Oil
optimism relying on fudged
statistics By Nafeez Mosaddeq
Ahmed
Headlines about 2012's World Energy
Outlook (WEO) from the International Energy Agency
(IEA), released mid-November, would lead you to
think we are literally swimming in oil.
The report forecasts that the United
States will outstrip Saudi Arabia as the world's
largest oil producer by 2017, becoming "all but
self-sufficient in net terms" in energy production
- a notion reported almost verbatim by media
agencies worldwide, from BBC News to Bloomberg.
Going even further, Damien Carrington, Head of
Environment at the Guardian, titled his blog: "IEA
report reminds us peak oil idea has gone up in
flames."
The IEA report's general
conclusions have been echoed by several other
reports this year. Exxon Mobil's 2013 Energy
Outlook projects that demand for gas will grow by
65% through 2040, with 20% of worldwide production
from North America, mostly from
unconventional sources. The
shale gas revolution will make the United States a
net exporter by 2025, it concludes. The US
National Intelligence Council also predicts US
energy independence by 2030.
This past
summer saw a similar chorus of headlines around
the release of a Harvard University report by
Leonardo Maugeri, a former executive with the
Italian oil major Eni. "We were wrong on peak
oil," read environmentalist George Monbiot's
Guardian headline. "There's enough to fry us all."
Monbiot's piece echoed a spate of earlier
stories. In the preceding month, the BBC had asked
"Shortages: Is 'Peak Oil' Idea Dead?" The Wall
Street Journal pondered, "Has Peak Oil Peaked?",
while the New York Time's leading environmental
columnist, Andrew Revkin, took "A Fresh Look At
Oil's Long Goodbye".
The gist of all this
is that "peak oil" is now nothing but an
irrelevant meme, out of touch with the data, and
soundly disproven by the now self-evident
abundance of cheap unconventional oil and gas.
Burning our bridges On the one
hand, it's true: there are more than enough fossil
fuels in the ground to drive an accelerated rush
to the most extreme scenarios of climate
catastrophe.
The increasing shift from
conventional to unconventional forms of oil and
gas - tar sands, oil shale, and especially shale
gas - heralds an unnerving acceleration of carbon
emissions, rather than the deceleration promised
by those who advocate shale as a clean 'bridge
fuel' to renewables. According to the CO2
Scorecard Group, contrary to industry claims,
shale gas "cannot be credited" with US emissions
reductions over the last half-decade. Nearly 90%
of reductions, says the group, "were caused by
decline in petroleum use" and the "displacement of
coal" by "non-price factors" rather than shale,
and coal's "replacement by wind, hydro, and other
renewables."
To make matters worse, where
natural gas saved 50 million tonnes of carbon by
substituting coal generation due its lower price,
it generated 66 million additional tonnes across
the commercial, residential, and industrial
sectors.
In fact, studies show that when
methane leakages are incorporated into an
assessment of shale gas' CO2 emissions, natural
gas could even surpass coal in terms of overall
climate impact. As for tar sands and oil shales,
emissions are 1.2 to 1.75 times higher than for
conventional oil. No wonder the IEA's chief
economist, Fatih Birol, remarked pessimistically
that "the world is going in the wrong direction in
terms of climate change."
But while the
new evidence roundly puts to rest the "doomer"
scenarios advocated by staunch "peak oil"
pessimists, the global energy predicament is far
more complicated.
Scaling the
peak Delving deeper into the available data
shows that we are already in the throes of a
global energy transition in which the age of cheap
oil is well and truly over. For most serious
analysts, far from signifying a world running out
of oil, "peak oil" refers simply to the point
when, due to a combination of below-ground
geological constraints and above-ground economic
factors, oil becomes increasingly and irreversibly
more difficult and expensive to produce.
That point is now. US Energy Information
Administration (EIA) data confirms that despite
the United States producing a "total oil supply"
of 10 million barrels per day (up by 2.1 mbd since
January 2005), world crude oil production remains
on the largely flat, undulating plateau it has
been on since it stopped rising that very year at
around 74 million barrels per day (mbd).
According to John Hofmeister, former
president of Shell Oil, "flat production for the
most part" over the past decade has dovetailed
with annual decline rates for existing fields of
about "4 to 5 million bpd". Combined with
"constant growing demand" from China and emerging
markets, he argues, this will underpin higher oil
prices for the foreseeable future.
The
IEA's WEO actually corroborates this picture, but
the devil is in the largely overlooked details.
