Sunday, March 23, 2014

A Three-Week Hiatus - Posting to Resume April 13

A crush of consulting work, a heavy travel schedule and an impending move (closer to downtown Portland) necessitate a three-week hiatus in posting. I expect to resume posting on Sunday, April 13.

Sunday, March 16, 2014

Net vs. gross energy: Is it wise to be complacent?

Everyone knows that when a potential employer makes a job offer, the salary or wage he or she proposes isn't what you'll be taking home. What you'll take home is your net pay. The number the employer offers you is your gross pay, and that's just what it says on your pay stub.

It's not quite a perfect analogy with net energy versus gross energy. But it's an everyday analogy that most people can understand. Net pay is what you have to pay your bills today. And, net energy is what society has in order to conduct its business (and its fun) on any given day. Net energy is what's left after the energy sectors of the economy--oil and gas, coal, nuclear, hydroelectric, renewable energy industries, and farming which provides food for human and animal energy and crops for biofuels--expend the energy they must to extract energy from the environment and then sell the surplus to the rest of us.

We don't often think of these sectors of the economy because for most people they are out of sight and therefore out of mind. And, until the last decade food and energy have been so consistently cheap in the last 60 years or so, that few people ever paused to ponder the fact that it takes energy to get energy. And, after all, cheap energy is an indication that it takes very little energy to extract huge amounts of energy from the environment. So, why worry about that?

However, as food and energy costs have risen dramatically in the last decade, the public and policymakers have begun to notice. What they don't seem to understand is that this rise results from the fact that it is now taking significantly more energy (and therefore money) to extract the energy we desire, both from fossil fuels in the ground and farm crops on the land (yields of which are currently heavily dependent on fossil fuel inputs). An obvious symptom is that wealth is flowing into the energy-gathering sectors of the economy mentioned above. But, that means there is less wealth left for the other sectors of the economy where the vast majority of people work, at least in so-called developed countries.

Still, as costs to extract energy continue to rise for those in the energy-gathering sectors of the economy, even their profits and wages will ultimately get squeezed. Yes, everyone eventually suffers when society must use more and more energy just to get the energy it needs to allow the non-energy parts of the economy to function properly.

Since 86 percent of the energy consumed worldwide is derived from burning finite fossil fuels, we are faced with a serious dilemma. Eventually, the energy we get from these fuels will turn down--and not for the reason that most people think. The world continues to extract more gross energy in the form of oil, natural gas, and coal each year. And yet, it takes energy to find, extract, refine and deliver that energy to society. So, are we still getting more net energy from those fuels each year? No one knows the answer.

One thing is clear. Because fossil fuels are finite, one day their rate of extraction will peak and then begin an irreversible decline. When that will occur, no one can know. But, before that happens--perhaps many, many years before it happens--the net energy from fossil fuels will peak and then begin an irreversible decline.

There are clues, obvious clues, that we may be nearing a net energy peak, even as the energy companies tout new records of gross fossil fuel extraction. High prices and now shrinking profits are evident in the oil and gas industry. Executives in the linked article give many explanations for falling profits, but none of them have to do with the declining net energy from their extractive activities. And, if the executives understand the latter cause--and I'm not sure they do--announcing it would hardly boost oil company stock prices.

But the word is out now that high costs for developing new fossil fuel energy sources are finally biting into energy company profits despite continuing high prices for oil and rebounding prices for natural gas.

One way the companies are fighting the high cost of developing new resources is simply to cut back on investment. But, this could create a self-reinforcing cycle in which exploration and development cutbacks lead to supply reductions worldwide which lead to higher prices which lead to recession and thus lower demand--and finally to much lower prices which discourage exploration and development.

But, back to my answer to the question, "Are we still getting more net energy from those [fossil] fuels each year?" My answer was that nobody knows. It's curious that in the information age no one has thought to examine this question very deeply except a few energy researchers who have been too ill-funded to gather and analyze extensive data on the subject. Charlie Hall and his students come to mind. They have gone to heroic lengths to obtain at least some data and analyze it in order to explore this question.

It is instructive that the premier energy statistics agency on the planet, the U.S. Energy Information Administration (upon which I rely heavily for accurate historical energy statistics), does not even have a category in its tables for net energy, nor any mention of it (in the sense I mean it) anywhere on its site that I can find.

The real peak then in fossil fuel energy will come not when the rate of extraction of oil or coal or natural gas peaks. As far as society is concerned, it will come when the net energy from these sources peaks and begins to decline. The fact that we won't even be able to see this when it arrives means we're headed for trouble already.

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 has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), 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.

Sunday, March 09, 2014

Ukraine, Russia and the nonexistent U.S. oil and natural gas "weapon"

Commentators were falling all over themselves last week to announce that far from being impotent in the Ukraine crisis, the United States had a very important weapon: growing oil and natural gas production which could compete on the world market and challenge Russian dominance over Ukrainian and European energy supplies--if only the U.S. government would change the laws and allow this bounty to be exported.

