February 27, 2014
Peak International Oil Company CapEx Spending
Gail Tverberg has excerpts from a Steve Kopits presentation on how big oil companies are cutting their capital expenditures budgets on exploration and drilling (Upstream) spending. The price of oil isn't high enough to justify enough drilling to maintain and increase oil production rates. Kopits argues that exploration and production costs are rising much faster than prices and have been for years. Those costs have now gotten high enough that oil companies can not economically justify spending enough to maintain production.
This is how Peak Oil happens. When costs go even higher than the price a monopolist could charge production is going to drop. Says Kopits:
Not in a Supply constrained model! In a Supply constrained model, the price goes up to a price that is very similar to the monopoly price, after which you really can’t raise it, because that marginal consumer would rather do with less than pay more. They will not recognize [pay] your marginal cost. In that model, you get to a price, and after that price, there is significant resistance from the consumer to moving up off of that price. That is the “Supply Constrained Price.” If your costs continue to come up underneath you, the consumer won’t recognize it.
Steve Kopits also shows up a lot in the comments of blog posts by UCSD energy economics specialist James Hamilton. For example, see the comments of Hamilton's post on US tight oil production. Did you know that without increased US tight oil production and Canadian oil sands production that global oil production would have dropped since 2009?
In a few graphs: Big oil publicly traded oil companies are spending more and producing less.
I believe we do not yet have the technologies needed to painlessly handle declining world oil production without going thru a deep global economic depression. If we are lucky oil global oil production will remain flat until we have such technologies. But I do not believe we are going to be lucky on this.
Randall Parker, 2014 February 27 07:17 PM
No mention of the sharp drop in the price of natural gas, which is presumably a substitute in some uses, as a reason why producing oil gets less profitable?
"Did you know that without increased US tight oil production and Canadian oil sands production that global oil production would have dropped since 2009?"
Production would have dropped, without some of the production? Man, I never would have seen that coming. That's brilliant!
The US could replace a lot of petroleum with CNG/LNG and batteries. I'm glad I made my move last year; with Midwest gasoline prices heading toward $4/gallon again, averaging over 100 MPG keeps it relatively painless.
I would bet that Elon Musk will be able to take every last cell of the 30 GWh of battery packs he expects to build and put it into a vehicle.
A steep increase in oil prices doesn't necessarily have to lead to a deep global economic depression. For example the United States currently uses about 6.7 billion barrels of oil a year at around $100 a barrel for a total cost of $670 billion dollars. If the the price of oil rises to $150 a barrel then an extra $335 billion has to go towards paying for it which is 2% of the USA's 16 trillion dollar GDP. As US growth is usually about 2% or so that's enough to cause a normal recession but not a depression unless something else is contributing to a poor economy. And that's the case even if the increase in oil price is very sudden. But even such an increase doesn't have to result in a recession as we know that with appropriate economic management countries can take this sort of a hit without slipping into recession. Australia during the Global Financial Crisis is an example. Other developed nations tend to be less dependent upon oil than the United States while developing nations vary. And while oil prices could increase by more than 50% that doesn't seem likely to happen outside of short term hikes because we now know how economies react to $147 a barrel oil and the world is better prepared now to cope with large oil price increases than it was 10 years ago.
I do not see why a drop in natural gas prices is going to make oil production less profitable. In Alberta cheap natural gas makes it much cheaper to extra oil from tar sands. Also, expensive natural gas boosts the return on extracting oil from fields that have a lot of natural gas mixed it. Massive amounts of natural gas are now getting torched in North Dakota tight oil fields because the pipelines aren't available to move the natural gas to market.
Also, oil can be traded over long distances much more easily than natural gas. The big oil companies making decisions about the North Sea, West Africa, Central Asia, or Iraq aren't going to cut CapEx in these places just because natural gas is cheap in the United States. Within the US natural gas drillers have shifted toward drilling for wet gas and oil because liquids are far more valuable than dry gas.
Granted, natural gas can be converted to liquids. But so far this isn't making oil cheap.
His point is we'd be globally past peak if not for the US and Canadian unconventional oil production increases.