First, the main reason US oil production will
overtake Saudi Arabia and Russia is because their
output is projected to decline, not rise as
previously assumed. So while US output creeps up
from 10 to 11 mbd in 2025, post-peak Saudi output
will fall to 10.6 mbd and Russia to 9.5 mbd.
Second, the report's projected increase in
"oil production" from 84 mbd in 2011 to 97 mbd in
2035 comes not from conventional oil, but
"entirely from natural gas liquids and
unconventional sources" - with conventional crude
oil output (excluding light tight oil) fluctuating
between 65 mbd and 69 mbd, never quite reaching
the historic peak of 70 mbd in 2008 and falling by
3 mbd sometime after 2012. The IEA also does not
forecast a return to the cheap oil heyday of the
pre-2000 era, but rather a long-term price rise to
about $125 per barrel by 2035.
Finally,
oil prices would be much higher if not for the
fact that governments are heavily subsidizing
fossil fuels. The WEO revealed that fossil fuel
subsidies increased 30% to $523 billion in 2011,
masking the threat of high prices.
Therefore, world conventional oil
production is already on a fluctuating plateau and
we are increasingly dependent on more expensive
unconventional sources. The age of cheap oil
abundance is over.
Fudging
figures But there are further reasons for
concern. For how reliable is the IEA's data? In a
series of investigations for the Guardian and Le
Monde, Lionel Badal exposed in 2009 how key data
was deliberately fudged at the IEA under US
pressure to artificially inflate official reserve
figures. Not only that, but Badal later discovered
that as early as 1998, extensive IEA data
exploding assumptions of "sustained economic
growth and low unemployment" had been
systematically suppressed for political reasons
according to several whistleblowers.
With
the IEA's research under such intense US political
scrutiny and interference for 12 years, its
findings should perhaps not always be taken at
face value.
The same goes, even more so,
for Maugeri's celebrated Harvard report. By any
meaningful standard, this was hardly an
independent analysis of oil industry data. Funded
by two oil majors - Eni and British Petroleum (BP)
- the report was not peer-reviewed, and contained
a litany of elementary errors. So egregious are
these errors that Dr. Roger Bentley, an expert at
the UK Energy Research Centre, told ex-BBC
financial journalist David Strahan that "Mr
Maugeri's report misrepresents the decline rates
established by major studies, [and] it contains
glaring mathematical errors... I am astonished
Harvard published it."
What the
scientists say In contrast to the blaring
media attention generated by Maugeri's report,
three peer-reviewed studies published in reputable
science journals in the first half of 2012 offered
a less than jubilant perspective.
A paper
published in Nature by Sir David King, the UK's
former chief government scientist, found that
despite reported increases in oil reserves and tar
sands, natural gas, and shale gas production,
depletion of the world's existing fields is still
running at 4.5% to 6.7% per year. They firmly
dismissed notions that a shale gas boom would
avert an energy crisis, noting that production at
shale gas wells drops by as much as 60 to 90% in
the first year of operation. The paper received
little, if any, media fanfare.
In March,
King's team at Oxford University's Smith School of
Enterprise and the Environment published another
peer-reviewed paper in Energy Policy, concluding
that the industry had overstated world oil
reserves by about a third. Estimates should be
downgraded from 1,150-1,350 billion barrels to
850-900 billion barrels.
"While there is
certainly vast amounts of fossil fuel resources
left in the ground," the authors argued, "the
volume of oil that can be commercially exploited
at prices the global economy has become accustomed
to is limited and will soon decline." The study
was largely blacked out in the media (except for a
solitary report in the Telegraph, to its credit).
In June - the same month as Maugeri's
deeply flawed analysis - Energy published an
extensive analysis of oil industry data by US
financial risk analyst Gail Tverberg, who found
that since 2005, "world [conventional] oil supply
has not increased". He argued that this was "a
primary cause of the 2008-2009 recession" and that
the "expected impact of reduced oil supply" will
mean the "financial crisis may eventually worsen."
But all the media attention was on the oil
man's oil-funded report. Tverberg's peer-reviewed
study in a reputable science journal, with its
somewhat darker message, was ignored.
What happens when the shale boom goes
boom? These scientific studies are not the
only indications that something is deeply wrong
with the IEA's assessment of prospects for shale
gas production and accompanying economic
prosperity. Indeed, Business Insider reports that
far from being profitable, the shale gas industry
is facing huge financial hurdles.
"The
economics of fracking are horrid," observes US
financial journalist Wolf Richter. "Production
falls off a cliff from day one and continues for a
year or so until it levels out at about 10% of
initial production."
