BREAKING: Gov’t Slashes Calif. Oil Estimate

As a follow-up to my previous posts from March 12th (Oil Company Woes: This is What Energy Depletion Looks Like) and March 20th (An Energy “Renaisance”?), pasted below is a press release from Post Carbon Institute.

Federal Government Reduces Monterey Tight Oil Estimate by Over 95%

Oakland, California (May 21, 2014) — In an article released last night, the Los Angeles Times reports that the Energy Information Administration (EIA) has drastically reduced its estimate of recoverable oil in California’s Monterey shale formation from 13.7 billion barrels to just 0.6 billion barrels—a reduction of over 95%.

The downgrade has major implications for California’s energy and economic future, as well as the debate over hydraulic fracturing (“fracking”) and other forms of well stimulation-enabled oil development. The perception of an impending oil boom has dominated energy policy discussions in California since the release of a 2011 report by EIA which had estimated up to 15.4 billion barrels of recoverable tight oil—64% of the nation’s total—in the state’s Monterey shale formation. The estimate was widely cited by drilling proponents, and economic forecasts based on it projected millions of new jobs and billions in new tax revenue.

“The oil had always been a statistical fantasy,” said geoscientist J. David Hughes, author of Drilling California: A Reality Check on the Monterey Shale, an influential report critical of the EIA’s original Monterey estimates. “Left out of all the hoopla was the fact that the EIA’s estimate was little more than a back-of-the-envelope calculation.”

Hughes’s report, published by PSE Healthy Energy and Post Carbon Institute in December 2013, was the first public analysis of actual oil production data from the Monterey Shale and the formation’s geological characteristics. The report found that all data suggested that the EIA estimates were wildly over-optimistic. INTEK, Inc., the source of the EIA’s original estimate, has since admitted that its Monterey figures were derived from technical reports and presentations from oil companies rather than hard data.

“We’re pleased that the EIA has corrected what was a groundless and highly misleading over-estimation of the potential of the Monterey,” said Asher Miller, Executive Director of Post Carbon Institute. “We hope that everyone—from the EIA to policymakers and the media—will learn a cautionary lesson from what transpired here in California as we wrestle with questions about what the future of American energy policy can and should be.”

“Now that Californians have a far more accurate idea of what promise the Monterey Shale does and does not hold,” added Dr. Seth B. Shonkoff, Executive Director of Physicians, Scientists and Engineers for Health Energy (PSE), “we must carefully weigh the benefits against the costs associated with fracking and other well stimulation-enabled oil and gas development.”

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ABOUT J. DAVID HUGHES
J. David Hughes is a geoscientist who has studied the energy resources of Canada and North America for nearly four decades, including 32 years with the Geological Survey of Canada as a scientist and research manager.  Over the past decade, Mr. Hughes has researched, published and lectured widely on global energy and sustainability issues in North America and internationally. He is a Fellow of the Post Carbon Institute and a board member of Physicians, Scientists & Engineers for Healthy Energy (PSE).
http://bit.ly/PCIhughes

ABOUT PSE HEALTHY ENERGY
Physicians, Scientists & Engineers for Healthy Energy (PSE) is a science-based organization dedicated to bringing scientific transparency to energy policy issues. PSE Healthy Energy empowers citizens and policymakers by generating, translating, and disseminating evidence-based scientific information.
http://www.psehealthyenergy.org

ABOUT POST CARBON INSTITUTE
Post Carbon Institute provides individuals, communities, businesses, and governments with the resources needed to understand and respond to the interrelated economic, energy, and environmental crises that define the 21st century. PCI envisions a world of resilient communities and re-localized economies that thrive within ecological bounds.
http://www.postcarbon.org

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.”

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.) :

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.”

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.

Peak Oil and The Illusion of Invincibility

Here’s an extended quote from this week’s Archdruid Report by John Michael Greer.  Worth reading in its entirety.

…Over the last six weeks or so, I’ve fielded emails and comments from many sources insisting that peak oil has been disproved conclusively by the recent fracking phenomenon. This is hardly a new theme—in recent months, the same claims have been repeated almost daily at earsplitting volume in the mass media—but there’s a difference of some importance. The people who are sending these claims my way aren’t trying to claim that everything’s fine and the future of perpetual progress promised us by our culture’s most cherished mythology is on its way.  No, they’re insisting that because peak oil has been disproved, I and other peak oil writers and bloggers need to get with the program, stop talking about peak oil, and start talking about the imminent threat of climate change instead.

It’s a curious claim, all things considered.  For well over a decade now, predictions based on peak oil have proven far more accurate than predictions based on the conventional wisdom that insists resource limits don’t matter.  A decade ago, cornucopian theorist Daniel Yergin was loudly proclaiming that the price of oil had reached a permanent plateau at $38 a barrel, smart money was flooding into exciting new ethanol and biodiesel startups, and everyone other than a few peak oil writers out there on the fringes assumed as a matter of course that the market would provide, ahem, limitless supplies of energy from alternative sources if the price of oil ever did rise to the unthinkable level of $60 a barrel.

Meanwhile, those peak oil writers out there on the fringe were garnering almost universal denunciation by predicting a difficult future of triple-digit oil prices, spiraling economic dysfunction, and the failure of alternative energy technologies to provide more than a very modest fraction of the vast energetic largesse our society currently gets from fossil fuels. The conventional wisdom was that this couldn’t possibly happen. A decade on, it’s not exactly hard to see who was right.

