[as you get further and further back in time, fewer and fewer links actually work...So it goes]
More Progress Than You Think, They Think
Secretary Abraham went public with his assessment that the Bush administration's energy policy was not only not dead, it was very near to having been fully enacted and/or implemented administratively. q.v. This came as something of a surprise to Pete.
Inc-ing the Load Through the Death Star and Back
At times Pete has been more than a bit critical of California energy authorities, since he is not a fan of utility deregulation, and thought they'd managed to achieve the worst of all possible worlds without half trying. Recent revelations about Enron's trading practices q.v. should make it obvious to all that there's no way even conscientious state regulators have a chance against determined market manipulation by national firms. That's OK because now that the extent of Enron's games have become known justice will be done, right? q.v. It was all illegal from the start, right? The Invisible Hand can be counted on to correct it, right? Yeah right.
Meanwhile, both the proverbial Belgian dentist and her US counterpart must be becoming more than a bit browned off at a financial system that instead of creating wealth managed to blow several trillions of it after everyone realized there were more just than a few thieves and incompetents at large in the senior managerial class. Pete, dirigiste to a fault, thinks it's time for all the spidermen in DC to dust off the old "Born to Regulate" costumes and start slinging some web.*
*Of course, in order to regulate you have to understand why there could be a problem if you didn't. FERC has recently released it's before-the-fact analysis of Enron Online. q.v. While FERC correctly commented on the danger of a single counterparty on the other side of every transaction, it seems clear they didn't really understand it. Pete assures you that there are plenty in the Washington regulatory crew who would have understood it and acted to stop it had they been given a chance. The real issue, as the rest of the independent power producers melt down, is how the nation is going to come up with the huge amount of electric generating capacity it needs in the immediate future. Admittedly, this is not the sort of problem regulators are good at solving. But someone is going to have to figure it out pretty quickly.
Annual Round Up: World Energy Production
So what happened to all that Kyoto business about cutting back on fossil fuel use by the rest of the world?
|World Primary Energy Production 1991-2000 (Quadrillion (1015) Btu)||1991||1992||1993||1994||1995||1996||1997||1998||1999||2000|
|Nuclear Electric Power||21.29||21.36||22.07||22.50||23.31||24.13||23.90||24.43||25.21||25.66|
|Geothermal, Solar, Wind, and Wood and Waste Electric Power||1.82||2.02||2.11||2.22||2.28||2.38||2.50||2.61||2.85||2.99|
|World Total Source: EIA||350.64||352.28||353.46||358.49||367.44||376.79||384.42||387.72||387.73||397.48|
Perhaps there's some comfort to be drawn from the relatively faster rate of growth for gas over coal. But it's pretty small comfort. Plus ça change ...
Russian Oil Production Increases
Russia continues to make progress in restoring oil production to Soviet-era levels. It is the world's second largest net exporter, even though the Soviet Union was once the world's largest producer, and the restructuring of the oil industry appears to be working well. No wonder OPEC was concerned. While Russia initially acceded to OPEC requests that it restrain production, it is not clear to what extent it actually did so. q.v.
Bringing the North Slope Gas Cap South
Pete was glad to learn that this issue is far from dead. It seems congress has a plan to guarantee the pipeline a $3.25 per Mcf price against tax credits for the difference with the market price, and to guarantee most of the construction costs of the Alaska portion. q.v. It's hard to imagine how the Canadian producers, who only get the market price, could look upon that one too favorably, and the line will certainly transit a lot of their turf, but it is at least attempting to do something that needs to be done. Meanwhile, the rest of the industry, responding to market price signals tick for lagged tick, continued to drop drilling activity, suggesting that the public purse may not be on the hook for too long if prices again spike up when the effect of the development lull is eventually felt. The moral, of course, is that consumers are going to have to pay for it one way or the other. No surprises there. Just hope the old pension mutual fund advisor didn't put it all in independent electricity producers.
Since Pete is usually wrong about price forecasts, it's worth noting that EIA doesn't believe that the real (in year 2000 dollars) wellhead gas prices will hit the $3.25 number until 2020 q.v., suggesting that it might be a good time to become an oil industry tax lawyer. Of course, it has always has been, and no doubt always will be, a good time to become an oil industry tax lawyer.*
*Several readers have suggested that Pete ignores that the current price of gas is already at the trigger, and that the real EIA price has little to do with it because the trigger may be nominal rather than indexed. As to the first point, obviously right, but Pete was thinking longer term. As to the second, Pete doesn't know whether the trigger price is real or nominal. Pete supports the building of the pipeline, but still doubts that the gas wellhead price will be enough to amortize the incredible construction cost, at least for the first several years, given what he expects to happen to the average price over that short term. On the other hand, wouldn't it be cheaper for the government to make this bet directly in the futures markets rather than through tax credits? Should it be the government that makes the bet at all? What about the folks who are going to earn the return on the pipeline investment, or the utilities cut in on the additional supply? If it has to come from the federal purse, why not just reimburse the cost of hedging the pipeline-builder's exposure?
Exxon Adjusts To Lower Oil Prices and Recession
Note that despite falling demand and lower revenues, Exxon still managed to increase c & e spending.
Exxon-Mobil Corp. First Quarter 2002 Results
|Earnings Excluding Merger Effects/Special Items|
|$ Per Common Share Assuming Dilution||0.31||0.72|
|$ Per Common Share Assuming Dilution||0.30||0.71|
|Capital & Exploration Expenditures|
The story was similar for Chevron-Texaco in terms of revenues and net income, but captial spending declined. q.v.
It looks as though Congress has considered the energy situation and decided that what we need is more ethanol and a legal prohibition on oil from Iraq. Must not be the same energy situation that Pete sees.
Both sides managed to squelch the few good ideas of the other. Democrats stopped the Republican attempt to extend the search for oil to ANWR's coastal plain. Republicans stopped the Democrat's mandatory fuel economy standards. It was Justice Jackson, in his 1949 dissent in Terminiello v. Chicago, who first raised the idea that the US Constitution could become a suicide pact. Mark you, he didn't say it was, and there is no reason to go around proclaiming that the twits responsible for the 2002 energy bill are sending us over the cliff, but it would be nice if they began to understand just how big the stakes are and just how wrong they keep getting it.
Pete's reminded of the old joke: Q. Why are we running out of oil? A. No one noticed it was getting low -- all the oil is in Texas, Louisiana, and Alaska, and all the dipsticks are in Washington, DC.
More Greenspan on Energy and Modeling
Mr. Greenspan begins to see the light: "In assessing the possible effects of higher oil prices, the inherent uncertainty about their future path is compounded by the limitations of the statistical models available to analyze such price shocks. When simulated over periods with observed oil prices spikes, these models do not show oil prices consistently having been a decisive factor in depressing economic activity. Yet, coincidence or not, all economic downturns in the United States since 1973, when oil became a prominent cost factor in business, have been preceded by sharp increases in the price of oil. This pattern leads one to suspect that the responsiveness of U.S. gross domestic product to energy prices is far more complex and may be quite different when households and businesses are confronted with abnormal price hikes. Macroeconometric models typically are specified as linear relationships, and they reflect average behavior over history. These models cannot distinguish between responses to outsized spikes and normal price fluctuations and thus may not capture the effect of sudden and sizable shifts in oil prices on the economy." q.v. Perhaps he should try EIA's short term econometric model, which does capture (or sort of capture) the macroeconomic effects of oil price spikes. q.v. Perhaps next time he should carefully think about what has been happening to oil prices before raising interest rates, as it is clear that OPEC's decision making is of much more decisive influence on the US economy than his own.
Getting Ready For Trading CO2 Credits
The US refuses to play, at least so far. But the rest of the world is getting ready to buy the right to future economic development from a special trading regime in which tropical forests feature prominently. Learn how it will work from the IEA's report on what the rest of the world agreed to at the Bonn conference on global warming. q.v.
What Happens in the Event of an Oil Emergency?
Oil prices soar, everything else tanks. But what is supposed to happen if everyone plays by the pre-arranged rules? The International Energy Agency has published a guide. q.v.
An Introduction to Hydrogen
It's often thought that the fossil fuel era will ultimately be replaced by the hydrogen economy. There are lots of good reasons to doubt this, or at least ponder the magnitude of the task. q.v.
Global Warming Redux
Another view on everyone's least favorite issue. q.v. Not that Pete buys it, but it has a certain interest, especially the charts. Thanks to Brian Regan for suggesting it.
