The questionable logic of U.S. natural gas exports

With U.S. natural gas production having risen more than 25 percent from its nadir in 2005, natural gas producers are pushing for an end to limits on U.S. natural gas exports. The growth in supplies comes primarily from previously inaccessible shale deposits deep in the Earth, a development that has convinced many people that the country is now entering a new era of natural gas abundance.

Trouble is, the United States remains an importer of natural gas. Through November 2012 the country imported 12.5 percent of its natural gas consumption for the year, mostly from Canada. That's down from an average of 15.7 percent for the previous 20-year period. But it's not exactly energy independence.

So worried are industrial consumers of natural gas about exports pushing up prices and thus their production costs that they've formed an alliance to fight the loosening of export restrictions. The alliance includes utilities dependent on natural gas to fuel electricity generation, chemical companies that use it as a feedstock for making myriad industrial chemicals, and heavy industrial users such Alcoa and Nucor who use natural gas to fire their metal-making operations. (Those who heat their homes and businesses with natural gas also stand to benefit if the alliance prevails.)

The members of the alliance have reason to worry since Europeans are paying close to $12 per thousand cubic feet for liquefied natural gas and the Japanese are paying more than $17. Compare that to the U.S. domestic pipeline price for natural gas of just $3.27 as of last Friday (Henry Hub spot price).

It's a classic case of those in an extractive industry seeking top dollar for their minerals, and those who buy the minerals to make other things seeking to keep a lid on the price of their inputs. Here in a nutshell is the logic on each side:

• Natural gas producers believe they ought to have the right to sell production coming from under American soil to the highest bidder worldwide. They can't do that now because of U.S. export restrictions. Whether the United States produces enough natural gas for domestic consumption is actually irrelevant to this argument since it rests on the notion that the owners of the natural gas have the right in a free market to dispose of it as they wish. (For context, these same companies have been promoting the idea of American energy independence in the media in order gain public acquiescence to lax environmental regulation and support for opening public lands to more drilling. So much for energy independence!)

• The industrial consumers believe that there is a broader good to be served by keeping the prices of energy and chemical feedstocks low for domestic industries, and thereby giving those industries an advantage over competitors abroad. This translates into higher employment and income across wide areas of the American economy since low natural gas prices benefit practically every business and homeowner—everyone, in fact, who pays a natural gas bill. High natural gas prices, on the other hand, only benefit those in the natural gas production business while dampening activity in natural gas consuming industries and the economy in general.

But what if U.S. natural gas production does ultimately exceed U.S. consumption? Won't that make both sides happy? Actually not necessarily, because in a worldwide market for natural gas, every consumer is bidding against every other consumer. Even if U.S. domestic gas production does rise significantly from here, exporting it would make everyone in the United States subject to worldwide pricing pressures. Right now the U.S. exports small amounts of natural gas to Mexico and Canada in places where it makes economic sense to do so because of the proximity of American supplies.

But, what the natural gas producers want is the development of a vast network of export terminals that cool natural gas to -260 degrees F where it becomes a liquid that can be shipped overseas by special liquefied natural gas carriers. If that expansion proceeds far enough, it might bring U.S. natural gas prices to parity with world prices. If it doesn't proceed very far at all—perhaps due to pressure from the alliance of natural gas users mentioned above—then the producers may only see a slight rise in domestic natural gas prices beyond what they would have seen without such export terminals.

All of this assumes that there will be plentiful supplies of natural gas in the United States. But, that might not be the case. U.S. natural gas production has been essentially flat for more than a year. Partly this is due to very low prices and subsequent cutbacks in drilling. But it belies the claim made in Congressional testimony by the industry's protagonist-in-chief, Chesapeake Energy CEO Aubrey McClendon, that supplies can grow 5 percent per year through 2018.

While the industry still clings to the now widely discredited notion that the United States has a 100-year supply of natural gas (at current rates of consumption), new assessments have suggested vastly reduced numbers for the amount of U.S. natural gas from shale—the main source of new supplies—that is technically recoverable. In 2011 the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, reported 862 trillion cubic feet (tcf) in shale gas resources. In 2012 the agency revised the number downward dramatically to 482 tcf based on new information from the U.S. Geological Survey. Keep in mind that this number says nothing about whether such resources will be economically recoverable. That number is bound to be much smaller.

