oilvoice magazine | may 2014

8/21/2019 OilVoice Magazine | May 2014

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Edition Twenty SixMay 2014

The trouble with gasEight energy myths explained

Is drilling in the Gulf safer? Regulators beg for an answer

Cover image by katsrcool


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1 OilVoice Magazine | MAY 2014

Issue 26 May 2014

OilVoiceAcorn House381 Midsummer BlvdMilton KeynesMK9 3HP

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EditorJames AllenEmail:[email protected]

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Chief Executive OfficerAdam Marmaras

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Adam Marmaras

Chief Executive Officer

Welcome to the 26th edition of theOilVoice Magazine.

Wed like to say a big thank you to allof our featured authors. Without them,the OilVoice Magazine would be bare.If you havent done so already, checkout ourOpinion & Commentarysection, packed full of interesting

articles by the experts in the industry.

This month we have great articles fromFinding Petroleum, FTI Consulting andMars Omega LLP. We'd also like towelcome back some of our regularauthors, including Gail Tverberg, andAndrew McKillop.

If you're interested to know more aboutseeing your articles featured on

OilVoice, pleaseget in touch.

Adam Marmaras

CEO

OilVoice
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Contents

Featured Authors

Bios for this months featured authors. 3Insight: Current demographics, and the current issue, in the oil & gasindustryby David Bamford

6

The trouble with gasby Andrew McKillop 7

Iraq: Shooting seismic into the political rifts and playsby Anthony Franks OBE 10

Oil exports: The rhetoric and the realityby Loren Steffy 14

Insight: What's happening to Exploration?by David Bamford 16

Eight energy myths explainedby Gail Tverberg 18

Oil & Gas Boom 2014: A Withering Regulatory Assaultby David Blackmon 28

Is drilling in the Gulf safer? Regulators beg for an answerby Loren Steffy 32

The absurdity of US natural gas exportsby Gail Tverberg 34


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Featured Authors

Andrew McKillop

AMK CONSULT

Andrew MacKillop is an energy and natural resource sector professional withover 30 years experience in more than 12 countries.

David Bamford

Finding Petroleum

David Bamford, a past head of exploration and head of geophysics at BP, is afounder shareholder of Finding Petroleum via his company New EyesExploration Ltd.

David Blackmon

FTI Consulting, Inc.

David Blackmon is managing director of Strategic Communications for FTIConsulting, based in Houston.

Gail Tverberg

Our Finite World

Gail the Actuarys real name is Gail Tverberg. She has an M. S. from theUniversity of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty

Actuarial Society and a Member of the American Academy of Actuaries.

Anthony Franks OBE

Mars Omega LLP

Anthony is responsible for managing and controlling the extensive informationnetworks, as well as directing and working with the analysis team to createreports for clients, and also works with Hamish in the Liaison and Mediationservice.
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Loren Steffy

30 Point Strategies

A senior writer for 30 Point Strategies and a writer-at-large for Texas Monthly.Loren worked in daily journalism for 26 years, most recently as an award-winning business columnist for the Houston Chronicle, and before that, as asenior writer at Bloomberg News.
http://30point.com/http://30point.com/http://www.lunarsafari.co.uk/http://30point.com/


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Insight: Currentdemographics, and thecurrent issue, in the oil& gas industry

Written by David BamfordfromFinding Petroleum

What impact has almost 30 years of RIF-ing had on our industry?

What can we say about the current demographics?

What is the current big issue?

By far the most authoritative insight into oil & gas industry demographics is thatproduced by Schlumberger Business Consultings annual review of HR benchmarkdata gathered from 40 E&P companies (at least that was the 2012 number). SBCsometimes present this data at conferences, the most recent presentation beingaccessiblehere.Their data covers Petro-technical Professionals (PTPs):

geoscientists (geologists, geophysicists, petrophysicists) and petroleum engineers(reservoir, drilling, completion, and production engineers).

To summarise their most recent findings, when the number of PTPs on a globalbasis is plotted as a percentage against the age bracket, theirpredictionfor 2016 isthat the peak will be at around 23% for the 25-29 age group, declining in pretty muchwavy straight line fashion to around zero at 65. This is in complete contrast with thefactsfrom 2005 where there was a secondary 13% peak for the 25-29 age group buta much bigger primary peak, at just over 20%, for the 45-49 age group.

SBC argue that, by 2016, there will be, on a global basis, roughly a 20% shortfall in

experienced PTPs whilst the overall numbers will look OK.This raises two questions:

1. Unless something is done, there is going to be a rapid near-term loss of skills andexperience from the industry. Can anything be done to retain this generation that has(early) retirement on its mind? Or at least ensure that its knowledge is retained in theindustry?

2. How can the younger generation more rapidly acquire the knowledge and absorbthe experiences that others have, and be brought to earlier deep expertise?So, in principle, if you are under 30 and have just entered, or are considering

entering, the oil & gas industry as a PTP, you can look forward to your skills,knowledge and commitment being much in demand. With rewards to match.
http://www.oilvoice.com/description/Finding_Petroleum/b84c9bc3.aspxhttp://www.oilvoice.com/description/Finding_Petroleum/b84c9bc3.aspxhttp://www.oilvoice.com/description/Finding_Petroleum/b84c9bc3.aspxhttp://www.sbc.slb.com/Our_Ideas/Executive_Presentations/Article_WGLC_HGanesan_29Oct13.aspxhttp://www.sbc.slb.com/Our_Ideas/Executive_Presentations/Article_WGLC_HGanesan_29Oct13.aspxhttp://www.sbc.slb.com/Our_Ideas/Executive_Presentations/Article_WGLC_HGanesan_29Oct13.aspxhttp://www.sbc.slb.com/Our_Ideas/Executive_Presentations/Article_WGLC_HGanesan_29Oct13.aspxhttp://www.oilvoice.com/description/Finding_Petroleum/b84c9bc3.aspx


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And yet the lessons of the past should tell you that this industry is capricious, givento RIF-ing, given also to displaying what I might term the Harry and Jack syndrome.

Look after your own career still seems like sound advice!

View more quality content fromFinding Petroleum

The trouble with gas

Written by Andrew McKillopfromAMK CONSULT

Cinderella Gas at the Thieves Ball

Simple questions can have complicated answers, but for Cinderella Gas the clockhas a habit of chiming 12-midnight all too often. The simple question is how comenatural gas in the USA has grave problems to even attain $27.50 per barrel of oilequivalent - but in Japan it can fetch about $100 per barrel equivalent? Do Japaneselike expensive things, or what?

Germany's riotously shizophrenic treatment of the Russia-Ukraine sanctions issue,with Angela Merkel being the first G7 leader to cast out Russia from the G8 group,while her Vice chancellor Sigmar Gabriel says that Germany's 'rational-baseddecision making' treats Russia as a key energy partner, can also be explained to a

large extent by gas supplies - and gas prices.
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No use for 'The Economist' magazine, 19 April, to chime that world gas offerseverything a rational decider could want. It is cheap and simple to extract, ship andburn with a 'low carbon footprint'. It is abundant, and present proven reservesamount to 109 years of current consumption, according to BP. The oil equation is atbest 40 years. Oil is expensive worldwide, as expensive as gas energy in Japan.

While US and European mainstream media have overworked the subject of Ukraineand energy security in Europe, as Germany's Sigmar Gabriel almost said out loud,April 7, the Ukraine gas issue only concerns pipelines. It has nothing whatsoever todo with gas reserves. World gas reserves are in fact certain to go on growing a lotfaster than consumption, but for oil that is a long way from sure. World gas suppliesfrom a fast-rising number of countries - not many of them dictatorships, mostly notbelonging to OPEC, and not located anywhere near Ukraine - are growing, and willgo on growing. Many are 'politically stable places', as 'The Economist' puts it.

