OilVoice Magazine - May 2014

Edition Twenty Six May 2014
The trouble with gas

Eight energy myths explained
Is drilling in the Gulf safer? Regulators beg for an answer
Cover image by katsrcool

1 OilVoice Magazine | MAY 2014

Issue 26 May 2014
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Adam Marmaras
Chief Executive Officer

Welcome to the 26th edition of the
OilVoice Magazine.

Wed like to say a big thank you to all
of our featured authors. Without them,
the OilVoice Magazine would be bare.
If you havent done so already, check
out our Opinion & Commentary
section, packed full of interesting
articles by the experts in the industry.
This month we have great articles from
Finding Petroleum, FTI Consulting and
Mars Omega LLP. We'd also like to
welcome back some of our regular
authors, including Gail Tverberg, and
Andrew McKillop.
If you're interested to know more about
seeing your articles featured on
OilVoice, please get in touch.

Adam Marmaras
CEO
OilVoice

Contents

Featured Authors
Bios for this months featured authors.
3
Insight: Current demographics, and the current issue, in the oil & gas
industry
by David Bamford
6
by Andrew McKillop
7
Iraq: Shooting seismic into the political rifts and plays
by Anthony Franks OBE
10
Oil exports: The rhetoric and the reality
by Loren Steffy
14
Insight: What's happening to Exploration?
by David Bamford
16
Eight energy myths explained
by Gail Tverberg
18
Oil & Gas Boom 2014: A Withering Regulatory Assault
by David Blackmon
28
Is drilling in the Gulf safer? Regulators beg for an answer
by Loren Steffy
32
The absurdity of US natural gas exports
by Gail Tverberg
34

Featured Authors

Andrew McKillop
AMK CONSULT
Andrew MacKillop is an energy and natural resource sector professional with
over 30 years experience in more than 12 countries.

David Bamford
Finding Petroleum
David Bamford, a past head of exploration and head of geophysics at BP, is a
founder shareholder of Finding Petroleum via his company New Eyes
Exploration Ltd.

David Blackmon
FTI Consulting, Inc.
David Blackmon is managing director of Strategic Communications for FTI
Consulting, based in Houston.

Gail Tverberg
Our Finite World
Gail the Actuarys real name is Gail Tverberg. She has an M. S. from the
University of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty
Actuarial Society and a Member of the American Academy of Actuaries.

Anthony Franks OBE
Mars Omega LLP
Anthony is responsible for managing and controlling the extensive information
networks, as well as directing and working with the analysis team to create
reports for clients, and also works with Hamish in the Liaison and Mediation
service.


Loren Steffy
30 Point Strategies
A senior writer for 30 Point Strategies and a writer-at-large for Texas Monthly.
Loren worked in daily journalism for 26 years, most recently as an award-
winning business columnist for the Houston Chronicle, and before that, as a
senior writer at Bloomberg News.

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Insight: Current
demographics, and the
current issue, in the oil
& gas industry

Written by David Bamford from Finding Petroleum
What impact has almost 30 years of RIF-ing had on our industry?

What can we say about the current demographics?

What is the current big issue?

By far the most authoritative insight into oil & gas industry demographics is that
produced by Schlumberger Business Consultings annual review of HR benchmark
data gathered from 40 E&P companies (at least that was the 2012 number). SBC
sometimes present this data at conferences, the most recent presentation being
accessible here. Their data covers Petro-technical Professionals (PTPs):
geoscientists (geologists, geophysicists, petrophysicists) and petroleum engineers
(reservoir, drilling, completion, and production engineers).

To summarise their most recent findings, when the number of PTPs on a global
basis is plotted as a percentage against the age bracket, their prediction for 2016 is
that the peak will be at around 23% for the 25-29 age group, declining in pretty much
wavy straight line fashion to around zero at 65. This is in complete contrast with the
facts from 2005 where there was a secondary 13% peak for the 25-29 age group but
a much bigger primary peak, at just over 20%, for the 45-49 age group.

SBC argue that, by 2016, there will be, on a global basis, roughly a 20% shortfall in
experienced PTPs whilst the overall numbers will look OK.
This raises two questions:

1. Unless something is done, there is going to be a rapid near-term loss of skills and
experience from the industry. Can anything be done to retain this generation that has
(early) retirement on its mind? Or at least ensure that its knowledge is retained in the
industry?

2. How can the younger generation more rapidly acquire the knowledge and absorb
the experiences that others have, and be brought to earlier deep expertise?
So, in principle, if you are under 30 and have just entered, or are considering
entering, the oil & gas industry as a PTP, you can look forward to your skills,
knowledge and commitment being much in demand. With rewards to match.


And yet the lessons of the past should tell you that this industry is capricious, given
to RIF-ing, given also to displaying what I might term the Harry and Jack syndrome.

Look after your own career still seems like sound advice!

View more quality content from
Finding Petroleum


Written by Andrew McKillop from AMK CONSULT
Cinderella Gas at the Thieves Ball

Simple questions can have complicated answers, but for Cinderella Gas the clock
has a habit of chiming 12-midnight all too often. The simple question is how come
natural gas in the USA has grave problems to even attain $27.50 per barrel of oil
equivalent - but in Japan it can fetch about $100 per barrel equivalent? Do Japanese
like expensive things, or what?

Germany's riotously shizophrenic treatment of the Russia-Ukraine sanctions issue,
with Angela Merkel being the first G7 leader to cast out Russia from the G8 group,
while her Vice chancellor Sigmar Gabriel says that Germany's 'rational-based
decision making' treats Russia as a key energy partner, can also be explained to a
large extent by gas supplies - and gas prices.


No use for 'The Economist' magazine, 19 April, to chime that world gas offers
everything a rational decider could want. It is cheap and simple to extract, ship and
burn with a 'low carbon footprint'. It is abundant, and present proven reserves
amount to 109 years of current consumption, according to BP. The oil equation is at
best 40 years. Oil is expensive worldwide, as expensive as gas energy in Japan.

While US and European mainstream media have overworked the subject of Ukraine
and energy security in Europe, as Germany's Sigmar Gabriel almost said out loud,
April 7, the Ukraine gas issue only concerns pipelines. It has nothing whatsoever to
do with gas reserves. World gas reserves are in fact certain to go on growing a lot
faster than consumption, but for oil that is a long way from sure. World gas supplies
from a fast-rising number of countries - not many of them dictatorships, mostly not
belonging to OPEC, and not located anywhere near Ukraine - are growing, and will
go on growing. Many are 'politically stable places', as 'The Economist' puts it.

The Lignite Revolution

In fact a counter-revolution. In the bizarre and schizoid playground of European
energy policy, today, lignite has a better place, than gas. As Bloomberg Business

Week reported, 15 April, German power companies - especially the Big 4 - have
obeyed Angela Merkel's 180-degree switch on nuclear power, following Fukushima,
as German elections approached, and started shutting down their Cash Cow nuclear
power plants. These NPPs were previously given generous (or foolhardy) operating
lifetime extensions by Angela Merkel herself. On a regular basis.