Actual proven reserves of dry natural gas in the United States at the end of 2010 (the most recent date for which U.S. Department of Energy figures are available) amounted to about a 12-year supply at current rates of consumption. A reserve is something that can be produced profitably at today's prices with existing technology from known fields. As you will see, it is a much smaller amount when compared to "resources," a term in the oil and gas industry that really only refers to estimates based on sketchy evidence of what might be in the crust of the Earth under a country, state or field.

Resources are never exploited to 100 percent, and often only a small fraction ever become reserves. Keep in mind that only 35 percent of all the oil ever discovered has actually been produced. The rest is too expensive and sometimes even impossible to extract. That's in fields we have drilled extensively! The percentage of an estimated resource that is likely to be extracted is often less than that because resource estimates have almost never been tested with an actual drill.

Petroleum consultant Art Berman estimates that when all natural gas resources thought to be available under the United States are totaled, and an appropriate reduction is made based our experience with extraction, the actual economically recoverable resource of natural gas is likely to be closer to 23 years of supply at current rates of consumption, not exactly a figure that makes one confident about committing to send large quantities of natural gas abroad.

Yet another thing to keep in mind is that none of the estimates discussed above contemplate increases in the rate of U.S. natural gas consumption, increases that natural gas producers have been promoting. The producers have suggested that there is enough natural gas to justify building a fleet of natural gas powered vehicles and increasing considerably electricity generation from natural gas (something that is already happening). If the rate of consumption were to increase each year, the time to the exhaustion of the presumed natural gas resource would shorten dramatically and the time to a peak in output followed by an irreversible decline would happen much, much sooner as well. Exactly what will we do with our new natural gas powered generating plants and vehicles if we experience a continuous decline in natural gas supplies, say, starting in 2025?

Given all this it's surprising that industrial natural gas users are even considering accepting a compromise to allow a limited, but considerably higher volume of exports. U.S. shale gas resources—the biggest source of new supplies—continue to be a moving target, and their estimated size is moving swiftly downward. Possibly for that reason, the alliance of natural gas users mentioned above is suggesting that a decision about U.S. exports be delayed until a clearer picture of the country's natural gas endowment emerges. A Dow Chemical Company spokesman opined that if there really is a 100-year supply of natural gas under the United States, then we need not be in any rush to make a decision about exporting U.S.-produced gas.

Kinda makes you wonder why all the natural gas producers are in such a hurry.

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

Natural gas consumers just got a big subsidy from investors, but it can’t continue

It isn’t often that the world’s working stiffs get a chance to fleece rich investors. But that’s essentially what has happened as a result of the vast overinvestment in natural gas drilling in the United States. That overinvestment has led to a glut which last April pushed the price of U.S. natural gas down to $1.82 per thousand cubic feet (mcf), a level not seen since 2001.

Investors have essentially subsidized natural gas through huge loss-making investments, creating an oversupply that has sent prices significantly below the average cost of new production. That means consumers get cheap natural gas while investors kick themselves for not realizing that they were buying into a flawed concept—one that oil and gas consultant Art Berman has called “an improbable business model that has no barriers to entry except access to capital, that provides a source of cheap and abundant gas, and that somehow also allows for great profit.”

The conventional wisdom is that prices are likely to stabilize between $3 and $4 per mcf and stay there for the rest of the decade as the natural gas drilling juggernaut continues. There just one problem with this outlook. The juggernaut has most definitely NOT continued.

Since the last week of August 2008 when the count of active U.S. natural gas drilling rigs peaked at 1606, the number of active rigs has plunged to just 425 for the week ending February 8.

Investors who helped to fuel the boom included hedge funds, wealthy individuals and institutional investors, all of whom chipped in a lot of money to finance the drilling of individual wells for what turned out to be meager payouts. None are eager to get burned that badly again.