While on the subject, it's worth noting in passing that BP has announced that it is ready to trade emissions credits with anyone who wants to play. Why would anyone want to, particularly in light of BP's curious emissions accounting (below)? Because the British government has made them an offer they can't refuse. No doubt the Godfather would approve, at least in spirit. According to the BP press release: "The UK Government has introduced a climate change levy, applied to energy used in the business and public sectors and effective from April 2001. An 80 per cent discount is allowed in the levy rates for those in energy intensive sectors of industry that agree to meet challenging targets for improving energy efficiency or reducing carbon emissions within a climate change levy agreement. Participants in these agreements will now be able (with the start of the UK Emissions Trading Scheme) to achieve their targets either by trading emission allowances with other companies in a climate change levy agreement, or by participating in the wider UK emissions trading scheme. ... BP has made a 353,500 tonnes of CO2 equivalent emissions reduction commitment into the UK Emissions Trading Scheme. All of its operated upstream assets are participating ..." Wait until the UK government gets the Exxon submission (and request for net refund?). Remember, Exxon claims to have avoided emissions more than equal to all of the emissions of the entire UK economy. What fun. Too bad Enron's untimely demise prevents it from playing, because it's just the sort of thing it was good at.
News From the Oil Patch
Robert Ehrlich has sent in the following report from the 2002 AAPG convention in Houston:
There seems to be a restless stirring in the oil patch as seen at the 2002 meeting of the convention of the American Association of Petroleum Geologists in Houston. Still dominated by lots of gray hair but more youngsters than in past years. Much sarcasm concerning the Majors increasing reserves by buying up companies commentary on the profitability of deep water exploration and production. The Association is worried in its low retention rate of geologists between 40 -50 years old. Few if any Geologists in their 20's and 30's signing up. However the word was that Shell is reopening a small office in Denver, the first major to make a new commitment to the onshore 48. Also apparently there has been some follow the "leader" in terms of Enron-style financing by the larger independents who have, in the past year, spent billions purchasing onshore producing properties, mainly from the Majors. Most of these purchasers did not staff up enough to really evaluate those properties but now are starting a sell-off to rid themselves of a portion of the incurred debt. This is benefiting the next lower tier of oil companies. At the same time, the low interest rates have trickled down to the oil patch and established independents have easier access to (low risk) money for the first time in a decade. Everyone is assuming gas will be the big ticket in the near future and the first stages of a new exploration cycle seems to be starting. However, beforehand, a lot of the small guys are perforating new zones in old wells and are finding a fair amount of bypassed production. East Texas, the Permian Basin (near Midland), the Anadarko Basin and the intermontain west are considered candidates for "resurrection". I heard several colleagues express serious interest in Ohio and Illinois! So although not full of cheer, the past convention was full of nervous optimism.
The Circumspect Saudis: One Hand Does Not Let The Other Know What's Going On
Pete has always been confused by the dual status of the larger OPEC national oil companies: they are both state-owned vehicles for producing oil in accordance with OPEC policies, and they are normal market participants with extensive and ever-increasing downstream commercial interests in the US. In this latter capacity, they play in the US / UK futures markets like any other large market participant, as they hedge for themselves and their multinational oil company clients.
But if the bosses back in Saudi Arabia not only know which way oil prices are going to go, but in fact set the price through production policy in concert with other OPEC oil ministers -- sort of like the world's ultimate insiders -- isn't it like shooting fish in a bucket to let their downstream entities play in the futures markets? If Pete could both set oil prices and then make bets with the rest of the clueless world about which way the oil price was going to go, he would do it and have a fine time too.
So does, say, Equiva, the Shell / Saudi-owned vehicle that markets through Shell in the US get to have this kind of fun? No, it claims. No one in Saudi Arabia ever lets it know what's going on.* Here's the complete q & a with the Shell Oil Products US Media Center q.v.:
Topic: Equiva Trading Company
Comment/Question: In view of the joint ownership of Motiva by Saudi Refining, which is owned by the government of Saudi Arabia, and the role that government plays in setting world oil prices, what specific measures does Equiva Trading use to prevent its inside information on the future course of world oil prices from providing an unfair advantage when trading on the US futures markets?
Neither representatives of the Saudi Arabian Oil Company nor the Saudi government consult with Equiva Trading on the formulation of crude oil pricing or give advance notice of pricing changes.
*Nonetheless, they do let it play and play big time. According to the Motiva web site, "Equiva Trading provides supply and trading services for Motiva [Motiva Enterprises LLC is a joint venture between Saudi Refining Inc. and Shell Oil Company] and affiliates of Shell. It has a substantial trading-for-profit business, which includes the buying and selling of crude oil, finished products and feedstocks for profit, as well as trading oil futures. Through its operations, Equiva Trading Company buys and sells more than 7 million barrels of hydrocarbons per day in physical markets, making it one of the largest petroleum supply organizations in the U.S. and the world." Maybe no one at Shell ever thought to ask their Saudi joint-venturers what they were going to do with prices. But Pete doubts it. Since it is a 'trading-for-profit' business, the real question might be whether it has ever lost money at it. Since we know that even all those brilliant J. Skilling clones at Enron managed to, uh, win some and lose some, it might be relevant to know whether Equiva has ever had a losing season. Shell, when asked, responded "Equiva's trading-for-profit business is conducted solely for the benefit of Equilon (Shell Oil Products US). Motiva does not participate in the profits or losses associated with that trading. The results of Equiva's trading-for-profit business are proprietary and will not be disclosed."
EIA's View of Global Carbon Emissions
Like IEA's forecast below, EIA's view (left figure) is not a pretty picture. q.v. But if carbon emissions are a problem, and nearly all seem willing to pay lip service that they are, then who or what is doing something about it? EIA was able to use the same "fun with statistics" approach that the Bush administration is taking with domestic emissions and apply it to world emissions. Everyone will be doing wonders lowering carbon emissions intensity (right figure), while actual emissions continue to grow unchecked. Hope Mother Nature doesn't catch on.
The World's Largest Oil Producers ...
are not the seven sisters, or whatever remains of them after decades of swallowing each other up, but the national oil companies of producing states. Here's how EIA figures the ranking:
|Crude Oil and Natural Gas Liquids in 2000|
|Saudi Arabian Oil*||2,889|
|National Iranian Oil*||1,337|
|Petroleos Mexicanos (Mexico)*||1,263|
|Petroleos de Venezuela*||1,187|
|Iraq National Oil*||940|
|ExxonMobil (United States)||913|
|Royal Dutch/Shell (Netherlands/United Kingdom)||832|
|Nigerian National Petroleum*||744|
|ChevronTexaco (United States)||716|
|*At least partially government owned||Source: EIA|
Roundup: Nuclear in 2001
Another record year. q.v. Very high capacity factors. But still no one has started work on a new nuke.
Apparently, the market has looked at the future, considered global warming, and has decided to ignore it. The left chart shows EIA's view on the fuels that will be used to generate US electricity in 2020. The right chart apparently shows why. But the implications are disturbing. Not only does the market entirely discount the problem of fossil fuel emissions, it apparently believes that capital costs are likely to escalate much more quickly than fuel prices over the next twenty years. That's certainly not how Pete sees it. Either that, or everyone's spreadsheets are set on stun (only looking out just beyond the end of next week). On the other hand, it looks as though it would only take a carbon tax of a few cents per kWh to even it all out.
The EIA report that is the source of the figures, Impact of US Nuclear Generation on Greenhouse Gas Emissions q.v., contains some particularly interesting analysis. For instance, the avoided emissions produced by using nuclear power instead of fossil fuels would approximate 3 billion metric tons (of course, the coming emissions trading protocol won't let the industry go back 40 years to come up with a number anywhere near that big). It also estimates that the marginal cost of the value of an emissions trading credit could be worth up to $348 per metric ton if the US were going to try and keep to Kyoto, even though it has already said it won't.* If the market were to assume that each new nuke gets a healthy share of what ever avoided costs are allowed, and the industry gets that action for the life of the plant, while each combined cycle turbine has to pay its share, nuclear power could be the low cost way to go.
*"In 2010, the carbon price necessary to achieve the targeted reductions [to Kyoto targets] ranges from $67 per metric ton in the 1990 +24 percent case to $348 per metric ton in the 1990 -7 percent case. All prices are in 1996 dollars. In the more restrictive cases, the carbon price escalates rapidly to achieve the more stringent reductions but then declines. Cumulative investments in more energy-efficient and lower carbon equipment, particularly for electricity generation, reduce the cost of compliance in the later years. The carbon prices represent the marginal cost of reducing carbon emissions, reflecting the price the United States would be willing to pay to purchase carbon permits from other countries or to induce carbon reductions in other countries. Since this is not an analysis of international trade, these prices do not attempt to represent an international market-clearing price for carbon permits or a price at which other countries would be willing to offer such permits." See appendix.