What the beleaguered utilities are doing, now, when forced by government to close
their Cash Cows is simple. They turn to lignite - a cheap, soft, muddy-brown colored
form of sedimentary rock riddled with pollutants and spewing (as Al Gore and the
Climate Crazies like to say) more greenhouse gases than any other fossil fuel.
Number 2 in Germany's Big 4, RWE now generates 52 percent of its power in
Germany from lignite. And RWE isn't alone. Utilities all over Germany have shut
down gas-fired plants and ramped up coal and lignite use as the nation watched the
mix of coal-generated electricity rise to 45 percent last year, the highest level since
2007. Beat that for Carbon Correct!

The counter revolution, for some observers like Joe Parson writing in 'Moscow
Times', 17 April, could even embolden pro-Russian separatists in eastern Ukraine.
The reason is the Donetsk (locally called Donbas) giant coal basin, ranking with
Poland's USB or Upper Silesian Basin, and three times larger than the Ruhr coal
basin. With increased tension in eastern Ukraine, coal basin cities like Donetsk and
Luhansk could win a reprieve from almost certain decline and death. Rising coal use
in the EU28 to generate power - because gas is too expensive - could be supplied
from the Ukraine. Alternately, locally-produced power using coal could be shipped to
Europe with relatively low capital costs and lead times, the key term 'relatively' of
course needing caution. If the eastern regions of Ukraine were to shift to Russia's
orbit, Ukraine could potentially lose control of about 45 percent of its coal reserves.
The loss of the Donets coal basin would deal another substantial economic blow to
Ukraine.

The Shale Gas and Coalbed Methane Revolutions

Almost certainly unknown to Yoko Ono and her 'Fracking Kills' star consortium,
including Sean Lennon to show its a family business
http://www.nydailynews.com/new-york/fracking-kills-yoko-fights-drilling-article-
1.1238624, of overpaid stars peddling dumb music and dumber ideas while they
spew (to use Al Gore's terminology) aviation jet fuel kerosene residues worldwide on
a very regular basis, shale gas 'fracking' attempts date from the first decade of the
19th century - not 20th or 21st. Today however it works, and putting that genie back
in the bottle is beyond Yoko Ono. Coalbed methane can be compared to lignite and
coal - people know about coal but not lignite, and have heard about 'fracking' but
know nothing about methane extraction from coal beds, avoiding and eliminating the
need to physically dig, then burn, almost always dirty coal. Net energy performance
is good, although recovery of energy in place as coal, versus gas energy extracted,
is low. Due to world coal resources (not reserves) to a depth of 3000 metres being
roughly estimated by Beijing's University of Petroleum at probably 200 trillion tons
(200 000 billion tons), resource depletion is no problem. Yoko Ono will certainly
disappear first, although she's taking a lot of time to do it! We can she hope she
speeds up.

Overworked and hyped shale gas potentials in Europe, to be sure, have left a bad
dirt line in the bath tub when the water of initial investor support ran out. This
however certainly does not mean shale gas cannot be produced in Europe - nor
coalbed methane. European gas prices have not reached the giddy heights of
Japanese gas prices, but are high.

Ukraine's massive coal reserves in place, in the Donbas, overworked and aged in
conventional-extraction terms, like the Ruhr basin, are an attractive prospect for
shale gas and coalbed methane extraction. Only the political decision making factor
is negative - to say the least. World gas prices, as the Japanese will surely
appreciate can only decline, while oil will tend to stay high, Cinderella Gas will at
some stage get her LPG or CNG-fuelled limo at 12 midnight!

AMK CONSULT

Iraq: Shooting seismic
into the political rifts
and plays

Written by Anthony Franks OBE from Mars Omega LLP
Earlier this week, Turkey's Minister of Energy and Natural Resources, Taner Yildiz,
was reported by Reuters as saying that one of the pipelines carrying crude oil from
the Kirkuk oilfields to Ceyhan - Turkey's Mediterranean port - was unusable
because of continued attacks by extremists.

True.

But that is not the only reason it is unusable; the pipeline is also politically unusable.

The continuing deadlock between Baghdad and Irbil over the sharing of oil revenues
and ownership of hydrocarbon resources in Kurdistan continues to cast a dark
shadow over inter-governmental relations.

Nothing is going to change on these issues before the elections, and we suggest it is
debatable if anything substantive will in fact change in the short-term, and this will
impact on both the business operations in Kurdistan of the various oil companies,
and on their share and stakeholders.

In fact, the way things are shaping up, we could potentially see the dark shadow turn
into a black hole, and the break up of the Iraqi republic.
However, it is wholly questionable how homogenous Iraq is nowadays in any case:
Kurdistan is talking openly of seceding;
Anbar province in the west is scarcely under true government control with
extremists operating openly in Fallujah and Ramadi and indeed elsewhere;
In the oil-rich south, Basra, the treasury of black-gold is restive and also
periodically threats to secede from federal Iraq;
In the fragile province of Diyala, the Islamic State of Iraq and the Levant (ISIL)
has set up forward operating bases;
Ninewah provincial governor, Athil al-Nujaifi (brother of Usama al-Nujaifi,
speaker of Parliament and leader of Mutahiddun) is reportedly being sued by
the Federal Ministry of Oil after he signed a preliminary contract for the
establishment of an oil refinery without Baghdads knowledge, and by
definition without its approval.
Meanwhile, Iraq is some 120 hours away from the election that will determine its
future trajectory. The various political rockets are on their launch pads with steam
and smoke hissing out of their bottoms. Metaphorically speaking, of course.

These various political parties have in the meantime continued to indulge in trench
warfare. During a televised appearance on Wednesday, Iraqi Prime Minister (PM)
Nuri al-Maliki accused political opponents of trying to put obstacles in the path of
Baghdads counter-terrorism plans.

Speaker of Parliament Usama al-Nujaifi responded by playing a backhand over the
political tennis net by accusing the government of letting the chaos in Anbar continue
as an act of commission. This he claimed - was being done in order to disrupt the
elections in the fragile Province of Anbar because Anbar is a Sunni majority region.

The Kurdish media reported that the Secretary General of Iraqi Hizbullah, Wathiq al-
Battat, decided to try to make the political tennis match a game of doubles by
jumping on the charabanc and calling the PM a dictator in a media statement.

For the record, Wathiq al-Battat is a Shia cleric and leads both Iraqi Hizbullah and
the Jaysh al-Mukhtar. He has been arrested several times by the security forces. Al-
Battat was also reported to have said, somewhat ominously, that, after the election,
the PMs destiny would be worse than that of Saddam Hussein as a result of his part
in fomenting violence against the Iraqi people.

