<http://truth-out.org/opinion/item/13629-age-of-cheap-oil-abundance-a-myth>
Rosy Forecast of Cheap Oil Abundance, Economic Boom a Myth
Monday, 31 December 2012 00:00
By Dr. Nafeez Mosaddeq Ahmed , Truthout | Op-Ed
Headlines about this year's "World Energy Outlook" (WEO) from the
International Energy Agency (IEA), released mid-November, would lead
you to think we are literally swimming in oil.
The report forecasts that the United States will outstrip Saudi
Arabia as the world's largest oil producer by 2017, becoming "all but
self-sufficient in net terms" in energy production - a notion
reported almost verbatim by media agencies worldwide, from BBC News
to Bloomberg. Going even further, Damien Carrington, head of
environment at The Guardian, titled his blog: "IEA report reminds us
peak oil idea has gone up in flames."
The IEA report's general conclusions have been backed up by several
other reports this year. Exxon Mobil's 2013 Energy Outlook projects
that demand for gas will grow by 65 percent through 2040, with 20
percent of worldwide production from North America, mostly from
unconventional sources. The shale gas revolution will make the US a
net exporter by 2025, it concludes. The US National Intelligence
Council also predicts US energy independence by 2030.
This last summer saw a similar chorus of headlines around the release
of a Harvard University report by Leonardo Maugeri, a former
executive with the Italian oil major Eni SpA. "We were wrong on peak
oil," read environmentalist George Monbiot's Guardian headline.
"There's enough to fry us all." Monbiot's piece echoed a spate of
earlier stories. In the preceding month, the BBC had asked
"Shortages: Is 'Peak Oil' Idea Dead?" The Wall Street Journal
pondered, "Has Peak Oil Peaked?" while the New York Time's leading
environmental columnist Andrew Revkin took "A Fresh Look At Oil's
Long Goodbye."
The gist of all this is that "peak oil" is now nothing but an
irrelevant meme, out of touch with the data and soundly disproven by
the now self-evident abundance of cheap unconventional oil and gas.
Burning our Bridges
On the one hand, it's true: There are more than enough fossil fuels
in the ground to drive an accelerated rush to the most extreme
scenarios of climate catastrophe.
The increasing shift from conventional to unconventional forms of oil
and gas - tar sands, oil shale, and especially shale gas - heralds an
unnerving acceleration of carbon emissions, rather than the
deceleration promised by those who advocate shale as a clean 'bridge
fuel' to renewables. According to the CO2 Scorecard Group, contrary
to industry claims, shale gas "cannot be credited" with US emissions
reductions over the last half decade. Nearly 90 percent of reductions
were caused not by switching to shale gas, but by a "decline in
petroleum use" linked to the "replacement" of coal "by wind, hydro
and other renewables." To make matters worse, where natural gas saved
50 million tons of carbon by substituting for coal in electricity,
increased gas use in commercial, residential and industrial sectors
generated 66 million additional tons of carbon.
In fact, studies show that when methane leakages are incorporated
into an assessment of shale gas' CO2 emissions, natural gas could
even surpass coal in terms of overall climate impact. As for tar
sands and oil shales, emissions are 1.2 to 1.75 times higher than for
conventional oil. No wonder the IEA's chief economist Fatih Birol
remarked pessimistically that "the world is going in the wrong
direction in terms of climate change."
But while the new evidence roundly puts to rest the "doomer"
scenarios advocated by staunch "peak oil" pessimists, the global
energy predicament is far more complicated.
Scaling the Peak
Delving deeper into the available data shows that despite being
capable of triggering dangerous global warming, we are already in the
throes of a global energy transition for which the age of cheap oil
is well and truly over. For most serious analysts, far from
signifying a world running out of oil, "peak oil" refers simply to
the point when, due to a combination of below-ground geological
constraints and above-ground economic factors, oil becomes
increasingly and irreversibly more difficult and expensive to produce.
That point is now. US Energy Information Administration (EIA) data
confirms that despite the US producing a "total oil supply" of 10
million barrels per day, up by 2.1 mbd since January 2005, world
crude oil production and lease condensate - conventional production -
remains on the largely flat, undulating plateau it has been on since
it stopped rising that very year at 74 million barrels per day (mbd).
According to John Hofmeister, former president of Shell Oil, "flat
production for the most part" over the last decade has dovetailed
with annual decline rates for existing fields of about "4 to 5
million bpd." Combined with "constant growing demand" - particularly
from China and emerging markets - he argues, this will underpin
higher oil prices for the foreseeable future.