Quick Guide to the Missing Ingredient in US Energy Policy
What does the rest of the world know that the US has yet to learn? The figure above compares national gasoline prices and the importance of tax as an element of petroleum policy. Even though this is the big week for energy in congress, have they even considered the issue? Of course not.
Why Economic Modeling Is Difficult
Most modelers seek to apply the quantitative techniques that work so well in capturing continuous motion in the physical world to the economic and financial world. But does it work as well? Clearly not. Emanuel Derman who is the managing director of firmwide risk at Goldman, Sachs, and well versed in both the modeling required for physics and the modeling required for finance, examines the issue. q.v.
Is Exxon Engagé? Has BP Reduced Greenhouse Emissions To The Extent Claimed?
The major oil companies are still somewhat awkward when it comes to talking a good environmental game. Exxon is so new at it that each step seems halting and painful. It has just lurched from 'greenhouse gases are irrelevant,' to 'it is a serious problem that needs further study,' to the current 'we've been doing something about it for a long time, but just haven't told anybody.' q.v. Pete was only mildly amused by the current claim that "The CO2 emissions we've avoided ... [are] well above the entire CO2 emissions of the UK in 1998." Let it lurch around a bit more, at least it's trying. If and when emissions trading becomes an international protocol, they may well be allowed to sell those avoided emissions to the rest of us, so long as everyone keeps a straight face.
BP is a harder case. They've been playing the white hat oil company for some time (their corporate logo is now a happy green solar flower) and have mastered the rhetoric of a firm trying to do the right thing about reducing CO2. In fact, their chairman just proclaimed they were producing 10% fewer greenhouse emissions now then they were in 1990, and that they had met this goal eight years earlier than planned. q.v. The only problem is that when you look at the details (or look at what details they make available q.v.), they admit that their estimates of how much CO2 their production and refining segment emitted in 1990 could be off by 35%. It also appears that only 46% of business units reporting emissions were actually audited to determine whether their estimates were accurate. So they may be entitled to pat themselves on the back; or not. Hard to say. Still, it didn't stop them from doing so.*
*Pete is still looking into Shell's position. He stopped temporarily after reading Shell's claim, "It is possible that gas and renewables could meet almost 50% of the fuel requirements for power generation in Organisation for Economic Cooperation and Development (OECD) countries by 2020." q.v. It's possible in the same sense that Britney Spears may run away to join a nunnery, but don't bet on it. At best, it's like saying "Between them, Pete and Barry Bonds could hit 70 home runs this season."
There was a time when the US let the market determine what constituted good gasoline but this hasn't been true for many years. To get some idea of how far the business of blending gasoline by legislative fiat has gone, take a look at this map taken from a recent EIA report. q.v. Add the willingness to put up with a crazy quilt of regulatory schemes to the list of oil industry accomplishments set out below.
The Effect of Drilling ANWR
EIA has released its assesment of the difference to domestic oil production that would result if congress let the coastal plain of the Arctic National Wildlife Refuge be drilled. q.v. Contrary to the prevailing wisdom, the difference is not de minimus. Nor, of course, does it solve the US energy problem.
In Pete's view it would be best to permit the drilling, but the far more important issue is how to encourage the transport and commercial use of the 35 Tcf of gas already found at Prudhoe.
Consider the remarkable efficiency of the oil industry. Every time you fill-up, you are putting in a fossil substance that originated more than sixty million years ago, was brought up from a mile or more beneath the earth, transported thousands of miles, often from the other side of the planet, heated to hundreds of degrees and refined, distributed though a particularly extensive network to be available wherever you need it, and then sold to you for a comparatively inexpensive price. It is both one of the triumphs of human ingenuity, and a potential source of danger should it prove impossible to continue this remarkable system as we have come to depend on it. (Table from API, How Much We Pay For Gasoline q.v.)
Secretary Abraham's New Initiative on Nuclear Power
Reading between the lines more than a little bit, it seems that DOE's new nuclear plan q.v. involves the construction of a single new nuke by 2010 at one of the fetid former weapons sites left over after the cold war. Pete may not know much about PR, but how can anyone get a warm and fuzzy feeling about the manifold benefits of the new Generation IV nuclear technology if the government is going to plunk one down on the unholy, radioactive mess left by the weapons boys? Isn't the mess they left just the sort of thing that causes the public to question nuclear power? By the way, it looks as though DOE views the revival of nuclear power as the prerequisite to the hydrogen economy for transportation fuels.
Saudi View of The Long-Term
"It is therefore inevitable that in the coming decades the Kingdom of Saudi Arabia will continue to derive most of its income from the black gold that lies within its territory. It is also inevitable that the Kingdom's role in the politics and economics of the Middle East and, indeed, on the wider international stage, will grow in importance as the smaller oil reserves of other countries become more difficult and more expensive to exploit or, finally, are exhausted." q.v. While this may be a modest, and typically understated official appraisal that would be hard to quarrel with, it is not yet clear that many Americans and Israelis have understood the rather obvious implications: those who have the oil have the upper hand, those who need it will be at a distinct and growing disadvantage. The terms of the Saudi peace proposal may be a non-starter for many, but they may not look too bad in hindsight, a decade down the road.
Not particularly likely, but since cold fusion was so much fun, you might enjoy its successor. q.v.
What's Holding Back the Digital Revolution?
As Pete never tires of telling you, one of the best ways out of the petroleum problem is to make it possible for knowledge workers to do their thing without using two ton cars to take them to where ever it is they're going to do it. The nearest networked computer is all that's required. So the holdup on delivering really first rate network connections has energy policy implications, among other consequences. The investment in obsolete technologies such as phone and cable networks is so large, and the owners of all that equipment so politically powerful, that the digital revolution is not nearly as far along as it should be. This week the House passed Tauzin-Dingell, giving the regional Bells a lock on DSL. q.v. But is DSL good enough? David Isenberg has written a clear analysis of what should be happening in networking, but isn't. (qv1 or qv2) and qv3. Finally, Will Rogers' famous dictim 'we have the best congress money can buy' remains all too true. q.v.
It's a bit too jiggy for Pete's tastes, but Royal Dutch has published its view of the long-term energy future. q.v.
How the UK Government Will Meet Its Kyoto Target
Pete suggests below that the UK will have no problem keeping to Kyoto greenhouse gas emissions objectives because North Seal oil is about to start a rapid decline. Whether or not the decline happens as BP forecasts below, Pete got it wrong. The reason the UK can go around talking about coming in to 2020 20% below 1990 is, uh, one or two parts the magic of forecasting and a great many more parts the magic of combined combined cycle gas turbines. OK, lets see. Electricity demand grows while the nuclear sector starts to fade quickly away. So how can it be done? It turns out, fortunately, that just about no one wants to generate electricity using coal in the UK anymore. The fall off is so sharp that apparently the modelers had to put in an artificial residual constraint to keep their LP model from eliminating all new coal fired capacity. But the model certainly likes combined cycle turbines. Electricity from gas grows amazingly from 0 in 1990 to 307 TWh in 2020. The modelers were a bit more restrained on renewables, foreseeing a mere eight-fold increase over the period. q.v. (See annex D).
Very nice, because gas use implies fewer CO2 emissions than coal use for each unit of electricity produced. But could the difference in CO2 emissions between a MWh of gas-fired and coal-fired electricity possibly be that great? Pete couldn't find the factor used in the report, but doesn't remember the difference as being all that large.* It's also worth noting that the report clearly weaves in some speculative but mandated stuff. Unlike US modelers, who don't try to capture the effects of measures that don't yet exist but might be enacted, the UK forecast assumes " the obligation for renewables to form 10% of electricity generation by 2010" (King Canute lives), a climate change tax levy, and UK sulfur dioxide emissions restricted to a ceiling of 585 kilotonnes in 2010, reflecting a UK commitment to the ECs National Emissions Ceilings Directive.
Of course, the really interesting question is where will all the gas come from, particularly if BP is right about the North Sea decline rates.
Even though the report projects the UK will be able to keep emissions below 1990 levels, it is unwilling to elaborate how the government's official target of 20% below 1990 levels can be acheived, stating with dry deference, "In order to achieve the Governments domestic goal of a 20% reduction below 1990 levels in CO2 emissions by 2010, significant policy action not identified in this paper would be required." Why not just obligate renewables to form 50% of electricity generation? BP, in its flowery new green guise, probably wouldn't object.**
*He looked up what EIA uses later. q.v.
