An Energy “Renaissance”?

David – I thought we were entering an energy “renaissance” with new and easy ways to extract gas via fracking.  Obviously, I understand the downsides of fracking.  Can you elaborate?

Ken Mann
Whatcom County Councilmember

Yes Ken, I would love to elaborate. Thank you for the question. Councilmember Mann’s note above was in response to my last post: Oil Company Woes: This is What Energy Depletion Looks Like.

Brief recap: In that post I pointed out that many of the big oil companies  (the “richest corporations in the history of civilization” according to Pete Kremen) actually are facing some serious cash flow difficulties. How could this be? I pointed to a Steven Kopits presentation at Columbia University showing that the costs of oil extraction have been rising rapidly in recent years, while the price that they’ve been able to sell for has remained fairly flat – about $100 a barrel for the last 3 years. Costs have risen almost 11% per year since 1999, and for oil companies to maintain expected profit ratios, the price should now probably be about $130/barrel or more.

Things are getting so bad that oil companies are cancelling projects, selling assets to pay dividends, and challenging property tax assessments.

Why don’t the oil companies raise the price?  Because they don’t set the price, markets do, according to Kopits.

Why doesn’t the market raise the price? Because the economy can’t afford it – prices that high could lead to another recession.

Why are the costs for extracting oil increasing so dramatically?

Here we come back to the concept of energy depletion. “The age of easy oil is over” Chevron CEO Dave O’Reilly told us in an ad campaign in 2005. It turns out he was right. Conventional oil production peaked that year.  What has made up the difference since then is unconventional oil sources: ultra-deep water oil, tar sands oil, oil from shale, and oil from fracking.  Which leads us to Councilmember Mann’s question:

I thought we were entering an energy “renaissance” with new and easy ways to extract gas via fracking…?

Yes, this is the meme that has been put out there through industry channels.  The peak oil community has continually challenged this message.  Petroleum geologist Art Berman said “I look at Shale gas more as a retirement party than as a revolution.”  Geoscientist Dave Hughes warns that we’re due for the gas bubble to burst in his Drill, Baby, Drill report (summary review here). And Richard Heinberg’s latest book is called “Snake Oil: How Fracking’s False Promise of Plenty Imperils Our Future.”

snake-oil-front-cover

Lately, even the mainstream media is catching on.  Forbes magazine ran a story on Jan. 26th: “Why Shale Oil Boosters Are Charlatans in Disguise.”
It is interesting that this story claims peak oil theory is wrong, but the argument laid out is exactly what the intelligent ‘peak oil’ theorists have been saying for years.  This is not new material – it is a simplified version of what’s been said on The Oil Drum peak oil site many times: the importance of getting a significant energy yield for the energy that is invested to get that yield.

The first thing to understand about fracking is that the wells tend to deplete very fast. The second thing to understand about all of these unconventional resources is that it is taking more and more energy to get less and less net energy returned.  When you see costs of extraction going up exponentially, that usually means a lot of energy associated with those costs.

We’re already tapped out on the low hanging fruit, and now we’re having to reach further, to dig deeper, to cause more environmental destruction, for less and less of a return. Instead of peak oil, the Forbes article talks about the end of cheap energy, which is fine by me, and perhaps a better way to frame it anyway.

The situation we find ourselves in today is following the trajectory laid out in Heinberg’s 2003 book The Party’s Over, in which he reported the prognosis laid out by geologists Colin Campbell and Jean LaHerrere.  As I quoted Heinberg in my last post:

So they were saying back before 2003, because it published in 2003, so it was actually written in 2001 and 2002. So they were saying back in 2000 and 2001 that we would see a peak in conventional oil around 2005—check—that that would cause oil prices to bump higher—check—which would cause a slowdown in economic growth—check. But it would also incentivize production of unconventional oil in various forms—check—which would then peak around 2015, which is basically almost where we are right now and all the signs are suggesting that that is going to be a check-off, too. So amazing enough, these two guys got it perfectly correct fifteen years ago.

