and put their vertical slums outside the city center, but notice that we Americans actually did it, replacing our old human-scaled center cities with priapic arrays of glass-and-steel tubes surrounded by parking lagoons. Anyway, nobody in the OECD world will have the energy to carry out anything like this again, not even France with its nuke plants.
Which brings me back to the New Urbanist annual meet-up last week in Denver. Given the gathering conditions of what I variously call The Long Emergency or the economic clusterfuck, they have had to shift their focus starkly. For years, their stock-in-trade was the greenfield New Town or Traditional Neighborhood Development (TND), a severe reform of conventional suburban development. That sort of reform work was only possible when 1.) the continued expansion of suburbia seemed utterly inevitable, requiring heroic mitigation and 2.) when they could team up with the production home-builders to get their TND projects built. To the group's credit, they realize that these conditions are no more. Suburbia is now cratering, both as a repository of wealth in real estate and as a practical matter of everyday existence. They get that the energy crisis and all its implications are real and that our response to it had better be deft. They understand that the capital resources we thought we had for Big Projects are flying into a black hole at the speed of light. Mostly they see that he time for "cutting edge" fashionista techno-triumphalist grandiosity is over.
To put it bluntly, the Congress for the New Urbanism (CNU) is perhaps the only surviving collective intelligence left in the United States that is producing ideas consistent with the reality. They recognize that our survival depends on down-scaling and re-localization. They recognize the crisis we will soon face in food production, and the desperate need to reactivate the relationship between the way we inhabit the landscape and the way we feed ourselves. They recognize that the solution to the liquid fuels crisis is not cars that can run by other means but on walkable towns and cities connected by public transit.
This is exactly what you will not find in the pages of The New York Times or the political corridors of power. Oh, by the way, the Obama administration contacted one of the leading lights of the New Urbanism in the weeks after the inauguration. He never heard back from the White House. I guess they're not interested.
P.S. (Added 2:45p.m. Monday):
Some commentors here have got the mistaken idea that I am against "urban density" or cities per se. This is a very dumb mis-reading of what I have said many times. I am strongly in favor of the urban human habitat at all levels, from village to city, and indeed I am in favor of "tight" urban design at the fine grain. I just don't believe that our giant "metroplex" cities will continue to exist in their current form. They are not scaled to future energy realities. They may well re-densify at their old centers and waterfronts even while they contract in population and total area of governance. Now, why is this so hard to understand???
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[Walter comments.....]
JK started his blog with: "Coming home from the annual meet-up of the New Urbanists, I was already agitated from the shenanigans of United Airlines -- two-hour delay, blown connection...."
Why do we still fly around on jumbo jets with fire-hose size fuel requirements to attend conferences, meetings, conventions, seminars, colloquiums, symposiums, forums, summits, etc.?
Ever heard of computers?
Teleconferencing?
Folks, if it doesn't truly REQUIRE changing the position of an actual physical object with respect to a reference position, with all the accompanying energy requirements, then don't "move the mass".
Viva la virtual!
Walk the walk Jim!
Walter
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Blunderov
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Re:It's official - cheap oil era is over
« Reply #2 on: 2009-06-17 02:22:52 » |
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Quote from: Walter Watts on 2009-06-16 21:24:14
I just don't believe that our giant "metroplex" cities will continue to exist in their current form. They are not scaled to future energy realities. |
[Blunderov] Neither are they scaled to current economic realities apparently.
Source:globalresearch
Author/s: Tom Leonard, Global Research, The Telegraph
Dated: June 16, 2009
US cities may have to be bulldozed in order to survive
The government is looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.
The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.
Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.
Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.
Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.
In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.
"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."
Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America.
"Places like Flint have hit rock bottom. They're at the point where it's better to start knocking a lot of buildings down," she said.
Flint, sixty miles north of Detroit, was the original home of General Motors. The car giant once employed 79,000 local people but that figure has shrunk to around 8,000.
Unemployment is now approaching 20 per cent and the total population has almost halved to 110,000.
The exodus – particularly of young people – coupled with the consequent collapse in property prices, has left street after street in sections of the city almost entirely abandoned.