During his Wednesday TV broadcast, the PM also said Baghdad was committed to
confronting the plight of terrorism, and suggested that the Iraqi army is securing
victories against the Islamic State of Iraq and the Levant (ISIL) extremists that have
been occupying parts of key cities in Anbar. He also suggested the local tribes were

cooperating and coordinating with the Iraqi army to drive terrorists out of Anbar.

Usama al-Nujaifi promptly questioned whether or not Baghdad was competent to
deal with the situation in Anbar. He criticised the PM for failing to take the Anbar
situation seriously, and then delivered a forehand volley The government must take
immediate action [in Anbar], including providing vital food and humanitarian aid to
citizens, and exert every effort to end this problem before it develops into a real
disaster.

However, it is worth noting that it has already developed into a real disaster now
according to information obtained by UNAMI from the Health Directorate in Anbar,
the total civilian casualties in Anbar up to 30 Mar 14 were: 156 killed and 741 injured;
with 80 killed and 448 injured in Ramadi; and 76 killed and 293 injured in Fallujah.

Anbar has thus become a microcosm of the intransigence that continues to consign
Iraqi politics to the limbo of feuding stasis.

The State of Law coalition sees the situation in Anbar as being the logical result of
Sunni extremism, while al-Nujaifi, Mutahiddun and their growing number of allies see
the situation in Anbar as being the logical result of blatant sectarianism.

And with that kind of political polarity, there seems to be little hope of real national
unity now, or in the future.

Mars Omega LLP

Oil exports: The
rhetoric and the reality

Written by Loren Steffy from 30 Point Strategies
If not natural gas, then oil. That seems to be the latest reaction to breaking Russias
energy grip on Europe.

Harold Hamm, the chief executive of Continental Resources, reciting a new meme in
the energy industry, told members of Congress this week to forget all the breathless
banter about natural gas exports to counter Russian aggression in the Ukraine. If we
really want to help wean Europe off its dependency on Russian energy, we should
immediately begin exporting oil. The first export terminal for liquefied natural gas
wont begin shipments until next year. It will simply take too long for LNG exports to
help Europe, Hamm argued.

While opening LNG exports is a noble goal and one that we as a country are actively
working towards, the fact is the infrastructure to undertake large scale overnight LNG
exports does not currently exist. If we want to have an overnight impact on todays
global events, we can immediately begin exporting crude oil, which does not have
the same infrastructure constraints.

While oil may be unconstrained by infrastructure, it also wont solve Europes
dependency issues in the same way gas might. Different grades of crude may make
it difficult for European refiners to simply switch to a new oil source.

But oil exports also have a different impact on the home front than LNG exports.
While we currently have more gas than we need, we still import, on a net basis,
about 7.3 million barrels a day, or just less than half of our daily consumption.

Any exports would have to be offset by additional imports, says Jeffrey Brown, an
independent petroleum geologist who tracks import data. Embracing exports the way
Hamm suggests would simply shift the burden of greater foreign oil dependency from
Europe back to the U.S.

This is why the notion of energy independence is unrealistic. Midwest producers like
Hamm talk about rising oil production as if we have a surplus, but we are a long way
from domestic production levels that would reduce imports to zero. Even if we
achieve those levels, we are unlikely to maintain them for long.

For consumers, the entire debate doesnt matter much. Exporting crude probably
would have little effect on gasoline prices because most refiners are already selling
their products based on the Brent price for crude, which is higher than the price for
West Texas Intermediate, the U.S. benchmark. The Brent, or world, price is currently
about $6.50 a barrel higher than WTI.


For Midwest producers like Hamm, oil exports would narrow that spread. Theyve
been forced to sell their crude to Midwestern refiners at WTI prices, only to watch the
refiners turn around and sell it at prices set by Brent. In other words, in the Midwest,
margins are migrating to the refiners. Exports would be a way for companies like
Continental to reverse the trend.

Our export policies, though, shouldnt be based on the special interests of a handful
of companies.

Just like Europe, U.S. refiners require different grades of crude, and some of the
biggest ones require heavier oil from places like Venezuela rather than the light
sweet crude produced in the domestic shale plays. Oil exports may, indeed, make
sense at some point, and lawmakers need to revisit energy policy that is based on
40 years of resource scarcity. The issue, though, needs to be studied carefully based
on its domestic impact, rather than as a knee-jerk response to Russian aggression in
the Ukraine or the opportunistic urging of oil producers at home.

The changing energy landscape in the U.S. has already altered the nature of global
petro-politics, and it will continue to do so. But we cant look to exports of gas or oil
as a quick fix for the worlds problems.

30 Point Strategies

Insight: What's
happening to
Exploration?

Written by David Bamford from Finding Petroleum
Explorers should be deeply troubled by recent events, namely:

1. The general lack of success, especially in Frontier plays, and the evident lack of
New Ideas and instead the re-cycling and re-hashing of old ones.

2. Exponentiating costs, especially for deep water drilling.

Exploration outcomes over the last 18-24 months

Over this period, the notable exploration successes have been:
US Shale Oil, notably the Eagleford, Bakken and Barnett plays.
Brazil Pre-Salt, with seven key oil discoveries Lula, Sapinhoa, Iracema,
Carioca, Carcara, Jupiter and Iara.
East Africa Gas offshore, in Tanzania and Mocambique
East Africa Oil onshore, in Kenya.
You will note that these are all continuations of earlier themes. Where are the New
Ideas?

Other notable successes are hard to find and indeed it is much easier to point to
some troubling failures. There has been disappointment all over NW Europe (North
Sea, the Barents, onshore), for example, and Richmond Energy Partners have
spotted 1 arguably commercial discovery in the last 27 Frontier wells drilled by the
group of companies they cover!

Is exploration getting harder?

The poison of exponentiating costs

At the same time that exploration appears to be getting much, much harder, costs
have been exponentiating.

Lets consider a very simple model in which an enterprise aims to discover 100
million boe in a 4 well program:

Suppose the drilling cost per well is $25m and other associated costs for the
whole 4 well program are $100m (drilling costs being 50% of total exploration
spend are a normal working guideline), then the total program cost is $200m
and the implied (success outcome) Finding (F) cost is $2/boe.
Now lets suppose the drilling cost per well is $50m and, by a super human
effort, other costs are kept at $100m, then the total program cost is $300m
and the implied F cost is $3/boe.
Next, we take a big step and assume a drilling cost of $100m/well, with other
costs powerfully constrained at $200m, giving a total cost of $600m and an F
cost of $6/boe.
And finally, if we assume a drilling cost of $200m/well, with other costs still
constrained to $200m, then total costs are $1000m and F cost is $10/boe.
So there could be then an Explorers view which says so what? Oil price is over
$100/barrel, F costs of $2 - 10 per boe are all OK!

Why does F cost matter?

Lets consider a simple metric for a growing through exploring company, namely:
X = Enterprise Value/2P reserves
It turns out that X ~ $8/boe for a matured E&P company.