The result is that
"drilling is destroying capital at an astonishing
rate, and drillers are left with a mountain of
debt just when decline rates are starting to wreak
their havoc. To keep the decline rates from
mucking up income statements, companies had to
drill more and more, with new wells making up for
the declining production of old wells. Alas, the
scheme hit a wall, namely reality."
Just a
few months ago, Exxon CEO Rex Tillerson complained
that the lower prices resulting from the US
natural gas glut were dramatically decreasing
profits. This problem is compounded by the swiftly
plummeting production rates at shale wells, which
start high but fall fast. Although Exxon had
officially insisted in shareholder meetings that
it was not losing money on gas, Tillerson candidly
told a meeting at the Council on Foreign
Relations: "We are all losing our shirts today.
We're making no money. It's all in the red."
The oil industry has actively and
deliberately attempted to obscure the challenges
facing shale gas production. A seminal New York
Times investigation in 2011 found that despite a
public stance of extreme optimism, the US oil
industry is "privately skeptical of shale gas".
According to the Times, "the gas may not be as
easy and cheap to extract from shale formations
deep underground as the companies are saying,
according to hundreds of industry e-mails and
internal documents and an analysis of data from
thousands of wells."
The emails revealed
industry executives, lawyers, state geologists and
market analysts voicing "skepticism about lofty
forecasts" and questioning "whether companies are
intentionally, and even illegally, overstating the
productivity of their wells and the size of their
reserves". Though corroborated by independent
studies, such revelations have been largely
ignored by journalists and policymakers.
But we ignore them at our peril. Arthur
Berman, a 32-year veteran petroleum geologist who
worked with Amoco (prior to its merger with BP),
on the same day as the release of the IEA's 2012
annual report, told OilPrice that "the decline
rates shale reservoirs experience... are
incredibly high."
Citing the Eagleford
shale - the "mother of all shale oil plays" - he
pointed out that the "annual decline rate is
higher than 42%". Just to keep production flat,
oil companies will have to drill "almost 1000
wells in the Eagleford shale, every year... Just
for one play, we're talking about $10 or $12
billion a year just to replace supply. I add all
these things up and it starts to approach the
amount of money needed to bail out the banking
industry. Where is that money going to come from?"
Chesapeake Energy recently found itself in
exactly this situation, forcing it to sell assets
to meet its obligations. "Staggering under high
debt," reported the Washington Post, Chesapeake
said "it would sell $6.9 billion of gas fields and
pipelines - another step in shrinking the company
whose brash chief executive had made it a leader
in the country's shale gas revolution." The sale
was forced by a "combination of low natural gas
prices and excessive borrowing".
The
worst-case scenario is that several large oil
companies find themselves facing financial
distress simultaneously. If that happens,
according to Berman, "you may have a couple of big
bankruptcies or takeovers and everybody pulls
back, all the money evaporates, all the capital
goes away. That's the worst-case scenario."
To make matters worse, Berman has shown
conclusively that the industry exaggerated the
estimated ultimate recovery (EURs) of shale wells
using flawed industry models that, in turn, have
fed into the IEA's future projections. Berman is
not alone. Writing in Petroleum Review, US energy
consultants Ruud Weijermars and Crispian McCredie
argued there remains strong "basis for reasonable
doubts about the reliability and durability of US
shale gas reserves", which have been "inflated"
under new Security & Exchange Commission
rules.
The eventual consequences of the
current gas glut, in other words, are more than
likely to be an unsustainable shale bubble that
collapses under its own weight, precipitating a
supply collapse and price spike. Rather than
fuelling prosperity, the shale revolution will
instead boost a temporary recovery masking deeper,
structural instabilities. Inevitably, those
instabilities will collide, leaving us with an
even bigger financial mess, on a faster trajectory
toward costly environmental destruction.
So when is crunch time? According to a
recent report from the New Economics Foundation,
the arrival of "economic peak oil" - when the cost
of supply "exceeds the price economies can pay
without significantly disrupting economic
activity" - will be around 2014 or 2015.
Black gold, it would seem, is not the
answer to our problems.
Dr Nafeez
Mosaddeq Ahmed is executive director of the
Institute for Policy Research & Development
and chief research officer at Unitas
Communications Ltd where he leads on geopolitical
risk. His latest book is A User’s Guide to the
Crisis of Civilization: And How to Save It (2010),
which inspired the award-winning documentary
feature film, The Crisis of Civilization
(2011).
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