In addition, the share prices of publicly traded drillers such as Chesapeake Energy, Devon Energy, Encana, and Southwestern Energy—who put an extraordinarily large proportion of their efforts and funds into finding natural gas (as opposed to oil)—have plummeted. That decline has for now made raising new capital through stock issuance a relatively rare event.

Furthermore, many drillers—who borrowed heavily to help finance their drilling efforts—now find themselves deeply in debt, groaning under the weight of interest charges and loan repayments. But, they’ve been unable to do much except sell assets to counter the devastating effects that low natural gas prices continue to have on their balance sheets.

It’s hard to imagine the same investors and banks deciding that for the rest of the decade, they’ll keep repeating what they’ve just done.

As for the drillers, they have moved on. They have already repositioned their rigs for drilling oil which is currently fetching a splendidly profitable price near $100 a barrel, that is, near the historically high levels seen since 2008. It turns out that even the natural gas drillers don’t believe the natural gas story any more if we judge by their actions. Indeed, even the biggest booster of the cheap (but somehow profitable) natural gas forever narrative, Chesapeake Energy, has given up and turned its focus to oil.

So, where does that leave the working stiffs who heat their homes with natural gas, the utilities who burn it to make electricity, and the chemical manufacturers who use it as a feedstock for many chemicals including nitrogen fertilizer? They all face an uncertain future in which natural gas prices are likely to rise significantly, perhaps even returning to the double-digit nosebleed levels of 2008 before gun-shy investors and drillers will dare to take the necessary steps to bring on significant new supply.

Which begs the question: What if drillers and investors wait that long to move back into the natural gas fields in force?

Petroleum geologist Jeffrey Brown of Export Land Model fame offered a startling response in a conversation at a recent conference I attended. The production decline rates of the shale gas wells that are providing the bulk of new U.S. supplies are so high—60 percent in the first year and up to 85 percent by the end of the second year—that we may never be able to return to today’s production level.

That would certainly put a nail in the coffin of the natural gas abundance narrative.

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

BP Energy Outlook 2030: An exercise in wish fulfillment

“Like dreams, statistics are a form of wish fulfillment,” French philosopher Jean Baudrillard once said.  Substitute “forecasts” for the word “statistics,” and you’ll have a good understanding of the public reaction to the recently released BP Energy Outlook 2030.

The psychoanalytic definition of wish fulfillment is “the satisfaction of a desire, a need, or an impulse through a dream or other exercise of the imagination.”

The oil giant’s long-term forecast—really an “exercise of the imagination”—was greeted with a sort of breathless astonishment by the media who took it for a statement of fact concerning the one thing about which we cannot know anything for certain: the future.

My first response to the coverage was: “Well, what did you expect the company to say?” This is the world’s third largest oil company. Of course, its forecast through 2030 is that the world will remain hooked on fossil fuels, particularly oil which, BP tells us, is going to be plentiful despite what those peak oil killjoys are saying.

To admit any near-term limitation would have meant that the company’s business model wasn’t just flawed, but about to be revealed as a sinkhole for long-term investors as its main business winds down. That would have led to an immediate downward valuation in the stock price and a considerable hit to the wealth of the company’s managers due to the effect on their stock options and holdings.

Once again, I say, “Of course, they’re telling everyone they’re optimistic about oil supplies.” And yet, a look at the company’s actual situation ought to lead to a much different conclusion.

BP’s oil and natural gas production combined has declined about 15 percent since 2009. (The linked article is in French, but Google Translate does a pretty good job of rendering it intelligible for those who can’t read the language.) And, it’s not just the 2010 Gulf of Mexico oil spill that’s been plaguing the company. The oil giant’s production is declining in the North Sea, in the United States and in Africa. Even in Central Asia where BP has dominated production in Azerbaijan, it is losing production volume.

Lest you think BP is alone, read the entire article. ExxonMobil’s conventional crude production is down 27.5 percent since 2007. French oil giant Total’s oil production (reported as crude and natural gas liquids production) declined by 18.8 percent between 2007 and 2011. Among the top four oil companies in the world only Shell seems to have sidestepped the decline for the present.