Thus, for any company, the extra Enterprise Value (EV) potentially created by an
extra 100 million boe is $100 x (8 F). So..

1. If F cost = $2.5/boe, then extra EV = $550m

2. If F cost = $5/boe, then extra EV = $300m

3. If F cost = $8/boe then extra EV = $0m.

For an Investor in:
A $100m Market Cap company, 1. and 2. are fantastic outcomes.
A $1bn Market Cap company, 1. is excellent, 2. is pretty good.
A $10bn Market Cap company, only 1. is of any interest.
So what? Well, to generalise, drilling costs of $25 or $50m/well are nowadays
characteristic of onshore exploration; $100/$200m per well costs are characteristic
of deep water exploration.

Ergo, if you want to invest in a growing through exploring company find one that is
exploring onshore...or invest in a drilling company running deep water rigs!

Conclusion Back to the Future!

Exploration needs to become much more successful and at significantly lower F
costs than have been the norm over the last couple of years.


Both New Ideas and dramatically reduced drilling costs are required.

These two will only be found together onshore.

Finding Petroleum

Eight energy myths
explained

Written by Gail Tverberg from Our Finite World
Republicans, Democrats, and environmentalists all have favorite energy myths. Even
Peak Oil believers have favorite energy myths. The following are a few common mis-
beliefs, coming from a variety of energy perspectives. I will start with a recent myth,
and then discuss some longer-standing ones.

Myth 1. The fact that oil producers are talking about wanting to export crude
oil means that the US has more than enough crude oil for its own needs.

The real story is that producers want to sell their crude oil at as high a price as
possible. If they have a choice of refineries A, B, and C in this country to sell their
crude oil to, the maximum amount they can receive for their oil is limited by the price
these refineries are paying, less the cost of shipping the oil to these refineries.

If it suddenly becomes possible to sell crude oil to refineries elsewhere, the
possibility arises that a higher price will be available in another country. Refineries
are optimized for a particular type of crude. If, for example, refineries in Europe are
short of light, sweet crude because such oil from Libya is mostly still unavailable, a
European refinery might be willing to pay a higher price for crude oil from the Bakken
(which also produces light sweet, crude) than a refinery in this country. Even with
shipping costs, an oil producer might be able to make a bigger profit on its oil sold
outside of the US than sold within the US.

The US consumed 18.9 million barrels a day of petroleum products during 2013. In

order to meet its oil needs, the US imported 6.2 million barrels of oil a day in 2013
(netting exported oil products against imported crude oil). Thus, the US is, and will
likely continue to be, a major oil crude oil importer.

If production and consumption remain at a constant level, adding crude oil exports
would require adding crude oil imports as well. These crude oil imports might be of a
different kind of oil than that that is exportedquite possibly sour, heavy crude
instead of sweet, light crude. Or perhaps US refineries specializing in light, sweet
crude will be forced to raise their purchase prices, to match world crude oil prices for
that type of product.

The reason exports of crude oil make sense from an oil producers point of view is
that they stand to make more money by exporting their crude to overseas refineries
that will pay more. How this will work out in the end is unclear. If US refiners of light,
sweet crude are forced to raise the prices they pay for oil, and the selling price of US
oil products doesnt rise to compensate, then more US refiners of light, sweet crude
will go out of business, fixing a likely world oversupply of such refiners. Or perhaps
prices of US finished products will rise, reflecting the fact that the US has to some
extent in the past received a bargain (related to the gap between European Brent
and US WTI oil prices), relative to world prices. In this case US consumers will end
up paying more.

The one thing that is very clear is that the desire to ship crude oil abroad does not
reflect too much total crude oil being produced in the United States. At most, what it
means is an overabundance of refineries, worldwide, adapted to light, sweet crude.
This happens because over the years, the worlds oil mix has been generally
changing to heavier, sourer types of oil. Perhaps if there is more oil from shale
formations, the mix will start to change back again. This is a very big if, however.
The media tend to overplay the possibilities of such extraction as well.

Myth 2. The economy doesnt really need very much energy.

We humans need food of the right type, to provide us with the energy we need to
carry out our activities. The economy is very similar: it needs energy of the right
types to carry out its activities.

One essential activity of the economy is growing and processing food. In developing
countries in warm parts of the world, food production, storage, transport, and
preparation accounts for the vast majority of economic activity (Pimental and
Pimental, 2007). In traditional societies, much of the energy comes from human and
animal labor and burning biomass.

If a developing country substitutes modern fuels for traditional energy sources in
food production and preparation, the whole nature of the economy changes. We can
see this starting to happen on a world-wide basis in the early 1800s, as energy other
than biomass use ramped up.


Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates
from Energy Transitions: History, Requirements and Prospects and together with BP
Statistical Data on 1965 and subsequent

The Industrial Revolution began in the late 1700s in Britain. It was enabled by coal
usage, which made it possible to make metals, glass, and cement in much greater
quantities than in the past. Without coal, deforestation had become a problem,
especially near cold urban areas, such as London. With coal, it became possible to
use industrial processes that required heat without the problem of deforestation.
Processes using high levels of heat also became cheaper, because it was no longer
necessary to cut down trees, make charcoal from the wood, and transport the
charcoal long distances (because nearby wood had already been depleted).

The availability of coal allowed the use of new technology to be ramped up. For
example, according to Wikipedia, the first steam engine was patented in 1608, and
the first commercial steam engine was patented in 1712. In 1781, James Watt
invented an improved version of the steam engine. But to actually implement the
steam engine widely using metal trains running on metal tracks, coal was needed to
make relatively inexpensive metal in quantity.

Concrete and metal could be used to make modern hydroelectric power plants,
allowing electricity to be made in quantity. Devices such as light bulbs (using glass
and metal) could be made in quantity, as well as wires used for transmitting
electricity, allowing a longer work-day.

The use of coal also led to agriculture changes as well, cutting back on the need for
farmers and ranchers. New devices such as steel plows and reapers and hay rakes
were manufactured, which could be pulled by horses, transferring work from humans
to animals. Barbed-wire fence allowed the western part of the US to become
cropland, instead one large unfenced range. With fewer people needed in
agriculture, more people became available to work in cities in factories.

Our economy is now very different from what it was back about 1820, because of
increased energy use. We have large cities, with food and raw materials transported
from a distance to population centers. Water and sewer treatments greatly reduce
the risk of disease transmission of people living in such close proximity. Vehicles
powered by oil or electricity eliminate the mess of animal-powered transport. Many
more roads can be paved.

If we were to try to leave todays high-energy system and go back to a system that
uses biofuels (or only biofuels plus some additional devices that can be made with
biofuels), it would require huge changes.

Myth 3. We can easily transition to renewables.

On Figure 1, above, the only renewables are hydroelectric and biofuels. While
energy supply has risen rapidly, population has risen rapidly as well.

Figure 2. World Population, based on Angus Maddison estimates, interpolated
where necessary.