In the city centre, the once grand Durant Hotel – named after William Durant, GM's founder – is a symbol of the city's decline, said Mr Kildee. The large building has been empty since 1973, roughly when Flint's decline began.
Regarded as a model city in the motor industry's boom years, Flint may once again be emulated, though for very different reasons.
But Mr Kildee, who has lived there nearly all his life, said he had first to overcome a deeply ingrained American cultural mindset that "big is good" and that cities should sprawl – Flint covers 34 square miles.
He said: "The obsession with growth is sadly a very American thing. Across the US, there's an assumption that all development is good, that if communities are growing they are successful. If they're shrinking, they're failing."
But some Flint dustcarts are collecting just one rubbish bag a week, roads are decaying, police are very understaffed and there were simply too few people to pay for services, he said.
If the city didn't downsize it will eventually go bankrupt, he added.
Flint's recovery efforts have been helped by a new state law passed a few years ago which allowed local governments to buy up empty properties very cheaply.
They could then knock them down or sell them on to owners who will occupy them. The city wants to specialise in health and education services, both areas which cannot easily be relocated abroad.
The local authority has restored the city's attractive but formerly deserted centre but has pulled down 1,100 abandoned homes in outlying areas.
Mr Kildee estimated another 3,000 needed to be demolished, although the city boundaries will remain the same.
Already, some streets peter out into woods or meadows, no trace remaining of the homes that once stood there.
Choosing which areas to knock down will be delicate but many of them were already obvious, he said.
The city is buying up houses in more affluent areas to offer people in neighbourhoods it wants to demolish. Nobody will be forced to move, said Mr Kildee.
"Much of the land will be given back to nature. People will enjoy living near a forest or meadow," he said.
Mr Kildee acknowledged that some fellow Americans considered his solution "defeatist" but he insisted it was "no more defeatist than pruning an overgrown tree so it can bear fruit again".
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Hermit
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Re:It's official - cheap oil era is over
« Reply #3 on: 2009-06-17 04:43:17 » |
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I think you guys must be watching http://www.smarterearth.org. Please feel free to sign up there too. Lots of parallels.
Kindest
Hermit&Co
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Walter Watts
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Re:It's official - cheap oil era is over
« Reply #5 on: 2009-06-18 01:27:07 » |
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Quote from: Hermit on 2009-06-17 04:43:17
I think you guys must be watching http://www.smarterearth.org. Please feel free to sign up there too. Lots of parallels.
Kindest
Hermit&Co
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Got it bookmarked.
Thanks.
Walter
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Walter Watts
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Fritz
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Re:It's official - cheap oil era is over
« Reply #6 on: 2010-03-14 23:09:17 » |
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We are forever hopeful with are heads in the sand ... here is the current view ... seems only yesterday we were all going to have small nuclear reactors in our basements providing virtually free energy to meet all our household needs.
Cheers
Fritz
Natural gas An unconventional glut
Newly economic, widely distributed sources are shifting the balance of power in the world’s gas markets
Source: The Economist print edition
Author : n/a
Date: Mar 11th 2010
SOME time in 2014 natural gas will be condensed into liquid and loaded onto a tanker docked in Kitimat, on Canada’s Pacific coast, about 650km (400 miles) north-west of Vancouver. The ship will probably take its cargo to Asia. This proposed liquefied natural gas (LNG) plant, to be built by Apache Corporation, an American energy company, will not be North America’s first. Gas has been shipped from Alaska to Japan since 1969. But if it makes it past the planning stages, Kitimat LNG will be one of the continent’s most significant energy developments in decades.
Five years ago Kitimat was intended to be a point of import, not export, one of many terminals that would dot the coast of North America. There was good economic sense behind the rush. Local production of natural gas was waning, prices were surging and an energy-hungry America was worried about the lights going out.
Now North America has an unforeseen surfeit of natural gas. The United States’ purchases of LNG have dwindled. It has enough gas under its soil to inspire dreams of self-sufficiency. Other parts of the world may also be sitting on lots of gas. Those in the vanguard of this global gas revolution say it will transform the battle against carbon, threaten coal’s domination of electricity generation and, by dramatically reducing the power of exporters of oil and conventional gas, turn the geopolitics of energy on its head.