The Lignite Revolution

In fact a counter-revolution. In the bizarre and schizoid playground of Europeanenergy policy, today, lignite has a better place, than gas. As Bloomberg Business


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Week reported, 15 April, German power companies - especially the Big 4 - haveobeyed Angela Merkel's 180-degree switch on nuclear power, following Fukushima,as German elections approached, and started shutting down their Cash Cow nuclearpower plants. These NPPs were previously given generous (or foolhardy) operatinglifetime extensions by Angela Merkel herself. On a regular basis.

What the beleaguered utilities are doing, now, when forced by government to closetheir Cash Cows is simple. They turn to lignite - a cheap, soft, muddy-brown coloredform of sedimentary rock riddled with pollutants and spewing (as Al Gore and theClimate Crazies like to say) more greenhouse gases than any other fossil fuel.Number 2 in Germany's Big 4, RWE now generates 52 percent of its power inGermany from lignite. And RWE isn't alone. Utilities all over Germany have shutdown gas-fired plants and ramped up coal and lignite use as the nation watched themix of coal-generated electricity rise to 45 percent last year, the highest level since2007. Beat that for Carbon Correct!

The counter revolution, for some observers like Joe Parson writing in 'MoscowTimes', 17 April, could even embolden pro-Russian separatists in eastern Ukraine.The reason is the Donetsk (locally called Donbas) giant coal basin, ranking withPoland's USB or Upper Silesian Basin, and three times larger than the Ruhr coalbasin. With increased tension in eastern Ukraine, coal basin cities like Donetsk andLuhansk could win a reprieve from almost certain decline and death. Rising coal usein the EU28 to generate power - because gas is too expensive - could be suppliedfrom the Ukraine. Alternately, locally-produced power using coal could be shipped toEurope with relatively low capital costs and lead times, the key term 'relatively' ofcourse needing caution. If the eastern regions of Ukraine were to shift to Russia'sorbit, Ukraine could potentially lose control of about 45 percent of its coal reserves.The loss of the Donets coal basin would deal another substantial economic blow toUkraine.

The Shale Gas and Coalbed Methane Revolutions

Almost certainly unknown to Yoko Ono and her 'Fracking Kills' star consortium,including Sean Lennon to show its a family businesshttp://www.nydailynews.com/new-york/fracking-kills-yoko-fights-drilling-article-1.1238624, of overpaid stars peddling dumb music and dumber ideas while theyspew (to use Al Gore's terminology) aviation jet fuel kerosene residues worldwide on

a very regular basis, shale gas 'fracking' attempts date from the first decade of the19th century - not 20th or 21st. Today however it works, and putting that genie backin the bottle is beyond Yoko Ono. Coalbed methane can be compared to lignite andcoal - people know about coal but not lignite, and have heard about 'fracking' butknow nothing about methane extraction from coal beds, avoiding and eliminating theneed to physically dig, then burn, almost always dirty coal. Net energy performanceis good, although recovery of energy in place as coal, versus gas energy extracted,is low. Due to world coal resources (not reserves) to a depth of 3000 metres beingroughly estimated by Beijing's University of Petroleum at probably 200 trillion tons(200 000 billion tons), resource depletion is no problem. Yoko Ono will certainlydisappear first, although she's taking a lot of time to do it! We can she hope she

speeds up.


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Overworked and hyped shale gas potentials in Europe, to be sure, have left a baddirt line in the bath tub when the water of initial investor support ran out. Thishowever certainly does not mean shale gas cannot be produced in Europe - norcoalbed methane. European gas prices have not reached the giddy heights ofJapanese gas prices, but are high.

Ukraine's massive coal reserves in place, in the Donbas, overworked and aged inconventional-extraction terms, like the Ruhr basin, are an attractive prospect forshale gas and coalbed methane extraction. Only the political decision making factoris negative - to say the least. World gas prices, as the Japanese will surelyappreciate can only decline, while oil will tend to stay high, Cinderella Gas will atsome stage get her LPG or CNG-fuelled limo at 12 midnight!

View more quality content fromAMK CONSULT

Iraq: Shooting seismicinto the political riftsand plays

Written by Anthony Franks OBEfromMars Omega LLP

Earlier this week, Turkey's Minister of Energy and Natural Resources, Taner Yildiz,was reported by Reuters as saying that one of the pipelines carrying crude oil fromthe Kirkuk oilfields to Ceyhan - Turkey's Mediterranean port - was unusablebecause of continued attacks by extremists.

True.

But that is not the only reason it is unusable; the pipeline is also politically unusable.

The continuing deadlock between Baghdad and Irbil over the sharing of oil revenues

and ownership of hydrocarbon resources in Kurdistan continues to cast a darkshadow over inter-governmental relations.
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Nothing is going to change on these issues before the elections, and we suggest it isdebatable if anything substantive will in fact change in the short-term, and this willimpact on both the business operations in Kurdistan of the various oil companies,and on their share and stakeholders.

In fact, the way things are shaping up, we could potentially see the dark shadow turninto a black hole, and the break up of the Iraqi republic.However, it is wholly questionable how homogenous Iraq is nowadays in any case:

Kurdistan is talking openly of seceding; Anbar province in the west is scarcely under true government control with

extremists operating openly in Fallujah and Ramadiand indeed elsewhere; In the oil-rich south, Basra, the treasury of black-gold is restive and also

periodically threats to secede from federal Iraq; In the fragile province of Diyala, the Islamic State of Iraq and the Levant (ISIL)

has set up forward operating bases; Ninewah provincial governor, Athil al-Nujaifi (brother of Usama al-Nujaifi,

speaker of Parliament and leader of Mutahiddun) is reportedly being sued bythe Federal Ministry of Oil after he signed a preliminary contract for theestablishment of an oil refinery without Baghdads knowledge, and bydefinition without its approval.

Meanwhile, Iraq is some 120 hours away from the election that will determine itsfuture trajectory. The various political rockets are on their launch pads with steamand smoke hissing out of their bottoms. Metaphorically speaking, of course.

These various political parties have in the meantime continued to indulge in trenchwarfare. During a televised appearance on Wednesday, Iraqi Prime Minister (PM)Nuri al-Maliki accused political opponents of trying to put obstacles in the path ofBaghdads counter-terrorism plans.

Speaker of Parliament Usama al-Nujaifi responded by playing a backhand over thepolitical tennis net by accusing the government of letting the chaos in Anbar continueas an act of commission. Thishe claimed - was being done in order to disrupt theelections in the fragile Province of Anbar because Anbar is a Sunni majority region.

The Kurdish media reported that the Secretary General of Iraqi Hizbullah, Wathiq al-

Battat, decided to try to make the political tennis match a game of doubles byjumping on the charabanc and calling the PM a dictator in a media statement.

For the record, Wathiq al-Battat is a Shia cleric and leads both Iraqi Hizbullah andthe Jaysh al-Mukhtar. He has been arrested several times by the security forces. Al-Battat was also reported to have said, somewhat ominously, that, after the election,the PMs destiny would be worse than that of Saddam Hussein as a result of his partin fomenting violence against the Iraqi people.

During his Wednesday TV broadcast, the PM also said Baghdad was committed toconfronting theplight of terrorism, and suggested that the Iraqi army is securing

victories against the Islamic State of Iraq and the Levant (ISIL) extremists that havebeen occupying parts of key cities in Anbar. He also suggested the local tribes were


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cooperating and coordinating with the Iraqi army to drive terrorists out of Anbar.