But, there's one very big problem with this view. The United States is still a net importer of both oil and natural gas. The economics of natural gas exports beyond Mexico and Canada--which are both integrated into a North American pipeline system--suggest that such exports will be very limited if they ever come at all. And, there is no reasonable prospect that the United States will ever become a net exporter of oil.

U.S. net imports of crude oil and petroleum products are approximately 6.4 million barrels per day (mbpd). (This estimate sits between the official U.S. Energy Information Administration (EIA) numbers of 5.5 mbpd of net petroleum liquids imports and 7.5 mbpd of net crude oil imports. And so, to understand my calculations, please see two comments I made in a previous piece here and here. My number is for December 2013, the latest month for which the complete statistics needed to make my more accurate calculation are available.)

The EIA in its own forecast predicts that U.S. crude oil production (defined as crude including lease condensate) will experience a tertiary peak in 2016 around 9.5 mbpd just below the all-time 1970 peak and then decline starting in 2020. This level is far below 2013 U.S. consumption of about 13.2 mbpd of actual petroleum-derived liquid fuels. (This number excludes natural gas-derived liquids which can only be substituted for petroleum-derived liquids on a very limited basis.)

So, when exactly is the United States going to drown the world market in oil and thereby challenge the Russian oil export machine? The most plausible answer is never. And, the expected 2016 peak in U.S. production is only about 1.5 mbpd higher than production today. That's really quite small compared to worldwide oil production of about 76 mbpd. And, there's no guarantee that the rest of the world isn't going to see a decline in oil production between now and then. So much for the supposed U.S. oil "weapon" taming the Russian bear.

But what about natural gas? Surely, America's great bounty of natural gas from shale could challenge the Russians. Well, not really. It's true that U.S. natural gas production trended up significantly from its post-Katrina nadir in 2005. But the trend has now stalled. U.S. dry natural gas production has been almost flat since January 2012. The EIA reports total production of 24.06 trillion cubic feet (tcf) for 2012 and 24.28 tcf for 2013, a rise of only 0.9 percent year over year.

Not mentioned by any of the commentators touting the U.S. natural gas "weapon" is that U.S. natural gas imports for 2013 were about 2.88 tcf or about 11 percent of U.S. consumption. So, let me see if I understand this: The plan seems to be to import more so we can export more. And this would change exactly what in the worldwide supply picture?

Certainly, it is true that low U.S. natural gas prices have reduced drilling and exploration dramatically. But prices will likely have to rise above $6 and trend higher as time passes as the easy-to-get shale gas is used up and only the more costly and difficult reservoirs remain. Drillers don't keep drilling unless they can make money and that will require significantly higher prices.

And, here's the kicker. In order to ship U.S. natural gas to Europe or Asia, it has to be liquefied at -260 degrees F, shipped on special tankers and then regasified. The cost of doing this is about $6 per thousand cubic feet (mcf). So, the total cost of delivering $6 U.S. natural gas to Europe is around $12 per mcf. With European liquefied natural gas (LNG) prices mostly below this level for the last five years, it's hard to see Europe as a logical market. Japan would be a better target for such exports with prices moving between $15 and $18 per mcf in the last five years. But a U.S. entry into the LNG market could conceivably depress world prices and make even Japan a doubtful destination for U.S. LNG. And, what if U.S. prices rise significantly above $6?

But all this presupposes that the United States will have excess natural gas to export. As my colleague Jeffrey Brown has pointed out, "Citi Research [an arm of Citigroup] puts the decline rate for existing U.S. natural gas production at about 24%/year, which would require the industry to replace about 100% of current U.S. natural gas production in four years, just to maintain current production."

It seems that U.S. drillers are going to be very, very busy just keeping domestic natural gas production from dipping, let alone expanding it to allow exports. And remember, we are still importing the stuff today!

How many companies will actually risk the billions needed to build U.S. natural gas export terminals to liquefy and load exports that may never appear? I doubt that very many will actually go through with their plans.

What is truly puzzling is that all the information I've just adduced--except the cost of liquefying, transporting and regasifying natural gas--is available with a few clicks of a mouse and a little arithmetic performed on tables of data. I got the cost information on LNG from a money manager specializing in energy investments. And yet, commentators, reporters, and editorial writers don't even bother to check the internet or call their sources in the investment business.

Perhaps the facts have become irrelevant. Only that would explain the current hoopla over the nonexistent U.S. oil and natural gas "weapon" in the face of the all-too-obvious and readily available evidence.

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 has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), 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.

Sunday, March 02, 2014

Taking a short break--No post this week

Other responsibilities have made it impossible to find time to write my weekly piece. I expect to post again on Sunday, March 9.