Has
The Peak Oil Idea… Peaked?
And
if so, does the planet stand a chance?
by
Gordon Campbell
27
Junel, 2012
They
call it oil, but it just might as well be quicksilver. In this year’s
Budget, all the energy cost assumptions were based on the oil price
for West Texas crude falling from above $US100 a barrel in the March
quarter of 2012, to $US94.4 a barrel by the June quarter of 2016.
Well, hello. At time of writing (June 18, 2012) the price
of West Texas crude was already down to $US83.27 a barrel and falling
towards a predicted low of $US65 by next year. In part, this plunge
is a reflection of the economic slowdown in the global economy –
and sure enough, a fall off in demand can only have helped to send
the price of Brent Crude tumbling from its four year high of $US128 a
barrel in March to $95.76 in mid June, a trend that has (finally!)
flowed through to lower prices at the petrol pump. Short term, that
sounds good, right?
There
is more to this story however, and there are forces out there keen to
defy gravity. At the last OPEC meeting on June 14, the Saudis
indicated they would be managing production outputs to stabilise
Brent at around $90 a barrel for the rest of the year, despite the
bounce back upwards in price that some might have been expected once
the sanctions against Iranian oil begin to take effect on July 1st.
So we’re probably talking lower prices, but not through the
floorboards. Because looking further out, the price declines that
we’ve seen in the past few months also happen to be a precursor of
a global resurgence in oil and gas production that is imminent, if
not already upon us. And not even the Saudis may be able to stand
against this incoming tide.
We
should all be feeling nervous at the prospect. Whatever happened to
the peak oil scenario, in which fossil fuels were supposed to go the
way of the dinosaurs, and where their increasing
scarcity might actually help to save the planet, by
making the switch to renewable energy sources both (a) inevitable and
(b) affordable?
The
recent BBC story “Is Peak Oil Idea Dead?” is
asking much the same question while
other commentaries are reaching grim conclusions (“Sad News For
Peak Oil Disciples”) about
the trendlines.
The Wall
St Journal on
the other hand, seems quite cock
a hoop that happy drilling days are here again.
For
clarity’s sake, it may be necessary to back up a little, and get a
few fallback positions clear. The term “peak oil” never did
herald the end of oil itself, but merely the optimum point for oil
production at a economically rational cost of extraction. Moreover,
the more sophisticated advocates of the original peak oil theory
never assumed that production would fall off a cliff (it was always
assumed the fall-off would look more like a bell curve ) or that
die-hard energy industry advocates wouldn’t re-double their efforts
to exploit less accessible sources of oil by say… drilling out in
deep water, or extracting oil and gas from tar sands. So optimists
could still try to argue that the end times of peak oil are still
unfolding, as predicted.
That’s
not the case, unfortunately (see below). For a time (we’re talking
about the heady days of 2005–2008) the peak oil milestone gave a crucial political momentum
to the transition to renewables, and to the business models
associated with alternative sources of energy. Essentially, peak oil
gave politicians around the world a mandate to fund the transition to
clean energy. Essentially, it is that
momentum that’s in trouble right now, in the short to medium term
at least.
Renewables
investments worldwide during Q1 2012 were the weakest they’ve been
since 2009, according to Ernst & Young. Tariff cuts and grid
challenges in Germany and Italy reduced the short-term attractiveness
of the renewables sector. The US has returned to boom-bust as a
result of uncertainty over the Production Tax Credits and
insufficient grid access in China is stifling the wind energy market,
according to a report. The analysis also suggests the end of a tax
break incentive in India is likely to dampen wind sector growth
through 2012…
There
are a few glimmerings in the gloom. The same Ernst and Young report
sees ground for optimism in the longer term, if costs can be
controlled. And on that score, the cost
of renewables has been falling as reported
here and here which might conceivably
keep the transition to more planet-friendly technologies cost
competitive, especially given the wider health and environmental
costs that are still going to be incurred with the continued use of
fossil fuels, regardless of the price per barrel.
What
can’t be denied though, is that the economic margin for renewables
has got much tighter, and some major clean energy players in the US
(such as Solyndra) have
already crashed and burned despite
receiving large government subsidies. The political attack on clean
energy in the US presidential campaign has already begun, with the
conservative Koch brothers stumping up for a $6.1 million ad
campaign against
the Obama administration’s support for clean energy technology.
In
sum, any room for complacency about peak oil and the political will
to finance the shift to renewables has evaporated. Remember how, as
recently as 2008, a major UK bi-partisan parliamentary report on peak
oil could
conclude:
While
large resources of conventional oil may be available, these are
unlikely to be accessed quickly and may make little difference to the
timing of the global peak. A peak in conventional oil production
before 2030 appears likely and there is a significant risk of a peak
before 2020.
