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.

No Time for Energy Complacency

The United States produced 11 million barrels of oil and natural gas liquids per day in the first quarter of 2014,  overtaking Saudi Arabia as the number one producer in the world. Already, in 2010, the US had made its mark as the number one producer of natural gas. This enormous accomplishment, unthinkable just a decade ago, was a product of  technical, operational and commercial tenacity and innovation, coupled with the efforts of a skilled and available workforce, a solid supply chain foundation, the availability of capital and a fiscal and mineral ownership system that incentivizes production.

Meanwhile, this past year,  the world’s reserve base continued to grow,  even while demand continued to increase. According to the BP Statistical Review of 2014, global oil reserves rose by 600 million barrels to 1,688 billion barrels in 2013, an increase of 27% over a decade earlier, despite cumulative production of 332 billion barrels during this same period. Gas reserves grew by 19%,  while production grew by 29%. Resource growth was enabled by unconventional oil and gas success, engineering innovation, delivery of new projects, successful new exploration plays, technical advancements across the entire exploration and production value chain, significant investment over the past decade and improved access to prospective basins.

Global energy consumption growth also accelerated in 2013, from 1.8 percent to 2.3 percent, slightly below the 10 year average growth rate of 2.5 percent.  BP’s annual review revealed that consumption and production increased for all fuels, reaching record levels for every fuel type except nuclear power. Somewhat alarmingly, for all fossil fuels,  global consumption rose more rapidly than production.

Still, with all the success in adding resources and production, and even with significant progress in renewables, it's no time for energy complacency.

Today, some see a future with so much oil and gas resource, and so little need for that resource given its carbon footprint, that trillions of dollars of carbon-rich assets will be left stranded.  Perhaps. But such scenarios heavily discount some elements of current reality: the dominance of oil, gas and coal in today's energy use ( more than 80% of primary energy consumption), the future energy needs of people in undeveloped countries striving to lift themselves from energy poverty ( 1.3 billion people today have no access to electricity), the magnitude of new oil and gas resources required to simply replace existing production decline in developed fields ( ~ 6% per year), and the growth of existing economies and emerging economies built on affordable, available and reliable energy.

World energy demand is likely to increase by around 40% in the next two decades, driven largely by the needs of emerging economies, and despite the best efforts of conservation and energy efficiency.  All energy sources will be required to meet this demand. Energy scenarios which minimize the role of oil, gas,  coal and nuclear to help meet these needs require a rate of market penetration of renewable energy at an unprecedented pace. Even with the welcome possibility of disruptive technologies, breakthrough acceleration of market share for renewable energy is an especially challenging task given 1) the enormity of the global energy scale, 2)  the incumbency and residency times  of planes, trains, automobiles, ships, trucks, heavy equipment, power plants, furnaces, smelters, factories, homes, hospitals, schools, businesses and infrastructure already in place relying on fossil fuels, 3) the magnitude of projects currently under construction ( for example, 1900 coal-power plants planned around the globe), 4) the often lower economic returns of renewable projects relative to other investment opportunities and consequent difficult availability of  large amounts of capital and 5) the low operational and high retirement costs for already built assets. For these reasons (and cost, availability and reliability)  the demand for fossil fuels today is increasing, not decreasing worldwide.

Massively increased research, innovation and investment across the entire energy sector  – solar, wind, battery storage, hydrogen,  coal ( clean coal, CCS), oil, gas and, yes, nuclear – is essential to meet the energy needs of our growing population while reducing the carbon footprint of that necessary energy. Energy pragmatism also helps. Low carbon scenarios become more plausible  when they embrace technologies like CCS and clean coal and step changes in energy efficiency. The scenarios gain more substance when natural gas is considered a key component of the solution rather than a problem, and the revitalization of nuclear power is again placed in the mix. And every new technology and breakthrough in renewable energy implemented on a commercial scale and providing cost competitive power to consumers provides more credibility and momentum than a hundred op-eds. We should support these efforts through investment.

Given the ever expanding energy demands of the world’s growing population, and the energy poverty in which so many live, our greatest concern should be the complacency with which so many view our energy supply. If supplies were constricted, whether by choice, depletion, natural or man-made disasters or geopolitics who would  want to have to choose between the energy haves and have nots?

On the demand side, some low carbon scenarios envision startlingly low levels of energy consumption, especially in the developing world.  Currently, the IEA defines “modern energy access” for those living in energy poverty in places like sub-Saharan Africa as 50 to 100 kWh/person/year - almost enough to power a  60W light bulb for five hours per day for a year. The average American would use that much energy in just three days. So, while a laudible first step on the energy ladder, would you want that for your own children?  Clearly, more energy will be required.

Even the IEA low level of modern energy access is considered high by some searching for more pragmatic energy solutions to help those living in energy poverty. In a recent report from the Sierra Club, Clean Energy Services for All (CES4All),  the first tier of energy access provides a person just 10 kWh of electricity per year -  less than 0.1 % of the  average American’s consumption of 13,000 kWh of electricity per year.  Is it realistic or desirable to assume this kind of level of energy use in energy planning? Shouldn’t we aspire for more?

The CES4All report clearly sees 10kWh per person per year as only a starting point  in alleviating energy poverty, recognizing the urgent need for implementing off grid solutions and the limited availability of investment capital. You have to start someplace.  But the point here is that to truly help those most in need will ultimately require significantly more energy – not less.

The people of the world need energy now. Complacency regarding meeting energy resource requirements when and where they are needed should be a greater concern now than concern over such issues as future stranded assets.  The  great challenge across the energy sector will be meeting continually growing demand in a timely fashion, without significant economic and societal disruption, and while reducing CO2.  The next article in this series will take a deeper look into this challenge, starting with oil and gas.

Additional posts on related topics by David Lawrence:

Energy Pragmatism http://lawrence1energy.blogspot.com/2014/06/energy-pragmatism_17.html

Who Determines  Energy Haves and Have Nots http://lawrence1energy.blogspot.com/2014/06/who-will-determine-energy-haves-and_23.html

Reserve Life, Resource Life and Meeting World Energy Needs http://lawrence1energy.blogspot.com/2014/06/reserve-life-resource-life-and-meeting.htm