The IEA's "World Energy Outlook" actually corroborates this picture
- but the devil is in the largely overlooked details. Firstly, the
main reason US oil supply will overtake Saudi Arabia and Russia is
because Saudi and Russian output is projected to decline, not rise as
previously assumed. So while US output creeps up from 10 to 11 mbd in
2025, post-peak Saudi output will fall to 10.6 mbd and Russia to 9.5
mbd.
Secondly, the report's projected increase in "oil production" from
84 mbd in 2011 to 97 mbd in 2035 comes not from conventional oil,
but "entirely from natural gas liquids and unconventional sources"
(and half of this from unconventional gas including shale) - with
conventional crude oil output (excluding light tight oil)
fluctuating between 65 mbd and 69 mbd, never quite reaching the
historic peak of 70 mbd in 2008 and falling by 3 mbd sometime after
2012. The IEA also does not forecast a return to the cheap oil heyday
of the pre-2000 era, but rather a long-term price rise to about $125
per barrel by 2035.
Thirdly, oil prices would be much higher if not for the fact that
governments are heavily subsidizing fossil fuels. The WEO revealed
that fossil fuel subsidies increased 30 percent to $523 billion in
2011, masking the threat of high prices.
Therefore, world conventional oil production is already on a
fluctuating plateau, and we are now increasingly dependent on more
expensive unconventional sources. The age of cheap oil abundance is
over.
Fudging the Figures
But there are further reasons for concern. For how reliable is the
IEA's data? In a series of investigations for the The Guardian and Le
Monde, Lionel Badal exposed in 2009 how key data was deliberately
fudged at the IEA under US pressure to artificially inflate official
reserve figures. Not only that, but Badal later discovered that as
early as 1998, extensive IEA data exploding assumptions of "sustained
economic growth and low unemployment," had been systematically
suppressed for political reasons, according to several whistleblowers.
With the IEA's research under such intense US political scrutiny and
interference for 12 years, its findings should perhaps not always be
taken at face value.
The same goes, even more so, for Maugeri's celebrated Harvard report.
By any meaningful standard, this was hardly an independent analysis
of oil industry data. Funded by two oil majors - Eni and British
Petroleum (BP) - the report was not peer-reviewed and contained a
litany of elementary errors. So egregious are these errors that Dr.
Roger Bentley, an expert at the UK Energy Research Centre, told
ex-BBC financial journalist David Strahan: "Mr Maugeri's report
misrepresents the decline rates established by major studies; it
contains glaring mathematical errors. . . . I am astonished Harvard
published it."
What the Scientists Say
In contrast to the blaring media attention generated by Maugeri's
report, three peer-reviewed studies published in reputable science
journals from January through to June this year offered a less than
jubilant perspective. A paper published in Nature by Sir David King,
the UK's former chief government scientist, found that despite
reported increases in oil reserves, tar sands, natural gas and shale
gas production via fracking, depletion of the world's existing fields
is still running at 4.5 percent to 6.7 percent per year. They firmly
dismissed notions that a shale gas boom would avert an energy crisis,
noting that production at shale gas wells drops by as much as 60 to
90 percent in the first year of operation. The paper received little,
if any, media fanfare.
In March, Sir [David] King's team at Oxford University's Smith School
of Enterprise & the Environment published another peer-reviewed paper
in Energy Policy, concluding that the industry had overstated world
oil reserves by about a third. Estimates should be downgraded from
1150-1350 billion barrels to 850-900 billion barrels. As a
consequence, the authors argued: "While there is certainly vast
amounts of fossil fuel resources left in the ground, the volume of
oil that can be commercially exploited at prices the global economy
has become accustomed to is limited and will soon decline." The study
was largely blacked out in the media - bar a solitary report in the
Telegraph, to its credit.
In June - the same month as Maugeri's deeply flawed analysis - Energy
published an extensive analysis of oil industry data by US financial
risk analyst Gail Tverberg, who found that since 2005, "world
[conventional] oil supply has not increased," that this was "a
primary cause of the 2008-2009 recession" and that the "expected
impact of reduced oil supply" will mean the "financial crisis may
eventually worsen." But all the media attention was on the oilman's
oil-funded report - Tverberg's peer-reviewed study in a reputable
science journal, with its somewhat darker message, was ignored.
What Happens When Shale Boom Goes Boom?
These scientific studies are not the only indications that something
is deeply wrong with the IEA's assessment of prospects for shale gas
production and accompanying economic prosperity.