Well,
“conventional” turned out to be the key word in that last
sentence. Unconventional production
techniques and locations are altering the energy landscape, and the
prospect of cheap-ish fossil fuel energy for the foreseeable is
putting the political impetus for the shift to renewables in
jeopardy. Oil and gas production is no longer on its death bed – in
fact, some in the industry are claiming to be on the brink of “a
new golden age of petroleum”. The production outlook for the next
decade has changed dramatically, as this June 2012 analysis in the
industry Oil
and Gas Journalappears
to confirm:
The
downside risk we saw in oil prices has started sooner than we had
expected….We continue to see downside pressure for oil prices into
2013, as our oil model points to a severely oversupplied global oil
market. While lower demand is part of the story, robust production
growth in the US is the monster lurking in the shadows. We expect
this bogeyman to fully show himself before the end of this year.
Accordingly, we believe Saudi Arabia will begin to noticeably cut
production in the fourth quarter, while US producers will begin to
curb activity in upcoming weeks…Combining the US-driven resurgence
in non-OPEC supply with our lackluster demand expectations, we
believe that once the market’s focus shifts from demand to supply,
the oil price picture will get uglier.
If
that surge was a short run, last fling thing for fossil fuels, we
might all breathe a little easier. But it isn’t. Most of the supply
predictions on oil and gas productions runs to 2030, or 2035.
On
most available measures, supply is likely to be outpacing demand for
the next couple of decades. The supply drivers have been huge finds
in Russia, in deep water deposits off the coast of Brazil, in the
eastern Meditteranean, Kenya, Angola, and off the Falklands, to cite
only a few. More importantly, new-ish extraction methods such as the
process of hydraulic fracturing (aka fracking) have unlocked vast new
sources of oil and gas.
Such
is the forecast rise in production, Canada’s oil output by the end
of the decade could almost be the same as the current volume from
Iran, OPEC’s No. 2 producer. Even if the extraction practice
involves dirty and very expensive technology, and even if the fall
off in such fields tends to be steep, the size of the North America
fields alone seems likely to be a game changer for the next couple of
decades, at least. And these happen to be the crucial decades, if
runaway climate change isn’t to become a reality. At the very least
what we are talking about is a shift in the current balance of fossil
fuel use – from OPEC to non-OPEC suppliers, and with more emphasis
in future on natural gas vis a vis oil – rather than the wholesale
replacement of fossil fuels altogether. The main brakes on production
will not be a lack of fossil fuel supply but (a) a lack of capacity
in pipelines to handle it and (b) such a surge will occur that prices
may drop to a point where some major projects get shelved as
uneconomic. Either way, these are not exactly green solutions.
Is
there any countervailing good news? Well… not much. Leaving aside
what will happen to energy prices when the global recovery takes
place and demand rises – neither of them likely any time soon –
production still appears likely to keep pace, if only because there
is such an obvious convergence of interest on the supply side when it
comes to price.
What
I’m getting at here is that both the new and the old oil and gas
suppliers have a common interest in the price staying out of the
basement, and up in the mid-range. The conventional players within
OPEC and the big players outside it can live with Brent prices in the
$90-100 price range. Go any higher, and the fear both within and
beyond OPEC is that this could cause a re-run of the latter half of
2008, when sky-high oil prices sparked a massive global investment in
alternative, cleaner forms of energy. For the industry, the trick
will be to keep prices just high enough to protect the profit margins
that are required (on top of the higher costs of exploration and
extraction) but without throwing renewables a life line. That’s
going to be the challenge: let prices rise too high and renewables
will get breathing space. Go too low and both fracking and renewables
become uneconomic, and all sorts of mayhem ensues.
As
mentioned, the new players (the frackers and the deepwater oil and
gas explorers ) have a different motive than the Saudis for
converging around much the same price. To repeat: they need the price
to stay relatively high (maybe just south of $100 a barrel) to
deliver a return on their relatively expensive activities. Trouble
is, the break-even estimates do vary quite widely on this point –
with anything from $60-130 a barrel being cited as the break-even
point for fracking when conceived as anything more than a hit and run
operation. The balancing act that will need to be sustained here will
be a struggle, especially next year when an oil glut is possible, and
– as mentioned – this could exceed even the Saudis’ supreme
skills in production management, especially in the event of a Romney
presidency that goes for broke on US energy independence and for
supremacy over OPEC, at last! In sum, the bigger risks are still
weighted towards lower prices and over supply, not higher ones.