A front page story in The Wall Street Journal on January 29th confirms our story about the cash flow struggles the industry is currently facing: “Big Oil Companies’ Big Projects Struggle to Justify Soaring Costs” by Daniel Gilbert and Justin Scheck, Jan. 29th.  I think the story is behind a paywall.  Someone tweeted the graphic used in the story, which says a lot by itself  (Twitter post here.) :

BfJQBz7CMAAAwoj

You can see that since 2009 the oil companies have worked very hard to supply the market with oil. The efforts have been compared to The Red Queen in Alice in Wonderland (“Fracking and The Red Queen Syndrome” from Climate Crocks):

Red Queen Syndrome: "It takes all the running you can do, to keep in the same place."

Red Queen Syndrome: “It takes all the running you can do, to keep in the same place.”

The problem is, they can only run in place for so long. As Gail Tverberg pointed out, if the oil companies are now having to cut back on their spending, does this spell The Beginning of The End?

Richard Heinberg and Chris Martenson are right: The Oil Revolution Story Is Dead Wrong.

Advertisements

Oil Company Woes: This is What Energy Depletion Looks Like

Here in Whatcom County, WA our local paper has an article today indicating the dismay being expressed by the local council over the fact that the two largest corporate taxpayers are challenging their property tax assessments.  These would be BP Cherry Point refinery and the Phillips 66 refinery in Ferndale.

The Bellingham Herald article by John Stark tells us that BP is challenging the most recent property tax assessment of $975 million, which they say is at least $275 million too high. BP is the number 1 taxpayer in Whatcom County, and number 2 is Phillips 66, which got an assessed value of $459 million for 2014 taxes and is also contesting its assessment, seeking a reduction of $35 million.

Council member Pete Kremen said he thought BP was asking for far too big a tax cut. “It is a huge, audacious ask, in my opinion,” Kremen said. “I think it is absurd. … It’s one of the richest corporations in the history of civilization.”

Kremen went on to joke that BP needs the money to pay for the oil spill in the Gulf of Mexico that resulted from the explosion of their Deepwater Horizon oil rig.

I would argue that we need to connect the dots to a more systemic problem the oil industry as a whole is facing.  Ironically, these “richest corporations in the history of civilization” actually are facing some serious cash flow difficulties.  The problem was spelled out in painful detail recently in a presentation by Steven Kopits at Columbia University.  You can view the hour long presentation or download the pdf here. Or you can get an overview from Gail Tverberg over at the excellent Our Finite World blog. She titled her post Beginning of the End? Oil Companies Cut Back on Spending. It boils down to this:

Steve Kopits recently gave a presentation explaining our current predicament: the cost of oil extraction has been rising rapidly (10.9% per year) but oil prices have been flat. Major oil companies are finding their profits squeezed, and have recently announced plans to sell off part of their assets in order to have funds to pay their dividends. Such an approach is likely to lead to an eventual drop in oil production…

Kopits presents data showing how badly the big, publicly traded oil companies are doing. He looks at two pieces of information:

  • “Capex” – “Capital expenditures” – How much companies are spending on things like exploration, drilling, and making of new offshore oil platforms
  • “Crude oil production” –

A person would normally expect that crude oil production would rise as Capex rises, but Kopits shows that in fact since 2006, Capex has continued to rise, but crude oil production has fallen…According to Koptis, the cost of oil extraction has in recent years been rising at 10.9% per year since 1999. (CAGR means “compound annual growth rate”)…Kopits explains that the industry needs prices of over $100 barrel…

…companies have found themselves coming up short: they find that after they have paid capital expenditures and other expenditures such as taxes, they don’t have enough money left to pay dividends, unless they borrow money or sell off assets. Oil companies need to pay dividends because pension plans and other buyers of oil company stocks expect to receive regular dividends in payment for their equity investment. The dividends are important to pension plans. In the last bullet point on the slide, Kopits is telling us that on this basis, most US oil companies need a price of $130 barrel or more.