The strategy for most of the majors now is to replace their reserves with something called “barrels of oil equivalent.” In essence, this means natural gas on an energy equivalent basis. (Approximately 6,000 cubic feet of natural gas contain the same energy as a barrel of oil.) But to admit the ongoing decline in their oil production capacity and then also to admit that there is little chance of turning that trend around would be tantamount to corporate suicide—at least if the objective is to collect the largest possible quarterly bonus and stock options payoff.

But there is something else at work here, namely, the credulity of the media and of public policy makers. It would be easy to ferret out a few facts that would cast serious doubt on BP’s forecast—for example, that world oil production proper has been flat since 2005 despite record prices and record investment in new production. If the record prices and record investment of the last seven years can’t lift world oil production significantly off its current plateau and if the supposedly revolutionary technology that is being deployed can’t either, then what is going to happen between now and 2030 to change things?

So, the explanation for this credulity and the oil industry’s ability to exploit it must lie elsewhere. Here’s my attempt to explain. First, most people don’t know that long-term forecasts are almost useless except as ways to explore various scenarios. The margin of error quickly escalates just a few years out and becomes incalculably large when the forecast is stretched to decades. In fact, previous long-term oil supply forecasts from government and international agencies and from ExxonMobil have been considerably wide of the mark. All of them were too optimistic about supply and wildly low on prices. (This is another one of those facts that would be easy to check.)

And yet, because the forecasts come from official agencies and the industry itself, people believe that these experts can somehow discern the future clearly. Well, clearly they cannot. But, most people never go back to check.

Second, the stability of global society depends entirely on the continuous flow of energy and materials into that society. More particularly, we have now become addicted to uninterrupted growth in those supplies. It is simply unthinkable to most people—even ones in high places who ought to know better—that this growth could come to a halt and indeed go into reverse.

If such a reversal were sustained, the consequences would be outside our experience within that last 150 years which have seen nothing but rapid economic expansion. When something is outside one’s experience, it’s easy to classify it as simply “not possible.”

And so, our system is utterly reliant for its stability on the presumed correctness of optimistic long-term supply forecasts for finite fossil fuels, particularly oil, put out by BP and others. These fuels are the backbone of the world economy supplying more than 80 percent of our energy with oil supplying about a third of the total. We know—we are certain, in fact—that based on previous experience with oil wells, oil fields, and oil-producing countries, worldwide oil production will someday decline. And yet, even with the fabulously faulty record of long-term forecasts, we still put our fate into the hands of self-interested parties who tell us not to worry. We do this because somehow many of us cannot face a future which would require deep structural changes in our lives.

As it turns out, the BP Energy Outlook 2030 is not a statistical or scientific document, but rather a political one. It is not a statement about the way the world is so much as about the way BP wishes it to be over the next 20 years. Naturally, that includes BP continuing as one of the world’s largest and most influential corporations.

In short, the BP Energy Outlook is an exercise in wish fulfillment. The company and many who read its forecast think that if we dress up our wishes in the form of color graphs and charts, those wishes will come true—or possibly they have already come true because BP conveniently tells us so in advance.

Certainly, one of the world’s major oil companies wouldn’t mislead us on a matter as grave as the future of oil, would it?

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P.S. For your edification here is the disclaimer on page 2 of the BP Energy Outlook 2030:

This presentation contains forward-looking statements, particularly those regarding global economic growth, population growth, energy consumption, policy support for renewable energies and sources of energy supply. Forward-looking statements involve risks and uncertainties because they relate to events, and depend on circumstances, that will or may occur in the future. Actual outcomes may differ depending on a variety of factors, including product supply, demand and pricing; political stability; general economic conditions; legal and regulatory developments; availability of new technologies; natural disasters and adverse weather conditions; wars and acts of terrorism or sabotage; and other factors discussed elsewhere in this presentation. (emphasis added)

In other words, you shouldn’t really count on any of what you read in the forecast turning out the way BP says it will. It’s boilerplate, I know. But there is more truth to this boilerplate language than the rest of the report. Should we really be basing our energy policy on information this shaky and uncertain? The risks are wildly asymmetrical. If BP is right, then it’s business-as-usual. If they’re overly optimistic then we could be in for a period of turmoil that could destabilize the entire global economic system which will be unprepared for the consequences of a persistent decline in oil supplies. Why? Because BP and other major forecasters told us we don’t have to prepare.