The
mid June outlook showed just how hard the balancing task will become,
looking out for a decade:
In
Houston, analysts at Raymond James & Associates Inc. reduced
their 2013 price forecasts for crude to an average $65/bbl for WTI,
down from $83/bbl previously, and to $80/bbl for Brent, down from
$95/bbl.
Both of these new forecasts are now well below the futures strip and consensus estimates,” they said. They also reduced their 10-year outlook for WTI to $80/bbl from $90/bbl.
Both of these new forecasts are now well below the futures strip and consensus estimates,” they said. They also reduced their 10-year outlook for WTI to $80/bbl from $90/bbl.
In
the meantime… while renewables are still competitive players, the
political pressure to scrap the subsidies for wind and solar is
already strong, and likely to become more intense. As a consequence,
there may not be quite as many green jobs created via renewables as
seemed likely during the heady days of late 2008.
In
the UK for instance, the picture is a classic good news/bad news
situation. Yes, costs for producing offshore wind power are
on course to steeply decrease by up to 30% but
the Tories have also signalled their intention to scrap by 2020 the
large subsidies being paid to
the producers of onshore wind energy.
Despite
opposition from the Liberal Democrats, who strongly support more
renewable energy, the subsidy regime for onshore wind and solar
panels is now firmly expected to be phased out by the end of the
decade….At present, householders pay for subsidies to renewable
energy producers through an extra charge on household electricity
bills. An email sent by Oliver Letwin, the Cabinet Office minister,
makes it clear that financial support both for onshore wind and solar
panels is expected to have “disappeared” within eight years.
On
the other side of the Atlantic, the ‘clean energy’ aspects of the
Obama energy plan are also coming under heavy fire, as the
presidential campaign heats up. Bearing the brunt of the criticism
are the U.S. clean energy subsidies — spending, tax breaks, loan
guarantees etc — which increased from $17.9 billion in fiscal 2007
to $37.2 billion in fiscal 2010, according to the Energy
Department. Yet
according to analyst Charles Lane in the Washington
Post, the
overwhelming market advantages enjoyed by fossil fuels have already
produced a litany of clean-energy company failures, from electric
cars to Solyndra. Lane’s analysis draws heavily upon a
scientific report carried
out under the aegis of the centrist Brooking Institute, and he
concludes :
The
best-laid plans are vulnerable to unforeseen market developments —
such as the boom in oil and natural gas “fracking” over the past
decade, which Obama has now embraced…..As for job creation,
clean-energy subsidies shift demand for labor; they don’t increase
it. “I’m not aware of a single peer-reviewed economic study that
shows these programs create jobs in the long run, and on a net
basis,” [according to Brooking Institute scientist Adele Morris] .
Solyndra and its 1,861 vanished jobs proves her point…
Well,
not exactly. The Solyndra bankruptcy was bad, but its failure alone
doesn’t prove the case that renewables can’t create a net number
of new jobs. All the same, if renewables can’t in the end compete
head to head with fossil fuels on narrow economic grounds, the
argument may need to be pitched (and won) on other grounds. On the
Foreign Policy site, US energy analyst Steve Devine makes that point,
and states the challenge facing
clean energy technology very succinctly:
Clean-tech
is under a perfect storm of challenges around the world: Subsidies
are under threat or have already been withdrawn not just in the U.S.,
but in Spain; U.S. and German companies are in trouble because of
competition from China; meanwhile, a surge in oil and natural gas
discoveries has undermined the peak-oil rationale for cleantech
development. Solar and battery companies are dropping like flies.
Only
in China do cleantech companies seem safe. Otherwise, cleantech does
seem at an inflection point, which is that it must establish a
rationale on its own merits. It must persuade the public not that the
world is running out of oil, that China is about to eat the West’s
lunch, or that cap-and-trade is needed to save civilization. Instead,
the industry must show that clean is simply better.
Easier
said than done. True enough, the market prices for fossil fuels do
not capture all the costs of procuring them, or of consuming them.
Such truths however, seem like shouting into a cyclone given the vast
amounts of fossil fuel energy and dirty tech jobs expected to accrue
from shale oil deposits in Alberta, Canada and from the Bakken field
that stretches from North Dakota into Saskatchewan, to the point
where the US could be close to energy independence in the near
future. Everyone, from
the Calgary
Herald, to Forbesmagazine has
been counting the potential output:
[Bakken
field production] went from a mere 3,000 barrels a day in 2005 to
225,000 in 2010, according to the [US] government’s Energy
Information Administration. EIA thinks it will produce 350,000
barrels a day by 2035, but most analysts think that estimate is far
too low. According to Harold Hamm, president of the energy company
Continental Resources, it could produce a million barrels a day by
2020.