…Kopits reports that all of the major oil companies are reporting divestment programs. Does selling assets really solve the oil companies’ problems? What the oil companies would really like to do is raise their prices, but they can’t do that, because they don’t set prices, the market does–and the prices aren’t high enough. And the oil companies really can’t cut costs. So instead, they sell assets to pay dividends, or perhaps just to get out of the business.

So what is the problem? Evidence continues to support the notion that, as many of us “peak oilers” have been saying for many years,  conventional oil production peaked in 2005.  Since that time the industry has had to increasingly rely on unconventional oil – the expensive, dirty, hard to get “oil” found in the ultra-deep waters of the ocean, from tar sands, from the Bakken shale, etc. The problem is not that those resources do not exist, the problem is that they are not cheap, they are not easy, and the energy returned on the energy invested continues to shrink.

Part 2 of the problem is that the oil companies can’t charge $130 a barrel, because that would crash the economy, and when the economy tanks, so do the oil prices, at which point the amount of oil they extract and process will have to shrink as well.

Continuing on this theme, I recommend the recent discussion between Chris Martenson and Richard Heinberg, which is a bit easier to follow that the above referenced presentations by Kopits and Tverberg.  Martenson says The Oil Revolution Story is Dead Wrong.

Chris Martenson: So I want to start here. The Party’s Over, the book that did get me started on peak oil, written in 2003. And very clearly articulated, oil is a finite substance, and we built this whole giant growing economic model around it and that is a problem, it is a predicament. Here we are, eleven years later in 2014, and the party is still continuing. What is going on?
Richard Heinberg: Well, you know, I recently went back and reread the first edition of The Party’s Overbecause it was the tenth year anniversary. And I was actually a little surprised to see what it really says. My forecasts in The Party’s Over were really based on the work of two veteran petroleum geologists—Colin Campbell and Jean Laherrère. So they were saying back before 2003, because it published in 2003, so it was actually written in 2001 and 2002. So they were saying back in 2000 and 2001 that we would see a peak in conventional oil around 2005—check—that that would cause oil prices to bump higher—check—which would cause a slowdown in economic growth—check. But it would also incentivize production of unconventional oil in various forms—check—which would then peak around 2015, which is basically almost where we are right now and all the signs are suggesting that that is going to be a check-off, too. So amazing enough, these two guys got it perfectly correct fifteen years ago.
Chris Martenson: Well, it is an amazing part of the story is that at a price, there is always more oil, right? If it was a trillion dollars a drop, I assume we would find ways to actually flip North Dakota over and scrape the source rock out. And so the price and availability and supply of oil is always a big deal. I see that a lot when people are talking about the resources of natural gas that exist but fail to tell me at what price those exist, right? To get the resource is always possible but the price is important.
And yet, we look at the economic sphere and we discover that the economy also has a price for oil but it’s what it can afford to pay.
Richard Heinberg: That is exactly right.
Chris Martenson: And as I look across the last three years, we have roughly been averaging $100 a barrel on the international landscape. And what do we see? We see Ukraine suddenly dissolving, we see Southern Europe with 50% unemployment rates—all things that I think were predicted by almost anybody who was really looking at the peak oil story a long time ago. It is all really coming true and yet the story today is not really connecting those two pieces together, except for people like you and myself and a number of others, but really a handful.
Richard Heinberg: Right. Yeah, the big news right now is that the industry needs prices higher than the economy will allow, as you just outlined. So we are seeing the major oil companies cutting back on capital expenditure in upstream projects, which will undoubtedly have an impact a year or two down the line in terms of lower oil production. That is why I think that Campbell and Laherrère were right on in saying 2015, 2016 maybe, we will also start to see the rapid increase of production from the Bakken and the Eagle Ford here in the US start to flatten out. And probably within a year or two after that, we will see a commencement of a rapid decline…
Is peak oil a myth? Tell that to our local refineries who are experiencing the downslope of formerly abundant oil flowing through the  Alaska pipeline, and now must instead turn to the more expensive and problematic oil coming via trains from North Dakota.
The era of easy oil is over, and the prospect of oil trains, coal trains, and less tax revenue from oil companies are all signs that things are changing, and changing fast. This is what the first stages of energy depletion look like.