Deep in the heart of Texas
The source of America’s transformation lies in the Barnett Shale, an underground geological structure near Fort Worth, Texas. It was there that a small firm of wildcat drillers, Mitchell Energy, pioneered the application of two oilfield techniques, hydraulic fracturing (“fracing”, pronounced “fracking”) and horizontal drilling, to release natural gas trapped in hardy shale-rock formations. Fracing involves blasting a cocktail of chemicals and other materials into the rock to shatter it into thousands of pieces, creating cracks that allow the gas to seep to the well for extraction. A “proppant”, such as sand, stops the gas from escaping. Horizontal drilling allows the drill bit to penetrate the earth vertically before moving sideways for hundreds or thousands of metres.
These techniques have unlocked vast tracts of gas-bearing shale in America (see map). Geologists had always known of it, and Mitchell had been working on exploiting it since the early 1990s. But only as prices surged in recent years did such drilling become commercially viable. Since then, economies of scale and improvements in techniques have halved the production costs of shale gas, making it cheaper even than some conventional sources.
The Barnett Shale alone accounts for 7% of American gas supplies. Shale and other reservoirs once considered unexploitable (coal-bed methane and “tight gas”) now meet half the country’s demand. New shale prospects are sprinkled across North America, from Texas to British Columbia. One authority says supplies will last 100 years; many think that is conservative. In 2008 Russia was the world’s biggest gas producer (see chart 1); last year, with output of more than 600 billion cubic metres, America probably overhauled it. North American gas prices have slumped from more than $13 per million British thermal units in mid-2008 to less than $5. The “unconventional”—tricky and expensive, in the language of the oil industry—has become conventional.
The availability of abundant reserves in North America contrasts with the narrowing of Western firms’ oil opportunities elsewhere in recent years. Politics was largely to blame, as surging commodity prices emboldened resource-rich countries such as Russia and Venezuela to restrict foreign access to their hydrocarbons. “Everyone would like to find more oil,” says Richard Herbert, an executive at Talisman Energy, a Canadian firm using a conventional North Sea oil business to finance heavy investment in North American shale. “The problem is, where do you go? It’s either in deep water or in countries that aren’t accessible.” This is forcing big oil companies to get gassier.
The oil majors watched from the sidelines as more entrepreneurial drillers proved shale’s viability. Now they want to join in. In December Exxon Mobil paid $41 billion for XTO, a “pure-play” gas firm with a large shale business. BP, Statoil, Total and others are sniffing around the North American gas patch, signing joint ventures with producers such as Chesapeake Energy. A wave of consolidation is likely in the coming months, as gas prices remain low, the drillers seek capital and the majors hunt for the choicest acreage.
Shale is almost ubiquitous, so in theory North America’s success can be repeated elsewhere. How plentiful unconventional resources might be in other regions, however, is far from established. The International Energy Agency (IEA) estimates the global total to be 921 trillion cubic metres (see chart 2), more than five times proven conventional reserves. Some think there is far more. No one will really know until companies explore and drill.
The drillers are already arriving in Europe and China, which are both expected to import increasing amounts of gas—and are therefore keen to produce their own. China has set its companies a target of producing 30 billion cubic metres a year from shale, equivalent to almost half the country’s demand in 2008. Several foreign firms, including Shell, are already scouring Chinese shales. After a meeting between the American and Chinese presidents last November, the White House announced a “US-China shale gas initiative”: American knowledge in exchange for investment opportunities. The IEA says China and India could have “large” reserves, far greater than the conventional resource.
Exploration is also under way in Austria, Germany, Hungary, Poland and other European countries. The oil industry’s minnows led this scramble, but now the big firms are arriving too. Austria’s OMV is working on a promising basin near Vienna. Exxon Mobil is drilling in Germany. Talisman recently signed a deal to explore for shale in Poland. ConocoPhillips is already there. The first results from wells being drilled in Poland, in what some analysts believe is a shale formation similar to Barnett, should be released this year.
No one expects production of shale gas in Europe to make a material difference to the continent’s supply for at least a decade. But the explorers in China and Europe present a long-term worry for those who have bet on exporting to these markets. Gazprom, Russia’s gas giant, is the company most exposed to this threat, because its strategy relies on developing large—and costly—gasfields in inhospitable places. But Australia, Qatar and other exporters also face a shift in the basics of their business.
