Tuesday, August 5, 2014
Global Energy Security: No Time for Energy Complacency Part 2
Recent world events highlight the criticality of a diverse, dispersed, affordable and available energy supply to meet growing energy demands. Dependence on a single source of energy, a single supplier, or a single geography drives instability and insecurity. Geopolitical constraints in a tight market create unwelcome volatility and can create undesirable leverage to those wielding control over supplies. The complacency with which many view our energy supply quickly evaporates when that supply is threatened.
Energy optionality requires decades to construct ( see No Time for Energy Complacency http://theenergycollective.com/david-lawrence/449261/no-time-energy-complacency and Energy Pragmatism http://lawrence1energy.blogspot.com/2014/06/energy-pragmatism_17.html) Forward looking countries recognize this, and act accordingly. While recognizing the need for research, innovation and investment in renewable energy to build additional energy capacity and critical mass, these countries take an approach based on current realities and also invest significantly in gas, oil, coal and nuclear – while simultaneously seeking solutions to manage emissions and CO2. An “eithor / or” single-issue strategy for energy supply reduces optionality and energy security; an “and” strategy increases both. It's time to take a more inclusive and pragmatic approach to the hard decisions on energy policy and energy security.
In this regards, oil and gas will continue to play a vital role in providing global energy security. Several weeks ago, I posted an article on the world’s current proved oil reserves and their role in meeting the energy needs of people as demand increases and population grows: http://lawrence1energy.blogspot.com/2014/06/reserve-life-resource-life-and-meeting.html The article was written in response to misleading newspaper headlines trumpeting, with remarkable precision, that we have only 53.3 years of oil left. The accuracy is a bit off. The headline number ( not the conclusion) was based on information provided in BP’s 2014 Annual Statistical Review and was derived by dividing global proved reserves by the projected production rates of oil.
Fortunately, proved reserves are just part of the resource story. They neglect oil and gas yet to be discovered and new plays. Proved reserves are, in part, a function of the price of oil – if oil prices drop and costs remain the same then fewer resources can be recovered economically at that price, and, hence, by definition, fewer proved reserves. Conversely if prices rise or costs drop then proved reserves can increase. And proved reserves are only a portion of ultimate recoverable resources in and around already discovered fields. Advancements in exploration, drilling, completion, development and production technologies continue to add resources during the lifetime of a field or play. The rule is: Big fields get bigger. And as the resource base grows, the resource life is extended. So, it's probably a bit premature to say we only have a half century of oil left. And it would be misguided to base any policies on this assertion.
The challenge for oil and gas and energy security though is not so much the total proved reserves or resource base remaining in the earth - it's the geography of those resources and the pace at which they can be delivered as demand increases. There are ( at least) seven components which could contribute to tension on this supply side of the equation over the next decade and undermine energy security globally, even while production levels in the US reach record levels: 1) production decline rates of existing fields, 2) the pace of unconventional resource development internationally, 3) continual project delays from some of the worlds largest oil and gas developments, 4) smaller global discovery volumes, 5) capital availability and investment levels, 6) Black Swan events and 7) geopolitical and social disruption impact on exploration and production in major energy producing regions.
1. Decline rates for conventional fields, (albeit poorly understood for some of the worlds larger fields, (which is itself a concern) ) average somewhere around 6 percent. And unconventional oil and gas wells have very rapid decline rates in the first year or two of production, requiring continual drilling to replenish the supply and arrest the decline. To offset these declines and accomodate growth in demand in developing countries, in the next decade the world will need about 40 million barrels per day of new oil production on stream, much of it from fields that haven’t been developed yet, along with volumes obtained through massive investment in field redevelopment and production optimization. That’s equivalent to about four times the current production of Saudi Arabia and more than twice the US daily crude consumption. It's a staggering amount of new oil to develop, produce and deliver. If decline rates are actually higher, or if some of the worlds super giant fields begin to struggle, the task will be that much greater.
2. While unconventional resources in North America are adding significantly to reserves, resources and production (with the US now assuming the leadership role in oil and natural gas liquids as well as gas), the pace of unconventionals growth elsewhere continues to languish. Challenges in infrastructure, logistics, technical and operational resources, regulations and policy still need to be overcome. The oil and gas resource is there – in geologic basins in Argentina, Russia, China, Colombia, Mexico, South Africa, Europe, Australia and the Middle East. The real supply side questions in the next 10 years will be whether the operational and commercial pace of exploration, development and production of the unconventional resources internationally will meet the anticipated demand requirements in a timely and economic manner and how long political and regulatory restrictions delay the exploration and evaluation of resources.