When we look at energy use on a per capita basis, the result is as shown in Figure 3,
on the next page.


Figure 3. Per capita world energy consumption, calculated by dividing world energy
consumption (based on Vaclav Smil estimates from Energy Transitions: History,
Requirements and Prospects together with BP Statistical Data for 1965 and
subsequent) by population estimates, based on Angus Maddison data.

The energy consumption level in 1820 would be at a basic levelonly enough to
grow and process food, heat homes, make clothing, and provide for some very basic
industries. Based on Figure 3, even this required a little over 20 gigajoules of energy
per capita. If we add together per capita biofuels and hydroelectric on Figure 3, they
would come out to only about 11 gigajoules of energy per capita. To get to the 1820
level of per capita energy consumption, we would either need to add something else,
such as coal, or wait a very, very long time until (perhaps) renewables including
hydroelectric could be ramped up enough.

If we want to talk about renewables that can be made without fossil fuels, the amount
would be smaller yet. As noted previously, modern hydroelectric power is enabled by
coal, so we would need to exclude this. We would also need to exclude modern
biofuels, such as ethanol made from corn and biodiesel made from rape seed,
because they are greatly enabled by todays farming and transportation equipment
and indirectly by our ability to make metal in quantity.

I have included wind and solar in the Biofuels category for convenience. They are
so small in quantity that they wouldnt be visible as a separate categories, wind
amounting to only 1.0% of world energy supply in 2012, and solar amounting to
0.2%, according to BP data. We would need to exclude them as well, because they
too require fossil fuels to be produced and transported.

In total, the biofuels category without all of these modern additions might be close to
the amount available in 1820. Population now is roughly seven times as large,
suggesting only one-seventh as much energy per capita. Of course, in 1820 the
amount of wood used led to significant deforestation, so even this level of biofuel use

was not ideal. And there would be the additional detail of transporting wood to
markets. Back in 1820, we had horses for transport, but we would not have enough
horses for this purpose today.

Myth 4. Population isnt related to energy availability.

If we compare Figures 2 and 3, we see that the surge in population that took place
immediately after World War II coincided with the period that per-capita energy use
was ramping up rapidly. The increased affluence of the 1950s (fueled by low oil
prices and increased ability to buy goods using oil) allowed parents to have more
children. Better sanitation and innovations such as antibiotics (made possible by
fossil fuels) also allowed more of these children to live to maturity.

Furthermore, the Green Revolution which took place during this time period is
credited with saving over a billion people from starvation. It ramped up the use of
irrigation, synthetic fertilizers and pesticides, hybrid seed, and the development of
high yield grains. All of these techniques were enabled by availability of oil. Greater
use of agricultural equipment, allowing seeds to be sowed closer together, also
helped raise production. By this time, electricity reached farming communities,
allowing use of equipment such as milking machines.

If we take a longer view of the situation, we find that a bend in the world population
occurred about the time of Industrial Revolution, and the ramp up of coal use (Figure
4). Increased farming equipment made with metals increased food output, allowing
greater world population.

Figure 4. World population based on data from Atlas of World History, McEvedy
and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.

Furthermore, when we look at countries that have seen large drops in energy
consumption, we tend to see population declines. For example, following the

collapse of the Soviet Union, there were drops in energy consumption in a number of
countries whose energy was affected (Figure 5).

Figure 6. Population as percent of 1985 population, for selected countries, based on
EIA data.

Myth 5. It is easy to substitute one type of energy for another.

Any changeover from one type of energy to another is likely to be slow and
expensive, if it can be accomplished at all.

One major issue is the fact that different types of energy have very different uses.
When oil production was ramped up, during and following World War II, it added new
capabilities, compared to coal. With only coal (and hydroelectric, enabled by coal),
we could have battery-powered cars, with limited range. Or ethanol-powered cars,
but ethanol required a huge amount of land to grow the necessary crops. We could
have trains, but these didnt go from door to door. With the availability of oil, we were
able to have personal transportation vehicles that went from door to door, and trucks
that delivered goods from where they were produced to the consumer, or to any
other desired location.

We were also able to build airplanes. With airplanes, we were able to win World War
II. Airplanes also made international business feasible on much greater scale,
because it became possible for managers to visit operations abroad in a relatively
short time-frame, and because it was possible to bring workers from one country to
another for training, if needed. Without air transport, it is doubtful that the current
number of internationally integrated businesses could be maintained.

The passage of time does not change the inherent differences between different
types of fuels. Oil is still the fuel of preference for long-distance travel, because (a) it
is energy dense so it fits in a relatively small tank, (b) it is a liquid, so it is easy to

dispense at refueling stations, and (c) we are now set up for liquid fuel use, with a
huge number of cars and trucks on the road which use oil and refueling stations to
serve these vehicles. Also, oil works much better than electricity for air transport.

Changing to electricity for transportation is likely to be a slow and expensive process.
One important point is that the cost of electric vehicles needs to be brought down to
where they are affordable for buyers, if we do not want the changeover to have a
hugely adverse effect on the economy. This is the case because salaries are not
going to rise to pay for high-priced cars, and the government cannot afford large
subsidies for everyone. Another issue is that the range of electric vehicles needs to
be increased, if vehicle owners are to be able to continue to use their vehicles for
long-distance driving.

No matter what type of changeover is made, the changeover needs to implemented
slowly, over a period of 25 years or more, so that buyers do not lose the trade in
value of their oil-powered vehicles. If the changeover is done too quickly, citizens will
lose their trade in value of their oil-powered cars, and because of this, will not be
able to afford the new vehicles.

If a changeover to electric transportation vehicles is to be made, many vehicles other
than cars will need to be made electric, as well. These would include long haul
trucks, busses, airplanes, construction equipment, and agricultural equipment, all of
which would need to be made electric. Costs would need to be brought down, and
necessary refueling equipment would need to be installed, further adding to the
slowness of the changeover process.

Another issue is that even apart from energy uses, oil is used in many applications
as a raw material. For example, it is used in making herbicides and pesticides,
asphalt roads and asphalt shingles for roofs, medicines, cosmetics, building
materials, dyes, and flavoring. There is no possibility that electricity could be adapted
to these uses. Coal could perhaps be adapted for these uses, because it is also a
fossil fuel.

Myth 6. Oil will run out because it is limited in supply and non-renewable.

This myth is actually closer to the truth than the other myths. The situation is a little
different from running out, however. The real situation is that oil limits are likely to
disrupt the economy in various ways. This economic disruption is likely to be what
leads to an abrupt drop in oil supply. One likely possibility is that a lack of debt
availability and low wages will keep oil prices from rising to the level that oil
producers need for extraction. Under this scenario, oil producers will see little point in
investing in new production. There is evidence that this scenario is already starting to
happen.

There is another version of this myth that is even more incorrect. According to this
myth, the situation with oil supply (and other types of fossil fuel supply) is as follows:

Myth 7. Oil supply (and the supply of other fossil fuels) will start depleting
when the supply is 50% exhausted. We can therefore expect a long, slow
decline in fossil fuel use.