Usama al-Nujaifi promptly questioned whether or not Baghdad was competent todeal with the situation in Anbar. He criticised the PM for failing to take the Anbarsituation seriously, and then delivered a forehand volley The government must take

immediate action [in Anbar], including providing vital food and humanitarian aid tocitizens, and exert every effort to end this problem before it develops into a realdisaster.

However, it is worth noting that it has already developed into a real disaster nowaccording to information obtained by UNAMI from the Health Directorate in Anbar,the total civilian casualties in Anbar up to 30 Mar 14 were: 156 killed and 741 injured;with 80 killed and 448 injured in Ramadi; and 76 killed and 293 injured in Fallujah.

Anbar has thus become a microcosm of the intransigence that continues to consignIraqi politics to the limbo of feuding stasis.

The State of Law coalition sees the situation in Anbar as being the logical result ofSunni extremism, while al-Nujaifi, Mutahiddun and their growing number of allies seethe situation in Anbar as being the logical result of blatant sectarianism.

And with that kind of political polarity, there seems to be little hope of real nationalunity now, or in the future.

View more quality content fromMars Omega LLP
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Oil exports: Therhetoric and the reality

Written by Loren Steffyfrom30 Point Strategies

If not natural gas, then oil. That seems to be the latest reaction to breaking Russiasenergy grip onEurope.

Harold Hamm,the chief executive ofContinental Resources,reciting a new meme inthe energy industry, told members of Congress this week to forget all thebreathlessbanter about natural gas exports to counter Russian aggression in the Ukraine.If we

really want to help wean Europe off its dependency on Russian energy,we shouldimmediately begin exporting oil.The first export terminal for liquefied natural gaswont begin shipments until next year. It will simply take too long for LNG exports tohelp Europe, Hamm argued.

While opening LNG exports is a noble goal and one that we as a country are activelyworking towards, the fact is the infrastructure to undertake large scale overnight LNGexports does not currently exist. If we want to have an overnight impact on todaysglobal events, we can immediately begin exporting crude oil, which does not havethe same infrastructure constraints.

While oil may be unconstrained by infrastructure, it also wont solve Europesdependency issues in the same way gas might. Different grades of crude may makeit difficult for European refiners to simply switch to a new oil source.

But oil exports also have a different impact on the home front than LNG exports.While we currently have more gas than we need, we still import, on a net basis,about 7.3 million barrels a day,or just less than half of our daily consumption.

Any exports would have to be offset by additional imports, says Jeffrey Brown, anindependent petroleum geologist who tracks import data. Embracing exports the way

Hamm suggests would simply shift the burden of greater foreign oil dependency fromEurope back to the U.S.

This is why the notion of energy independence is unrealistic. Midwest producers likeHamm talk about rising oil production as if we have a surplus, but we are a long wayfrom domestic production levels that would reduce imports to zero. Even if weachieve those levels, we are unlikely to maintain them for long.

For consumers, the entire debate doesnt matter much. Exporting crude probablywould have little effect on gasoline prices because most refiners are already sellingtheir products based on the Brent price for crude, which is higher than the price for

West Texas Intermediate, the U.S. benchmark. The Brent, or world, price iscurrentlyabout $6.50 a barrel higher than WTI.
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For Midwest producers like Hamm, oil exports would narrow that spread. Theyvebeen forced to sell their crude to Midwestern refiners at WTI prices, only to watch therefiners turn around and sell it at prices set by Brent. In other words, in the Midwest,margins are migrating to the refiners. Exports would be a way for companies like

Continentalto reverse the trend.

Our export policies, though, shouldnt be based on the special interests of a handfulof companies.

Just like Europe, U.S. refiners require different grades of crude, and some of thebiggest ones require heavier oil from places like Venezuela rather than the lightsweet crude produced in the domestic shale plays. Oil exports may, indeed, makesense at some point, and lawmakersneed to revisit energy policy that is based on40 years of resource scarcity.The issue, though, needs to be studied carefully basedon its domestic impact, rather than as a knee-jerk response to Russian aggression in

the Ukraine or the opportunistic urging of oil producers at home.

The changing energy landscape in the U.S. has already altered the nature of globalpetro-politics, and it will continue to do so. But we cant look to exports of gas or oilas a quick fix for the worlds problems.

View more quality content from30 Point Strategies
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Insight: What'shappening toExploration?

Written by David BamfordfromFinding Petroleum

Explorers should be deeply troubled by recent events, namely:

1. The general lack of success, especially in Frontier plays, and the evident lack of

New Ideasand instead the re-cycling and re-hashing of old ones.

2. Exponentiating costs, especially for deep water drilling.

Exploration outcomes over the last 18-24 months

Over this period, the notable exploration successes have been:

US Shale Oil, notably the Eagleford, Bakken and Barnett plays. Brazil Pre-Salt, with seven key oil discoveriesLula, Sapinhoa, Iracema,

Carioca, Carcara, Jupiter and Iara. East Africa Gas offshore, in Tanzania and Mocambique East Africa Oil onshore, in Kenya.

You will note that these are all continuations of earlier themes. Where are the NewIdeas?

Other notable successes are hard to find and indeed it is much easier to point tosome troubling failures. There has been disappointment all over NW Europe (NorthSea, the Barents, onshore), for example, and Richmond Energy Partners havespotted 1 arguably commercial discovery in the last 27 Frontier wells drilled by thegroup of companies they cover!

Is exploration getting harder?

The poison of exponentiating costs

At the same time that exploration appears to be getting much, much harder, costshave been exponentiating.

Letsconsider a very simple model in which an enterprise aims to discover 100million boe in a 4 well program:
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Suppose the drilling cost per well is $25m and other associated costs for thewhole 4 well program are $100m (drilling costs being 50% of total explorationspend are a normal working guideline), then the total program cost is $200mand the implied (success outcome) Finding (F) cost is $2/boe.

Now lets suppose the drilling cost per well is $50m and, by a super human

effort, other costs are kept at $100m, then the total program cost is $300mand the implied F cost is $3/boe.

Next, we take a big step and assume a drilling cost of $100m/well, with othercosts powerfully constrained at $200m, giving a total cost of $600m and an Fcost of $6/boe.

And finally, if we assume a drilling cost of $200m/well, with other costs stillconstrained to $200m, then total costs are $1000m and F cost is $10/boe.

So there could be then an Explorers view which says so what? Oil price is over$100/barrel, F costs of $2 - 10 per boe are all OK!

Why does F cost matter?

Lets consider a simple metric for a growing through exploringcompany, namely:

X = Enterprise Value/2P reserves

It turns out that X ~ $8/boe for a matured E&P company.

Thus, for any company, the extra Enterprise Value (EV) potentially created by anextra 100 million boe is $100 x (8F). So..

1. If F cost = $2.5/boe, then extra EV = $550m

2. If F cost = $5/boe, then extra EV = $300m

3. If F cost = $8/boe then extra EV = $0m.

For an Investor in:

A $100m Market Cap company, 1. and 2. are fantastic outcomes. A $1bn Market Cap company, 1. is excellent, 2. is pretty good.

A $10bn Market Cap company, only 1. is of any interest.

So what? Well, to generalise, drilling costs of $25 or $50m/well are nowadayscharacteristic of onshore exploration; $100/$200m per well costs are characteristicof deep waterexploration.

Ergo, if you want to invest in a growing through exploringcompany find one that isexploring onshore...or invest in a drilling company running deep water rigs!

ConclusionBack to the Future!

Exploration needs to become much more successful and at significantly lower Fcosts than have been the norm over the last couple of years.


