/* Added by TWP, 10/12/2012 */ /* End of addition */

One of the live oaks that bless my home

Saturday, September 29, 2012

The Discrete Charm of Drilling in America

This blog is a companion to "The Discrete Charm of Living at the Peak."

If you follow national media, you are probably convinced by now that in 10-15 years from today, the United States will be producing enough oil to become independent of foreign oil suppliers.  (In most predictions of energy independence, Canada and Mexico are treated as the almost domestic oil suppliers.)

So can the United States of America be dependent only on domestic crude oil production and imports from Canada augmented by Mexico? This scenario is not as nonsensical as it may sound, if (1) the United States continues to destroy demand for petroleum just as it has in the last four years; and (2) crude oil imports from Canada increase dramatically, because Mexico will not be able to export much crude oil in 5-10 years from now.  Since 2008, the U.S. has destroyed demand for 2 million barrels of crude oil per day, which translates into an average annual destruction rate of about 0.5 million barrels of oil per day.

If each year of the next decade the US petroleum demand diminished by 0.5 million barrels of crude oil per day, we would be consuming only 19-5=14 millions barrels of oil per day in 2022.  If we also imported 4 million barrels of oil per day from Canada (1.6 million barrels more than the current 2.4 million barrels of per day), only 10 million barrels per day of demand would be left.  The domestic production of crude oil might increase to 7 - 7.5 million barrels of oil per day from the current rate of 6 - 6.5 million barrels of oil per day, but this increase will be difficult to achieve.  The remaining demand for 2.5 - 3 million barrels of oil per day might be satisfied by switching to domestic natural gas and natural gas liquids.

Sun sets on the Suncor Millennium open pit tar sand mine in Fort McMurray, Alberta, Canada. Source: Robert Kunzig, The Canadian Oil Boom, National Geographic, March 2009.
An increase of 1.6 million barrels of oil  per day in US imports would require Canadians to double current production from the tar sands in Alberta.  Given the dire environmental impacts of such doubling, my proposed Canadian imports solution is iffy at best.
Click on this chart to see it in high resolution.  The US DOE EIA data for crude oil production and active rotary rigs have been put into an Excel spreadsheet by Mr. Dave Room of the US Association for the Study of Peak Oil (ASPO), and plotted in a similar form.
The chart above shows monthly production of crude oil in the United States versus the number of active rigs drilling for oil.  I have assumed that on average a newly drilled well starts producing after a six-month delay. In the chart, the monthly oil production rates are color-coded as deep red for the oldest data, and follow rainbow colors up to deep purple for the newest data.

The monthly oil production and the number of active rigs decreased almost monotonically each year between 1987 and 2000.  The years 2000 and 2001 (hues of blue), showed the largest scatter and a reversal of direction.  Between 2001 and 2012, oil production increased a little with a six fold increase of active oil rigs.

We could assume that going backward in time from the year 2000 to 1987, would result in a substantial increase of oil production with the increasing number of active rigs: the production would increase about 60 percent with the number of rigs quadrupling. Not so between the years 2001 and 2012: the oil production increased less than 20 percent, while the number of rigs grew six-fold.  But reality is even more unsettling.  The newer rigs are 2 - 4 times more efficient than the old ones, so the relative effort of maintaining oil production in the US has increased not just 7 times, but perhaps as much as 14 - 28 times!
Barrels of oil produced in the US per month per active rig vs time.  It is assumed that production from each rig lags by 6 months on the average.  Rig productivity peaked in the year 2000, and has declined with an average exponential rate of 17 percent per year. Data source: Mr. Dave Room of ASPO.
Another way of looking at the same data is shown in the chart above as 25 years of oil rig productivity in the Unites States.  The plot is semi-logarithmic to show exponential decline of rig productivity at the rate of 17 percent per year.  Thus, to maintain or increase our domestic production over the last decade, we have entered the classical Red Queen's race.

The Red Queen's Hypothesis, or "Red Queen Effect"  is taken from the Red Queen's race in Lewis Carroll's Through the Looking-Glass. In Chapter II, the Red Queen said, "It takes all the running you can do, to keep in the same place." The Red Queen Principle can be stated thus: "For an evolutionary system, continuing development is needed just in order to maintain its fitness relative to the systems it is co-evolving with."
'Well, in OUR country,' said Alice, still panting a little, 'you'd generally get to somewhere else—if you ran very fast for a long time, as we've been doing.'
'A slow sort of country!' said the Queen. 'Now, HERE, you see, it takes all the running YOU can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!'
'I'd rather not try, please!' said Alice. 'I'm quite content to stay here—only I AM so hot and thirsty!'

