Happy Days are Here Again?

• Lindsey Grant
• May 1, 2012
• Forum Papers
• Forum Paper
• 0 Comments

Click here for a downloadable, printable PDF version

EUPHORIA

The Press. An energy story appeared in the New York Times on March 13th.  Titled “U.S. Inches Toward Goal of Energy Independence” and drawing more on anecdote than on data, it quoted a wildcatter in West Texas as saying “To not be concerned with where our oil is going to come from is probably the biggest home run for the country in a hundred years.”  An epochal overstatement (as I will document below), but of course the wildcatter had a vested interest in talking up the industry.

On April 10, the New York Times ran a spate of stories that, if not quite so vivid, were at least as optimistic as the wildcatter.  “Fuel to Burn. What Now?” argued that “the promise of abundant and cheaper fuel…could have profound effects on what people drive, domestic manufacturing and America’s foreign policy. Cheaper fuel produced domestically could reduce the cost of shipping and manufacturing, trim heating and cooling bills, improve the auto market”, reestablish American industry and transform our foreign trade deficit.  It argued that all these benefits would far outweigh any environmental concerns. It quoted the CEO of Exxon as saying that “The transformation unfolding in North America represents a potentially decisive shift in the history of energy,” and cited a claim that “as many as 3.6 million new jobs might be created by 2020 thanks to the energy boom.”  (It did not point out that that is far too few jobs to solve the unemployment problem or even to absorb the intervening growth anticipated in the numbers of job seekers.  It quoted a figure of 9 million barrels per day (mb/d) for current U.S. oil production – (the correct figure is 5.5 mb/d) – and predicted that U.S. production could reach 15.6 million barrels a day by 2020. It wound up calling the U.S. “an energy-rich superpower.”

Another New York Times article in that issue described the expectations of an oil/gas bonanza in Africa and, indeed, most of the world. It consisted mostly of statements about companies’ investment plans, and offered no figures to document the supposed bonanza.

Taken together, the articles spelled out hopes that defy both history and logic. That is a bubble.

The politicians have joined the press in the general enthusiasm. They want to please the voters and perhaps to persuade themselves that energy independence is around the corner, that there are no limits to growth, and that all we need do is to get the growth machine going again. The Republicans have been offering “drill, baby, drill” as the solution to high gasoline prices, and accusing the President of insufficient enthusiasm for their remedy.

The President, in turn, has been announcing the opening of new areas to oil and gas exploration. And, in his 2012 State of the Union address, he announced that we have “nearly a hundred years” supply of natural gas.

That figure may have been extrapolated from a paper last year sponsored by a consortium of companies with investments in oil and gas exploitation. It projected 2170 trillion cubic feet (tcf) of “proved”, “probable”, “possible” and “speculative” potential natural gas resources in the United States,² Consumption in 2011 was 23.52 tcf. At that rate, the estimated resource would last 93 years. (That itself is a flawed measure, because it assumes that production and consumption levels will stay constant – which they won’t – but it offers a graphic way to visualize huge numbers.)

THE FACTS

Any effort to estimate unproven oil and gas resources is simply a compilation of educated guesses about dozens of fields, each with a range of error that can be tenfold or more. The median (or the 50% confidence level) estimates are used to compile the national and global data.  The U.S. Geological Survey (USGS) is the most widely cited source of such estimates, and the U.S. Energy Information Administration (EIA) is the principal source of projections of U.S. annual supply and demand. Their view of the future is much more conservative than the press stories.

The USGS’ 1995 National Assessment of U.S. Oil and Gas Resources is still its latest consolidated estimate of U.S. oil and gas reserves, projected reserve growth, and recoverable resources.³ USGS has, however, been updating the recoverable resource estimates, field by field, since then. Together, they provide a picture of the present assessment, though that picture is incomplete and internally inconsistent

Oil.  In 1995, the mean estimate of total available crude oil was 191 billion barrels.  Since then, we have pumped about 30 billion barrels of that oil. The projected production through 2035 (see below) is nearly 60 billion barrels, suggesting that nearly half our remaining oil will have been exhausted by 2035.   New USGS estimates, however, raise the “undiscovered, recoverable conventional oil resources” by 30%, to 108 b/b.4 That growth reflects a reevaluation of the oil recoverable with new technologies offshore in the Arctic and the Gulf of Mexico.

Those estimates do not include shale oil recovered by fracking. A new USGS compilation of onshore resources does include shale oil.  It doesn’t add much, raising the estimate of recoverable onshore resources (also by 30%) to 35 b/b5, which is less than five years’ annual U.S. crude oil consumption.

We have a little more time, but not much.