This myth is a favorite of peak oil believers. Indirectly, similar beliefs underly climate
change models as well. It is based on what I believe is an incorrect reading of the
writings of M. King Hubbert. Hubbert is a geologist and physicist who foretold a
decline of US oil production, and eventually world production, in various documents,
including Nuclear Energy and the Fossil Fuels, published in 1956. Hubbert observed
that under certain circumstances, the production of various fossil fuels tends to follow
a rather symmetric curve.

Figure 7. M. King Hubberts 1956 image of expected world crude oil production,
assuming ultimate recoverable oil of 1,250 billion barrels.

A major reason that this type of forecast is wrong is because it is based on a
scenario in which some other type of energy supply was able to be ramped up,
before oil supply started to decline.

Figure 8. Figure from Hubberts 1956 paper, Nuclear Energy and the Fossil Fuels.

With this ramp up in energy supply, the economy can continue as in the past without
a major financial problem arising relating to the reduced oil supply. Without a ramp
up in energy supply of some other type, there would be a problem with too high a
population in relationship to the declining energy supply. Per-capita energy supply
would drop rapidly, making it increasingly difficult to produce enough goods and
services. In particular, maintaining government services is likely to become a
problem. Needed taxes are likely to rise too high relative to what citizens can afford,
leading to major problems, even collapse, based on the research of Turchin and
Nefedov (2009).

Myth 8. Renewable energy is available in essentially unlimited supply.

The issue with all types of energy supply, from fossil fuels, to nuclear (based on
uranium), to geothermal, to hydroelectric, to wind and solar, is diminishing returns. At
some point, the cost of producing energy becomes less efficient, and because of
this, the cost of production begins to rise. It is the fact wages do not rise to
compensate for these higher costs and that cheaper substitutes do not become
available that causes financial problems for the economic system.

In the case of oil, rising cost of extraction comes because the cheap-to-extract oil is
extracted first, leaving only the expensive-to-extract oil. This is the problem we
recently have been experiencing. Similar problems arise with natural gas and coal,
but the sharp upturn in costs may come later because they are available in
somewhat greater supply relative to demand.

Uranium and other metals experience the same problem with diminishing returns, as
the cheapest to extract portions of these minerals is extracted first, and we must
eventually move on to lower-grade ores.

Part of the problem with so-called renewables is that they are made of minerals, and
these minerals are subject to the same depletion issues as other minerals. This may
not be a problem if the minerals are very abundant, such as iron or aluminum. But if
minerals are lesser supply, such as rare earth minerals and lithium, depletion may
lead to rising costs of extraction, and ultimately higher costs of devices using the
minerals.

Another issue is choice of sites. When hydroelectric plants are installed, the best
locations tend to be chosen first. Gradually, less desirable locations are added. The
same holds for wind turbines. Offshore wind turbines tend to be more expensive than
onshore turbines. If abundant onshore locations, close to population centers, had
been available for recent European construction, it seems likely that these would
have been used instead of offshore turbines.

When it comes to wood, overuse and deforestation has been a constant problem
throughout the ages. As population rises, and other energy resources become less
available, the situation is likely to become even worse.

Finally, renewables, even if they use less oil, still tend to be dependent on oil. Oil is
important for operating mining equipment and for transporting devices from the
location where they are made to the location where they are to be put in service.

Helicopters (requiring oil) are used in maintenance of wind turbines, especially off
shore, and in maintenance of electric transmission lines. Even if repairs can be made
with trucks, operation of these trucks still generally requires oil. Maintenance of
roads also requires oil. Even transporting wood to market requires oil.

If there is a true shortage of oil, there will be a huge drop-off in the production of
renewables, and maintenance of existing renewables will become more difficult.
Solar panels that are used apart from the electric grid may be long-lasting, but
batteries, inverters, long distance electric transmission lines, and many other things
we now take for granted are likely to disappear.

Thus, renewables are not available in unlimited supply. If oil supply is severely
constrained, we may even discover that many existing renewables are not even very
long lasting.

Our Finite World

Oil & Gas Boom 2014:
A Withering
Regulatory Assault

Written by David Blackmon from FTI Consulting, Inc.
While the Obama Administration frequently touts its commitment to an all of the
above energy policy, its ongoing devotion to handing out massive subsidies (wind,
solar) and demand quotas (ethanol, biofuels) to some forms of energy while ramping
up taxes and heavy-handed regulations on others reveals this commitment to be
highly qualified and selectively applied. Nowhere is the downside of this picking-and-
choosing approach to energy policy more evident than as it relates to the oil and gas
industry, upon which the Administrations ongoing withering regulatory assault
continued last week on several fronts.

First, on March 25, the Environmental Protection Agency (EPA), working in concert

with the Army Corps of Engineers, issued its new Waters WAT +0.43% of the
United States proposed regulation, which EPA claims would clarify the scope of its
regulatory authority under the Clean Water Act (CWA). Naturally, in clarifying its
authority, EPA as it invariably does seeks to vastly expand said authority.

The proposed rule would take EPAs current statutory authority under the CWA to
regulate navigable waters and clarify it in a way that would allow it to regulate any
connected or adjacent wetlands, streams, creeks, ditches or ponds, including those
that are intermittent, seasonal, man-made or ephemeral, whatever that means.
EPA protested that concerns expressed by the various industries the rule would
impact were overblown, which is what EPA always does before going about
ensuring that such concerns invariably are either met or exceeded by the ultimate
impacts. This is how EPA has functioned since its inception, in administrations of
both parties, and no one should expect it to change anytime soon. Or ever, for that
matter its the nature of this bureaucracy.

EPA Administrator Gina McCarthy quickly moved to reassure the Agricultural
industry that their existing exemptions under the CWA would not be impacted, a
statement no one really believed. Conversely, no such assurances were forthcoming
related to the oil and gas or other energy industries, an omission which surprised no
one.

This proposed rule is the third effort in recent years to expand EPA authority in this
area. There were repeated efforts to pass legislation through congress during the
early part of President Obamas first term, all of which failed. More recently, the EPA
issued a guidance document under the statute that it decided to withdraw in
response to strong protests by affected industries. So one must assume the agency
hopes that this third attempt to regulate your local drainage ditch or stock pond will
be the charm.

Not to be outdone, on March 28 the U.S. Fish and Wildlife Service announced its
decision to list the Lesser Prairie Chicken as threatened under the Endangered
Species Act. While this designation is a step below the endangered status under
the ESA, and theoretically provides regulators and affected parties more flexibility in
determining ways to go about protecting this bird, the potential negative impacts of
the listing on vast swaths of five different states is very significant.