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Both New Ideasand dramatically reduced drilling costsare required.

These two will only be found togetheronshore.

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Eight energy mythsexplained

Written by Gail TverbergfromOur Finite World

Republicans, Democrats, and environmentalists all have favorite energy myths. EvenPeak Oil believers have favorite energy myths. The following are a few common mis-beliefs, coming from a variety of energy perspectives. I will start with a recent myth,and then discuss some longer-standing ones.

Myth 1. The fact that oil producers are talking about wanting to export crudeoil means that the US has more than enough crude oil for its own needs.

The real story is that producers want to sell their crude oil at as high a price aspossible. If they have a choice of refineries A, B, and C in this country to sell their

crude oil to, the maximum amount they can receive for their oil is limited by the pricethese refineries are paying, less the cost of shipping the oil to these refineries.

If it suddenly becomes possible to sell crude oil to refineries elsewhere, thepossibility arises that a higher price will be available in another country. Refineriesare optimized for a particular type of crude. If, for example, refineries in Europe areshort of light, sweet crude because such oil from Libya is mostly still unavailable, aEuropean refinery might be willing to pay a higher price for crude oil from the Bakken(which also produces light sweet, crude) than a refinery in this country. Even withshipping costs, an oil producer might be able to make a bigger profit on its oil soldoutside of the US than sold within the US.

The US consumed 18.9 million barrels a day of petroleum products during 2013. In
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order to meet its oil needs, the US imported 6.2 million barrels of oil a day in 2013(netting exported oil products against imported crude oil). Thus, the US is, and willlikely continue to be, a major oil crude oil importer.

If production and consumption remain at a constant level, adding crude oil exports

would require adding crude oil imports as well. These crude oil imports might be of adifferent kind of oil than that that is exportedquite possibly sour, heavy crudeinstead of sweet, light crude. Or perhaps US refineries specializing in light, sweetcrude will be forced to raise their purchase prices, to match world crude oil prices forthat type of product.

The reason exports of crude oil make sense from an oil producers point of view isthat they stand to make more money by exporting their crude to overseas refineriesthat will pay more. How this will work out in the end is unclear. If US refiners of light,sweet crude are forced to raise the prices they pay for oil, and the selling price of USoil products doesnt rise to compensate, then more US refiners of light, sweet crude

will go out of business, fixing a likely world oversupply of such refiners. Or perhapsprices of US finished products will rise, reflecting the fact that the US has to someextent in the past received a bargain (related to thegap between European Brentand US WTI oil prices), relative to world prices. In this case US consumers will endup paying more.

The one thing that is very clear is that the desire to ship crude oil abroad does notreflect too much total crude oil being produced in the United States. At most, what itmeans is an overabundance of refineries, worldwide, adapted to light, sweet crude.This happens because over the years, the worlds oil mix has been generallychanging to heavier, sourer types of oil. Perhaps if there is more oil from shaleformations, the mix will start to change back again. This is a very big if, however.The media tend to overplay the possibilities of such extraction as well.

Myth 2. The economy doesnt really need very much energy.

We humans need food of the right type, to provide us with the energy we need tocarry out our activities. The economy is very similar: it needs energy of the righttypes to carry out its activities.

One essential activity of the economy is growing and processing food. In developing

countries in warm parts of the world, food production, storage, transport, andpreparation accounts for the vast majority of economic activity (Pimental andPimental, 2007). In traditional societies, much of the energy comes from human andanimal labor and burning biomass.

If a developing country substitutes modern fuels for traditional energy sources infood production and preparation, the whole nature of the economy changes. We cansee this starting to happen on a world-wide basis in the early 1800s, as energy otherthan biomass use ramped up.
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Figu re 1. World Energy Consumption by Source, Based on Vaclav Smil estimatesfrom Energy Transitions: History, Requirements and Prospects and together with BPStatistical Data on 1965 and subsequent

The Industrial Revolution began inthe late 1700s in Britain.It was enabled by coalusage, which made it possible to make metals, glass, and cement in much greaterquantities than in the past. Without coal, deforestation had become a problem,

especially near cold urban areas, such as London. With coal, it became possible touse industrial processes that required heat without the problem of deforestation.Processes using high levels of heat also became cheaper, because it was no longernecessary to cut down trees, make charcoal from the wood, and transport thecharcoal long distances (because nearby wood had already been depleted).

The availability of coal allowed the use of new technology to be ramped up. Forexample,according to Wikipedia,the first steam engine was patented in 1608, andthe first commercial steam engine was patented in 1712. In 1781, James Wattinvented an improved version of the steam engine. But to actually implement thesteam engine widely using metal trains running on metal tracks, coal was needed to

make relatively inexpensive metal in quantity.

Concrete and metal could be used to make modern hydroelectric power plants,allowing electricity to be made in quantity. Devices such as light bulbs (using glassand metal) could be made in quantity, as well as wires used for transmittingelectricity, allowing a longer work-day.

Theuse of coal also led to agriculture changesas well, cutting back on the need forfarmers and ranchers. New devices such assteel plows and reapers and hay rakeswere manufactured, which could be pulled by horses, transferring work from humansto animals.Barbed-wire fenceallowed the western part of the US to become

cropland, instead one large unfenced range. With fewer people needed inagriculture, more people became available to work in cities in factories.
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Our economy is now very different from what it was back about 1820, because ofincreased energy use. We have large cities, with food and raw materials transportedfrom a distance to population centers. Water and sewer treatments greatly reducethe risk of disease transmission of people living in such close proximity. Vehiclespowered by oil or electricity eliminate the mess of animal-powered transport. Many

more roads can be paved.

If we were to try to leave todays high-energy system and go back to a system thatuses biofuels (or only biofuels plus some additional devices that can be made withbiofuels), it would require huge changes.

Myth 3. We can easily transition to renewables.

On Figure 1, above, the only renewables are hydroelectric and biofuels. Whileenergy supply has risen rapidly, population has risen rapidly as well.

Figu re 2. World Population, based onAngus Maddison estimates,interpolatedwhere necessary.

When we look at energy use on a per capita basis, the result is as shown in Figure 3,on the next page.
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Figu re 3. Per capita world energy consumption, calculated by dividing world energyconsumption (based on Vaclav Smil estimates fromEnergy Transitions: History,Requirements and Prospectstogether with BP Statistical Data for 1965 andsubsequent) by population estimates, based onAngus Maddison data.

The energy consumption level in 1820 would be at a basic levelonly enough togrow and process food, heat homes, make clothing, and provide for some very basic

industries. Based on Figure 3, even this required a little over 20 gigajoules of energyper capita. If we add together per capita biofuels and hydroelectric on Figure 3, theywould come out to only about 11 gigajoules of energy per capita. To get to the 1820level of per capita energy consumption, we would either need to add something else,such as coal, or wait a very, very long time until (perhaps) renewables includinghydroelectric could be ramped up enough.

If we want to talk about renewables that can be made without fossil fuels, the amountwould be smaller yet. As noted previously, modern hydroelectric power is enabled bycoal, so we would need to exclude this. We would also need to exclude modernbiofuels, such as ethanol made from corn and biodiesel made from rape seed,

because they are greatly enabled by todays farming and transportationequipmentand indirectly by our ability to make metal in quantity.

I have included wind and solar in the Biofuels category for convenience. They areso small in quantity that they wouldnt be visible as a separate categories, windamounting to only 1.0% of world energy supply in 2012, and solar amounting to0.2%, according to BP data. We would need to exclude them as well, because theytoo require fossil fuels to be produced and transported.

