Trouble with the curve

What goes up

Must come down

    - Blood Sweat and Tears

I'm coming down fast

   - John Lennon ( Helter Sketer)

Greetings

        Ugo Bardi  has a done a few recent posts addressing his model for the decline in oil production after a peak.    He suggests that the curve may not have the same shape going down as it did going up, in line with a statement by Seneca:

"It would be some consolation for the feebleness of our selves and our works if all things should perish as slowly as they come into being; but as it is, increases are of sluggish growth, but the way to ruin is rapid."

        One real life illustration of this phenomenon can be seen in the context of fishing harvests, which go along fine, and then crash.   Bardi suggest that the the rapid decline after the peak is caused by the response of the fishing industry to m a situation where it is harder and harder to find the fish -   an increased investment in fishing  boats.  seehere  He says:

   "There are several historical examples of the Seneca cliff; in the case of fisheries, it is especially evident in the case of the Canadian cod fishery and for the Caspian Sturgeon; but it is evident also in the case of the UK fishing industry. Note, in the figure above, the steep decline of the landings of the late 1970s, it is significantly steeper than the growth of the left side of the curve. This is the essence of the Seneca mechanism. And we can see very well what causes it: the start of the decline in production corresponds to a rapid growth of investments. The result is the increase of what the authors of the paper call "fishing power" - an estimate of the efficiency and size of the fishing fleet.

        Which brings us to decline rates for oil.    The post peak decline rate of an oil field is not a fixed thing.  It is depends on the way the field is developed and operated.  Using enhanced oil recovery techniques, one can take more in the early years, but at the expense of a steeper decline at the end.    A very interesting paper  called, "Giant oil field decline rates and their influence on world oil production",  provides an excellent review of the way that decline rates may vary.

"Prolonged plateau levels and increased depletion made possible by new and improved technology result in a generally higher decline rates. Detailed case studies of giant oilfields suggest that technology can extend the plateau phase, but at the expense of more pronounced declines in later years (Gowdy and Juliá, 2007)."

      One chart , Table 4, (which i can't figure out how to copy) shows how the decline rates have increased over time.  Land based fields which plateaued in the 1960's declined at -4.2%,  in each succeeding decade the decline rate increased, and by the 2000's the rate was -10.7%..  The off shore fields were even more dramatic. see Table 5.  There was divergence between OPEC and non-OPEC fields, which was presumably caused by the difference in philosophy between for profit corporations, and state run operations.  However even OPEC fields are showing increasing decline rates in the 1990's and 2000's.     

       Thus, the fields which were developed first have lowest decline rate, once they peak.    At that point we will be relying on the growth in the later fields.    When these later fields peak , things get interesting, because their decline rates drag down the total.    We can vividly see this with the fracking, which is the only development keeping the total production from peaking.   The decline rate for fracked wells is very large, averaging between 60-90% in the first three years.l.     

      Initially, the post peak decline is slow, as it is a blend of declining fields with fields which are growing, or at least not declining.  Hirsch suggested in his report, that we could reasonable adapt to decline rate of 2%, but that 5%, would trigger a recession.    

 For perspective, it's useful to know that IEA estimates that even with additional capital spending the decline   rate for all fields is   6.7%  for post peak fields.   Otherwise it would be 9.0%

       As we know, capital spending is way down right now due to the precipitous drop in oil prices. 

I'll close with this quote from an executive at Total, the French oil company , from a few days ago.  See here

””There is a natural decline of five percent a year from existing fields around the world. That means by 2030 more than half of the existing global oil production will disappear. There is an enormous amount of money that needs to be invested to get another 50 million barrels per day of new production

Time to pay the Red Queen

They say It'll kill me

but they don't say when

     -Eric Clapton

How long
do I hafta wait

    -Jorma Kaukonen (Hesitation Blues)

Greetings

        Hope you all have had a nice Labor Day.  Still time to can those tomatoes and stack that wood somewhere dry.

        Here's a nice little something to inspire you.  It comes from  Tom Whipple, a retired CIA analyst,

        He points out that the the only thing between us and the world  peak is the US  "tight oil",  which most experts (including the EIA)  agree will be unable to increase after 2016.(or even earlier see this, Oil Industry insider says peak in 2014).   Nevertheless the EIA, predicits a long plateau, assuming the oil companies will drill greater numbers of wells.

         But, oil companies are already having trouble increasing production right now. 