The oil and gas industry and other affected parties were naturally disappointed by
the decision, given that companies, ranchers and other landowners had already
agreed to set aside more than 3 million acres of land as habitat for the chicken under
the Five State Conservation Plan that is sponsored by the states of Texas,
Oklahoma, Colorado, New Mexico and Kansas. The decision ultimately becomes
another victory for radical groups like the Center for Biological Diversity (CBD), which
have been allowed to abuse this statute and circumvent the normal regulatory and
administrative processes with their Sue and Settle racket I detailed for readers in
this space last year.

In fact, Oklahoma Attorney General Scott Pruitt challenged this spurious and really
un-American practice in a lawsuit he filed in federal court earlier in March. If there is
any justice remaining in this countrys legal system, he will prevail. Of course, any

ultimate disposition of that case will come years in the future. In the meantime, CBD
will have free reign to continue collecting millions of dollars from the federal
government at the expense of taxpayers and consumers.

Also on March 28, the White House released an outline of its long-awaited Climate
Action Plan Strategy to Reduce Methane Emissions. The strategy would initiate a
process whose ultimate goal would be EPA regulation of methane emissions at
several points along the upstream, midstream and downstream supply chain for
natural gas, as well as the coal industry and landfills.

The process would begin with the solicitation of input from affected industries
through a series of technical white papers, followed by bureaucratic determination of
possible actions that everyone expects would result in heavy-handed regulation of
the natural gas industry, which has long been the goal at EPA. The strategy
document also includes proposed updated standards under the Bureau of Land
Managements Onshore Order #9, which governs venting and flaring of natural gas
in oilfield operations on federal lands.

Interestingly, the strategy in no way contemplates mandatory regulation of farm
animal flatulence and other agricultural industry emissions, which are the largest
single source of methane emissions in the United States. Then again, if EPA were to
regulate flatulence from cows and sheep, it might then attempt to extend its authority
to similar human emissions, and nobody with any fiber in their diet wants to see that
happen.

Coincidentally, on April 1, the House Budget Committee under Chairman Paul Ryan
issued its proposed 2015 budget.

In his statement accompanying the release, Rep. Ryan criticized the Administration
for creating nearly $500 billion in additional annual regulatory activity costs
associated with compliance since 2009.

The President has installed a heavy-handed compliance culture dependent on
regulations, favorable tax treatment and spending on administration-favored
constituencies. This administration has proposed more economically significant
regulations in four years than previous administrations have in the past 15 years
combined, Ryan said.

Mr. Ryan was of course speaking globally about the Administrations impacts across
the economy, but no sector has been more impacted by this unending assault has oil
and gas. And almost three more years of this fun still to come.

FTI Consulting, Inc.

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Is drilling in the Gulf
safer? Regulators beg
for an answer

Written by Loren Steffy from 30 Point Strategies
Federal regulators have a new approach for improving safety in the Gulf of Mexico:
beg the industry to cooperate. Maybe even say pretty please.

The Bureau of Safety and Environmental Enforcement unveiled a plan this week in
which it will set up a series of meetings with offshore operators and pitch them on the
idea of providing the regulator with data on near-miss incidents.

BSEE wants to use the information to build a database that could show patterns for
potential safety problems. In other words, it wants to track telltale signs of another
Macondo disaster so companies can avert the next catastrophe.

We are approaching the fourth anniversary of BP's Deepwater Horizon disaster, and
BSEE, the regulator born of that accident, still finds itself begging for the industrys
help in making offshore operations safer. Compiling a clearinghouse of near-miss
data is crucial to improving offshore safety. Participation shouldnt be voluntary. It
should be required as it is in some other countries and the results should be
transparent.

In U.S., the industry has fought such efforts, getting them removed from rules
proposed in 2006. Companies claimed the reporting requirements would be too
burdensome. That, of course, was before the Macondo blowout. The industry now
should be asking itself whether reporting near-miss data would be more burdensome
than another Macondo-scale accident.

The dearth of data remains a significant problem in the gulf. Rather than rely on
accurate information about safety rates, the industry too often continues to cling to
comfortable myths. One of the most prevalent is that some 50,000 wells have been
drilled in the gulf with only been one major accident.

That statement, repeated almost weekly to me by someone in the industry, ignores
two important points. The first is that the industry didnt drill 50,000 wells like
Macondo before the accident. At the time, only 43 wells of similar complexity had
been drilled.

More important, we dont know how many times a Macondo-like disaster was
narrowly averted in some six decades of offshore drilling.

Currently, BSSE compiles reports of hydrocarbon releases that result in a shutdown
of operations. That doesnt produce enough data points to offer meaningful insights
into performance trends. Whats needed is data on all hydrocarbon releases.

That would enable BSEE to track performance. Are potentially dangerous incidents
increasing in frequency, and if so why? What can be done to correct the problem? Or
are they decreasing, in which case what is being done to effectively make the Gulf
safer?

This is vital information, but four years after Macondo, we dont know enough to even
answer the question of whether drilling safety has improved in the Gulf.

Late last year, when BSEEs new chief, Brian Salerno, first called for a near-miss
database, I had hoped he would finally address the problem of a lack of drilling data.
But BSEE, like its predecessor the Mineral Management Service, has a soft touch for
the industry it purports to regulate.

Instead of requiring data, its pleading. Instead of making the data transparent, as it
is for aviation accidents and workplace safety, BSEE is promising the industry it will
keep the information confidential. Part of the benefit of a near-miss database would
be for all companies in the gulf to see how their operations compare with others. The
public, too, should know the safest operators. Hiding the numbers behind a veil of
secrecy undermines the benefits of the initiative. It caters to the long-standing
industry practice of coddling, rather than calling out, its weakest performers.

The industry claims it has an excellent safety record, and if thats true, it should be
confident that compiling near-miss data would prove the point. Instead, it prefers to
wrap itself in the blanket of self-delusion, as if the absence of disaster is a synonym
for safety.

30 Point Strategies

The absurdity of US
natural gas exports

Written by Gail Tverberg from Our Finite World
Quiz:

1. How much natural gas is the United States currently extracting?

(a) Barely enough to meet its own needs
(b) Enough to allow lots of exports
(c) Enough to allow a bit of exports
(d) The United States is a natural gas importer

Answer: (d) The United States is a natural gas importer, and has been for many
years. The EIA is forecasting that by 2017, we will finally be able to meet our own
natural gas needs.

Figure 1. US Natural Gas recent history and forecast, based on EIAs Annual
Energy Outlook 2014 Early Release Overview

In fact, this last year, with a cold winter, we have had a problem with excessively
drawing down amounts in storage.


Figure 2. US EIAs chart showing natural gas in storage, compared to the five year
average, from Weekly Natural Gas Storage Report.

There is even discussion that at the low level in storage and current rates of
production, it may not be possible to fully replace the natural gas in storage before
next fall.

2. How much natural gas is the United States talking about exporting?

(a) A tiny amount, less than 5% of what it is currently producing.
(b) About 20% of what it is currently producing.
(c) About 40% of what it is currently producing.
(d) Over 60% of what it is currently producing.