In total, the biofuels category without all of these modern additions might be close tothe amount available in 1820. Population now is roughly seven times as large,

suggesting only one-seventh as much energy per capita. Of course, in 1820 theamount of wood used led to significant deforestation, so even this level of biofuel use
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was not ideal. And there would be the additional detail of transporting wood tomarkets. Back in 1820, we had horses for transport, but we would not have enoughhorses for this purpose today.

Myth 4. Population isnt related to energy availability.

If we compare Figures 2 and 3, we see that the surge in population that took placeimmediately after World War II coincided with the period that per-capita energy usewas ramping up rapidly. The increased affluence of the 1950s (fueled by low oilprices and increased ability to buy goods using oil) allowed parents to have morechildren. Better sanitation and innovations such as antibiotics (made possible byfossil fuels) also allowed more of these children to live to maturity.

Furthermore, theGreen Revolutionwhich took place during this time period iscredited with saving over a billion people from starvation. It ramped up the use ofirrigation, synthetic fertilizers and pesticides, hybrid seed, and the development of

high yield grains. All of these techniques were enabled by availability of oil. Greateruse of agricultural equipment, allowing seeds to be sowed closer together, alsohelped raise production. By this time, electricity reached farming communities,allowing use of equipment such as milking machines.

If we take a longer view of the situation, we find that a bend in the world populationoccurred about the time of Industrial Revolution, and the ramp up of coal use (Figure4). Increased farming equipment made with metals increased food output, allowinggreater world population.

Figure 4.World population based on data from Atlas of World History, McEvedyand Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.

Furthermore, when we look at countries that have seen large drops in energyconsumption, we tend to see population declines. For example, following the
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collapse of the Soviet Union, there were drops in energy consumption in a number ofcountries whose energy was affected (Figure 5).

Figure 6.Population as percent of 1985 population, for selected countries, based onEIA data.

Myth 5. It is easy to substitute one type of energy for another.

Any changeover from one type of energy to another is likely to be slow andexpensive, if it can be accomplished at all.

One major issue is the fact that different types of energy have very different uses.When oil production was ramped up, during and following World War II, it added newcapabilities, compared to coal. With only coal (and hydroelectric, enabled by coal),we could have battery-powered cars, with limited range. Or ethanol-powered cars,but ethanol required a huge amount of land to grow the necessary crops. We couldhave trains, but these didnt go from door to door. With the availability of oil, we wereable to have personal transportation vehicles that went from door to door, and trucks

that delivered goods from where they were produced to the consumer, or to anyother desired location.

We were also able to build airplanes. With airplanes, we were able to win World WarII. Airplanes also made international business feasible on much greater scale,because it became possible for managers to visit operations abroad in a relativelyshort time-frame, and because it was possible to bring workers from one country toanother for training, if needed. Without air transport, it is doubtful that the currentnumber of internationally integrated businesses could be maintained.

The passage of time does not change the inherent differences between different

types of fuels. Oil is still the fuel of preference for long-distance travel, because (a) itis energy dense so it fits in a relatively small tank, (b) it is a liquid, so it is easy to


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dispense at refueling stations, and (c) we are now set up for liquid fuel use, with ahuge number of cars and trucks on the road which use oil and refueling stations toserve these vehicles. Also, oil works much better than electricity for air transport.

Changing to electricity for transportation is likely to be a slow and expensive process.

One important point is that the cost of electric vehicles needs to be brought down towhere they are affordable for buyers, if we do not want the changeover to have ahugely adverse effect on the economy. This is the case because salaries are notgoing to rise to pay for high-priced cars, and the government cannot afford largesubsidies for everyone. Another issue is that the range of electric vehicles needs tobe increased, if vehicle owners are to be able to continue to use their vehicles forlong-distance driving.

No matter what type of changeover is made, the changeover needs to implementedslowly, over a period of 25 years or more, so that buyers do not lose the trade invalue of their oil-powered vehicles. If the changeover is done too quickly, citizens will

lose their trade in value of their oil-powered cars, and because of this, will not beable to afford the new vehicles.

If a changeover to electric transportation vehicles is to be made, many vehicles otherthan cars will need to be made electric, as well. These would include long haultrucks, busses, airplanes, construction equipment, and agricultural equipment, all ofwhich would need to be made electric. Costs would need to be brought down, andnecessary refueling equipment would need to be installed, further adding to theslowness of the changeover process.

Another issue is that even apart from energy uses, oil is used in many applicationsas a raw material. For example, it is used in making herbicides and pesticides,asphalt roads and asphalt shingles for roofs, medicines, cosmetics, buildingmaterials, dyes, and flavoring. There is no possibility that electricity could be adaptedto these uses. Coal could perhaps be adapted for these uses, because it is also afossil fuel.

Myth 6. Oil will run out because it is limited in supply and non-renewable.

This myth is actually closer to the truth than the other myths. The situation is a littledifferent from running out, however. The real situation is that oil limits are likely to

disrupt the economy in various ways. This economic disruption is likely to be whatleads to an abrupt drop in oil supply. One likely possibility is that a lack of debtavailability and low wages will keep oil prices from rising to the level that oilproducers need for extraction. Under this scenario, oil producers will see little point ininvesting in new production. There isevidence that this scenario is already starting tohappen.

There is another version of this myth that is even more incorrect. According to thismyth, the situation with oil supply (and other types of fossil fuel supply) is as follows:
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Myth 7. Oil supply (and the supply of other fossil fuels) will start depletingwhen the supply is 50% exhausted. We can therefore expect a long, slowdecline in fossil fuel use.

This myth is a favorite of peak oil believers. Indirectly, similar beliefs underly climate

change models as well. It is based on what I believe is an incorrect reading of thewritings ofM. King Hubbert.Hubbert is a geologist and physicist who foretold adecline of US oil production, and eventually world production, in various documents,includingNuclear Energy and the Fossil Fuels,published in 1956. Hubbert observedthat under certain circumstances, the production of various fossil fuels tends to followa rather symmetric curve.

Figu re 7. M. King Hubberts 1956 image of expected world crude oil production,assuming ultimate recoverable oil of 1,250 billion barrels.

A major reason that this type of forecast is wrong is because it is based on ascenario in which some other type of energy supply was able to be ramped up,before oil supply started to decline.

Figure 8.Figure from Hubberts 1956 paper,Nuclear Energy and the Fossil Fuels.
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With this ramp up in energy supply, the economy can continue as in the past withouta major financial problem arising relating to the reduced oil supply. Without a rampup in energy supply of some other type, there would be a problem with too high apopulation in relationship to the declining energy supply. Per-capita energy supplywould drop rapidly, making it increasingly difficult to produce enough goods and

services. In particular, maintaining government services is likely to become aproblem. Needed taxes are likely to rise too high relative to what citizens can afford,leading to major problems, even collapse, based on the research of Turchin andNefedov (2009).

Myth 8. Renewable energy is available in essentially unlimited supply.

The issue with all types of energy supply, from fossil fuels, to nuclear (based onuranium), to geothermal, to hydroelectric, to wind and solar, is diminishing returns. Atsome point, the cost of producing energy becomes less efficient, and because ofthis, the cost of production begins to rise. It is the fact wages do not rise to

compensate for these higher costs and that cheaper substitutes do not becomeavailable that causes financial problems for the economic system.

In the case of oil, rising cost of extraction comes because the cheap-to-extract oil isextracted first, leaving only the expensive-to-extract oil. This is the problem werecently have been experiencing. Similar problems arise with natural gas and coal,but the sharp upturn in costs may come later because they are available insomewhat greater supply relative to demand.

Uranium and other metals experience the same problem with diminishing returns, asthe cheapest to extract portions of these minerals is extracted first, and we musteventually move on to lower-grade ores.