Historically, the United States doesn't spend more than about 4.5% of GDP on oil. Above that level the economy has a hard time of it. Business and consumers have lots of other things that also have to be purchased and money diverted to oil cuts demand for other things. Higher oil costs feed into making things more expensive. As oil becomes more expensive oil consumption declines and therefore production dependent on oil goes down.
Oil consumption for purposes other than transportation has been dropping for decades. The utility of oil for transportation is much greater than for other uses. So more expensive oil causes non-transportation uses to drop. For cars batteries cost too much and offer too little range. For trucks that travel long distances batteries are even worse as a substitute. For ships the advantage of oil is even larger and for aircraft the advantage of oil is huge.
The problem we face at this point is that most of the non-transportation uses of oil have been cut already. The technologies needed to substitute away from oil in vehicle transportation have been slow in coming and are still quite expensive. Smaller vehicles, lighter (but more expensive) materials, and more efficient (but costlier) drive trains are our main ways to cut back on oil in transportation.
If everyone was as rational about energy use as you are we would be in far better shape with regard to Peak Oil. But the vast majority aren't thinking about the potential for global oil production to fall. If global oil production starts declining in the next 5 years we are so not going to be ready.
Randall! You're a smart guy. Use some of your brain power to take Econ 101. Sheesh, use the Kahn Academy.
Thanks for the kind words, but personal rationality isn't able to overcome government policy. For reasons unknown to me, the CNG versions of conventional light vehicles carry price tags far higher than I'd expect based on the cost of gas tankage and fuel systems. I suspect this is because NG likes to burn lean, and lean mixtures require special, very costly catalysts to convert NOx. The cost of EPA certification to perform vehicle conversions is astronomical, perhaps because of this.
I'm hoping that something like the SWRI dedicated EGR engine will fix this problem, as well as dealing with NG's low flame speed by adding "reformate" to the inlet gas stream.
"His point is we'd be globally past peak if not for the US and Canadian unconventional oil production increases."
Sure, I understand that. I just don't think it's a particularly cogent point. Peak oil projections were based on oil producers not adapting, not searching for "unconventional" sources. Like Ehrlich's side of the Simon–Ehrlich wager, it was projecting static behavior patterns on an intelligent species, a fundamentally mistaken thing to do.
Like predicting that somebody is only going to walk 20 more feet, because there's a tree in their path, and not accounting for the fact that they're capable of stepping around it.
Randall, any major increase in the price of oil will of course be a kick in the pants for the economy, but a 50% increase is recession territory, not a prolonged depression. Of course oil could increase by a lot more than 50% but I don't think that would last for long. While it does take time for people to adjust, it's not that difficult to reduce oil use. The US could cut passenger vehicle oil use by about 40% simply by adopting European or Japanese style fuel efficiency standards without the use of any hybrid or electric vehicle technology. But hybrid and other methods of saving fuel can and do pay for themselves. For example, you won't find a conventional gasoline powered internal combustion engine taxi in Australia. They are all either LPG powered or Priuses. And that's in a country with no fuel efficiency standards. The only requirement we have is for the last six years when you buy a new car it has to have a sticker on the windshield saying what the fuel economy is. All we have is a higher tax on gasoline and diesel and people responded to that. Our gasoline is close to $5 US a gallon and if and when it reaches that price in America people will respond in a similar way as Australians. Here it seems a done deal that a considerable number of vehicle kilometers will end up being powered by electricity. We only have one electric bus in my city at the moment but it seems clear that diesel buses can't compete and will gradually be replaced, followed by our natural gas buses. And if batteries cost $400 a kilowatt-hour and there is no decrease in oil prices our taxis would be likely to go electric thanks to lower maintenance costs, although improved hybrids may delay or prevent that. The average cost of charging a taxi during the day will probably be very low in Australia. It's noon now and my state is currently getting about 30% of its electricity use from rooftop solar. As solar increases further in capacity its going to continue to push down the daytime price of electricity. And of course an increasing number of people will probably start using electric cars for private use. While I don't expect private electric car use to take off immediately there is obviously a lot of potential there with our high gasoline prices and high car maintenance costs. And every drop of oil that isn't burned in a passenger vehicle is oil that can be used in an area where it is more difficult cut consumption such as air travel.