Indeed, Business Insider reports that far from being profitable, the
shale gas industry is facing huge financial hurdles. "The economics
of fracking are horrid," observes US financial journalist Wolf
Richter. "Production falls off a cliff from day one and continues for
a year or so until it levels out at about 10 per cent of initial
production." The result is that "drilling is destroying capital at an
astonishing rate, and drillers are left with a mountain of debt just
when decline rates are starting to wreak their havoc. To keep the
decline rates from mucking up income statements, companies had to
drill more and more, with new wells making up for the declining
production of old wells. Alas, the scheme hit a wall, namely reality."
Just four months ago, Exxon's CEO, Rex Tillerson, complained that the
lower prices due to the US natural gas glut, although reducing energy
costs for consumers, were depressing prices and, thus, dramatically
decreasing profits. This problem is compounded primarily by the
swiftly plummeting production rates at shale wells, which start high
but fall fast. Although in shareholder and annual meetings, Exxon had
officially insisted it was not losing money on gas, Tillerson
candidly told a meeting at the Council on Foreign Relations: "We are
all losing our shirts today. We're making no money. It's all in the
red."
The oil industry has actively and deliberately attempted to obscure
the challenges facing shale gas production. A seminal New York Times
investigation last year found that despite a public stance of extreme
optimism, the US oil industry is "privately skeptical of shale gas."
According to the Times, "the gas may not be as easy and cheap to
extract from shale formations deep underground as the companies are
saying, according to hundreds of industry e-mails and internal
documents and an analysis of data from thousands of wells." The
emails revealed industry executives, lawyers, state geologists and
market analysts voicing "skepticism about lofty forecasts" and
questioning "whether companies are intentionally, and even illegally,
overstating the productivity of their wells and the size of their
reserves." Though corroborated by independent studies, a year later
such revelations have been largely ignored by journalists and
policymakers.
But we ignore them at our peril. According to Arthur Berman, a
32-year veteran petroleum geologist who worked with Amoco (prior to
its merger with BP), "the decline rates" for shale gas reserves are
"are incredibly high." Citing the Eagleford shale - the "mother of
all shale oil plays," he points out that the "annual decline rate is
higher than 42 percent." Just to keep production flat, they will have
to drill "almost 1000 wells in the Eagleford shale, every year. . . .
Just for one play, we're talking about $10 or $12 billion a year just
to replace supply. I add all these things up, and it starts to
approach the amount of money needed to bail out the banking industry.
Where is that money going to come from?"
Chesapeake Energy recently found itself in exactly this situation,
forcing it to sell assets to meet its obligations. "Staggering under
high debt," reported the Washington Post, Chesapeake said "it would
sell $6.9 billion of gas fields and pipelines - another step in
shrinking the company whose brash chief executive had made it a
leader in the country's shale gas revolution." The sale was forced by
a "combination of low natural gas prices and excessive borrowing."
The worst-case scenario is that several large oil companies find
themselves facing financial distress simultaneously. If that happens,
according to Berman, "you may have a couple of big bankruptcies or
takeovers, and everybody pulls back, all the money evaporates, all
the capital goes away. That's the worst-case scenario." To make
matters worse, Berman has shown conclusively that the industry
exaggerated EURs (Estimated Ultimate Recovery) of shale wells using
flawed industry models that, in turn, have fed into the IEA's future
projections. Berman is not alone - writing in Petroleum Review, US
energy consultants Ruud Weijermars and Crispian McCredie argued there
remains strong "basis for reasonable doubts about the reliability and
durability of US shale gas reserves," measures of which have been
"inflated" under new Security & Exchange Commission rules.
The eventual consequences of the current gas glut, in other words,
are more than likely to be an unsustainable shale bubble that
collapses under its own weight, precipitating a supply collapse and
price spike. Rather than fueling prosperity, the shale revolution
will instead boost a temporary recovery masking deeper, structural
instabilities. Inevitably, those instabilities will collide, leaving
us with an even bigger financial mess, on a faster trajectory toward
costly environmental destruction.
So when is crunch time? According to a new report from the New
Economics Foundation out last month, the arrival of 'economic peak
oil' - when the costs of supply "exceeds the price economies can pay
without significantly disrupting economic activity" - will be around
2014-15.
Black gold, it would seem, is not the answer to our problems.
Dr. Nafeez Mosaddeq Ahmed is executive director of the Institute for
Policy Research & Development and chief research officer at Unitas
Communications Ltd. His latest book is A User's Guide to the Crisis
of Civilization: And How to Save It (2010), which inspired the
award-winning documentary feature film, The Crisis of
Civilization (2011).
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