Part of the problem with so-called renewables is that they are made of minerals, andthese minerals are subject to the same depletion issues as other minerals. This maynot be a problem if the minerals are very abundant, such as iron or aluminum. But ifminerals are lesser supply, such as rare earth minerals and lithium, depletion maylead to rising costs of extraction, and ultimately higher costs of devices using theminerals.

Another issue is choice of sites. When hydroelectric plants are installed, the best

locations tend to be chosen first. Gradually, less desirable locations are added. Thesame holds for wind turbines. Offshore wind turbines tend to be more expensive thanonshore turbines. If abundant onshore locations, close to population centers, hadbeen available for recent European construction, it seems likely that these wouldhave been used instead of offshore turbines.

When it comes to wood, overuse and deforestation has been a constant problemthroughout the ages. As population rises, and other energy resources become lessavailable, the situation is likely to become even worse.

Finally, renewables, even if they use less oil, still tend to be dependent on oil. Oil is

important for operating mining equipment and for transporting devices from thelocation where they are made to the location where they are to be put in service.
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Helicopters (requiring oil) are used in maintenance of wind turbines, especially offshore, and in maintenance of electric transmission lines. Even if repairs can be madewith trucks, operation of these trucks still generally requires oil. Maintenance ofroads also requires oil. Even transporting wood to market requires oil.

If there is a true shortage of oil, there will be a huge drop-off in the production ofrenewables, and maintenance of existing renewables will become more difficult.Solar panels that are used apart from the electric grid may be long-lasting, butbatteries, inverters, long distance electric transmission lines, and many other thingswe now take for granted are likely to disappear.

Thus, renewables are not available in unlimited supply. If oil supply is severelyconstrained, we may even discover that many existing renewables are not even verylong lasting.

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Oil & Gas Boom 2014:A WitheringRegulatory Assault

Written by David BlackmonfromFTI Consulting, Inc.

While the Obama Administration frequently touts its commitment to an all of theabove energy policy, its ongoing devotion to handing out massive subsidies (wind,solar) and demand quotas (ethanol, biofuels) to some forms of energy while rampingup taxes and heavy-handed regulations on others reveals this commitment to behighly qualified and selectively applied. Nowhere is the downside of this picking-and-choosing approach to energy policy more evident than as it relates to the oil and gasindustry, upon which the Administrations ongoing withering regulatory assaultcontinued last week on several fronts.

First, on March 25, the Environmental Protection Agency (EPA), working in concert
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with the Army Corps of Engineers, issued its new WatersWAT +0.43%of theUnited States proposed regulation, which EPA claims would clarify the scope of itsregulatory authority under the Clean Water Act (CWA). Naturally, in clarifying itsauthority, EPAas it invariably doesseeks to vastly expand said authority.

The proposed rule would take EPAs current statutory authority under the CWA toregulate navigable waters and clarify it in a way that would allow it to regulate anyconnected or adjacent wetlands, streams, creeks, ditches or ponds, including thosethat are intermittent, seasonal, man-made or ephemeral, whatever that means.EPA protested that concerns expressed by the various industries the rule wouldimpact were overblown, which is what EPA always does before going aboutensuring that such concerns invariably are either met or exceeded by the ultimateimpacts. This is how EPA has functioned since its inception, in administrations ofboth parties, and no one should expect it to change anytime soon. Or ever, for thatmatterits the nature of this bureaucracy.

EPA Administrator Gina McCarthy quickly moved to reassure the Agriculturalindustry that their existing exemptions under the CWA would not be impacted, astatement no one really believed. Conversely, no such assurances were forthcomingrelated to the oil and gas or other energy industries, an omission which surprised noone.

This proposed rule is the third effort in recent years to expand EPA authority in thisarea. There were repeated efforts to pass legislation through congress during theearly part of President Obamas first term, all of which failed. More recently, the EPAissued a guidance document under the statute that it decided to withdraw inresponse to strong protests by affected industries. So one must assume the agencyhopes that this third attempt to regulate your local drainage ditch or stock pond willbe the charm.

Not to be outdone, on March 28 the U.S. Fish and Wildlife Service announced itsdecision to list the Lesser Prairie Chicken as threatened under the EndangeredSpecies Act. While this designation is a step below the endangered status underthe ESA, and theoretically provides regulators and affected parties more flexibility indetermining ways to go about protecting this bird, the potential negative impacts ofthe listing on vast swaths of five different states is very significant.

The oil and gas industry and other affected parties were naturally disappointed bythe decision, given that companies, ranchers and other landowners had alreadyagreed to set aside more than 3 million acres of land as habitat for the chicken underthe Five State Conservation Plan that is sponsored by the states of Texas,Oklahoma, Colorado, New Mexico and Kansas. The decision ultimately becomesanother victory for radical groups like the Center for Biological Diversity (CBD), whichhave been allowed to abuse this statute and circumvent the normal regulatory andadministrative processes with their Sue and Settle racket Idetailed for readers inthis space last year.

In fact, Oklahoma Attorney General Scott Pruitt challenged this spurious and really

un-American practice in a lawsuit he filed in federal court earlier in March. If there isany justice remaining in this countrys legal system, he will prevail. Of course, any
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ultimate disposition of that case will come years in the future. In the meantime, CBDwill have free reign to continue collecting millions of dollars from the federalgovernment at the expense of taxpayers and consumers.

Also on March 28, the White House released an outline of its long-awaited Climate

Action Plan Strategy to Reduce Methane Emissions. The strategy would initiate aprocess whose ultimate goal would be EPA regulation of methane emissions atseveral points along the upstream, midstream and downstream supply chain fornatural gas, as well as the coal industry and landfills.

The process would begin with the solicitation of input from affected industriesthrough a series of technical white papers, followed by bureaucratic determination ofpossible actions that everyone expects would result in heavy-handed regulation ofthe natural gas industry, which has long been the goal at EPA. The strategydocument also includes proposed updated standards under the Bureau of LandManagements Onshore Order #9, which governs venting and flaring of natural gas

in oilfield operations on federal lands.

Interestingly, the strategy in no way contemplates mandatory regulation of farmanimal flatulence and other agricultural industry emissions, which are the largestsingle source of methane emissions in the United States. Then again, if EPA were toregulate flatulence from cows and sheep, it might then attempt to extend its authorityto similar human emissions, and nobody with any fiber in their diet wants to see thathappen.

Coincidentally, on April 1, the House Budget Committee under Chairman Paul Ryanissued its proposed 2015 budget.

In his statement accompanying the release, Rep. Ryan criticized the Administrationfor creating nearly $500 billion in additional annual regulatory activity costsassociated with compliance since 2009.

The President has installed a heavy-handed compliance culture dependent onregulations, favorable tax treatment and spending on administration-favoredconstituencies. This administration has proposed more economically significantregulations in four years than previous administrations have in the past 15 yearscombined, Ryan said.

Mr. Ryan was of course speaking globally about the Administrations impacts acrossthe economy, but no sector has been more impacted by this unending assault has oiland gas. And almost three more years of this fun still to come.

View more quality content fromFTI Consulting, Inc.
http://www.forbes.com/management/http://www.forbes.com/management/http://www.oilvoice.com/description/FTI_Consulting_Inc/93acde6b.aspxhttp://www.oilvoice.com/description/FTI_Consulting_Inc/93acde6b.aspxhttp://www.oilvoice.com/description/FTI_Consulting_Inc/93acde6b.aspxhttp://www.forbes.com/management/


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Is drilling in the Gulfsafer? Regulators begfor an answer

Written by Loren Steffyfrom30 Point Strategies

Federal regulators have a new approach for improving safety in the Gulf of Mexico:beg the industry to cooperate. Maybe even say pretty please.