"Sure, I understand that. I just don't think it's a particularly cogent point. Peak oil projections were based on oil producers not adapting, not searching for "unconventional" sources. Like Ehrlich's side of the Simon–Ehrlich wager, it was projecting static behavior patterns on an intelligent species, a fundamentally mistaken thing to do."
The point I hear is not that they won't try other avenues, but that it won't be enough to keep with growing demands at a cost effective manner. Production from easy cheap sources is not just going to stop going up but start going down and more expensive alternatives have to take up for the fallen production as well as generate additional production to meet the ever increasing demand.
Yeah, eventually. EVENTUALLY. But, not nearly as soon as projected, because people adapt, and all predictions based on people not adapting are fundamentally flawed.
Fracking wasn't predicted in advance, but something like it was going to come along, which is why a prediction based on people just running the same old behavior into the ground was never going to be right.
The adaptation to the end of easy-to-get oil will include substituting non-oil energy supplies where oil was previously standard.
In other words, demand destruction and Peak Oil.
There's a lot of cheap, easy to get oil left. It just happens to be controlled by oil dictators and national oilcos who either let their oilfield infrastructures go to rust or pace production to save some for the great grandchildren. Lifting costs are still cheap across much of the oil producing world. Sadly the US dollar is losing its value faster than a cobra strike, and oil is priced in dollars. Call it peak oil if you want, but the oil sheikhs are pretty put out that the price of oil in real value is far too low for them to do all the things they want. Budgetary breakeven costs are killers, but those are political decisions not geological facts.
Gail Tverberg has been putting out the same doomer message for decades. Doom is coming any decade now, believers! We'll be dead, but we should celebrate our perspicacity now, while we can. Pat ourselves on the back, form a circle reach around, and sing with the echoes.
BTW, if the person didn't predict the current US/Canada oil and gas boom ahead of time, they get no credence when they predict the end of that same boom. Doom skeptics are usually much smarter than doomers, who keep singing the same tune for decades while the skeptics are inventing and innovating better ways to do things.
Unless you want to advocate for lots of invasions and colonial occupation armies the behavior of the national oil companies is just a fact of life. Also, the starving of national oil companies by sovereign governments (most notably Venezuela) is a fact of life. They aren't going to pump the oil out of the ground at the rate a private company would do it.
Higher prices have enabled much higher cost fields to be brought into production. This has prevented (so far) a global decline in oil production. But the addition of the higher cost fields has not enabled oil production to resume growing at the rate of historical trend before 2004. The old trend has been broken.
Prices have gotten high enough to cut demand in some regions as fast as demand has grown in other regions. Prices can't grow high enough to enable even more expensive oil to be brought on line fast enough to enable global production to grow like it used to.
But will natural gas stay cheap? The drilling rate required to keep production up in tight gas formations is really high.
Shale hydrocarbon reserves are vast. The wells are used up quickly but the potential number of wells to be drilled are high. The costs of drilling more wells is included in the business plan, and should not be marveled at by outsiders as some sour surprise deal stopper.
On site production costs per barrel of oil for shale varies between about 30 and 70 US dollars a barrel, varied by site and production group. The costs have been going down. Gas is often a side product from oil production so even with low cost it is a plus. Gas can be used onsite to drive machinery at well heads.
But will natural gas stay cheap?
It doesn't have to. When crude oil is $17/mmBTU and requires expensive refining, natural gas at $10/mmBTU is a bargain. Co-fueled engines can switch back to diesel at any time, such as during periods of high NG demand. Such engines can leverage a small amount of diesel fuel to use a much larger amount of a cheaper fuel.
The costlier fuel will also drive electrification.