**Pete hoped this last bit was dripping with so much sarcasm that no one would take it seriously. But Rudolf Rechsteiner writes from Switzerland to suggest that since Pete may be right about gas, the UK would do well to go for as much wind power as it possibly can. He points out that the best German thinking on European use of wind is that wind is abundant (100 times current elctricity consumption onshore and more offshore); the windfarms need to be dispersed - from Russia to Morocco - to balance seasonal wind differences; existing hydro storage is sufficient for backup to balance windfree hours; but the grid needs to be improved to HVDC all over Europe. They believe that even this change will be a low cost option and losses of transport will be minor. He suggests several reports: Global Renewable Energy Potential and Approaches to its Use q.v. and A Comparison of Intra- and Extraeuropean Options for an Energy Supply with Wind Power q.v.
The IEA's View of Greenhouse Emissions
Pete refuses to fork out the generous sum the International Energy Agency wants for its World Energy Outlook, so he must wait for the mandarins to make free ones available several years later. Here is what IEA was thinking about emissions in 1999.
Stop Me Before I Sign Again
Poor California, which hasn't done anything right for years, announced that it might have to ask FERC to help get it out of contracts it just signed several months ago. q.v. (requires registration) Nothing like locking in prices long-term not far from the peak.
The Foundation for Taxpayer & Consumer Rights has produced a clear and interesting (although not necessarily neutral) report on the background to the present mess. q.v.
Assorted EIA Background Info on Natural Gas
Does Science Matter in Energy Policy?
Pete, whose credentials to even raise the question are a bit dodgy, has no problem answering in the affirmative. Yet year after year so many people advocate approaches that make no sense. They may be politically correct; they may be emotionally desirable. But, ultimately, the worth of many alternative energy proposals must be judged on how well they measure up to well understood scientific principles. The following examples are from the Energy Advocate site run by Dr. Howard Hayden. q.v. Ethanol from corn is always going to be a net energy loser, since it takes 129,600 Btu to produce a gallon but the energy value of a gallon is only 76,000 Btu. q.v. Even the very best electricity storage technology pales in comparison to gasoline in terms of energy delivered per unit of weight. q.v. And, of course, while energy policy is no substitute for energy, the US could have been doing something about securing energy but didn't. q.v.
Warm Enough For You? And Other Politically-Charged Questions
The previous quarter year was the warmest ever in the US and January was the warmest ever worldwide. What's worse, the record that the record-breaking three months broke was only two years old. q.v. Course, it may not be evidence of global warming, it may just be an anomaly. Then again, it may not be. In either case, see global warming bits above and below ...
Everyone is whistling in the dark and hoping for the best when it comes to the largely unregulated market for risk transfer instruments. No one knows how big the total thing is, but the part controlled by the largest banks, which if not regulated is at least reported, has a phenomenally large and growing notional value. The data banks report aren't all that useful, so it's not possible to know how much (if any, had everyone been doing their jobs right) was affected by the collapse of Enron. However, the banks stay away from commodity derivatives, so their exposure is not thought to be too large. Nevertheless, since Pete doesn't get too many chances to present graphs with a Y axis labeled in the trillions of dollars, here is what the Comptroller of the Currency reported in the most recent report on the overall size of the market. q.v. Needless to say, the banks' gross exposure, which isn't all that meaningful compared to net, exceeded their actual assets by up to 1,000 % (JP Morgan). Just hope the dollar doesn't take a dive, or hope they really are all financial wizards and masters of the universe.
The Gold Price of Oil
The ratio between oil prices and gold, averaged over long periods, used to be fairly predictable. This has certainly not been the case recently, however, as oil has become distinctly pricey in gold terms, suggesting either that gold prices must rocket upward, or oil prices must plummet in order for the long term relationship to obtain. Of course, the world's central banks are trying to unlink that long term relationship, so the data may mean nothing more than that they're succeeding. In any event, the data are all charted at the gold-eagle web site. q.v.
Dubious Energy Policy, Part 37
In which Senator Boxer and the Forces of Light prevent the Evil Oil Industry from drilling the California offshore, even though they purchsed the rights to do just that, while the rest of the country gets to pay for all those rights and years of litigation, and even has to give the Evil Oil Industry equivalent federal offshore leases in the Gulf of Mexico to boot ... q.v. While it's good pork for California, it's not clear why such a deal is anything more than an insult to everyone else. Why should California be allowed to usurp federal jurisdiction over the OCS, run up the tab to billions, and then ask everyone else to pay for it? How can the administration justify drilling ANWR when it is apparently going to reward states for hindering offshore production? Instead, let the litigation run its course, fight the good fight on jurisdictional grounds, and let the chips fall where they may. Sure, California is still hurting financially from their last dubious energy policy, but that doesn't give them the right to try and inflict yet another one on the rest of America.
Riding Down the Hubbert Peak: UK
Take a look at an obscure but interesting graph from a recent BP submission to the UK cabinet office energy policy review. q.v. Even though the key is illegible, put in anything you want for non-conventional production from the UK continental shelf (i.e. the non-green bits) and the decline is still surprisingly rapid. BP is assuming up to 70 % conventional recovery from the largest field, so the decline would be even sharper if these objectives aren't realized. It may not be too hard to keep to the Kyoto targets if there's not much left to produce, but try to imagine running the UK economy without all that nice North Sea tax booty.
Pete, ever skeptical about just how seriously to take BP's purported conversion to solar advocacy, reads with some surprise BP's recommendation that the best approach to deal with what certainly looks like a tricky problem is to subsidize solar rooftop installations. With any luck, global climate change will move the Costa Del Sol somewhere between Manchester and Leeds.
Has Anyone Seen This Man?
Talk about low profile. When did you last see him on the box? Meanwhile, the curious cabal of 'security experts' that for the moment controls foreign policy in Washington would seem to be preparing the world for possible attacks against Iraq, Iran, and/or, for laughs presumably, North Korea. Perhaps Mr. Abraham could at least phone in and remind the President that not everyone in the rest of the world finds Texan braggadocio that appealing. So they didn't get Osama: that's OK, no one thought they would. They did a good job of rattling the sabers, taking over another impoverished country, and showing us how weird Osama's minions look in orange prison clothes with their heads shaved. More importantly, Mr. Abraham might point out that the oil markets will end any prospect of quick economic recovery if the zealots don't stop fooling around.
Bush Plan On Global Warming: More Illusion
You may recall that Pete was unhappy with the dishonest approach the Clinton administration took on global warming. They made a commitment without figuring out how much it would cost or whether it could be done, did nothing to implement it, let emissions grow unimpeded, and then told the rest of the world that the US had measures in place that would produce the promised reductions even though the measures consisted of programs that didn't exist and would never be enacted if anyone had the nerve to propose them. Not surprisingly, the rest of the world didn't fall for it.
While the Bush administration was right to abandon the Kyoto commitment to hold US emissions to 1990 levels, since greenhouse emissions were by then hopelessly above that level and the deadline was too close to bring them down without economic catastrophe, one has to admire the chutzpah of the administration's new approach of promising to reduce emissions intensity rather than emissions. q.v. This is about the same as promising to do nothing. Here is the reason: CO2 emissions per dollar of GDP have been falling for a long time, and are likely to continue falling (Figure 98), even though CO2 emissions will continue increasing (Figure 100). The real underlying point is that energy use per dollar of GDP has been declining since the 1920s, even though energy consumption continues to increase. Energy consumption intensity has and will continue to decline, despite ever increasing energy demand, as will emissions intensity, since emissions are the direct product of energy usage. So reducing emissions intensity doesn't mean much. It certainly isn't the same as doing something about global warming.
An argument could be made that at least it shows that the administration is trying out its slickest dance moves on an important problem, but it looks like one left foot too many to avoid derision. The other measures in the Bush plan aren't worth much either, particularly 'clean coal' and the1605b voluntary reporting program. q.v. Needless to say, these programs have been around for many years and haven't achieved any measurable greenhouse gas reductions. This sort of rope-a-dope isn't going to get far.
Don't be confused by the promises to drop other pollutants by dramatic amounts, since with one minor exception (nox) they aren't greenhouse gases and will have no effect on global warming.
Here's a hint to the administration: read the part of your energy plan that deals with nuclear power. q.v. (page 15 ff.) You might also want to read the work of the International Energy Agency's best analysts on what could be done to reduce transportation demand and the emissions it causes. qv1 qv2. Unfortunately, these analyses assume that there exists a set of leaders interested in doing something about either import dependence and/or global warming.
Should OPEC Worry About Candian Tar Sands?
Zaki Yamani, former Saudi oil minister and an analyst with formidable insight, spoke recently about OPEC's strategic options. q.v. He foresees that there is not much that can be done to prevent further price declines without production cuts and doubts OPEC will get any real help from the rest of the world's producing countries on that score. He goes through key OPEC member country finances to show that the effects of a prolonged period below $20 / bbl would cause difficulties. Oddly, he is willing to entertain the possibility that OPEC could be persuaded to believe the US has the option of cutting oil imports up to 80 percent by using a combination of Canadian tar sands and heavy oil. Looks like a four flush to Pete, but Mr.Yamani is always interesting.