The Bureau of Safety and Environmental Enforcementunveiled a plan this weekinwhich it will set up a series of meetings with offshore operators and pitch them on theidea of providing the regulator with data on near-miss incidents.

BSEE wants to use the information to build a database that could show patterns forpotential safety problems. In other words, it wants to track telltale signs of anotherMacondo disaster so companies can avert the next catastrophe.

We are approaching the fourth anniversary ofBP'sDeepwater Horizon disaster, andBSEE, the regulator born of that accident, still finds itself begging for the industryshelp in making offshore operations safer. Compiling a clearinghouse of near-miss

data is crucial to improving offshore safety. Participation shouldnt be voluntary. Itshould be requiredas it is in some other countries and the results should betransparent.

In U.S., the industry has fought such efforts, getting them removed from rulesproposed in 2006. Companies claimed the reporting requirements would be tooburdensome. That, of course, was before the Macondo blowout. The industry nowshould be asking itself whether reporting near-miss data would be more burdensomethan another Macondo-scale accident.

The dearth of data remains a significant problem in the gulf.Rather than rely onaccurate information about safety rates, the industry too often continues to cling tocomfortable myths. One of the most prevalent is that some 50,000 wells have beendrilled in the gulf with only been one major accident.

That statement, repeated almost weekly to me by someone in the industry, ignorestwo important points. The first is that the industry didnt drill 50,000 wells likeMacondo before the accident. At the time, only 43 wells of similar complexity hadbeen drilled.

More important, we dont know how many times a Macondo-like disaster was

narrowly averted in some six decades of offshore drilling.
http://www.oilvoice.com/description/30_Point_Strategies/c97b8ea5.aspxhttp://www.oilvoice.com/description/30_Point_Strategies/c97b8ea5.aspxhttp://www.oilvoice.com/description/30_Point_Strategies/c97b8ea5.aspxhttp://fuelfix.com/blog/2014/04/01/feds-confront-industry-skepticism-on-new-close-call-hotline/http://fuelfix.com/blog/2014/04/01/feds-confront-industry-skepticism-on-new-close-call-hotline/http://fuelfix.com/blog/2014/04/01/feds-confront-industry-skepticism-on-new-close-call-hotline/http://www.forbes.com/companies/bp/http://www.forbes.com/companies/bp/http://www.forbes.com/companies/bp/http://www.houstonchronicle.com/business/steffy/article/Dearth-of-data-leaves-Gulf-safety-record-in-the-4097951.php#/0http://www.houstonchronicle.com/business/steffy/article/Dearth-of-data-leaves-Gulf-safety-record-in-the-4097951.php#/0http://www.houstonchronicle.com/business/steffy/article/Dearth-of-data-leaves-Gulf-safety-record-in-the-4097951.php#/0http://www.forbes.com/companies/bp/http://fuelfix.com/blog/2014/04/01/feds-confront-industry-skepticism-on-new-close-call-hotline/http://www.oilvoice.com/description/30_Point_Strategies/c97b8ea5.aspx


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Currently, BSSE compiles reports of hydrocarbon releases that result in a shutdownof operations. That doesnt produce enough data points to offer meaningful insightsinto performance trends. Whats needed is data on all hydrocarbon releases.

That would enable BSEE to track performance. Are potentially dangerous incidents

increasing in frequency, and if so why? What can be done to correct the problem? Orare they decreasing, in which case what is being done to effectively make the Gulfsafer?

This is vital information, but four years after Macondo, we dont know enough to evenanswer the question of whether drilling safety has improved in the Gulf.

Late last year, when BSEEs new chief, Brian Salerno,first called for a near-missdatabase,I had hoped he would finally address the problem of a lack of drilling data.But BSEE, like its predecessor the MineralManagementService, has a soft touch forthe industry it purports to regulate.

Instead of requiring data, its pleading. Instead of makingthe data transparent, as itis for aviation accidents and workplace safety, BSEE is promising the industry it willkeep the information confidential. Part of the benefit of a near-miss database wouldbe for all companies in the gulf to see how their operations compare with others. Thepublic, too, should know the safest operators. Hiding the numbers behind a veil ofsecrecy undermines the benefits of the initiative. It caters to the long-standingindustry practice of coddling, rather than calling out, its weakest performers.

The industry claims it has an excellent safety record, and if thats true, it should beconfident that compiling near-miss data would prove the point. Instead, it prefers towrap itself in the blanket of self-delusion, as if the absence of disaster is a synonymfor safety.

View more quality content from30 Point Strategies
http://www.forbes.com/sites/lorensteffy/2013/10/29/a-long-overdue-change-could-make-offshore-drilling-safer/http://www.forbes.com/sites/lorensteffy/2013/10/29/a-long-overdue-change-could-make-offshore-drilling-safer/http://www.forbes.com/sites/lorensteffy/2013/10/29/a-long-overdue-change-could-make-offshore-drilling-safer/http://www.forbes.com/sites/lorensteffy/2013/10/29/a-long-overdue-change-could-make-offshore-drilling-safer/http://www.forbes.com/management/http://www.forbes.com/management/http://www.forbes.com/management/http://www.oilvoice.com/description/30_Point_Strategies/c97b8ea5.aspxhttp://www.oilvoice.com/description/30_Point_Strategies/c97b8ea5.aspxhttp://www.oilvoice.com/description/30_Point_Strategies/c97b8ea5.aspxhttp://www.forbes.com/management/http://www.forbes.com/sites/lorensteffy/2013/10/29/a-long-overdue-change-could-make-offshore-drilling-safer/http://www.forbes.com/sites/lorensteffy/2013/10/29/a-long-overdue-change-could-make-offshore-drilling-safer/


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The absurdity of USnatural gas exports

Written by Gail TverbergfromOur Finite World

Quiz:

1. How much natural gas is the United States currently extracting?

(a) Barely enough to meet its own needs(b) Enough to allow lots of exports

(c) Enough to allow a bit of exports(d) The United States is a natural gas importer

Answer: (d) The United States is a natural gas importer, and has been for manyyears. The EIA is forecasting that by 2017, we will finally be able to meet our ownnatural gas needs.

Figu re 1. US Natural Gas recent history and forecast, based on EIAs AnnualEnergy Outlook 2014 Early Release Overview

In fact, this last year, with a cold winter, we have had a problem with excessivelydrawing down amounts in storage.
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Figu re 2. US EIAs chart showing natural gas in storage, compared to the five yearaverage, fromWeekly Natural Gas Storage Report.

There is even discussionthat at the low level in storage and current rates ofproduction, it may not be possible to fully replace the natural gas in storage before

next fall.

2. How much natural gas is the United States talking about exporting?

(a) A tiny amount, less than 5% of what it is currently producing.(b) About 20% of what it is currently producing.(c) About 40% of what it is currently producing.(d) Over 60% of what it is currently producing.

The correct answer is (d) Over 60% what it is currently producing. If we look at theapplications for natural gas exports found on theEnergy.Gov website,we find that

applications for exportstotal 42 billion cubic feet a day, most of which has alreadybeen approved.* This compares to US 2013 natural gas production of 67 billion cubicfeet a day. In fact, if companies applying for exports build the facilities in, say, 3years, and little additional natural gas production is ramped up, we could be left withless than half of current natural gas production for our own use.