Choked
These producers are already getting a taste of the global gas glut. Almost in tandem with the surge in American production, recession brought a slump in world demand. The IEA says consumption in 2009 fell by 3%. In Europe, the drop was 7%. Consumption in the European Union will grow marginally if at all this year and will not be sufficient to clear an overhang of supplies, contracted through take-or-pay agreements signed in the dash for gas of the past decade. IHS Global Insight, a consultancy, reckons that the excess could amount to 110 billion cubic metres this year, almost a quarter of the EU’s demand in 2008.
The glut has been exacerbated by the suddenly greater availability of LNG. Importers with the infrastructure to receive and regasify LNG can now easily tap the global market for spot cargoes. This is partly a product of the recession, which dampened demand from Japan and South Korea, the leading LNG buyers. But another cause is that many exporters, not least Qatar, the world’s LNG powerhouse, spent the past decade ramping up supplies aimed at the American market. That now looks like a blunder.
America is still taking some of this LNG, but the exporters’ bonanza is over before it ever really began. “You’ll always find a buyer in North America,” says Frank Harris, an analyst at Wood Mackenzie, a consultancy, “but you might not like the price.” And LNG will grow increasingly abundant as new projects due to come on stream this year add another 80m tonnes to annual supply, almost 50% more than in 2008.
Gas out, money in
Qatar’s low production costs mean it can still make money, even in North America. Others cannot. In February, for example, Gazprom postponed its Shtokman gasfield project by three years because of the change in the market. Some of the gas from that field, in the Barents Sea, was to be exported to America. But Shtokman’s gas will be costly, because the field is complex and its location makes it one of the world’s most difficult energy projects to execute. Some analysts now wonder whether gas will ever flow from Shtokman.
China offers some hope for ambitious exporters, but even there the outlook has become cloudier. The Chinese authorities want natural gas to account for at least 10% of the country’s energy mix by 2020 and are building LNG import terminals. With that target in mind, Australia, which has its own burgeoning conventional and unconventional gas supplies, has been busily building an LNG export business. But warning lights are coming on. In January, PetroChina let a deal to buy gas from Australia’s Browse LNG project expire. The original agreement was made in 2007, when LNG prices were soaring in Asia, but China can afford to be picky now. “Too many Australian LNG plants are chasing too little demand,” says Mr Harris.
The shift in the global market has left China well-placed to dictate prices. This will be another blow to Gazprom, which has long talked of exporting gas to the country. Indeed, while the Chinese and the Russians have squabbled over the terms, Turkmenistan has quietly built its own export route to China. Even if Beijing’s shale-gas plans come to nothing, supplies from Central Asia and new regasification terminals along its coast may allow China to reach its natural-gas consumption targets without pricey Siberian supplies.
The glut has weakened Gazprom’s position in Europe, too. It has been losing market share to cheaper Norwegian and spot-market supplies. In 2007 Gazprom talked of increasing its annual exports to the EU to 250 billion cubic metres. Now, says Jonathan Stern, of the Oxford Institute for Energy Studies, Gazprom will probably only ever supply the EU with 200 billion cubic metres a year (it shipped about 130 billion in 2008). The company forecast in 2008 that its gas prices in Europe would triple, to around $1,500 per 1,000 cubic metres, on the back of rising oil prices, which help set prices in long-term contracts. But the price dropped to about $350 last year and is expected to fall again in 2010. The weak market could last for another five years, believes Wood Mackenzie. Gazprom has been renegotiating with leading customers, injecting elements of spot pricing into contracts to make them more attractive.
Shtokman shtymied
Moreover, Europe’s need for new pipelines to guarantee supplies suddenly looks less pressing. Construction of Nord Stream, Gazprom’s flagship project to export gas directly to Germany through the Baltic Sea, will begin next month. It is due to come on stream in 2011. The scheduled doubling of its capacity to 55 billion cubic metres a year is in doubt, says Mr Stern, because Shtokman was to have supplied the gas for it.