Globally, unit costs for development of unconventional oil and gas exceed those in the US, driven largely by supply chain, logistics and infrastructure limitations. Drilling and hydraulic fracking policies in the face of environmental and social concerns have shut down or delayed exploration in several plays in places like France, Germany and South Africa. Mineral ownership internationally is typically controlled by the state, compromising the private entrepreneurial incentive present in many locales in the US where mineral rights may be held privately ( although this may be turned to an advantage should governments assume an advocacy role). The engineering and operations learning curve for unconventional gas and oil is still in its infancy in many international plays. Rigs and fracking equipment and supplies are often costly, and few and far between. In many places, there is no oil and gas infrastructure to build on. And uncertainty in policy and regulations or legislative action can lead to extensive delays. For these reasons, a time lag of at least several years in significant production for international unconventional plays should be expected, and the pace of production growth is not likely to approach that of the US, at least in this decade.
3. While there has been some success in project delivery in places like the Deepwater Gulf of Mexico ( which again have infrastructure, logistics and resource advantages) many major projects, critical to replacing production, face ongoing delays and cost escalation, from the giant Kashagan project in the Caspian, to the pre-salt in Brazil, to Gorgon in Western Australia, to the recovery and development of the large Iraqi oil fields, to exploration and development projects across the Arctic. Each delay in production, while not in itself of major significance, cumulatively create short term and potentially costly tensions in supply scenarios.
4. Conventional oil and gas discovery volumes are getting smaller. According to IHS, the 2013 global oil discovery volume of 13 Bbbl of oil was the lowest it has been since 1952, the number of new field discoveries has fallen by 50% and the average exploration success rate is now below 15%. The impact of this on current production is of course not immediate. It can take 5-10 years or more to bring a discovery in a remote region with little infrastructure to first production. To be sure there have been some strong exploration bright spots and exploration discovery volumes are historically lumpy. But pressures on timeliness of production will continue to mount over the next decade if conventional exploration performance does not improve.
5. The oil and gas industry is a capital intensive business. According to the US EIA, major oil companies major uses of cash( capital spending, dividends, buy backs) this past year totaled $677 billion. The gap between cash from operations and major uses of cash has widened in recent years from a low of $18 billion in 2010 to $100 billion to $120 billion during the past three years. Many companies have been reducing their capital expenditures after a period of significant growth over the last decade. While in the short term this reduction may result in greater focus, more efficient capital deployment and higher returns on capital, if the trend continues, discoveries volumes, development projects and ultimately production will lag.
6. The potential for Black Swan events ( major spills, massive shutdowns etc), whether caused by natural disasters, human error, equipment malfunction, malicious intent or otherwise, while extremely remote, can never be completely and absolutely eliminated. Industry and regulators have done much to improve safety management systems and processes, strengthen competencies, add resources, and provide additional and redundant hardware and inspections. Still, should such an event occur in a prolific hydrocarbon basin, supply disruptions could be significant.
7. Despite the wishes of some, geology does not respect political boundaries. Many areas of large potential eithor are in areas of turmoil or political sensitivity ( e.g. Iraq, Kurdistan and parts of North Africa, Nigeria, and South China Sea), or require transport of resources across such areas (e.g. Russia and Ukraine). You can't explore when you’re at war. Other potentially prolific areas, like the Arctic, already facing considerable logistical and development challenges, are continually delayed by regulatory, legal, legislative and political action. Massive resources in Canadian oil sands await resolution of pipeline issues in the US even while alternative transport solutions are implemented. War, civil unrest, terrorist acts, geopolitical strife, and social and environmental concerns have always been a component of the supply/demand equation, but as demand grows and supply tightens, the ability to accommodate disruptions diminishes. The world has been very fortunate that reductions in oil supply in the Mideast this past year have been offset by increases in unconventional light tight oil and gas in the US.
Why raise these concerns at a time of significant growth in US oil and gas supply? Certainly there is supply upside too, as best demonstrated by the shale gas and tight oil revolution in the US. There will be other new plays still just a glimour in a geologist’s eye. Global oil and gas demand may decrease below that of envisioned scenarios through vastly accelerated disruptive deployment of alternative energy technologies or by sustained weak economic growth.
Still, today, over 55 percent of the worlds primary energy consumption is oil and natural gas and demand continues to grow, driven by emerging economies and the increased use of gas in power generation. The global energy supply of that oil and gas (which so many take for granted, and which some would want to see curtailed or even abandoned), does not come easily or in one smooth upward trending planning curve. Of course, trading volatility mirrors this reality in the short term. But in planning for energy needs to meet national and global requirements, challenges faced in delivering oil and gas production shouldn’t be dismissed in a time of apparent abundance or misdirected towards discussion of perceived stranded assets. The world will need this base load of global energy to feed, clothe, shelter, transport, care for and educate a population that will grow at an average rate of well over a million people per week until the middle of this century. Energy drives our economies and our lifestyle and is crucial to lift people from a life of hardship and poverty: for schools, farms, businesses, hospitals, and industry – and to meet basic needs.
Energy policies forged in times of crisis are typically too little and too late. Pragmatic policies that encourage access, investment, innovation, technology development and deployment across all energy sectors, including oil, gas, renewables, nuclear and coal will be essential to provide energy security and meet the energy needs of people everywhere, while managing emissions and CO2. Better to act when you can than when you must.