Lewis Carol, Through the Looking Glass, Chapter II. The Garden of Live Flowers.

Well, in OUR country, we run faster and faster to maintain oil production, and we are getting hot and thirsty in North Dakota's Bakken oil play, or in Texas' Eagle Ford Shale and the Permian Basin.  In the mean time, it is also increasingly more difficult to maintain ultra deep offshore production in the Gulf of Mexico, and Shell's foray into the Arctic is proving far more difficult and expensive than expected.

As oil well drilling and completions get faster and more robust, the reservoirs these wells penetrate become less accessible,  less permeable, and less rich in oil at equal speed.  Thus, travel on the road to the future oil independence of these United States feels like Alice trying to outrun the Red Queen.

P.S.  The same trend holds for Texas and natural gas.  The chart below plots the history of average gas well productivity in Texas.  If nothing is done to make future wells more productive (and a lot is being done), an average gas well in Texas will cease production 30 years from now.
Average gas production per well in Texas.  This plot was obtained by dividing the total gas production reported by the Texas Railroad Commission through the number of active gas wells.  Source: Texas Railroad Commission website, accessed on 08/05/2012.
It is obvious that employment in the oil and gas industry must increase dramatically to staff the new difficult and well-intensive projects.  This new increased employment is no longer a boom-or-bust proposition, but is necessary to keep hydrocarbons flowing in the US and elsewhere in the world.

Saturday, September 15, 2012

Fossil Fuels and U.S.

Modern societies run on power, not mere energy.  Power is energy per unit time, or force times speed.  We aren't interested in driving as fast as we run, or in phone calls that take a day to go through.  We also don't like sitting in the dark, while food is getting warm in the refrigerator, only because our outlets ran out of juice.  In short, we crave for power that is just there, waiting for us to be used at will.  And, yes, most environmentalists have similar sentiments.

Two tons of American love of power, including 450 pounds of human payload.  Source: Don Petersen for The New York Times, September 14, 2012.
But, there is a price to pay for our cravings. No, I am not speaking about carbon dioxide emissions or mercury in the fish we eat.  Hardly anyone cares about such things anymore.  I am talking about our utter, total reliance on fossil fuels and nuclear energy, with large dams providing a thin icing on a huge power cake.  You see, renewables can produce a lot of energy, but never enough power, 24/7, and when we want it.  This is the discovery the impatient people and their governments are making in 2012.

Excessive power that runs our power-hungry society is expensive.  But just how expensive?  I have tried to answer this question using the lovely Index Mundi website with a large selection of global commodity prices, the EIA database for petroleum and natural gas consumption in the U.S., and the BP statistical review of world energy for the U.S. coal production.  To normalize all prices, I have used the Consumer Price Index (CPI) to account for inflation.

I have chosen the year 1983 to reference the U.S. dollar value as one.  In January 1983, I started working for Shell Development as a young researcher.  That life-changing experience converted me into a petroleum engineer for good.  Each dollar I earned then is equal to 2.3 dollars today. So much for low inflation in the deregulated, booming global economy.

I have used the West Texas Intermediate and Brent crude oil prices since August 1982, to determine the upper limit of petroleum cost in the U.S. For natural gas, I have used the Henry Hub prices and the Russian prices since August 1991 (earlier price data were unavailable for Henry Hub).  For coal, I have used the Australian thermal coal prices, understanding the the top secret U.S. prices might have been up to 10 - 30 percent lower, because of the huge captive coal supply in Western U.S.  This coal price differential has probably disappeared by 2011.  But I don't know for sure.

Below, there are twelve charts.  The first five charts are for crude oil,  the next five for natural gas, and the final two for coal. The monthly bill charts show the rates of expenditures, and the cumulative charts show total expenditures from a starting date.  All cumulative curves, but those for natural gas paid for with Henry Hub prices, are hockey sticks, increasing very rapidly (curving up quickly) in recent years, despite the global recession. 