The correct answer is (d) Over 60% what it is currently producing. If we look at the
applications for natural gas exports found on the Energy.Gov website, we find that
applications for exports total 42 billion cubic feet a day, most of which has already
been approved.* This compares to US 2013 natural gas production of 67 billion cubic
feet a day. In fact, if companies applying for exports build the facilities in, say, 3
years, and little additional natural gas production is ramped up, we could be left with
less than half of current natural gas production for our own use.

*This is my calculation of the sum, equal to 38.51 billion cubic feet a day for Free
Trade Association applications (and combined applications), and 3.25 for Non-Free
Trade applications.

3. How much are the United States own natural gas needs projected to grow by
2030?

a. No growth
b. 12%
c. 50%
d. 150%

If we believe the US Energy Information Administration, US natural gas needs are
expected to grow by only 12% between 2013 and 2030 (answer (b)). By 2040,
natural gas consumption is expected to be 23% higher than in 2013. This is a little
surprising for several reasons. For one, we are talking about scaling back coal use
for making electricity, and we use almost as much coal as natural gas. Natural gas is
an alternative to coal for this purpose.

Furthermore, the EIA expects US oil production to start dropping by 2020 (Figure 3,
below), so logically we might want to use natural gas as a transportation fuel too.

Figure 3. US Annual Energy Outlook 2014 Early Release Oil Forecast for the United
States.

We currently use more oil than natural gas, so this change could in theory lead to a
100% or more increase in natural gas use.

Many nuclear plants we now have in service will need to be replaced in the next 20
years. If we substitute natural gas in this area as well, it would further send US

natural gas usage up. So the EIAs forecast of US natural gas needs definitely seem
on the light side.

4. How does natural gass production growth fit in with the growth of other US fuels
according to the EIA?

(a) Natural gas is the only fuel showing much growth
(b) Renewables grow by a lot more than natural gas
(c) All fuels are growing

The answer is (a). Natural gas is the only fuel showing much growth in production
between now and 2040.

Figure 4 below shows the EIAs figure from its Annual Energy Outlook 2014 Early
Releaseshowing expected production of all types of fuels.

Figure 4. Forecast US Energy Production by source, from US EIAs Annual Energy
Outlook 2014 Early Release.

$&spl1t&%
Natural gas is pretty much the only growth area, growing from 31% of total energy
production in 2012 to 38% of total US energy production in 2040. Renewables are
expected to grow from 11% to 12% of total US energy production (probably because
the majority is hydroelectric, and this doesnt grow much). All of the others fuels,
including oil, are expected to shrink as percentages of total energy production
between 2012 and 2040.

5. What is the projected path of natural gas prices:

(a) Growing slowly
(b) Ramping up quickly
(c) It depends on who you ask

It depends on who you ask: Answer (c). According to the EIA, natural gas prices are
expected to remain quite low. The EIA provides a forecast of natural gas prices for
electricity producers, from which we can estimate expected wellhead prices (Figure
5).

Figure 5. EIA Forecast of Natural Gas prices for electricity use from AEO 2014
Advance Release, together with my forecast of corresponding wellhead prices. (2011
and 2012 are actual amounts, not forecasts.)

In this forecast, wellhead prices remain below $5.00 until 2028. Electricity companies
look at these low price forecasts and assume that they should plan on ramping up
electricity production from natural gas.

The catchand the reason for all of the natural gas exportsis that most shale gas
producers cannot produce natural gas at recent price levels. They need much higher
price levels in order to make money on natural gas. We see one article after another
on this subject: From Oil and Gas Journal; from Bloomberg; from the Financial
Times. The Wall Street Journal quoted Exxons Rex Tillerson as saying, We are all
losing our shirts today. Were making no money. Its all in the red.

Why all of the natural gas exports, if we dont have very much natural gas, and the
shale gas portion (which is the only portion with much potential for growth) is so
unprofitable?The reason for all of the exports is too pump up the prices shale gas
producers can get for their gas. This comes partly by engineering higher US prices
(by shipping an excessive portion overseas) and partly by trying to take advantage of

higher prices in Europe and Japan.

Figure 6. Comparison of natural gas prices based on World Bank Pink Sheet data.
Also includes Pink Sheet world oil price on similar basis.

There are several catches in all of this. Dumping huge amounts of natural gas on
world export markets is likely to sink the selling price of natural gas overseas, just as
dumping shale gas on US markets sank US natural gas prices here (and misled
some people, by making it look as if shale gas production is cheap). The amount of
natural gas export capacity that is in the approval process is huge: 42 billion cubic
feet per day. The European Union imports only about 30 billion cubic feet a day from
all sources. This amount hasnt increased since 2005, even though EU natural gas
production has dropped. Japans imports amounted to 12 billion cubic feet of natural
gas a day in 2012; Chinas amounted to about 4 billion cubic feet. So in theory, if we
try hard enough, there might be a place for the 42 billion cubic feet per day of natural
gas to gobut it would take a huge amount of effort.

There are other issues involved, as well. The countries that are importing huge
amounts of high-priced natural gas are not doing well financially. They arent going to
be able to afford to import a whole lot more high-priced natural gas. In fact, a big part
of the reason that they are not doing well financially is because they are paying so
much for imported natural gas (and oil).

If the US has to pay these high prices for natural gas (even if we produce it
ourselves), we wont be doing very well financially either. In particular, companies
who manufacture goods with electricity from high-priced natural gas will find that the
goods they make are not competitive with goods made with cheaper fuels (coal,
nuclear, or hydroelectric) in the world marketplace. This is a problem, whether the
country produces the high-priced natural gas itself or imports it. So the issue is not
an imported fuel problem; it is a high-priced fuel problem.

Another issue is that with shale gas, we are the high cost producer. There is a lot of
natural gas production around the world, particularly in the Middle East, that is
cheaper. If we add our high cost of shale gas to the high cost of shipping LNG long-
distance across the Atlantic or Pacific, we will most definitely be the high cost
producer. Other producers with lower costs (even local shale gas producers) can
undercut our prices. So at best those shipping LNG overseas are likely to make
mediocre profits.

And there would seem to be great temptation to stir up trouble, to encourage Europe
to buy our natural gas exports, rather than Russias. Of course, our ability to provide
this natural gas is not entirely clear. It makes a good story, with lots of ifs involved:
If we can really extract this natural gas. If the price can really go up and stay up. If
you can wait long enough. The story makes the US look more rich and powerful
than it really is. We can even pretend to offer help to the Ukraine.

Perhaps the best outcome would be if virtually none of this natural gas export
capacity ever gets builtapproval or no approval. If it is really possible to get the
natural gas out, we need it here instead. Or leave it in the ground.

Our Finite World

OilVoice Magazine - May 2014

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OilVoice Magazine - May 2014

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Edition Twenty Six May 2014

The trouble with gas

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