The U.S. Energy Information Administration (DOE/ EIA) focuses on energy demand and how it will be met. It has been over-optimistic before, but its analysis of the current boom is modest.   It observes that, after a long decline, U.S. crude oil production rose from 5.1 million barrels per day (mb/d) in 2005 to 5.5 mb/d in 2010, or 8%. As a result of fracking and the new offshore sources, it expects production to rise another 22% to 6.7 mb/d by 2020 and then decline to 6.1 mb/d by 2035.

“Import dependency” can be measured in various ways.  By the EIA’s measure, it peaked at 60% in 2005, declined to 49% in 2010, and may be down to 36% in 2035. That 36% is achieved with a little manipulation. Conventional crude oil production used to be the standard indicator for oil production. Now, however, the EIA talks of “U.S. liquid fuels supply”, adding shale oil, natural gas liquids, heavy and super-heavy oils, tars, kerogen, liquified coal and gases, and liquid biofuels to conventional crude oil. The change in nomenclature helps to lower the import percentage, but — to reach that 36% – EIA assumes that U.S. liquid biofuel production will more than double. That is a questionable projection. It ignores the limits on biofuel supply, and we have already seen what the U.S. corn-to- ethanol experiment has done to worldwide corn prices. My advice: be very skeptical.

That projection may be a distraction. In barrels of oil, which is the key number in the oil trade, crude oil imports in 2035 are projected to be 83% of the 2010 level – if we can find suppliers.   Domestic production will again be declining, and the need for imports again rising, in a sellers’ market. That is not “energy independence”.

There is a demographic angle to all this.  Per capita petroleum consumption has been falling since the 1970s. The EIA expects the decline to continue.  However, that decline is wiped out by population growth.  The Census Bureau expects our population to grow 25% from 2010- 2035.  The total projected crude oil consumption – unlike the per capita projection — is nearly flat. If population were stable, oil imports in 2035 could be less than half the EIA projection. We are allowing population growth to wipe out the gains from conservation and increased domestic crude oil production. And the population will still be there – and probably growing – when the less painful conservation measures and the production gains are exhausted.

Gas.  The news about gas is much better, although estimates of gas resources are notoriously unreliable. The 1995 study put total U.S. natural gas availability at just over a quadrillion cubic feet, with undiscovered recoverable resources at about 527 trillion cubic feet (tcf). They now have a new estimate of the undiscovered conventional recoverable resources (not including reserves or unconventional oils such as shale oil).  It is 786 tcf, of which 388 tcf are in onshore and 398 tcf in offshore fields (Note 4). That is 49% higher than in 1995.

The USGS culture is more scientific than governmental, and it is quite willing to report studies with differing results. A 2011 field-by-field summary of onshore resources (Note 5) puts them at 1025 tcf, including 336 tcf of shale gas.  That leaves 689 tcf of conventional resources, or almost twice the figure above, and it is the first national estimate we have from USGS for shale gas. Combining the two estimates as best I can – assuming that there will be little if any fracking in deep water, and adding the 1995 estimates of reserves and reserve growth – one comes up with a ballpark figure of something like 1650 to 1950 tcf. That is some 60% to 85% higher than the consolidated estimate of 1995. It represents 70 to 83 years’ consumption at the current rate, or about 46 to 52 years if one accepts and extends the EIA expectation (below) of rising total consumption.

The EIA projects annual natural gas production only out to 2035.  Shale gas presently constitutes 23% of the total.  By 2035, it is projected to more than double, providing 49% (or 13.6 tcf/year) of U.S. natural gas output. The projected production from 2010-2035 would consume 252 tcf of shale gas, which is 75% of the USGS’ 336 tcf of recoverable onshore resources. And the rest would go much faster, as the effort is made to extract shale gas to make up for the anticipated decline of other natural gas sources.  Moreover, the EIA has just lowered its estimate of recoverable shale gas in the critical Marcellus formation by 42%.6  One wonders if the EIA has fully absorbed the implications of that dramatic downward revision.

The EIA traditionally fits its supply projections to its estimates of consumption, so it is under pressure to identify sources of gas to meet projected demand, but the gas may not be there for long.

Some experts believe that the whole set of shale gas statistics, from drillers’ production and reserve estimates to the EIA sampling techniques, are systemically inflated.⁷

The arithmetical exercise above is indicative, but hardly definitive.  There may be new and unexpected discoveries, or another technological break comparable to fracking, or deep sea drilling, or enhanced recovery, which would raise the definition of “recoverable”.   On the other hand, the amount recoverable will decline with rising costs as exploration enters increasingly inaccessible environments. It takes more and more energy to extract the remaining energy, which lessens the real energy available to the economy. And there is no assurance as to how much of the nation’s and the world’s shale will be susceptible to fracking.  Environmental constraints may keep some resources off limits.  And finally, the estimates above of recoverable resources are “technically recoverable.” They are not necessarily economically recoverable.

The Economics of Exploitation. Since one exercise in 1998, the USGS has not tried to estimate how much of the resources may be economically recoverable. It may turn out to be rather small.