*This is my calculation of the sum, equal to 38.51 billion cubic feet a day for FreeTrade Association applications (and combined applications), and 3.25 for Non-FreeTrade applications.
http://ir.eia.gov/ngs/ngs.htmlhttp://ir.eia.gov/ngs/ngs.htmlhttp://ir.eia.gov/ngs/ngs.htmlhttp://online.wsj.com/news/articles/SB10001424052702304157204579471411923930676http://online.wsj.com/news/articles/SB10001424052702304157204579471411923930676http://energy.gov/fe/services/natural-gas-regulationhttp://energy.gov/fe/services/natural-gas-regulationhttp://energy.gov/fe/services/natural-gas-regulationhttp://energy.gov/fe/services/natural-gas-regulationhttp://energy.gov/fe/services/natural-gas-regulationhttp://energy.gov/fe/services/natural-gas-regulationhttp://energy.gov/fe/services/natural-gas-regulationhttp://online.wsj.com/news/articles/SB10001424052702304157204579471411923930676http://ir.eia.gov/ngs/ngs.html


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3. How much are the United States own natural gas needs projected to grow by2030?

a. No growthb. 12%

c. 50%d. 150%

If we believe the US Energy Information Administration, US natural gas needs areexpected to grow by only 12% between 2013 and 2030 (answer (b)). By 2040,natural gas consumption is expected to be 23% higher than in 2013. This is a littlesurprising for several reasons. For one, we are talking about scaling back coal usefor making electricity, and we use almost as much coal as natural gas. Natural gas isan alternative to coal for this purpose.

Furthermore, the EIA expects US oil production to start dropping by 2020 (Figure 3,

below), so logically we might want to use natural gas as a transportation fuel too.

Figu re 3. US Annual Energy Outlook 2014 Early Release Oil Forecast for the UnitedStates.

We currently use more oil than natural gas, so this change could in theory lead to a100% or more increase in natural gas use.

Many nuclear plants we now have in service will need to be replaced in the next 20years. If we substitute natural gas in this area as well, it would further send US


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natural gas usage up. So the EIAs forecast of US natural gas needs definitely seemon the light side.

4. How does natural gass production growth fit in with the growth of other US fuelsaccording to the EIA?

(a) Natural gas is the only fuel showing much growth(b) Renewables grow by a lot more than natural gas(c) All fuels are growing

The answer is (a). Natural gas is the only fuel showing much growth in productionbetween now and 2040.

Figure 4 below shows the EIAs figure from itsAnnual Energy Outlook 2014 EarlyReleaseshowing expected production of all types of fuels.

Figu re 4. Forecast US Energy Production by source, from US EIAs Annual EnergyOutlook 2014 Early Release.

$&spl1t&%Natural gas is pretty much the only growth area, growing from 31% of total energyproduction in 2012 to 38% of total US energy production in 2040. Renewables areexpected to grow from 11% to 12% of total US energy production (probably becausethe majority is hydroelectric, and this doesnt grow much). All of the others fuels,

including oil, are expected to shrink as percentages of total energy productionbetween 2012 and 2040.
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5. What is the projected path of natural gas prices:

(a) Growing slowly(b) Ramping up quickly(c) It depends on who you ask

It depends on who you ask: Answer (c). According to the EIA, natural gas prices areexpected to remain quite low. The EIA provides a forecast of natural gas prices forelectricity producers, from which we can estimate expected wellhead prices (Figure5).

Figure 5.EIA Forecast of Natural Gas prices for electricity use from AEO 2014Advance Release, together with my forecast of corresponding wellhead prices. (2011and 2012 are actual amounts, not forecasts.)

In this forecast, wellhead prices remain below $5.00 until 2028. Electricity companieslook at these low price forecasts and assume that they should plan on ramping upelectricity production from natural gas.

The catchand the reason for all of the natural gas exportsis that most shale gasproducers cannot produce natural gas at recent price levels. They need much higherprice levels in order to make money on natural gas. We see one article after anotheron this subject: FromOil and Gas Journal;fromBloomberg;fromthe FinancialTimes.TheWall Street Journal quotedExxons Rex Tillerson as saying, We are alllosing our shirts today. Were making no money. Its all in the red.

Why all of the natural gas exports, if we dont have very much natural gas, and theshale gas portion (which is the only portion with much potential for growth) is sounprofitable?The reason for all of the exports is too pump up the prices shale gas

producers can get for their gas. This comes partly by engineering higher US prices(by shipping an excessive portion overseas) and partly by trying to take advantage of
http://www.ogj.com/articles/2014/03/financial-questions-seen-for-us-shale-gas-tight-oil-plays.html?cmpid=EnlLNGMarch252014http://www.ogj.com/articles/2014/03/financial-questions-seen-for-us-shale-gas-tight-oil-plays.html?cmpid=EnlLNGMarch252014http://www.ogj.com/articles/2014/03/financial-questions-seen-for-us-shale-gas-tight-oil-plays.html?cmpid=EnlLNGMarch252014http://www.bloomberg.com/news/2014-02-27/dream-of-u-s-oil-independence-slams-against-shale-costs.htmlhttp://www.bloomberg.com/news/2014-02-27/dream-of-u-s-oil-independence-slams-against-shale-costs.htmlhttp://www.bloomberg.com/news/2014-02-27/dream-of-u-s-oil-independence-slams-against-shale-costs.htmlhttp://www.ft.com/intl/cms/s/0/3e56228a-2ce4-11e3-8281-00144feab7de.html#axzz2xb2YYNAZhttp://www.ft.com/intl/cms/s/0/3e56228a-2ce4-11e3-8281-00144feab7de.html#axzz2xb2YYNAZhttp://www.ft.com/intl/cms/s/0/3e56228a-2ce4-11e3-8281-00144feab7de.html#axzz2xb2YYNAZhttp://www.ft.com/intl/cms/s/0/3e56228a-2ce4-11e3-8281-00144feab7de.html#axzz2xb2YYNAZhttp://online.wsj.com/news/articles/SB10001424052702303561504577492501026260464http://online.wsj.com/news/articles/SB10001424052702303561504577492501026260464http://online.wsj.com/news/articles/SB10001424052702303561504577492501026260464http://online.wsj.com/news/articles/SB10001424052702303561504577492501026260464http://www.ft.com/intl/cms/s/0/3e56228a-2ce4-11e3-8281-00144feab7de.html#axzz2xb2YYNAZhttp://www.ft.com/intl/cms/s/0/3e56228a-2ce4-11e3-8281-00144feab7de.html#axzz2xb2YYNAZhttp://www.bloomberg.com/news/2014-02-27/dream-of-u-s-oil-independence-slams-against-shale-costs.htmlhttp://www.ogj.com/articles/2014/03/financial-questions-seen-for-us-shale-gas-tight-oil-plays.html?cmpid=EnlLNGMarch252014


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higher prices in Europe and Japan.

Figure 6.Comparison of natural gas prices based on World Bank Pink Sheet data.Also includes Pink Sheet world oil price on similar basis.

There are several catches in all of this. Dumping huge amounts of natural gas onworld export markets is likely to sink the selling price of natural gas overseas, just as

dumping shale gas on US markets sank US natural gas prices here (and misledsome people, by making it look as if shale gas production is cheap). The amount ofnatural gas export capacity that is in the approval process is huge: 42 billion cubicfeet per day. The European Union imports only about 30 billion cubic feet a day fromall sources. This amount hasnt increased since 2005, even though EU natural gasproduction has dropped. Japans imports amounted to 12 billion cubic feet of naturalgas a day in 2012; Chinas amounted to about 4 billion cubic feet. So in theory, if wetry hard enough, there might be a place for the 42 billion cubic feet per day of naturalgas to gobut it would take a huge amount of effort.

There are other issues