Swales Update: A Pulse of Snow and Rain Offer Good Chance to Observe and Interact

HPIM1813

Good design depends on a free and harmonious relationship to nature and people, in which careful observation and thoughtful interaction provide the design inspiration, repertoire and patterns. It is not something that is generated in isolation, but through continuous and reciprocal interaction with the subject.

– David Holmgren, Permaculture: Principles & Pathways Beyond Sustainability

 

Getting about a foot of snow a week ago, then a few more inches this last weekend, followed by rain today offered a good opportunity to employ Permaculture Principle #1 with our swales: Observe and Interact.  Above, see the sun glistening on the snow that has blanketed our raised beds and berms between the swales.  Below, see one of our swales iced over.

HPIM1814

Timeout for building a snowman (Permaculture Principle #12: Creatively Use and Respond to Change):

HPIM1774

From PatternDynamics (TM) by Tim Winton

From PatternDynamics (TM) by Tim Winton

 

In PatternDynamics, we call this big influx of snow and rain a Pulse event. “The Pulse Pattern signifies  the repeated rhythmic surges of activity related to resource flows and exchanges.” – See more at: http://www.patterndynamics.com.au/patterns/rhythm/pulse/#sthash.wVQZx4Sf.dpuf

Since installing our swales last summer, we have been mostly Observing how they’re behaving through the seasons.  Brian Kerkvliet advised that we might need to tweak them at some point for fine tuning.  In our last Swale post, Angela ended with this comment: “I’m excited to see how the swales work and to know that we can change them in subtle ways as the needs arise.”

Over time we have so far observed that the spillways at the end of each swale have not yet come into use.  The swales had not yet filled to the point of overflowing into the spillways.  We’ve been concerned that perhaps we need to dig the spillways down a little lower so that the swales could drain a bit, but we’ve been taking the Small and Slow Solutions approach (Principle #9), to just keep observing over time (for now).

Time to check in with the snowman again, and Observe how he’s reacting to a little bit of warmth. Our friend Sus observes: “This guy has so much class in all phases of life. I see him ecstatically surrendering to the sun.”

HPIM1805

After the big pulse of snow started to melt…followed by more snow, and then more rain…we were eager to see again today how the swales are responding. For the first time, I noticed that the spillway of the 2nd swale has been operationalized! It is now spilling out into the yard below – with puddles beginning to form in the yard (where without the swales we would have a huge pond right now).  The first swale, however (pictured below), is still not emptying into it’s spillway.  Instead it seems to be overflowing at the other end (on the west side closest to the fence).  That area has the most clay soil, and water is pooling on the ground near our peach tree between the two swales (peach tree to the right in the photo below).

HPIM1847

This next photo below shows the spillway from the first swale where water is not flowing. It has finally become clear to me that it is time to follow our Observations with some Interactions.

HPIM1848

But first lets go back in time a few days and check back in on our snowman…ah, devolution. I think this is the Order/Chaos Pattern at play.

HPIM1827

And now its finally time to go to work.  Going just a shovel length deep, I carved a deeper winding path in the spillway, and bingo! The water started to flow!

HPIM1854

I used some of the soil dug from here to build up a little more berm on the west end of the swale where it was overflowing.  It will be interesting to continue the Observation tomorrow and in the days ahead to see the effect of my actions today.

HPIM1858

It was very satisfying to see the water now flowing between the swales.

HPIM1857

*All photos in this post by Angela (except the first snowman by David).  Snowman constructed by David