Let's start from petroleum, as it is by far the largest cost of powering the U.S. society.  After the almost instantaneous downward price correction in late 2008 and 2009, the price of oil resumed its pre-2008 growth, saturating at a somewhat lower level than the all-time peak.  The monthly bills in 2011 and 2012 have been suppressed mostly by a significant destruction of demand for petroleum products: The demand for 1.6 million barrels of crude oil per day disappeared in the U.S. between 2008 and 2012.

The roughly 11 trillion constant dollars of total debt, accumulated in the U.S. since 1982, are 2.5 times more than the 4.3 trillion constant dollars we paid for crude oil in either of the two reference prices.  The actual expenditures for crude purchases in the U.S. were less because several lower quality, heavy and sour crudes from Venezuela, California, and Canada are priced lower. One could argue that we have subsidized our love for Camaros, suburbs, Hummers, F150s, highways, Ford Excursions, more highways, exurbs, etc. by borrowing from the world and printing paper dollars.

On an energy-equivalent basis, natural gas should be roughly 6 times cheaper than oil.  Therefore, today, 1,000 standard cubic feet (mcf) of gas, should cost roughly the price of one barrel of oil divided by six, or 17 dollars per mcf.  At $3 per mcf, natural gas in the U.S. is 5 times cheaper than oil, in contrast to Europe or Asia.

Today, the U.S. monthly expenditures for natural gas are as high as they were in 2002, even though we consume 1 trillion standard cubic feet (Tcf) of gas more.  The discovery and production of unconventional natural gas allowed for this incredible achievement; the only exception to the global trend of ever more expensive fossil power.

Since 2008, the cumulative cost of natural gas in the U.S. has been less by 560 billion dollars of the day (256 billion constant dollars), compared with the cost of natural gas exported by Russia.  One might say that the savings on natural gas alone paid for much of the two wars in Iraq and Afghanistan.  One might also say that the current better shape of U.S. economy relative to the E.U. is the result of cheaper natural gas (and coal).

Natural gas production in the U.S. is a phenomenal success story, one that dwarfs the ever-fashionable iPhone.  So whenever you feel like hating "fracking,"  please stop and reflect on the fact that you might have a job only because hydrofracturing has been so successful in the recovery of natural gas and - now- light oil.

Coal has always been dirt-cheap in the U.S. Still, the total bill for U.S. coal could be as high as 800 billion constant dollars since 1982.  Today, natural gas is cheaper than coal in the U.S., and the natural gas-fired power plants are several times cheaper than the coal-fired ones. 

In summary, easy cheap oil is gone and oil price must grow, while demand is destroyed.  Cheap surface coal is also limited worldwide, and coal price will continue to grow.  Everywhere, but in the U.S., the price of natural gas has been increasing as well.  Cheap unconventional gas in the U.S. is the miracle energy source that saved us from a lot worse recession to the tune of 600 billion dollars of the day, and probably twice that amount in American jobs created and saved from disappearance.