More
is to come, with the potential extractable output from Bakken being
in time, in the region of 80 billion barrels
:
By
itself, the Bakken formation, a deep shale layer beneath North
Dakota, Montana, and Saskatchewan, is said by state and industry
geologists to contain 22 billion barrels of recoverable oil. That is
five times more oil than the U.S. Geological Survey estimated a few
years ago. State geologists say the entire formation holds 168
billion barrels of oil, and industry engineers say that the
development of production technology is proceeding so steadily that
perhaps half of the reserve is conceivably recoverable.[ ie. If the
price holds up high enough.]
To
its credit, the Canadian Financial
Post proceeded
to cite some of the downsides. As mentioned before in this article,
the depletion rate in some fracking-driven fields can be
precipitously high, and this may function as a deterrent to the
investors needed to secure the gains. That’s
the hope – for the planet, at least.
In
addition, new oil drilling and fracking technologies are very
expensive. The research we’ve read shows the cost of developing
many of these unconventional oil plays requires a break-even price
ranging from US$60 to US$130 per barrel, depending on the play type,
which happens to be quite similar to the breakeven price for many
Canadian oil sands projects.
Many
of these unconventional fields also exhibit high initial decline
rates to the tune of 60% to 80% in the first year alone. Therefore,
should there be any prolonged downturn in oil prices, the high cost
structure of developing these plays would result in less overall
third-party capital being made available to keep up the pace. The
end result would be a supply response to the downside.
Right.
Which goes to underline the delicate balance we’re talking about
here. The trick for the industry will be open up new fields of
production without flooding the market in a way that renders those
same endeavours uneconomic to pursue. Ironically this could affect
New Zealand in the form of a fairly grim, green joke.
Ultimately,
what might well save the East Cape from the exploration and
extraction activities of the Brazilian oil form Petrobras is a fossil
fuel boom that could turn the local deepwater drilling plans of the
(already stretched) oil giant into a no-longer-viable bet.
Ultimately,
this means that our best bet of saving East Cape from potential
pollution could rest upon a plunge in oil prices that puts the entire
planet at further risk from climate change. ( Save East Cape or save
the planet: take your pick.) Because here’s the thing: what we do
know is that some of the current deepwater/fracking operations look
likely to be big enough to extend affordable fossil fuel use beyond
the point of no return for the planet. As the BBC article linked to
earlier noted, clean tech has been put on the back foot:
The
worry over energy security was helping to drive development of
renewables and nuclear. Now that has slipped, a flood of cheap gas on
to the world market threatens to starve wind and solar…[Yet] to
meet the carbon cuts that scientists calculate are needed by 2020,
the IEA says, the world needs to generate 28% of its electricity from
renewable sources and 47% by 2035. Yet renewables now make up just
16% of global electricity supply… On carbon capture and storage,
the picture is even worse: the world needs nearly 40 power stations
to be fitted with the technology within eight years, and so far none
at all have been built.
Moreover,
a further hope had existed (in some quarters at least) that new and
safe, non-carbon emitting forms of nuclear energy could help to
rescue the situation – but such hopes have taken a hit since last
year’s nuclear accident at Fukushima, Japan. “Expectations for
atomic energy capacity in 2025,” the BBC’s Roger Harrabin adds,
“have been scaled back by 15%.”
Okay,
forget about the celebratory ululations from the oil and gas industry
for a moment. How’s the current outlook for the planet? Not great,
according to the data presented to an April meeting in London of
energy ministers from
the world’s biggest economies:
… “The
world’s energy system is being pushed to breaking point,”
according to Maria van der Hoeven [pictured left], executive director
of the International Energy Agency. “Our addiction to fossil fuels
grows stronger each year. Many clean energy technologies are
available but they are not being deployed quickly enough to avert
potentially disastrous consequences.” On current form, she warns,
the world is on track for warming of 6C by the end of the century –
a level that would create catastrophe, wiping out agriculture in many
areas and rendering swathes of the globe uninhabitable, as well as
raising sea levels and causing mass migration, according to
scientists. “Energy-related CO2 emissions are at historic highs,
[van der Hoeven added] and under current policies we estimate that
energy use and CO2 emissions would increase by a third by 2020, and
almost double by 2050. This would be likely to send global
temperatures at least 6C higher within this century.”
The
environmental imperatives behind the peak oil concept remain. Thanks
to the resilience of the fossil fuel industry though,
the political battle has suddenly become a whole lot
harder.
ENDS
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