Will US natural gas prices remain cheap? I presume so by international standards, but I do expect US prices to rise. There are several reasons why I think this. Firstly I assume the US has been extensively geologically surveyed and so the lowest cost fracking sites used first. As these are gradually exhausted costs of gas from new wells will increase. And while the Federal Funds rate is still only a quarter of a percent at some point interest rates are likely to rise and this will increase the cost of the capital intensive job of gas extraction. If the US builds infrastructure required to export a lot of what is now stranded natural gas that could greatly increase prices, but I think that by the time the US could do that international gas prices will have fallen. I think international prices will fall because at their current level renewables are very competive with gas. Major importer Japan is rapidly expanding its renewable capacity and it remains to be seen just how many reactors they will decide to operate. South Korea will expand its own renewable capacity as will other gas importing nations. China will continue to import gas for quite some time to help prevent mass die offs from coal pollution but its expanding renewables program will help keep a lid on prices. And Australia and other countries have bet tens of billions of dollars on gas prices remaining high and built a massive amount of export capacity that will be competing with any additional US gas that enters international markets. I expect to see a slump in the development of natural gas resources world wide before too long. Just how many years before it happens I don't know. If I knew these sorts of things I'd be really rich.
I'm not at all sure the lowest cost sites are being extracted right now. I mean, you'd expect the best coal reserves would be mined, but along comes Grand Staircase-Escalante National Monument. A large part of the US is locked up under control of a government which is, at least for present, hostile to fracking. Should that change, a lot of natural gas would suddenly become available for extraction which is off limits now.
Brett, there is a huge amount of coal at the Grand Staircase National Monument but it is stranded and will never be used. At least not with US coal use declining and international coal prices looking set to fall further thanks to concerns over pollution and the declining costs of renewables. A lot of Australian coal projects have been cancelled and they probably had easier access to international markets. And of course if the US increases natural gas gas exports that is also going to keep coal prices down. Also, if cost of lobbying and political capital spent to get permission to frack for gas or drill for oil in national parks is regarded as just another business expense, then the cheapest sites are probably being exploited first.
Randall, when you said: "E-P, If everyone was as rational about energy use as you are we would be in far better shape with regard to Peak Oil" I think you were acknowledging that we really do have the tech we need, right now, to deal with Peak Oil. The fact is, E-P is saving money - his choice is economically optimal, even without internalizing the real costs of pollution and security of supply.
Which brings us to a more important point: the enormous indirect costs of oil:
Your intuition is that Peak Oil could cause a deep, lasting depression. In other words, our current dependence on oil could cause, say a loss of GDP of $3T for, say, 10 years. That's enormous. That's far greater than the cost of converting from ICE vehicles to various forms of electric (PHEV, HEV, EV, EREV, etc).
Or think of it another way: $3T per year is a lot of money per bbl of oil consumed in the US. Give it a discount and just tax fuel $5 per gallon (and rebate it, to eliminate the fiscal effect on the economy). That would cause a really fast transition away from oil.
One thing I didn't mention earlier about why US natural gas prices might go up is climate change. If the US climate continues on its trend of becoming more Australia like with more extensive and long lasting droughts that's going to have a large effect on water supplies and fracking can remove a great deal of water from human use. Less rain, or less reliable rain means higher costs for water used for fracking and oil extraction and less tolerance for polluting of water supplies as somebody's got to use that water. The water problem appears to be a major reason why more fracking isn't going on in China at the moment as they are water constrained. It's certainly a problem for frackers in Australia. Companies are using methods to reduce water use but they do cost money.
Fracking does not require water. It can be done with many different fluids. There's at least one process that uses propane, and I wouldn't be surprised if someone uses or intends to use carbon dioxide.
The idea of using CO2 or C3H8 as the fraccing fluid is interesting, because laying the delivery pipeline before completing the well would allow the pipeline to deliver the fraccing fluid and remove it again instead of using trucks. Pulling the fluid out of one well allows it to be piped to a nearby well, so long as the pipelines are not in use for production.
Here we just use water because its the cheapest option. Sometimes the water that comes up is apparently suitable for human consumption but mostly it's not. We have over three and a half thousand coal seam gas wells in Australia with about four quarters of them in Queensland. Almost all the gas produced is for export. A gas power plant was just shut down recently because it was more profitable to sell the gas overseas than sell electricity in Australia's wholesale market.
" there is a huge amount of coal at the Grand Staircase National Monument but it is stranded and will never be used."