Ken Ainsworth has sent in the following comment: "To reinforce your skepticism abouth the impact of Canadian tar sands as an alternative to conventional imports, I thought I'd pass on this company's experience. We have a relatively sizable producing property in Wyoming which primarily produces high sulfur, low gravity crude. In a normal market, we take a sizable deduct from West Texas intermediate price to sell this stuff, like to the tune of $5-$6 per barrel. When the price of crude goes south of $18 / bbl, that deduct goes away, because the tar sand & heavy oil operations shut down, leaving a number of refineries in Salt Lake City and Billings short of feeder stock. The point to all this is that the heavy oil threat would only be viable in the event of $25 / bbl prices. And the former Soviet republics certainly feel like a more effective counter to that situation than does the tar sand / heavy oil threat."
Feast to Famine to Feast to ?
Natural gas should be relatively easy to forecast, since the key short-term demand variable, weather, returns to normalcy over more extended forecast periods and there's plenty of data on nearly all aspects of supply and demand. But almost every forecaster has been way wrong about gas for some years. The economic cost of missing the last spike has been enormous: there's a good case to be made that the unprecedented prices that prevailed a year ago were the basic cause for the current recession. To be fair, the return of low prices is one of the factors helping pull us out. So what lies ahead?
Matthew Simmons, also cited below, has prepared several other very interesting presentations on his company's website showing why prices fell so far so fast. q.v.
Despite recent declines, there's strong reason to believe natural gas demand will continue upward, particularly from demand for electricity generation. Randy Udall has sent in a quote from Calpine's 2000 annual report: " Calpine's fleet of modern highly efficient power plants will consume vast quantities of natural gas. In five years, 10% or more of the natural gas produced in North America will be used to fuel Calpine energy centers. Our annual gas bill will exceed $10 billion! We're exploring opportunities to bring LNG into the US, gas pipelines from Northern Canada and Alaska, coal gasificiation and other advanced programs that will keep the lid on gas prices." Even if Calpine has gone through something of an Enron-induced restructuring period like a lot of players in the independent electricity production business, and has to cancel quite a few plants,* Randy figures that we're still looking at 250,000 megawatts of new capacity over the next decade which means we need 17 Bcf per day, or 6.4 Tcf per year, just to keep those plants operating. This is in line with EIA's thinking. The only trouble is, this is an amount roughly equal to what we get now from Canada. Any one got an extra Canada to spare?
Another way to get a handle on how much gas supply will be dedicated to electricity generation over the next decade is to consider that the amount is roughly that required to heat 68 million homes. This doesn't mean that it's coming at the expense of 68 million households, of course, but if no one comes up with another Canada and the roller coaster heads back in to shortage in one of the coming winters, someone is going to have the unpleasant job of deciding just how much electricity load needs to be shed to keep houses warm.
*According to Goldman, Sachs "Calpine cancelled 34 7-FA gas turbines from GE and deferred 16 units in 2003. Combining this with Mirant s cancellation in January of 12 units in 2002 and deferring 7 units out of 2003, means that [GE's] Greenville shipping schedule for 2002 is at 300 units and the 2003 schedule is approximately at 200 units."
Giant Oil Fields
Twenty percent of the world's daily oil comes from 14 giant fields. Most of these fields were discovered, and went into production, well before 1960. According to Matthew Simmons, who recently examined the issue for the Hubbert Institute Newsletter, "The average production from the generation of giant fields discovered prior to 1950 and still producing in 2001 is 5 times greater than that of the fields discovered over the last decade." q.v. So the issue of how much remains in the giants is of considerable importance. Have these fields peaked? or will they last another 100 years? The answer is elusive, because basic data remains scarce, "there is surprisingly little public data on what most fields actually produce, including many of the worlds giant fields, particularly within all the OPEC countries where most of the true giants are located. There is almost no data on the excess productive capacity for any of these giant fields in terms of 'shut-in' or choked back daily supply. There is even less data on what the average decline rates for any of those fields might be. Few supply forecasters have ever attempted to model the future decline rates for these giant fields. The task, if performed, would be daunting as the data needed to create such a model is seriously lacking." Since production from giant fields accounts for more than 90% of the daily production of Saudi Arabia, the Emirates, Kuwait, and Iraq, it would be very helpful if the governments in question provided better data. It wouldn't hurt if the US made the acquisition of such data a policy objective.
Alaskan Crude Oil Production in 2001
Roger Blanchard, who correctly assessed the likely production from Alaska's Prudhoe Bay field for Pete's readers last year, has been good enough to send in a further report. As he explains, " Last year you had a note on your website concerning the Prudhoe Bay field which stated that in 2000, Prudhoe Bay field production only declined 3.0% relative to 1999 production. I sent a note stating that I felt the low rate of decline would be a short-term phenomenon. A years worth of field production data indicates that it was a short-term phenomenon. Prudhoe Bay* field production declined 9.00% (-51,030 b/d) in 2001 relative to 2000 (2001 production was 515,860 b/d). You also had a note on your website last spring stating that the U.S. DOE/EIA was projecting Alaskan oil production in 2001 would be higher than in 2000 (In the early months of last year the U.S. DOE/EIA was projecting a ~5% increase in Alaskan oil production for 2001). It was obvious early in the year that Alaskan oil production was not going to have an increase remotely close to 5% (It was realistic to expect a decline in Alaskan production, which is what I was predicting). Because of a surge in production late in the year, due to several recent field developments, Alaskan crude oil production only declined 2,490 b/d (based upon data from the Alaska Department of Natural Resources)." Here is his report for the most recent year:
Based upon data from the Alaska Department of Revenue, Alaskan crude oil production for 2001(1,024,331 b/d) was essentially the same as that for 2000, with a minor decline of 2,490 b/d. Significant production declines occurred in mature producing areas but a flurry of recent oil field developments largely negated the production declines. [The table] contains year 2000 and 2001 production data for mature North Slope producing areas.
2000 Production (b/d)
2001 Production (b/d)
% Production Decrease
(a). Prudhoe Bay includes the Prudhoe Bay field and the satellites Midnight Sun, Aurora, Polaris and Borealis
(b). Kuparak includes the Kuparak field, West Sak, Tobasco, Tarn and Meltwater
(c). Lisburne includes the Lisburne field, Point McIntyre, Niakuk, West Beach and North Prudhoe Bay State
(d). Endicott includes the Endicott field, Sag Delta, Eider and Badami
In the last 1.5 years, the Alpine, Aurora, Borealis, Meltwater and Northstar fields have been brought on-line. The Alpine and Northstar fields are the largest of the recent developments. Alpine was brought on-line in late 2000 and was projected to have a plateau production level of 75,000-80,000 b/d. In the later half of 2001 it was consistently producing 100,000 b/d. Northstar was brought on-line in late 2001. In the later half of December it was producing ~35,000 b/d. It is scheduled to have a plateau production level of 65,000 b/d.
Given this history, Pete wondered what EIA thinks is going to happen with Alaskan production. This time he stayed away from the short-term forecast, but was still surprised to see that the long-term forecast shows a large increase predicted when the Alaska portion of Naval Petroleum Reserve comes on line after 2010. Note that this is not the same as ANWR. q.v. It's not going to make a lot of difference to the onslaught of imports. That figure also appears.
Big Picture on Oil
Pete apologizes for being at least a quarter late in pointing you to the most recent Colin Campbell big picture piece. q.v. Campbell, whose views might politely be called dire, may or may not be right that the worldwide Hubbert peak is imminent, but it can't be too far off. Ah, but what about recent discoveries in the Caspian, off Angola, etc. Glad you asked ... "The market may hope that some important recent discoveries tell a different story with a happier ending. The long-known Azadegan prospect on the Iraq-Iran border was at last tested, delivering some 5 Gb* of reserves to Iran. Kashagan East in the north Caspian found about 7 Gb of high sulfur oil at great depth, demonstrating that the prospect was not one huge structure as hoped, but several independent reefs. The disappointment caused two major companies to withdraw from the venture, which is not a good omen. Promising deepwater finds continue to be made off West Africa, but it is becoming clear from the experience of the Gulf of Mexico that deep-water operations test technology and management to the absolute limit. Small accidents or setbacks can have devastating consequences in this extreme environment. Petroconsultants recently announced the total oil discovery for 2000 at 11.2 Gb, less than half consumption, and of that much was in the Former Soviet Union and in deepwater off West Africa." Everyone should consider Campbell's analysis carefully. Please note, "All of this is so incredibly obvious, being clearly revealed by even the simplest analysis of discovery and production trends. The inexplicable part is our great reluctance to look reality in the face and at least make some plans for what promises to be one of the greatest economic and political discontinuities of all time. Time is of the essence. It is later than you think." Compare and contrast: the National Public Radio story on world oil. q.v.
