Sunday, June 28, 2015

Taking a short break--no post this week

I'm taking a short break and expect to post again on Sunday, July 5.

Sunday, June 21, 2015

Radio Interview: Nuclear and other alternative energy sources

In lieu of my weekly post, I'm posting a link to a radio interview I did recently. Doug Goldstein, host of the personal finance show "Goldstein on Gelt," brought me back for a return engagement to discuss the future of alternative energy including molten salt reactors. The show was broadcast on Israel's English-language radio network, Israeli National Radio. Click here to go to the page containing the podcast.

To hear my previous interview on the swoon in oil prices, click here.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, June 14, 2015

No, BP, the U. S. did NOT surpass Saudi Arabia in oil production

Even the paper of record for the oil industry, Oil & Gas Journal, got it wrong. With the release of the latest BP Statistical Review of World Energy, media outlets appeared to be taking dictation rather than asking questions about which countries produced the most oil in 2014.

If they had asked questions, they would have ended up with a ho-hum headline announcing that last year Russia at 10.1 million barrels per day (mbpd) and Saudi Arabia at 9.7 mbpd were once again the number one and number two producers of crude oil including lease condensate (which is the definition of oil). The United States at 8.7 mbpd remained in third place.

The most important question they could have asked is this: How is BP defining oil? It turns out that oil according to the BP definition includes something called natural gas liquids which includes lease condensate--very light hydrocarbons that come from actual oil wells and are included in the oil refinery stream--and natural gas plant liquids which come from natural gas wells and include such things as ethane, propane, butane and pentanes. Only a small portion of natural gas plant liquids are suitable substitutes for oil.

Production of natural gas plant liquids in the United States has grown rapidly as a result of increasing exploitation of natural gas in deep shale deposits, so-called shale gas. These liquids are useful, but they are not oil and only displace oil in a minor way. Moreover, their energy content is around 65 percent that of crude oil and so counting barrels of natural gas plant liquids as equivalent to oil is doubly misleading.

The second question media outlets could have asked is whether natural gas plant liquids can be sold as oil on the world market. The answer is a resounding "no." In fact, major exchanges accept neither natural gas plant liquids nor lease condensates as satisfactory delivery for crude oil. And, if we subtract lease condensate from each country's total, U.S. production will actually look relatively lower. It turns out that U.S. wells now produce a higher proportion of condensate as a result of growth in oil extraction from shale deposits (which tend to be rich in these condensates).

All of this leads my friend and colleague, Texas oilman Jeffrey Brown, to point out the following: If what you're selling cannot be sold on the world market as crude oil, then it's not crude oil. The implications are fairly obvious: The world has substantially lower oil production than widely believed, and growth in world oil supplies has slowed considerably in the last several years. Using the BP definition of oil, world production in 2014 was 88.7 mbpd. Using the stricter definition of crude oil including lease condensate, the number was 77.8 mbpd. Big difference!

Growth in oil supplies according to BP from 2005 through 2014 was 8.2 percent. Using the stricter definition, growth was 5.4 percent, which is down from 15.7 percent for the previous nine-year period. (Worldwide numbers for crude oil excluding lease condensate are not available.)

So, BP and the oil industry have one definition when referring to oil supply--one designed to create a rosy picture of the future--but must bow to the market's definition when they actually want to sell oil to somebody. Who would you accept as the better authority on what constitutes oil, the buyers or the sellers?

All this is not to deny that oil production in the United States is rising, and has been doing so rather quickly. But, this must be put in context.

First, although the United States produced 9.6 mbpd of oil proper for the week ending June 5 according the U.S. Energy Information Administration (EIA), it had net imports of 6.2 mbpd. (For comparison, OPEC reports that Saudi Arabian oil production as of May 15 was 10.3 mbpd.)

Second, even the ever optimistic EIA expects U.S. oil production (crude oil including lease condensate) to decline after 2020. This implies that the United States will continue to be a large importer of crude oil. One independent analysis based on actual well performance suggests that the EIA projections are probably correct in the short run, but far too optimistic in the long run. American production may not remain near current levels for very long and, in fact, may drop considerably in the next two decades.