And my point was, the "monument" was created specifically TO strand it, and see to it that it never gets used. Otherwise there'd be mines there right now. I was simply pointing out some evidence that there are fossil fuel reserves on Federal land, which are lying untapped for no other reason than that the Federal government didn't want them tapped. (In that specific case, because they'd compete with a campaign contributor's mines, but currently just out of a hostility to fossil fuels.)
But that can change, and if an administration came into office which wasn't hostile to fracking, gas reserves currently going untouched could be brought into production.
IOW, the reserves currently being tapped are not necessarily the best, they were chosen for multiple reasons, some of them political.
Brett, I meant it is economically stranded whether or not mining is allowed there. I can't see any rail lines within 100 kilometers of the place. And even if transport infrastructure was in place, what would be done with the coal? Thanks to cheap natural gas and the declining cost of renewables demand is way down in the US and exporting it would require long distance overland travel, a coal terminal, and longer ocean transport to reach markets than competitors. I doubt digging it up would be profitable.
As for whether we have the technology to deal with Peak Oil: It depends on the amount of preparation we do in advance. With our current technology we need to do more preparation in advance if the peak is in 2015. If we have 2025 technology for a peak in 2025 then we can do less in advance.
Imagine world oil production starts declining in 2015. Then I do not think we can avoid a severe economic downturn. People won't start adapting to the change instantly. A couple of declining year in oil production could be passed off as a temporary thing with the oil companies loudly claiming that the solution is to open more areas for drilling. So I expect adaptation will come slowly.
Another factor: the rate of the production decline. The sharper the decline the more we have to prepare in advance.
Look at most people with their cars. A pretty small fraction of the car driving public buy a new car in any given year. The shift to buying more fuel efficient vehicles was slow even in 2007 and 2008. People saw expensive gasoline as a temporary thing. I expect they'll do the same thing next time. I could be wrong about how fast the public will wake up. I hope so.
Batteries are getting cheaper. CAFE standards are rising. The longer we go before oil production starts declining the better we will be able to handle it.
> I suspect this is because NG likes to burn lean, and lean mixtures require special, very costly catalysts to convert NOx. The cost of EPA certification to perform vehicle conversions is astronomical, perhaps because of this.
Yet the consumer-level cost of conversion doesn't seem prohibitive, according to a couple hours' reading I did. Some say cars don't get such a great range on NG, but that seems a modest issue. Thing is, conversion may be semi-affordable, but not for everyone ; not in a sagging economy. I don't believe in the alleged growth since 2008 -- at all, let alone at median wage level. So who is gonna fund it. Ah, Congress will just cut some semi-useless govt services, should be no sweat.
My question is whether NG can work as well for heavy trucks, farm equipment, or ships. For trucks it seems like the answer should be yes (in contrast to the case with batteries?), but unlike a car user who can use a fairly affordable small compressor, a trucker will need access to powerful compression stations in order to refuel. So a slew of those would have to be built nationwide, and that might be fairly expensive.
I don't know about farm equipment -- seems a lot of powerful compressors, and/or high-pressure pipeline, would be needed. $$... ?
Besides all of the above, if huge new demand for NG appears, even though there may be some supply elasticity it seems like the price /BTU will begin to move somewhat toward the (present) price of oil.
> Besides all of the above, if huge new demand for NG appears, even though there may be some supply elasticity it seems like the price /BTU will begin to move somewhat toward the (present) price of oil.
Unless there really is a huge amount of profitably-recoverable tight NG is the US, which I understand is a possibility, as opposed to the known-to-be-limited amount of tight oil in the US.
But with so much QE/ZIRP money sloshing around with nothing better to do, I think only time will tell how much profitable tight gas we have.
RS, here in Australia about 10% of miles driven are powered by LPG. It's not the same as methane as it's more energy dense and doesn't need as large a tank and it causes less of a drop in performance. There is a government subsidy for purasing LPG cars or converting to LPG. To me it seems pretty pointless to have a subsidy to for LPG but no actual fuel efficiency standards that could do much more to reduce oil use, or even a similar subsidy for going electric. It's almost as if the subsidy exists to benefit our domestic LPG industry. Funny that. But at least the subsidy will have saved some lives by cutting air pollution in our cities. Currently we are moving away from LPG thanks to its increasing price. So while the US is thinking about moving towards using LPG/natural gas for transport, a country that has tried it is doing the opposite. I find that slightly amusing.