Demand is a bigger problem. Even without recession or European shale, the assumption that Europe’s consumption will keep growing is looking shaky, because the EU’s efforts to boost efficiency and reduce carbon emissions are making gradual headway. Edward Christie, an economist at the Vienna Institute for International Economic Studies, says the EU could be importing a third less natural gas in 2030 than the European Commission forecast in 2005. That makes the case for additional supply lines much less compelling. The IEA expects rich European countries’ demand to grow by only 0.8% a year in the next two decades, against 1.5% for the world as a whole (see chart 3).
An age of plenty for gas consumers and of worry for conventional-gas producers thus seems to be dawning. But two factors could reverse the picture again. The first surrounds the uncertainty about how fruitful shale exploration will be outside North America. A clearer understanding of the geology will emerge from pilot wells in the coming months. Second, there are reasons for caution above ground, too. Despite natural gas’s greener credentials than oil’s or coal’s, shale drilling has critics among environmentalists, who worry that water sources will be poisoned and landscapes despoiled.
The industry says cement casing of wells and the depth to which they are drilled make the practice safe and relatively unobtrusive. But so far it has been drilling mainly in North America, where land is plentiful and people are accustomed to the sight of oilmen’s detritus. In densely populated Europe, the rapacious rate at which shale plays must be drilled to sustain production is less likely to be tolerated.
Even in America, opposition to shale gas is rising. New York state has imposed a moratorium on drilling in its portion of the Marcellus Shale, which it shares with Pennsylvania. Lawmakers in Congress want to study the ecological impact of fracing. The Environmental Protection Agency, a federal body, also raised concerns about “potential risks” to the watershed.
The path of demand in gas’s new age is hard to predict, but abundant new sources could bring about profound change in patterns of energy consumption. Some of the downward pressure on price will ease: despite sedate growth, the LNG glut should dissipate, probably by 2014, says Mr Harris; and low prices will kill more projects, clearing the inventory. France’s Total thinks global demand will recover strongly enough to require another 100m tonnes a year of LNG by 2020, on top of plants already planned. However, the Energy Information Administration, the statistical arm of America’s Department of Energy, predicts decades of relatively weak prices.
If this is correct, it makes sense, for both environmental and economic reasons, for the country to gasify its power generation, half of which comes from coal-fired plants. This could be done cheaply and quickly, because America’s total gas-fired capacity (as opposed to production) already exceeds that for coal. Put a price of only $30 a tonne on carbon, say supporters, and natural gas would quickly displace coal, because gas-fired power stations emit about half as much carbon as the cleanest coal plants. The IEA agrees that penalising carbon emissions would benefit natural gas at the expense of dirtier fuels.
There would be political obstacles. The coal lobby remains strong in Washington, DC. Climate legislation struggling through Congress even includes provisions to protect “clean coal”, a term covering an array of measures, so far uncommercial, to reduce emissions from burning the black stuff. Ironically, oil companies that were once suspicious of proposals to control carbon now regard a carbon price or even a carbon tax as a potential boon to their new gas businesses.
A more radical idea, and one that would have ramifications for the global oil sector, is to gasify transport. T. Boone Pickens, a corporate raider turned energy speculator, has launched a campaign to promote this, and has support from the gas industry. By converting North America’s fleet of 18-wheeled trucks to natural gas, says Randy Eresman, boss of EnCana, a Canadian gas company, America could halve its imports of Middle Eastern oil. EnCana is promoting “natural gas transportation corridors”: highways served by filling stations offering natural gas.
All this is some way off. The coal industry will not surrender the power sector without a fight. The gasification of transport, if it happens, could also take a less direct form, with cars fuelled by electricity generated from gas.
A gasified American economy would have profound effects on both international politics and the battle against climate change. Displacement of oil by natural gas would strengthen a trend away from crude in rich countries, where the IEA believes demand has already peaked as a result of the recent spike in oil prices. Another consequence of the energy market’s bull run, the unearthing of vast new supplies of gas, could bring further upheaval. If the past decade was characterised by the energy-security concerns of consumers, the coming years could give even the world’s powerful oil producers reason to worry, as a subterranean revolution shifts the geopolitics of global energy supply again.
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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