Uncle's Impact on Natural Gas
Nine of ten of all future US electric generating facilities will be gas fired for as long as any one can foresee. That statement should give you pause. Twenty five years ago it was illegal to fire a new electricity generating plant with gas; today it is encouraged, both because it is far more efficient to do so and because it is somewhat more environmentally benign, even though the resource endowment remains about the same. The federal government even subsidizes GE's market dominance in the new technology, through it's award-winning efforts to design even better combined cycle turbines. q.v. The turbines aren't just being used for summer peaking but for year round baseload, which means that competing claims are growing on the pipeline throughput formally reserved for seasonal commercial and residential heating load. The combination of moderate weather and a serious economic downturn made it possible for the natural gas industry to build winter stocks well-beyond the minimum safety level this year, so there's no reason to expect the conflict between gas-fired electricity and consumer space heating to become too pronounced for the next several years, but after that there could be a problem. Even though DOE has put together a first rate program, the issue is whether the government should be effectively subsidizing GE, and whether the funds might not be better spent to ameliorate the inevitable crunch.
The Current US Position on Global Climate Change
The administration has been so busy hunting down terrorists in Afghanistan there hasn't been much time to worry about global climate change. While the current program may not be as unspeakably bogus as the Clinton administration's plan, since the Bush energy proposal that Congress has so far failed to enact has some positive features, it would be hard to say the US is doing anything real about greenhouse gases. q.v. Naturally, Pete doesn't count carbon sequestration programs involving pristine forests in impoverished tropical lands, since they have no potential to address the cause of the problem, are not real carbon sinks, are based on a type of emissions accounting that would make even Enron blush, and are really just international hokum writ large. Same for "clean coal" programs, which seem to be the only thing the administration is actually spending big money on. Kyoto was flawed and contrary to US interests, but the problem is real enough. While the Bush policy is more honest than what preceded it, it isn't there yet.
Post-Deregulation: Time for the Adults to Step In
Whether or not deregulation was given a fair chance, it is time to admit that the very public disasters brought about in its name have been too costly. Bring back the adults and sobriety, and save the child-like piratical spirit for the true capitalist frontiers. q.v. Selling utilities their supplies should be a dull, predictable business managed by those with little tolerance for risk, rather than a celebration of the joys of volatility.
Nuclear Waste: The Political Class Jumps In
A bit of wishful thinking perhaps, but looks like it's time for the annual fun and games on Yucca Mountain. q.v.
Greenspan On Energy Policy
Not a bad overall summary of the situation. q.v. There's lots of stuff about letting market signals shine through unimpeded and that sort of thing, but he gets the general picture right. He even understands the dangers ahead for natural gas. Perhaps next time he'll pay more attention to energy prices before he raises interest rates.
"New Day" For US-Russian Energy Relations
Sounds a bit corny, but who knows? q.v. Only don't try to stand OPEC on its head just yet. Let the price stabilize in the mid-20s first, then start to play the card, slowly. But what about Russia and Iran and nukes? Read the Hersh piece in the New Yorker. q.v.
California and Energy Analysis
We all know that energy analysis is not only not a science, it's not even a black art most of the time at the hands of many practitioners. Actually, it's more like finger painting for more than a few. All too often a call to Miss Cleo or Nancy Reagan's astrologer would work just as well, and would be far less expensive. Still, California seems to have been plagued with some of the least prescient analysts imaginable, and it now looks like the state, having been rolled by every trader east of the Rockies, was unlucky enough to have energy analysts who also completely missed the stop-gap solution after deregulation failed. A while ago Pete commented, dryly he thought, that perhaps California could make up in volume the losses they were taking selling surplus electricity back to the market. Looks like they will be taking him up on it big time. q.v.
In Defense of Energy Analysis
Still, there are many very competent analysts who deserve a wide audience. Pete invites your attention to a version of a paper that reader Robert Erlich and others published in the Oil and Gas Journal last August. They argue that there is still much oil to discover in existing onshore fields that are often passed over as mature: "Today a case can be made that a campaign involving hundreds of onshore wells can be as, or more, profitable at lower risk than fewer wells drilled in high-risk, deepwater, or frontier locations. That is to say a program designed to discover 50 million bbl of reserves is just as possible in the cratonic interior as elsewhere given that we can detect tectonic features smaller than those exploited heretofore. " q.v. Pete certainly hopes they got it right.
Back to the Future Again
Pete came in two years ago with the price of oil near $10. It rose to the mid-30s. As expected, the world economy tanked. The events of the past week suggest that a much lower oil price is in the cards, with the effects of recession still kicking in and the Saudi oil minister once again trying to enforce discipline. Ultimately, the Russians should play along with OPEC, because however sweet the price may seem for those trying to pull the American economy out of the longest manufacturing slide since the great depression, the Russians can't afford $10 oil any more than anyone else can. And that includes the US.
Sure lower prices will help the US for the next month or two, but look what happens two or three years out to domestic gas. It was the shockingly high gas prices that lagged but inevitably followed the sharp drilling declines of 1998 / 99 when last the Saudis played the tough guy, much more than the briefly crazy oil prices, that proved to be the real aggravating factor driving the domestic economy over the cliff. And while it was these same prices that caused a lot of the domestic e & p industry to search for gas, the spike in gas prices hasn't been enough to make anyone confident that future supply will be up correspondingly. Anyway, gas drilling in the key Gulf and horizontal markets
is much more a function of the oil price than the gas price. When the Saudis start tying to crack the whip, the US had better be among the ones who jump.
The current drop in natural gas to $2+ / mmBtu may seem a return to market-enforced sanity, but it's not. It's a lesson to BP and Exxon that they can't yet start bringing the Prudhoe Bay gas cap south until some sort of long term stability is reached. And it can't be reached until everyone falls in line and holds both oil and gas prices at reasonable (that is, fairly high) and predictable levels for a while.
Without that discipline, the stage is set for the next rocket upwards and downwards. Is this anyway to run an economy, thinks Pete. Capitalism may work in the long run, but it sure can be painful to watch as a spectator sport. Pete, who remains dirigiste to a fault, continues to think it's high time for the federal government to come up with an energy policy. Whatever happened to all those congresspersons who kept saying the same thing when oil was at $35 / bbl?
Thanks to WTRG Economics for permitting use of the charts.
British Government on the Geopolitical Significance of Afghanistan
"Keeping Afghanistan broken and destabilized suits those who do not want the Caspian/Central Asian oil and gas pipelines to take one of the shortest and economical outlets over Afghanistan and Pakistan to the Arabian Sea. .... A sustained and institutionalised process of addressing concerns about terrorism or fundamentalism may produce positive results. Similarly, a more cooperative endeavour to stabilize the Eurasian heartland regions could bring handsome dividends to all regional and extra regional interests." q.v. Although written some time ago, the assessment is particularly interesting in light of recent and coming events.
EIA's Energy Analysis
EIA still thinks the long-term relationship between domestic petroleum and natural gas will continue to change, with gas production growing sharply to approach 30 quads in 2020, while oil production will fall or hold constant. EIA even thinks we'll be producing more gas than coal, without any growth at all in nuclear power.
Meanwhile, Europeans take note, the US will continue to do nothing about greenhouse gases, with 2020 emissions way, way above 1990 levels. q.v. Even energy use per capita is going to continue to climb despite all the talk about the importance of conservation q.v. And alternate fuels will grow faster than ever in the past but remain of minor significance.
Of course, this is not EIA's policy prescription; it is what the agency expects given current technology, law, and trends. A summary of the full analysis is available. q.v. The whole report is due out on December 21, 2001.
Nipped in the Bud
Despite persistent reports of $5 gasoline in parts of the midwest following the terrorist bombings, Lee Raymond, chairman of Exxon, took the unusual step of calling up the Financial News Network to report that he hadn't authorized that one and that prices would stay where they are.
Deregulation and Nukes
Although one imagines the industry may be less than flattered, America's favorite nuclear power plant safety supervisor is Homer Simpson. What if Homer were given free reign to let Mr. Burns make as much money as he wanted without the legions of regulators looking over his shoulder? How long until we are all walking around with little glowing green pellets lodged in our clothing? Even though we all know that Mr. Burns would never squeeze Homer out in a cost-cutting internal reorganization, at least some researchers think it may be a good idea to keep the rules around a while longer. q.v.