      " Usually missing from optimistic estimates for future U.S. shale oil production is any discussion of just how fast production from fracked wells declines....The EIA recently noted that for North Dakota to increase its oil production by 20,000 barrels a day (b/d) next month, it must bring 94,000 b/d of new production online. At Texas’s Eagle Ford basin, it will take 152,000 b/d of new production next month to increase net production by 31,000 b/d."

       Talk about your "Red Queen Sydrome"  !  The decline rate for fracked oil wells is quite stunning.    Whereas, production from  traditional wells takes years, even decades to peak, and then decline at about 6%,  fracking wells will decline almost immediately, at rates up to 75%/ per year.

The average flow from a shale gas well drops by about 50 percent to 75 percent in the first year, and up to 78 percent for oil, said Pete Stark, senior research director at IHS Inc.

"The decline rate is a potential show stopper after a while," said Stark, a geologist with almost six decades in the oil patch. "You just can’t keep up with it.

Here's another way to look at it. Ron from "peakoilbarrel" analyzes one of the fracking fields. " I... it takes almost 7.6 barrels of every 10 barrels from new wells just to make up for the decline in production from old wells. And of course that number increases every month."

        Trying to keep up with declines, is an expensive proposition.  And an oil price of "merely" $100, may not provide enough cash to fund the ambitious drilling campaign needed. as this article makes clear:

"Last July the government agency, which has collected mundane statistics on energy matters for decades, quietly revealed that 127 of the world's largest oil and gas companies are running out of cash.

They are now spending more than they are earning. Profits have lagged as expenditures have risen. Overburdened by debt, these firms are selling assets.

The math is simple. The 127 firms generated $568 billion in cash from their operations during 2013-2014 while their expenses totalled $677 billion. To cover the difference of $110 billion, the energy giants increased their debt load or sold off assets.

Given that the gap between earned cash and spending stood at a modest $10 billion in 2010, that's a significant change for the industry as well as the global economy it fuels.      

     This insvestment problem is not limited to US. Both private companies and state run companies are subject to it. For an interesting analysis of how oil prices affect various OPEC countries see this article.   The "break even price"  is the price which allows a county to continue to operate the governmental including its various welfare programs).    Last year, on average, the  break even price  increased  by 7%, while the price  only rose by 1.9%.   At the current price,  Venezuela, Iraq, Nigeria, Algeria, and  Iran are already running in the red. 

     Will this affect future exploration in OPEC countries?   It already has.  The CEO of Saudi Aramco recently said that it has "        launched a program to reduce its capital cost by 20%, as "even at Saudi Aramco, project costs have roughly doubled over the last decade."   He notes that  lack of investment is " likely to put downward pressure on supplies over the longer term..",  .  

  The world's oil fields are in decline, so the world needs to replace close to 40 million barrels a day of new capacity within the next two decades, Mr. Al-Falih said. A lot of those resources will be complex and expensive, such as shale oil and gas and heavy oil projects.

"So, to tap these increasingly expensive oil resources, oil prices will need to be healthy enough to attract needed investments," said Mr. Al-Falih

 see here

       These fats are not unknown to the "folks in charge"  Mr Whipple is in fcat reporting from Falls Church in Fairfax county, Virginia - the epicenter of the "establishment"  both in terms of political power and wealth ( Fairfax County, in  suburban DC, is also the 3rd wealthiest county in the US ).
                   But, most politicians, like the execs of the oil companies that fund them,  are taught to focus solely on the next  quarter, or the next election.  So, from  that perspective, 2016 is still a long way off  

------

The Peak Oil Crisis - When?

For those following the world oil production situation, it has been clear for some time that the only factor keeping global crude output from moving lower is the continuing increase in U.S. shale oil production, mostly from Texas and North Dakota. Needless to say, once the fabled “peak” comes oil and gasoline prices are certain to move higher, triggering a series of economic events – most of which will not be good for the global economy.

Thus the key question is just how many more months or years production of U.S. shale oil (more accurately call light tight oil) will continue to grow. Many have answers to this question ranging from the “next year or so” on out the middle or end of the next decade. Some forecasts as to time remaining until the “peak” arrives are politically tinged. No politician, business manager, or even investor wants to hear that serious economic problems affecting their lives may be only a few years away. Fortunately for these folks, there are many forecasters available to spin stories about how “technology” will enable US shale oil production to continue on into the dim future of the 2020’s – which most of us really can’t comprehend or plan for.

