In my earlier article, “2006: A Time of Transition ,” I looked back at some of the major changes and trends of the last year. The most obvious to me were 1) a major change in public consciousness about global warming and our vulnerability in oil and gas supply, 2) confirmation of peak oil theory in the data from last year’s supply and demand, and 3) some very weighty changes in the geopolitical balances of power, as influenced by oil and gas. Now let’s take a look at how those trends will develop in 2007.
First and foremost, I think it’s clear that 2007 is the year when renewable energy finally gets real. That is, it will make sense as an investment just on the return alone, no matter what your politics or your view on climate change may be. This tipping point for RE has been awaited for so long that the veterans in the wind and solar businesses (especially) have grown gray and wrinkled, waiting at the altar with a handful of long-dried brown flowers while their beards grew to the floor. But no more. This is it, baby!
Let’s take a look at just a small selection of the positive indicators.
The Energy Information Administration’s (EIA) Annual Energy Outlook 2007 projects major growth in all forms of RE: more biofuels, more CTL capacity, more alternative forms of transportation, more nuclear generation, more coal use, and an acceleration in the adoption of energy efficiency measures. In fact, the biggest growth sector in their projections through 2030, at 6.8% annually, is “Other,” a category that “includes liquid hydrogen, methanol, and some domestic inputs to refineries.” Their projected annual growth rate for ethanol? A stunning 11.8%!
Bellying Up to Ethanol
In the ethanol sector, 2006 saw a few darlings turned demons and some IPOs that went south so fast you’d think it was a migration of falcons. So should ethanol still be unloved? Not at all.
As any observer who is up-to-date on peak oil knows, the most pressing problem right now isn’t a need for greener electricity, but for liquid fuels. Solar and wind and other forms of RE are great, and clean, and we continue to love them, but they make electricity. What we need most urgently is a replacement for liquid fuels, particularly diesel and gasoline. As I will explain next week, there are some inherent limits to biodiesel production, primarily that it’s mostly made from corn in the U.S. and therefore quickly cuts into food supply. While ethanol is also mostly made from corn today, it can be made from a variety of waste products as well.
Ethanol production in the U.S. is set to double over the next 18 months and increase as much as 15-fold by 2030. Now that’s a growth story! So much so that Thomas Weisel Partners analyst Kevin Monroe wrote in his January 5 note to clients that the latter part of 2007 may see an oversupply of ethanol—although he primarily blames the demand side, calling for greater discretionary spending and higher Renewable Portfolio Standards (RPS) for ethanol.
Other Liquid Fuel Alternatives
Other than ethanol, the only liquid fuel alternatives are biodiesel, methanol, and various technologies for converting coal, natural gas, wood and other less energy-dense (and therefore less desirable) energy feedstocks into liquid fuels—at high production costs, both in dollars and energy. Let’s run down the numbers:
- Like ethanol, biodiesel production is also set to explode in a 16-fold increase from 25 million gallons in 2005 to 400 million gallons in 2030.
- Methanol has some good potential in specific applications, but as an industry it’s still very much in its infancy and has negligible production.
- Coal-to-liquids, or CTL, which uses the Fischer-Tropsch process originally developed by the Nazis to synthesize liquid fuels from coal, is a promising direction. We have relatively large supplies of coal (never mind the “200 years’ worth” estimate, by the time it gets used for everybody’s Plan B, it will be closer to 80 years’ worth), and if some of the new “in-situ” recovery techniques prove economical and practical, such that you can get the hydrocarbons out without destroying entire landscapes, it might not be all that horrible as a substitute. But the EIA anticipates only 5.7 billion gallons of CTL production by 2030, equivalent to about 8% of the production we anticipate from biodiesel and ethanol by then. And other methods for converting less preferential feedstocks, such as gasifying oil shale and wood and then turning that gas into a liquid, are not yet production-scale technologies.
- Demonstrating their serious intent in Congress, Sen. Barack Obama and other Midwest senators have already offered the Biofuels Security Act, which would require the United States to use 60 billion gallons of ethanol and biodiesel a year by 2030. Along with Sen. Jim Bunning (R-KY), he also introduced the Coal-to-Liquid Fuel Promotion Act of 2007, a package of loan guarantees and tax credits that would promote large-scale production of CTL fuels. Other Congressmen are offering their own energy solutions, such as Rep. Roscoe Bartlett’s Energy Farm Bill, which would offer federal R&D support to make farms “net positive” in both food and energy.