The Future Comes Home
Everyone knows the future is hard to forecast, so is it worth trying? For thirty years, the US government has had an extraordinarily competent, even brilliant, team of analysts working on forecasting the medium term energy future. They have been given special legal dispensation from having to be politically correct, and while they are only one of several groups in the world engaged in the exercise, they do it as well as anyone. But how good is that? Pretty good, when it comes it comes to supply and demand; indifferent to pretty poor when it comes to prices. q.v. Natural gas has always been a problem, especially when they completely missed the events of 2000/2001 until just before they happened, but so it goes. The future is like that sometimes.
It is worth the effort and money? Most certainly, thinks Pete. If only more of the political class would read their analyses and puzzle out the implications, we might be a lot closer to a sensible energy policy.
Saudi / Iran Rapprochement Continues
Ever since Henry Kissinger, US policy has been to use the Iraqis as a buffer to keep the Iranians from dominating the rest of the gulf states. It hasn't been much of a policy, as the Iraqis proved more of a threat than Iran ever did. So the Saudi's, still embarrassed by the extent of American involvement in their defense, have been cutting back on the purchase of Western weapon systems and gradually trying to come to better terms with Iran. This seems to be working. q.v.
When considered with the humiliating failure of the Israeli / Palestinian 'peace process' and the US's failure to deliver the 'fruits of the cold war' from the Caspian, this is just one more indication that US middle eastern policy needs rethinking.
The Trouble With Wind
Heiko Gerhauser writes from the UK with a response to some of the points favoring wind turbines made in the piece that follows. "Mr. Rechsteiner's comment that more recent worldwide electrical generating capacity has been added from wind turbines than nuclear power is highly misleading. The capacity factor of nuclear power plants is close to 90%. The average wind turbine manages less than 20%. Recent capacity added inland in Germany has capacity factors between 10 and 15%. Furthermore, most of the increase in nuclear output is due to a slight improvement in its capacity year over year and not to new plants coming on-line. You'll find in your own pages that this slight increase translated into 3.5% more nuclear output or 25.8 billion kWh in the case of the United States. 3000 MW of wind amount to around 5 billion kWh of output."
"Furthermore, wind turbines sometimes have zero output and at other times produce at close to peak capacity. During a storm, output from even a large area with wind turbines will go from close to peak output to zero within minutes. This puts considerable strain on the supporting electricity plants. In effect, the wind turbines have to be 100% backed up by natural gas fired power plants. There are good reasons not to rely on natural gas for baseload power, which is exactly what any significant fraction supplied by wind would entail. " [Pete's emphasis]
"Storage via hydrogen would require much, much lower electricity prices. Hydrogen produced from wind would only be able to compete with natural gas with input electricity prices of less than 1 cent per kWh."
"While wind turbine technology is improving, its costs are very site dependant. Halving wind speeds results in cutting output by a factor 8. Even in Germany where you can see wind turbines everywhere, wind turbine output is still lower than that of a single large nuclear plant, and nevertheless the good sites are running out, resulting in steadily higher, not lower costs for wind."
Choosing The Best Long Term, Non-Fossil Fuel Alternative
Readers may recall that from time to time Pete engages in a friendly discussion with Rudolf Rechsteiner q.v., member of the Swiss parliament, on the relative merits of wind versus nuclear power. Mr. Rechsteiner has again been good enough to send a very interesting letter with references explaining his position. Among other good points, he notes that more recent worldwide electrical generating capacity has been added from wind turbines than nuclear power, that the costs of wind continue to decline, that nuclear remains very dangerous, and that the US has the potential to be the Saudi Arabia of wind power.
While Pete continues to hold his ground qv1 qv2, he did manage to visit a large and apparently successful wind farm in central Pennsylvania in recent weeks and was impressed. Mr. Rechsteiner's letter is reproduced in full.
Golden State Electricity
Now that California is in the electricity business, it can't be having much fun. The weather has provided some relief, giving the state a temporary power surplus, so the state has been selling it back to the spot markets. q.v. The only problem is that it is selling for between $1 to $25 per megawatt what it paid an average of $138 per megawatt to get. Perhaps they can make it back in volume.
The return of $1.50 gasoline and $3 natural gas has taken the edge away from the administration's efforts to interest anyone in energy policy. The roof may still leak, but it isn't raining, so no one worries. The $600 tax rebate adds to the torpor: for many it will go to pay the remains of last winter's energy bills, which is pretty nice of uncle, but dubious conservation policy.
Congress, which was never interested in energy policy and never will be so long as smoke, mirrors, and rope-a-dope works so well, doesn't seem to care. So who is buying? Pete's not sure but it looks like the senior staff are still out selling. q.v. Dedication is good but given the weather, what would constitute a fixed roof? At a minimum, agreement that natural gas can't be the primary fuel for electricity generation for the indefinite future (implication: less federal slush for natural gas turbine r & d q.v.); that café standards for SUVs be reinstituted (Congress currently forbids it) and tightened; and that at least one new-design nuke be started (implication: extending Price-Anderson past 2002). That may not be much, but it would be the largest victory for sound energy policy in a generation.
BP won't release its second quarter numbers until August 7, 2001. But if you want to know what they're likely but not guaranteed to be, BP has provided a tip sheet with the key ingredients. q.v. Presumably, with a little more research into historical numbers, you could easily roll your own spreadsheet to forecast the quarter, much like all those fellows on Wall Street who get paid hundreds of thousands for the same thing.* Whether all forecasts are equal is another matter, but Pete likes the idea and hopes other majors will consider it. Looks like the US downstream sector is (was?) sweet.
* On the fun and games of forecasting, Ken Adams writes from Sacramento, "I've worked in Data Processing for the last 30 years. In the mid-1970's I worked for a San Francisco Bay Area manufacturing company. One weekend a programmer was in working on the 'forecasting' program and I asked him why we had to rerun the quarterly 'forecasting' job so often. It seemed like we had to run it a half dozen times every quarter. He told me that management didn't like the numbers, and so we would have to keep running it until we got the numbers they liked. Which was why he was in that weekend so he could 'fix' the program to give management the numbers they liked better. I asked him if it wouldn't be simpler for management to give us the numbers, but he told me that wasn't the way the game was played."
White House Science?
Is science political? Or is it just science? What do you do when you aren't sure of someone else's science? You commission your own, as the White House did with respect to the IPCC's warnings on global warming. q.v. Pete's not sure it was worth the effort, as the conclusions seem to agree for the most part, but that's science for you. At least we're more certain of what's uncertain, unless we're less uncertain of what's certain. But that's politics for you.
Reserve Replacement Costs
As energy becomes increasingly scarce, the cost of replacing oil reserves must be going up, right? Au contraire ... q.v. So why are domestic reserves falling off so fast with sales prices still in the $20s and replacement costs in the $5s? True, replacement costs are only a subset of actual operating costs, but there still should be plenty of incentive to book reserves.*
* Steve Andrews writes from Denver with a plausible explanation, "Looking at the US industry's replacement cost record, the 'anomalous' price spike in 1979-1985 period corresponds tightly with the most active 5-year drilling frenzy in US history. We drilled more wells during any five years of that stretch than we did during any 10-year drilling period (excluding those years) in our history. But heavily incentivized drilling didn't bring in the oil surfeit cavalry. Not finding a great deal of oil, at a great price--thus the spike. The 1998 price spike? Well, the industry was drying up, so rigs on shorter term contracts were being shut down. By contrast, some of the most expensive deepwater Gulf of Mexico drilling operations had so much sunk cost in them that they couldn't be shut down, so replacement costs briefly spiked. But after a sufficient period of time, once the longer-term contracts were completed in the GOM, the costs dropped...along with the swan song of drilling activity. When drilling started picking up mid-year 1999, three months after the OPEC/Mexico decision to cut supplies in early March (and actually mean it), it was the lower-risk, cheaper stuff that was being drilled again." Other theories?
Greenspan on Energy
Longtime readers may recall Pete's view that the only agency with a significant energy policy in Washington is the Federal Reserve, and unfortunately they get it wrong too often to be worth much. q.v. Pete takes the following slice of Greenspan-sprecht to be an admission that Pete is right: "Pending the development of far better insights into the actual impact of oil price spikes than currently can be gleaned from macroeconomic models, it is prudent to follow energy markets far more closely than our models would suggest is necessary." OK, you may not read it that way; heaven knows, he's always a bit elliptic. His remarks on energy have been published. q.v.