Usually missing from optimistic estimates for future U.S. shale oil production is any discussion of just how fast production from fracked wells declines. Most fracked wells are adequate or at least economic producers for three years or so, after which their production is so small that they need to be replaced or reworked to keep a meaningful amount of production going. As shale oil production grows larger and larger, more and more wells will have to be drilled and fracked just to keep production level. At some point there will be a cross over between new wells coming on stream and old wells going out of production, so output will start to slip. The EIA recently noted that for North Dakota to increase its oil production by 20,000 barrels a day (b/d) next month, it must bring 94,000 b/d of new production online. At Texas’s Eagle Ford basin, it will take 152,000 b/d of new production next month to increase net production by 31,000 b/d.

There is no doubt that the shale oil drilling industry has made many significant technological advances in recent years. Multiple wells are now being drilled from a single drilling pad – foregoing the need to move drilling rigs and setting up all the expensive infrastructure needed to frack shale wells. For a while shale oil drillers were drilling and fracking longer wells, which reduced the cost per barrel. Now we hear that drillers are increasing production per well by pumping more fracking materials down each well, and some are saying this will be enough to offset any decline in prices.

Currently US shale oil production is about 3 million b/d and in June output increased by about 100,000 b/d. About half of US shale oil production comes from North Dakota, where winter conditions are so harsh that production has been falling during the winter months.

The two major forecasting agencies, Washington’s EIA and Paris’ IEA, are both more pessimistic than is generally known for they both foresee US shale oil production leveling off as soon as 2016. The reason for this is that drillers will simply run out of new places to drill and frack new wells. While new techniques of extracting more oil from a well are possible, there is need to look closely at the costs of these techniques vs. the potential payoff.

The shale oil situation in Texas is somewhat different than in North Dakota, for there you have much better weather and two separate shale oil deposits. The recent growth in Texas’s shale oil production has been much smoother than in storm-prone North Dakota and has been increasing at about 44,000 b/d each month. So faras can be seen from the outside of the industry, production in both states will continue to grow for at least another year or two – but then we will be at 2016.

The government has never gotten around to publishing the assumptions that go into the forecast that U.S. shale oil production will stop growing circa 2016. The biggest difference between EIA/IEA and independent analysts is the government forecasters do not see a precipitous drop in shale oil production following the peak. Instead they see a period of flat production followed by a gentle decline stretching well into the next decade. Such a gentle end to the shale oil “bubble” can only assuage fears of a calamity. This projection on a gentle end to U.S. shale oil is at variance with outside forecasters who note that shale oil wells are pretty well gone in three years and simply do not see where the oil to maintain production levels will be coming from for another 10 or 15 years after the peak.

Independent analyses of U.S. shale oil generally come to the same conclusion that production will peak in the 2016-2017 timeframe, but as noted above see a much faster decline than does the government.

There are however, other factors that could become the primary cause of world oil production peaking in the next few years. The first is the turmoil in the Middle East. A lot of oil production in the region has dropped off line in recent years for political reasons and Iraqi production is endangered. The spread of militant Islam could eventually threaten other major producers in the region as could the Arab-Israeli standoff.

A more recent development having serious long-term implications for the oil industry is the growing disparity between the cost of producing a new barrel of oil from the Canadian oil sands or deep below the ocean and the selling price of that oil. A recent study points out that many planned oil production projects are simply not economical at today’s oil prices, which have been relatively stable for the past five years as costs continued to soar. Oil companies are already cutting back on new drilling projects which will have little impact on current production, but will be very significant five years or so from now.


Originally published at Falls Church News-Press.

Burning Rubber

You gassed her up, behind the wheel

Your arm around your sweetie

In your Oldsmobile 

- Tom Waits ( Heart of Saturday night)

I'm riding with lady luck

Freeway cars and trucks

      - Eagles

Greetings

       For years the American experience has been entwined with cars.  Americans are always talking about freedom.  What does that mean?   Getting in your car, burning rubber, and getting on the road!  

      So, it's a little sad to see that after all these years of more, we've hit " peak miles" .  As is nicely analyzed below, its a result of falling wages, higher gas prices, and stagnant MPG.   