Hard Times for Hydrocarbons
Not only is the Democratic majority leading the way in Congress to push for alternative fuels, but they’re also gunning for Big Oil. It looks likely that they will repeal some of the 2004 tax cuts for oil and gas companies, to the tune of $5 billion. Not only that, they are making a concerted effort to collect royalties on drilling leases, which went unpaid under the Bush administration due to a clerical error. Add another $9 to $11 billion for that. And where will that money go? Into a new fund to promote conservation and help develop renewable energy. Compared to the dearth of investment in renewables under the last six years of leadership by Big Oil cronies, that’s a HUGE shot in the arm for renewables.
Further, the oil industry can expect a new attempt at passing a federal law against price gouging by oil companies and the elimination of another set of tax breaks that weren’t intended for them, but that have benefited them anyway—“a break they didn’t earn, deserve or need” says Rep. Jim McDermott, D-WA.
But the biggest potential new cost—untold billions more—may come from another proposal that would raise taxes on oil inventories. “That would significantly raise the cost of holding inventory” and “prices will go through the roof,” causing oil companies to reduce their stores, according to Red Cavaney, president of the American Petroleum Institute. This is very bad news indeed for a country increasingly dependent on imports.
The Peak Comes Into View
The oil industry isn’t going to like 2007 for another reason: the peak of global production. As I mentioned in my 2006 wrap-up, it appears that we may have reached the global peak of crude oil production in 2006, including the unconventional types that were expected to increase overall production for another few years. We already hit the conventional oil peak in 2005.
The outlook for oil production in 2007 isn’t promising. Exploration for oil fields is coming up with gas more often than oil, reflecting the reality that we’ve already plucked the low-hanging fruit and we’re now getting into the iffy prospects. Oil companies are reducing their exploration budgets, preferring to prospect on Wall Street for M&A targets than to risk drilling yet another dry hole. Dry holes are now outnumbering wet ones by about four to one.
It also appears that previous forecasts were overly optimistic, both for growth in reserves and growth in new oil and gas fields. “An Evaluation of the USGS World Petroleum Assessment 2000,” a 2005 paper from the American Association of Petroleum Geologists, compared a 30-year forecast by the USGS (US Geological Survey) from 1995 with the actual additions that materialized in the world through 2003. They discovered that in the intervening eight years, or 27% of the forecast span, “only about 11% of the estimated undiscovered oil and about 10% of the estimated undiscovered gas resources were discovered.” This is not an encouraging revelation given how often these USGS surveys are cited as if they were biblical truth. The only “growth” that was more or less on target was the growth in reserves estimates, which are, as any peak oil student knows, notoriously unreliable and politically skewed.
Unfortunately, the “Invisible Hand” isn’t showing itself yet to correct the supply issue via higher prices. For a multiplicity of reasons, not the least of which is futures speculation, crude and gas prices remain low relative to the recent past, with light sweet crude now at an 18-month low. Consequently, expansion plans are being tabled, particularly for some of the more exotic (though eagerly anticipated) sources like the tar sands of Alberta.
In some cases, ironically, the price of oil itself is stifling oil projects. For example, at Shell’s Alberta oil sands project, the cost of producing a barrel of oil after a planned 100,000 b/d expansion will be six times higher than the cost of a barrel when the project first started!
Let’s take another example: offshore oil production. Just Saudi Arabia’s efforts alone to offset the depletion of their major fields and increase their “spare” production capacity have drawn some 58 offshore drilling rigs away from the Gulf of Mexico. That’s over a third of the 148 rigs that we had in the Gulf in 2001. This competition from the Saudis has caused the cost of renting the rigs to skyrocket from about $190,000 per day last year, to $520,000 per day this year. That pushes them out of the feasibility zone for some of the mature, marginal wells in the Gulf. All of which adds up to less domestic production of oil and a greater reliance on imports.
In dollar terms, it adds up to about $20 trillion in new investment over the next 25 years just to keep supplies up with demand, according to a recent IEA estimate. But as frightening as that number is, following the lessons of the examples we just discussed, we should expect that number to be even higher when the day arrives. Much higher!
Higher Prices, More Attacks Ahead
All of this has prompted some observers to note that we seem to be setting ourselves up for another crisis and a serious price spike, when (not if) the next major shortage event occurs (another bad hurricane season, a successful terrorist attack on a Saudi oil facility, Iran blocking the Strait of Hormuz, Russia playing hardball . . . pick your poison).
Stay tuned for more next week on the big picture for 2007.