At least two chains of truck stops in the USA are installing LNG dispensers (news items go back 2 years or more). I recall a news item about LNG for rail locomotives, I forget the particular line but the positioning of the stations allowed trans-continental routes. LNG is certainly capable of powering heavy equipment, the issue is of availability and convenience (off-road machines aren't good candidates).
Sorry, previous comment was by me. (New computer.)
I presume it would be easy for trains to go CNG as it would be fairly easy for them to haul around a big tank of it if necessary.
LNG tanks are bigger than diesel tanks, but a tender is about all that's necessary.
CNG makes no sense for trains, and apparently is sub-optimal for OTR trucks. Local trucks and cars are going CNG.
> LNG is certainly capable of powering heavy equipment, the issue is of availability and convenience (off-road machines aren't good candidates).
In that case, what's the fate of hi-tech farming if oil prices rise more?
Or does subbing-in of CNG and LNG in transport leave oil prices bearable, so that farming and long-haul trucking can keep running 'ordinary' liquid fuels as usual -- for X years, anyhow -- ?
RS, farm equipment is a good canidate for electrification. In much the same way that mining has been gradually going electric, agricuture will probably do the same. But propane/butane tractors are available and some farmers run theirs off biodiesel. Using natural gas or propane/butane for road vehicles will help keep oil prices down, but this might only happen in the US due to its low natural gas prices. However, a lot of electrification of transport appears likely to happen in the rest of the world. International natural gas prices may drop in the future but I would guess electrification will win out over natural gas for most short haul road vehicles with one important reason being its potentially much lower greenhouse gas emissions.
I realize now that I may have been confusing people with my terminology. LPG is Liquid Petroleum Gas which is propane and butane. Australia's conventional natural gas resources have a lot of those two gases in them. Our coal seam wells mostly produce methane, but that is mostly intended for export and will be converted to LNG (Liquid Natural Gas). Later in the year Australia will start expending a gigawatt of electricity on compressing it which at the moment will mostly come from coal and if our current Coal-ition government has its way it will come from coal for many years. Looking it up I see Australia is a world leader in CNG (compressed Natural Gas) buses. This surprised me. I assumed the US with its low natural gas prices and other countries with worse pollution problems would be way ahead. Anyway, our taxis were almost all LGP powered, but they are now switching to Priuses thanks to their lower operating costs.
I didn't know mining was going electric ; most interesting. Do you think there are enough rare earths to electrify a great deal of farming worldwide? Especially given you also seem to like windmills, which would compete for them?
I read somewhere that more rare earths development was beginning to take place in various parts of the world, in response to PRC's using rare earths as a bit of a geopolitical lever. But as we all know, certainly easy to say, not necessarily either easy or hard to do. Those petroleum bosses we've been discussing, who upped their capex or at least credit-capex these past several years, were no doubt hoping things would come out better than they seem to have come out.
RS, rare earths aren't really rare and no one particular rare earth is vital for electrification. Electric motors don't need supermagnets in them, if they are used they are basically entirely recyclable, and while lithium batteries appear to currently have the edge it's just one of many potential energy storage methods and if required lithium can be obtained from seawater and this has already been done commercially. Current reserves of lithium on land are good for over a billion electric cars. Lithium might be old hat long before we reach that point, but it still represents more than one electric car per 10 people on the planet and if they are self driving that's more than enough to provide door to door transport for everyone. We mine rare earths in Australia and we load the ore on ships and send it to China because all things considered it is cheaper than refining it ourselves. (And by the way, at least one of the mines is using a combination of wind and solar power to save on diesel costs.) There is a clear limit to how high rare earth prices can be jacked up before other countries spit the dummy and start refining them themselves, so China has only a limited amount of power to control rare earth prices. And once an electric car or battery pack is built it's built. The situation is completely unlike internal combustion engine cars which need to be infused every week with tens of kilos of petroleum derived liquid, which is itself getting kind of rare and has in the past had its supply manipulated for political purposes. Electrification is reducing opportunities to be jerked around.