P.P.S. Another astute reader of the Outlook 2030 noticed that at the end of BP’s cheery presentation, the company wrote that if its forecast comes true, we will be faced with a climate catastrophe. The forecast didn’t put it that way; but, that’s the implication of this language:

Carbon emissions from energy use continue to grow, increasing by 26% between 2011 and 2030 (1.2% p.a.). We assume continued tightening in policies to address climate change, yet emissions remain well above the required path to stabilise the concentration of greenhouse gases at the level recommended by scientists (450 ppm).

It turns out then that if the BP forecast comes true, it is actually a doomsday prophecy. Not so cheery after all.

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

Oil, climate and time: Why some problems will wait and others will not

America believed it could put off the question of slavery. It did for 73 years from the drafting of the U.S. Constitution to the beginning of the Civil War.

America believed it could put off women’s suffrage after the Civil War even though so many women had worked so hard for abolition and for the rights of former slaves. It did for 54 years until the passage of the 19th Amendment.

The right of gays and lesbians to marry and to be free from discrimination in employment and housing is an ongoing struggle.

All these problems, however painful in their consequences, were or are being addressed over time. I say over time because, by their very nature, they were or are capable of being addressed by human action alone. In short, they are social problems. And, while those who are suffering from discrimination and hatred would like both to end now, the American republic has experienced continuity for more than 220 years despite many such trying social issues.

With gun control, the soaring federal deficit and the sluggish economy dominating the headlines now, it easy to confuse problems that are primarily social in character such as gun control with ones that involve the laws of physics such as climate change and resource depletion.

Exclusively social problems have a way of being addressed—if they are addressed at all—over many decades. Problems such as climate change and resource depletion will not wait for that kind of schedule.

The laws of physics are indifferent to the political schedules of humans. Climate change appears to be speeding up as ice melts faster and faster on Greenland and at the poles. Last year was the warmest year ever recorded in the United States. Climate change is not struggling to be emancipated or seeking the right to vote or to marry. It cannot be put off with assurances that it will have to wait until next year when the political climate might be better.

Climate change is indifferent to such condescension and remorseless to boot. It proceeds whether we like it or not, whether we acknowledge it or not.

The same can be said of resource depletion. We can pretend that America is heading toward so-called “energy independence,” even as worldwide oil production remains stalled for seven years running. But oil cannot be cajoled to do anything that the laws of physics will not allow.

Lawmakers and presidents think in terms of what the public or a particular lobby will permit. Physics does not have a lobby. It merely has laws which we have no choice but to follow. If our human laws, regulations, customs and practices don’t come into alignment with the laws of physics, then it will be our grief since the laws of physics show mercy for no one.

It really is that simple. The complex part is the human side of the equation. We did not evolve in a climate that was rapidly changing. We did not evolve in a full world in which both renewable and nonrenewable resources were being tapped at ever higher rates. We did not evolve in societies so complex and global in their scope that our circle of electronic “friends” might include thousands, many of whom live continents away. We did not evolve in societies in which planning for events decades into the future—for example, highway and airline traffic—was a necessity.

We are fit to understand and align with the laws of physics in matters that are close to us, say, playing catch or accurately steering a car. But when it comes to abstract worldwide phenomena, we seem to be at a loss.

Some say it is the vested interests in the fossil fuel industry and elsewhere that are preventing us from taking the necessary actions to address climate change and resource depletion. There is certainly some truth in this. But those interests are counting on us to stay stuck in our evolutionary training which makes us blind to the most urgent problems around us.

Transcending that training will be our most difficult and necessary task ahead if we are to survive as a species in the coming century.

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