       How about the EV?   Can EV's turn  that around?   Bring back the good old days?    There's a lot of talk about new battery technology, coming down the pike.  Due to arrive in 2016 or 2017.   Interesting timing.  2016 may also mark the year that oil production begins in descent from the plateau.  Even the optimistic EIA seems agree with that.  So, one scenario is a rise in gas prices giving the EV sales a boost, moving us into the new era.

       One has to wonder, though, whether the car buying public will be able to afford these new EVs.   The average Joe/Jane has seen his/her income drop by about 7% since it peaked in 2002.     Those who can afford to buy, still prefer trucks and SUVs over cars.

        Of course the key question is decline rates.  If the decline rate is slow, the EV technology with have a chance to "mature" and bring down costs.  A more severe decline rate, may cause  economic disruptions, reducing sales.   Here is an interesting analysis of the "giant" oil fields.  These 507 fields.  provide 60% of the total world production.  Approximately 80% are past peak, and have an average decline rate of 6.5%.  The addition of various technical solutions, such as additional drilling, can put off peak, but result in a steeper decline.  Fields that peaked in the last decade have a decline rate of 10%.

      The Hirsch report makes it clear that it is very difficult to handle the transition off oil, if you wait and start after the decline starts.    Here is one scenario that puts that in stark terms.    First she  figures out the rock bottom amount needed to run essential service - agriculture, rail, trucking, ambulance, police etc.  She puts that around 20% of our total use.   Then makes an  estimate of the decline rate.  She assumes it will start out slow and pick up to around 10%.  Then see how long it takes to get us into trouble.   Hmm.....

    "With a 4/5/6/7/8/9/10/10 /10/….. decline rate scenario, we’ll dip below the essential transportation fuel needed 16 years from now."

---------

This graph, from “economonitor,” is very interesting because it contains so much relevant information. (However, note one detail: the title of the graph, “Miles Driven” is somewhat misleading; it should be “mileage”, as the text of the post clearly says.) The relation of mileage to hourly wages is a parameter worth examining because it tells us a lot about the “systemic” efficiency of road transportation. What kind of efficiency can we actually afford?

Now, the graph shows a clear “peak mileage” which occurred around the year 2000, when Americas could afford the highest mileage from their cars in history. It was an efficiency peak of the road transportation system. But then, this efficiency diminished. How can we explain that?

The data of the graph depend on three factors 1) the cost of gasoline, 2) the average hourly wage, and 3) the average mileage of cars. Let see first the behavior of oil prices, which determine gasoline prices.

You see how oil prices spiked twice during the past 50 years, with the first and the second (ongoing) oil shocks. Amazingly, after the start of the first oil crisis, the mileage per hour worked increased, despite the steep price increases. But the opposite took place with the second oil crisis, mileage per hour worked rapidly decreased. Something must have compensated the price increase during the first crisis, but that is not occurring during the second. Why?

Of the other two parameters involved in the mileage curve, hourly wages play only a minor role. In real terms, wages have remained more or less constant in the US since the early 1970s, as you can see in this graph (source: income inequality)

What changed a lot in this period is the technology of cars. The first oil shock in the 1970s was, indeed, a shock. People reacted by actively seeking for technological solutions which would increase the mileage of their cars. And these solutions were easy to find: simply reducing the size and the weight of the monster gas guzzlers of the 1960s did the job. Look at these data (source):

You see how quickly mileage increased throughout the 1970s – it nearly doubled in less than 10 years! And you can see how quickly people forgot about the oil problem once prices collapsed in the second half of the 1980s. The graph also shows that, with the second oil crisis, mileage restarted to increase, but by far not as fast as in the 1970s. There is a reason: it is difficult to optimize something already optimized. This we call ‘diminishing returns of technological progress.”

In the end, it looks like the “peak mileage” of the late 1990s is the real one. In the future, the a combination of factors which led to the peak will never return. Oil depletion is destined to make oil less and less affordable, even though market oscillations may hide this phenomenon. Wages are unlikely to grow in real terms after having been static for the past 40 years. And technological miracles are unlikely. Even the Toyota Prius, technological marvel of our times, can only bring us back to where we were 15 years ago in terms of mileage per hour worked. As long as we remain within the paradigm of “road vehicle powered by a combustion engine” we have reached the limit of what we can do.

The result of the reduced overall efficiency of transportation we can see in this last graph (fromadvisorperspectives). In the US; people are driving less. Perhaps there are behavioral factors involved, but “peak mileage” suggest that they are doing that because they can’t afford to drive more.

h/t Giorgio Mastrorocco