The lower carbon dioxide and mercury emissions in the U.S. result from natural gas displacing coal in electricity generation.  Also, we have lowered oil consumption by 1.6 million barrels of oil per day compared with the amount of oil we were burning daily just four years ago.  Burning less oil means lower carbon dioxide emissions.  We still have a long way to go to decrease fossil fuel consumption in the U.S. to the per capita level of industrialized Europe.
Click on the image to see it in high resolution.  Monthly bills for crude oil consumption in the U.S. using the Brent crude oil price.  Note that after the August 2008 price spike and the subsequent collapse, the crude oil price has recovered, despite the ongoing global recession.  In constant dollars, the recent U.S. bills have been about $25-30 billion per month, and in the dollars of the day, 60-70 billion dollars per month.  For calibration, the Fed just announced that it would begin buying $40 billion a month in mortgage-backed securities.
Click on the image to see it in high resolution.  Since August 1982, the cumulative bill for crude oil purchases has been up to 7.5 trillion dollars of the day and 4.2 trillion in the 1983 dollars.  The 2011 U.S. GDP was $15 trillion.
Click on the image to see it in high resolution.   Monthly bills for crude oil consumption in the U.S. using the West Texas Intermediate (WTI) crude oil price.  Note that after the August 2008, price spike and the subsequent collapse, the crude oil price has recovered, despite the ongoing global recession.  In constant dollars, the most recent U.S. bill has been $20-27 billion per month, and in the dollars of the day, $50-60 billion dollars per month.
Click on the image to see it in high resolution.   Since August 1982, the cumulative bill for crude oil purchases at the West Texas Intermediate price has been up to 7.5 trillion dollars of the day and 4.2 trillion of the 1983 dollars.  It does not matter if crude oil has been purchased at the Brent or WTI crude oil prices.
The cumulative difference between the Brent and WTI crude oil prices.  Before 2010, WTI was more expensive and after 2010, it was substantially less expensive than the Brent crude.  The post-2010 depression of the WTI crude was caused by too much production in Texas and elsewhere and not enough pipeline capacity.
Monthly bills for natural gas consumption in the U.S., using the Henry Hub price.  Note that after the August 2008 price spike and the subsequent collapse, natural gas price in the U.S. has remained low.  In constant dollars, the most recent U.S. bill has been $2.5-4 billion per month and in the dollars of the day, $5-9 billion dollars per month.
Monthly bills for natural gas consumption in the U.S., using the Russian monthly price.  Note that after the August 2008 price spike and the subsequent collapse, natural gas price charged by Russia has fully recovered.  In constant dollars, the most recent U.S. bill would be $10-12 billion per month, and in the dollars of the day, it would be $25-28 billion dollars per month.
Since August 1991, the cumulative bill for natural gas purchases at the Henry Hub prices has been up to 1.7 trillion dollars of the day and 1 trillion of the 1983 dollars.
Since August 1991, the cumulative bill for natural gas purchases at the Russian prices has been up to 2.4 trillion dollars of the day and 1.2 trillion of the 1983 dollars.
The cumulative difference of the Russian and Henry Hub prices of natural gas. Up until 2008, there was hardly any difference. After 2008, the cumulative difference has been 0.25 trillion of the  1983 dollars and 0.55 trillion dollars of the day. This difference is due entirely to the unconventional gas production in the U.S.  People like me have provided half a trillion dollars of savings to the struggling U.S. economy. So before you go on hating us, please think of our contribution to your job and your family's well-being:  Excess Power = Well-being.
Monthly bills for coal consumption in the U.S., using the Australian thermal coal monthly price.  Note that after the August 2008 price spike and the subsequent collapse, coal price has fully recovered.  In constant dollars, the most recent U.S. bill was up to $5 billion per month, and in the dollars of the day it was $10 billion dollars per month.  Note that in 2011, natural gas in the U.S. was generally cheaper than coal.
Since 1982, the cumulative bill for coal purchases at the Australian thermal coal price has been up to 1.4 trillion dollars of the day and 0.8 trillion of the 1983 dollars. The actual prices paid by the U.S. utility companies might have been 10-30 percent lower.

P.S. A couple of illustrations of the points made here were published in the September 15 New York Times. An increase of gasoline prices in August 2012, pushed consumer prices up by 0.6 percent, at the fastest rate in more than three years.  That it must have happened follows for example from the second chart, with the cumulative oil cost hockey stick curving up.  Higher prices of fuels equal depressed economic activity and that's what happened.  Production at the U.S. factories, mines and utilities dropped 1.2 percent in August, the biggest decline since August 2009.

The United States still has cheap natural gas to prevent it from slipping into an outright recession;  but not so in Japan.  While Japan is setting a policy to phase out nuclear power by 2040, its cost of delivering power to the population and industry has skyrocketed:
[The] Keidanren business federation and others have insisted that the higher energy costs are crippling the country’s economy. Tokyo Electric, Japan’s largest utility and the operator of the Fukushima Daiichi plant, has increased rates for both homes (an average of more than 8 percent) and businesses (an average of about 15 percent).

Business leaders warn that such costs will prompt more companies to move their operations overseas. And costly fuel imports already contributed last year to Japan’s first annual trade deficit in more than 30 years and made the nation more dependent on oil and natural gas from the volatile Middle East and Russia.
(By Hiroko Tabuchi)
Interestingly, a day later (9/16/2012) , the same Mr. Hiroko Tabuchi reported that Japan wouldn't stop work on nuclear reactors. 

The Japanese society is at a fork:  It can either deindustralize and live with much less power, or it must use nuclear power to keep on the current path.  The same fork is awaiting Germany, which declared their phase out of nuclear power (26 percent of electricity) by 2026.