As for the claim that the fracking phenomenon has disproved peak oil, it’s worth revisiting two graphs I’ve posted before. The first one tracks oil production in the United States between 1920 and 2012:

 

See the little bitty uptick over on the right hand side of the graph?  That’s the vast new outpouring of crude oil made possible by fracking technology. That’s what all the shouting and handwaving are about. I’d encourage my readers to take a long hard look at that very modest upward blip, and then turn to the second graph, which should also be familiar:

 

This is the diagram of peak oil from M. King Hubbert’s original 1956 paper on the subject.  Those of my readers who are paying attention will already have noticed the very large area on the right hand side of the curve, more than two and a half times the size of all cumulative production and proven reserves  shown, labeled “future discoveries.”  The Bakken shale?  It’s included in there, along with many other oil fields that haven’t even been found yet.

The current fracking phenomenon, in other words, doesn’t disprove peak oil theory.  It was predicted by peak oil theory. As the price of oil rises, petroleum reserves that weren’t economical to produce when the price was lower get brought into production, and efforts to find new petroleum reserves go into overdrive; that’s all part of the theory.  Since oil fields found earlier are depleting all the while, in turn, the rush to discover and produce new fields doesn’t boost overall petroleum production more than a little, or for more than a short time; the role of these new additions to productive capacity is simply to stretch out the curve, yielding the long tail of declining production Hubbert showed in his graph, and preventing the end of the age of oil from turning into the sort of sudden apocalyptic collapse imagined by one end of the conventional wisdom.

Pick up any decent book on peak oil, or spend ten minutes of independent research on the internet, and you can learn all of this. Somehow, though, the pundits whose heated denunciations of peak oil theory show up in the mainstream media nearly every day don’t manage to mention any of these points. It’s not the only noticeable gap in their reasoning, either:  I’ve long since lost track of the number of times I’ve seen media stories insist with a straight face that kerogen shales like the Green River formation are the same as oil shales like the Bakken, say, or duck the entire issue of depletion rates of fracked wells, or engage in other bits of evasion and misstatement that make our predicament look a great deal less challenging than it actually is…

“extreme energy = extreme methods = extreme disasters = extreme opposition”

Last night I had the privilege of introducing author Andrew Nikiforuk to the “Literature Live” audience assembled at Village Books in Bellingham, WA.  His latest book is The Energy of Slaves: Oil and the New Servitude.  It was a great talk, and a good discussion (I hope to get a recording of the talk online soon).

One of the comments made by Mr. Nikiforuk was this:

“We forget that the hydrocarbons we are now exploiting are qualitatively different than the ones we drilled one hundred years ago. They are heavy, they require more refining, they’re more carbon intensive, and they cost a fortune to bring to the surface.  So deep sea oil and bitumen from northern Alberta are extreme hydrocarbons that come with extreme costs.  The United States was built on cheap oil – 2 bucks a barrel. Can it be sustained on oil that costs nearly one hundred bucks a barrel?”

A new post today by Michael Klare expands on this same motif.  This is a great post summarizing the reality of today’s situation, in contrast to a number of articles appearing in the mainstream media over the past year claiming that we need not worry about peak oil, and that energy independence might return someday soon to the U.S. Klare is the author of numerous books, the latest of which is The Race for What’s Left: The Global Scramble for the World’s Last Resources.

His new post at Tom Dispatch is titled “The new ‘Golden Age of Oil’ That Wasn’t”.

Last winter, fossil-fuel enthusiasts began trumpeting the dawn of a new “golden age of oil” that would kick-start the American economy, generate millions of new jobs, and free this country from its dependence on imported petroleum.  Ed Morse, head commodities analyst at Citibank, was typical.  In the Wall Street Journal he crowed, “The United States has become the fastest-growing oil and gas producer in the world, and is likely to remain so for the rest of this decade and into the 2020s.”

Once this surge in U.S. energy production was linked to a predicted boom in energy from Canada’s tar sands reserves, the results seemed obvious and uncontestable.  “North America,” he announced, “is becoming the new Middle East.”  Many other analysts have elaborated similarly on this rosy scenario, which now provides the foundation for Mitt Romney’s plan to achieve “energy independence” by 2020.

By employing impressive new technologies — notably deepwater drilling and hydraulic fracturing (or hydro-fracking) — energy companies were said to be on the verge of unlocking vast new stores of oil in Alaska, the Gulf of Mexico, and shale formations across the United States.  “A ‘Great Revival’ in U.S. oil production is taking shape — a major break from the near 40-year trend of falling output,” James Burkhard of IHS Cambridge Energy Research Associates (CERA) told the Senate Committee on Energy and Natural Resources in January 2012.

Increased output was also predicted elsewhere in the Western Hemisphere, especially Canada and Brazil.  “The outline of a new world oil map is emerging, and it is centered not on the Middle East but on the Western Hemisphere,” Daniel Yergin, chairman of CERA, wrote in the Washington Post.  “The new energy axis runs from Alberta, Canada, down through North Dakota and South Texas… to huge offshore oil deposits found near Brazil.”

Extreme Oil

It turns out, however, that the future may prove far more recalcitrant than these prophets of an American energy cornucopia imagine.  To reach their ambitious targets, energy firms will have to overcome severe geological and environmental barriers — and recent developments suggest that they are going to have a tough time doing so.

Consider this: while many analysts and pundits joined in the premature celebration of the new “golden age,” few emphasized that it would rest almost entirely on the exploitation of “unconventional” petroleum resources — shale oil, oil shale, Arctic oil, deep offshore oil, and tar sands (bitumen).  As for conventional oil (petroleum substances that emerge from the ground in liquid form and can be extracted using familiar, standardized technology), no one doubts that it will continue its historic decline in North America.

The “unconventional” oil that is to liberate the U.S. and its neighbors from the unreliable producers of the Middle East involves substances too hard or viscous to be extracted using standard technology or embedded in forbidding locations that require highly specialized equipment for extraction.  Think of it as “tough oil.”…

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