It's difficult to call out the venerable BP Statistical Review of World Energy, especially when one considers that BP does this as a service to the world. The company spends money gathering and organizing data on all kinds of energy and makes that data freely available to anyone who wants it. On the other hand, we should recognize that BP has substantial U.S. investments, and this may color its view on the future of U.S. oil production. Downbeat assessments don't do anything for stock prices.

Perhaps the most important thing to remember about oil supplies is that oil is a worldwide market. It is worldwide supply that matters, and supply from every country needs to be seen in this context.

The current slump in oil prices has many believing that supply will continue to be ample in the long run. But, we ought to consider that the rate of oil production in the United States may be nearing its peak and that all of the production growth in oil worldwide since 2005 has come from just two countries, the United States and Canada. That should make us more cautious about projecting the triumphant pronouncements of one of the world's largest oil companies very far into the future.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, June 07, 2015

Delayed gratification for OPEC, more pain for investors

Delayed gratification is said to be a sign of maturity. By that standard OPEC at age 55 demonstrated its maturity this week as it left oil production quotas for its members unchanged. It did so in the face of oil prices that are about 40 percent lower than they were at this time last year, delaying once again a return to the $100-per-barrel prices seen during the past four years.

Why OPEC members chose to leave their oil output unchanged is no mystery. The explicit purpose for keeping oil prices depressed is to close down U.S. oil production from deep shale deposits--production that soared when oil hovered around $100 a barrel, but which is largely uneconomic at current prices. That production was starting to threaten OPEC's market share.

If OPEC were to cut its oil production now and drive prices back up, it would only lead to increased drilling in the United States and loss of market share. In fact, even as spot oil prices sank below $45 per barrel in the United States earlier in the year, investors continued pumping money into U.S. oil drilling. According to The Wall Street Journal U.S. oil companies sold almost $17 billion in new shares in the first quarter of 2015, more than they sold in any quarter last year when prices were much higher.

Preliminary estimates by the U.S. Energy Information Administration show that oil production continues to grow in the United States despite low prices. (The final numbers won't be in for months.) New investors in U.S. oil company shares must believe they are catching the bottom and will have a very profitable ride up from here. This demonstrates that OPEC's work is not done and accounts in part for the decision to leave production quotas unchanged.

OPEC's next task is to convince those making new investments in oil that rather than catching a bottom in oil prices, they have caught a falling knife. The cartel must dampen enthusiasm for investment for the long term if the organization's members are going to benefit. A crippled U.S. oil industry without friends in the investment world is the only way to assure that rising prices won't simply lead to a stampede back into U.S. shale deposits.

How long will investors in those deposits have to suffer before they say, "Never again"? My guess is at least another year. And, the pain for those investors might get much worse in the meantime. With the prospect of a nuclear agreement between Iran and the United States and Europe, Iranian oil exports could ramp up considerably as economic sanctions end. Disruptions elsewhere--Nigeria, Libya, and Iraq, for instance--might ease and further add to world exports.

For Saudi Arabia, OPEC's largest exporter, winning the oil price war with U.S. producers in the next year may be part of a broader strategy meant to maximize Saudi revenues as production in the kingdom hovers at an all-time high over the next decade before beginning a decline.

The Saudis have already said they have no plans to expand beyond their current capacity of around 12.5 million barrels per day. Is this because they choose not to or because they can't? Only the Saudis know. The idea that the country is essentially on a production plateau that may not last for the long term would explain why the Saudis want to crush the U.S. domestic oil industry now rather than wait for declines in U.S. production expected after 2020.

Under this scenario the Saudis want to raise prices while maintaining their current volumes well before then in order to take advantage maximum all-time flow rates that could be over by the mid '20s. This scenario has major implications for a world that as recently as 2011 was counting on more than 15 million barrels per day from Saudi Arabia by 2035.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.