Letter from the AAPG Conference
Every once in a while, Robert Ehrlich has been good enough to provide a few observations. His most recent letter is from Denver: "I recently attended the annual meeting of the American Association of Petroleum Geology in Denver. My own observations as well as the scuttle-butt was largely a confirmation of Harold Simmons observations: the domestic hydrocarbon exploration/ production infrastructure is largely gone. A lot of white hair among the attendees. Few drillers, geologists, and petroleum engineers have entered the field and few of those separated from the field are planning on coming back. The accumulated store of "art" learned on the job is pretty much gone. Even the majors (BTW EXXON-Mobil was conspicuously absent as a convention sponsor) seem to believe that little competitive advantage accrues from in-house expertise; thus encouraging them to sign umbrella contracts (exploration, drilling, production) with the two giant service companies Halliburton and Schlumberger / Geoquest. Our new administration in Washington has no plans to encourage domestic on-shore exploration, perhaps as a product of our Pres.' dismal exploration record in Midland. The so-called oil guys in the government appear to be 'all hat and no cattle.'"
"This provides a good deal for the few old timers like me for the near future. However the oil E &P business is a bit different from the dot coms. Going against my native optimism, there is a real chance that the domestic E & P will not be able to deliver the goods in the near and medium term because we've eaten the seed corn."
|US Crude Oil Reserves for Selected States/Regions|
|Federal offshore, Gulf of Mexico||1760||2744|
BP Publishes 50th Edition of Statistical Review of World Energy q.v.
This year, BP has also published a similar review of the US market. q.v. Borrowing from one of the tables, you can see it wasn't a good decade for US oil reserves in every major oil producing state. The only exception was the federal offshore sector in the Gulf of Mexico.
The situation was much better for reserves of natural gas, which held their levels over the decade. Wyoming was the noticeable winner, while Kansas, Louisiana, California, and Oklahoma all lost gas reserves by significant amounts. Texas increased somewhat, as did Alaska.
The table to the left below lists the 15 largest importers of crude into the US in 2000. Note how much standings changed in just 2 years. Motiva Enterprises is a joint venture owned by Shell, Saudi Aramco and whatever is left of Texaco. q.v. It's not clear why Shell appears again as a separate entry. Presumably, PDV America (i.e. the government of Venezuela), second largest importer in 1998, was replaced by Citgo in 2000, which it owns. Data source: EIA.
2000 Crude Importers
|MOTIVA ENTERPRISES LLC||249,679|
|EXXON CO USA||243,027|
|MOBIL OIL CORP||188,245|
|MARATHON ASHLAND PETRO LLC||176,005|
|AMOCO OIL CO||175,382|
|VALERO MKTG & SUPPLY CO||164,019|
|KOCH PETRO GROUP LP||156,415|
|TOSCO REFG CO||154,189|
|CITGO PETRO CORP||132,662|
|SHELL OIL CO||101,194|
|COASTAL CORP THE||93,431|
|PREMCOR REFG GROUP INC THE||92,420|
|LYONDELL CITGO REFG LP||87,504|
|1998 Crude Importers||(000 bbls)|
|MOBIL OIL CORP||
|PDV AMERICA INC||
|AMOCO CORP USA||
|SUN CO INC||
|SHELL OIL CO||
|KOCH INDUS INC||
|CLARK REFG & MKTG INC||
|VALERO ENERGY CORP||
|LYONDELL PETROCHEM CO||
Advanced Reactor Designs
Pete is sure that once the Democrats end their fascination with technologies that don't work well enough to provide a useful answer, they will come to understand what the Republicans are beginning to fathom: the only way to deal with persistent long-term energy shortages and the causes and consequences of global warming is to support expanded nuclear power. It is more expensive in terms of initial capital costs but can be very competitive on a life-cycle basis, particularly if natural gas prices remain where they've been these last six months and interest rates stay fairly low. It is the only really environmentally acceptable alternative, however slow environmental groups may have been to catch on.
But the sector needs honest leadership on the vexing issue of long term waste disposal. Unfortunately, the Democrats have been extraordinarily irresponsible, killing everything put forward. That issue isn't going away anytime in the next several thousand years, so they'll have to deal with it sometime. Which leaves the issue of whether the basic technology is safe enough to support. Even though the current generation of US reactors have been working well and producing electricity at record levels, new developments in reactor design promise to make the next phase of reactor deployment even safer. q.v.
Japan Prepares to Spend $8 Billion in Iran
Having been turned away by the Saudis, the Japanese had little choice but invest big in a long term source of supply, so they went after and got Azadegan, Iran's largest oil field. q.v. So what if the US still thinks Iran is off-limits? Just more evidence that US sanctions are a bad policy that no one in the rest of the world takes seriously. Too bad Congress is about to renew them.
Keeping It In Context
With an oil man in charge in Washington and prices holding well above the levels of the past decade, the oil patch is a hotbed of feverish activity, right? Yes, well sort of: most activity for 15 years, but nothing like the frenzy of the late 70s and early 80s. Just as well, as a lot of that effort didn't produce much and contributed to the near collapse of the banking sector after Penn Square, Continental Illinois, and a lot of other banks got over-extended financing deep gas only to have the bottom drop out of prices. And that's not to mention the damage done to the rest of the domestic petroleum industry...
The extreme volatility of oil and gas prices makes it hard for a bank to rely on the magnitude of the revenue stream holding up over the life of almost any development project, with consequences for the extent to which booked reserves must be discounted. Given the historical record, even assuming $25 oil is going to hold up for a few more years could be an expensive gamble. What is needed is a sustained period where prices fall within a predictable range. An important objective of energy policy should be to fashion a mechanism that makes that happen, despite the anti-trust implications. To those who argue that OPEC has done this, remember how ineffective OPEC was after 1985 in light of sustained demand declines, and look at the valley in post-1997 prices when the damage that we're paying for now was caused by the Saudi oil minister trying to enforce cartel discipline. If the industrial nations have a right to assume OPEC won't let prices remain too high too long, the industrial nations should be willing to guarantee the opposite as well. Tax policy is one method, as the Europeans know well, but it is not necessarily the best method in terms of assuring a reasonable and stable revenue stream to the producing sector.
Graphic courtesy of WTRG Economics.
Should Refineries Be Exempted From Blackouts?
Everyone wants a pass from the expected 120 hours of electricity blackouts this summer in California, but there is reason to believe that refineries really should be exempted. The issue will come up at a hearing before the public utility commission on June 28. q.v. The case for the exemption is well made by EIA q.v. Even though many refineries are capable of cogeneration, most can't produce enough electricity to keep themselves going and the danger caused by emergency shutdowns is real enough.
Understanding the Saudis
Pete certainly doesn't claim to, but as it's becoming increasingly apparent that the fate of the US is inextricably linked with the desert kingdom, it can't hurt to try. EIA has just revised its country study with recent data. q.v. However, the ultimate web-based report remains Helen Metz's 1993 study for the Library of Congress. q.v.
Volume of Recoverable Gas Locked Up by Federal Actions
Recent reports revise way upwards estimates of the volume of natural gas that could be drilled but is now locked up due to federal administrative action, to the tune of 79 Tcf. q.v. On closer examination of the DOE release, it turns out that there hasn't been any change in the National Petroleum Council's earlier estimates of what is truly off limits. It's just that DOE is now willing to consider as off limits land that is subject to seasonal environmental restrictions and other routine land use rules. In addition, individuals associated with the firm conducting the study apparently regard as viable resources that which many would consider non-economic and well out of the range of normal reserves. qv2 qv3 qv4
[missing graphic showing how much more California gas prices have been]
Of course, credit risk remains a problem, and it is over the Rockies and probably the rainbow, but sometimes you might even think there was something behind California's paranoia. Source: EIA q.v.
Natural Gas Storage
Pete among others has spent a lot of bytes warning you that there could be problems next winter if enough gas is not stored this summer. Fortunately, it looks now as though the industry has been able to inject enough to stay on schedule, with good prospects for the rest of the season. According to EIA, "The higher levels of storage injections, which were over 100 billion cubic feet (Bcf) per week during the four weeks of May, are believed to be the result of the mild April and May weather, and also a result of lost demand for gas in the industrial and utility sectors. Based on EIA survey data and recent information from the American Gas Association on early-season storage additions, we estimate that, on an EIA survey basis, working gas in storage at the end of May was 1,494 Bcf ([EIA's] Figure 14). Heavy injections into storage during recent weeks have eased concerns about storage levels going into the fall, and together with mild weather have caused spot and near futures prices to fall to under $4.00 per thousand cubic feet (Mcf) from recent peaks well over $5.00 per Mcf. Continued high storage injections are expected for the remainder of the summer and gas storage levels at the beginning of the heating season (Nov. 1) are expected to be higher than they were at that time last year. This summer, however, the event of very hot temperatures and above-normal cooling demand in regions that use large amounts of gas for power generation would heighten the competition for gas between cooling and storage demand sources and lead to increases in gas prices."