We have entered an interesting period of history. Given the exploding cost of continuous power in money and biological survival, developed societies will have to make clear moral and political choices, and live with the consequences of theses choices for decades or centuries.

"Clean" power (not energy!) means a very, very different world with many fewer people.  But I have already written on this subject; see, for example, this or this or this or this, or a dozen other blog entries.

P.S.P.S. Here is a thoughtful comment I got via email on 09/30/2012:

John H. King, Jr.
2517 Rhonda. Dr.
Vestal, NY 13850
E-mail at: zeropoint1@earthlink.net
Subject: Your Blog on
Fossil Fuels and U.S.

Dear Professor Patzek,

I'm writing you directly as I was not able to post my comments to your LifeItself Blogspot website. Thank you for a very necessary, informative and clear presentation. Unfortunately, it seems that few people, especially politicians, "get it" as yet. Most everyone in denial or too scary to contemplate or both? Now, here's a few of my thoughts.

I have one basic question which is: why is "fracked" N-gas today so much cheaper in constant $ / BTU compared to Coal, Brent, WTI, Russian N-gas and all the other fossil fuels? Is it that the Net Energy or equivalently the EROI of "fracked" N-gas is very much better than that of all the other current fossil fuels? If that is the case, why? It would not seem that just the improved efficiency of the drilling and "fracking" mechanisms could make such a big difference. Could it be that the effective energy density of N-gas due to the very high pressures at 6,000 ft. and deeper is as high or even higher than that of liquid petroleum in the ground? How else can the implied EROI be so high? Now a few of my own comments and observations.

In your first paragraph you note that "Modern societies run on power, not mere energy." That is, though globally energy flow (power) is more or less continuous power consumption at the local level is highly variable. And, as you further note, that fact has fundamental consequences when considering alternative sources of energy which fundamentally cannot provide continuous flows of energy even from large concentrated sources though potentially, on average, at a global scale more or less. Yet, this problem already existed to some degree at the very beginnings of the use of wood from the forests for fires by early man, continued through to the beginnings of and through the age of coal and, as you note, it still exists to this day with the use of all the fossil fuels. Because the production and transport of the energy carriers (fossil fuels) from and across the ground is fundamentally somewhat intermittent or at least a variable process there is the need for storage of vast amounts of the energy carriers, the equivalent of energy storage. This has always been necessary and continues to be a fundamental necessity to this day. Indeed, consider all the piles of coal and the various "tank farms" storing N-gas, raw petroleum and finished petroleum products.

As you note, the introduction of new intermittent sources of produced energy flow (power) such as Wind Power and Solar Power will likely require even more vast amounts of energy storage in order to be able to meet the variable rates of power demand required by almost all the various consumers at local levels. And, it's not just that the amount of energy storage that probably will have to be significantly greater but this new requirement for energy storage will require new technologies for creating stored energy from the energy flow from mostly electric power, something we do today on only very small scales, such as with the batteries in Hybrid cars, batteries for cell phones, iPhones, iPads and etc. And, every conversion of power to stored energy or the conversion of stored energy to (electric) power has its various significant inefficiencies. The worst (lowest) efficiencies,
»0.3 - »0.4, are associated with heat engines and the highest efficiencies, »0.90 - »0.97,  are associated with batteries and electrical machinery. But how much lithium and other rare earth elements or chemical compounds suitable as electrolytes and such is available for making great numbers giant batteries? And, what other energy storage and/or production technologies could be developed that don't involve the use of inefficient heat engines? Building and maintaining all this supporting infrastructure will necessarily consume an additional very large amount energy.

Therefore, there is certainly a very great amount of new energy infrastructure based on new energy (power) producing technology that will be necessary to be developed and built to the necessary large scales along with a vast new energy storage infrastructure to support the worlds modern high energy intensity civilizations in the future. Creating and maintaining all this new infrastructure will necessarily require a very significant additional energy expenditure. The $64 x 10
12 question: can all this be accomplished in time to avoid a catastrophic collapse of the world's modern civilizations with the net energy from the fossil fuels that still remain accessible? The alternative is too horrific to even contemplate!

No need to reply directly but I thought you might want to consider these issues and questions in a bit more detail in one of your future Blog postings.

Best regards, John King