The Dirt on Coal

March 30, 2007 at 6:35 pm
Contributed by:

Folks,

As promised, here is my take on the recent revelations about the impending global peak of coal production, originally published at Energy and Capital. This is really, really bad news.

Once again, I applaud the work of Richard Heinberg, upon whose shoulders so many of us stand.

More to come about this subject next week.

–C

[Update 04/04/07]
The final version of the Energy Watch Group report was published today and is available at:
http://www.energywatchgroup.org/files/Coalreport.pdf

The Dirt on Coal

By Chris Nelder

Friday, March 30, 2007

The peak of world production is only ten to fifteen years away.

The peak of U.S. production is in the past.

Reserves have been overstated by as much as 90%.

There are serious implications for our entire way of life.

And the media are still reporting that there will be abundant supplies for another 150 years, 200 years, or more.

I’m talking about oil, right?

Nope.

I’m talking about coal.

That’s right, coal. The next great hope for fossil fuels.

Those are the conclusions of a forthcoming study by the Energy Watch Group of Germany.

Now, I never believed the oft-cited claim that the U.S. has a 200-year supply of coal. I know, having spent many an hour reading about energy, what such projections are made of. The assumptions usually aren’t stated, and when they are, you discover that they assume the rate of use will stay constant, that business as usual will continue along in a healthy economy, and so on.

Since U.S. domestic oil, natural gas and uranium are all past their peak production levels, many observers have pointed to coal as the next big practical source of usable hydrocarbons. They expect many users of those fuels to switch over to coal, which is abundant in the U.S., “the Saudi Arabia of coal.”

Indeed, by using production-scale applications of the Fischer-Tropsch process to turn coal into liquid fuels, some cornucopians have been eyeing coal as a big part of the solution to the peak oil problem.

So the rate at which we’re using coal couldn’t possibly stay constant. It would have to increase, and pretty markedly. That 200 years’ worth would turn into 50 right quick.

Still, it would be something. Enough to give us a few more decades to work on longer term solutions, to find a way to bridge the supply gap between the oil peak and a more sustainable, lower energy world filled with solar panels, wind turbines, and other renewable generators.

Our coal endowment has been a critical last bit of our proverbial rope.

Oops, We Did It Again

So it was with a sinking feeling that I read Richard Heinberg’s report on the EWG study in his Museletter #179 last week.

Turns out that, in terms of energy content, the U.S. passed its peak of coal production too . . . in 1998!

You see, various types of coal have different levels of energy content. The best stuff–anthracite (with 30 megajoules of energy per kilogram, or “30 Mj/kg”) from Appalachia and Illinois–has been in decline since 1990. Our “vast reserves” are mainly of lower-quality bituminous coal, delivering 18 to 29 Mj/kg, and sub-bituminous coal and lignite, delivering a mere 5 to 25 Mj/kg.

For comparison purposes, the energy content of the coal produced is translated into “tons of oil equivalent.” In terms of volumes of stuff mined, growth in U.S. coal production can continue for about another ten to fifteen years. But in terms of energy, which is the only metric that really matters, U.S. coal production peaked in 1998 at 598 million tons of oil equivalent, and fell to 576 million in 2005.

What’s worse, in a replay of the well-worn debate about oil reserves, it turns out that the global reserve numbers for coal have also been vastly overstated. The information we’ve had is decades old and unreliable, and modern reassessments by nice, transparent countries like Germany and the UK have resulted in 90% reductions.

Whoa.

The reserve numbers from Asia are particularly suspect, some dating back to the 1960s. China hasn’t reduced its reported reserve numbers in 15 years, even though we know they’ve produced some 20% of their reserves since then.

In fact, for the last 20 years, all major coal-producing nations that have updated their reserve numbers have adjusted them downward. And in the last 25 years, the global total reserve estimate has been cut by 60%.

The report’s authors conclude, “The present and past experience does not support the common argument that reserves are increasing over time as new areas are explored and prices rise.”

I’ve said it before, and I’ll say it again: when it comes to non-renewable resources, neo-classical economics just doesn’t work. So much for the Invisible Hand.

This is, most emphatically, not a growth scenario.

Quickly, then, let’s run the numbers:

In terms of world energy consumption, coal provides about one quarter of the total. Electricity production is 40% powered by coal. Two thirds of the steel industry relies on it for fuel, and that coal must be the high-energy kind.

In terms of world coal consumption, China uses 36%, the U.S. 10%, and India 7%.

In terms of coal production, China is the largest producer, and will hit its peak “within the next 5 to 15 years, followed by a steep decline.” The U.S. is the second-largest producer at 30%, and will likely peak between 2020 and 2030.

Total global reserves: about 909 billion tons. A little more than half of that is the good, high-energy stuff, and the rest is low grade. About 90% of all coal in the world is in just six countries: the U.S., which has the most, plus Russia, India, China, Australia and South Africa.

Here’s a useful chart:

coal chart

The Bottom Line

The absolute peak of global coal production will likely be around 2020 . . . approximately ten years, maybe less, after the global peaks of oil and gas.

The needle on the world’s fossil fuel tank is dropping toward the E.

That leaves us with precious little time to turn this ship around. Or, perhaps more accurately, to make this ship a whole lot more efficient. It’s time to think about putting up the sails and shutting down the engines, in order to stretch that last half a tank as long as we can.

With this new information, it’s time to update the bigger energy picture. I’ll do that next week.

Until then,

signature

Chris

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The Oil Depletion Protocol

March 23, 2007 at 11:09 am
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The Oil Depletion Protocol: A Plan to Avert Oil Wars, Terrorism and Economic Collapse

by Richard Heinberg

This is Heinberg’s third book about peak oil. It presents a simple and elegant proposal, suggested by ASPO founder Dr. Colin Campbell, for managing the decline of global oil production. The protocol establishes voluntary limits for oil producing nations to reduce their output at a measured rate, and for oil consuming nations to agree to reduce their consumption accordingly. This way, the world can work cooperatively to ensure that the transition to a lower energy world is measured and steady and fair, so that we can readjust our economies without too much pain and chaos. It’s probably too sensible an idea to work, but it’s the only suggestion I’m aware of which even attempts to take a proactive approach to the problem of peak oil. I sincerely hope that the world’s governments will see the sense of it and sign on.

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Powerdown

March 23, 2007 at 10:52 am
Contributed by:

Powerdown: Options and Actions for a Post-Carbon World

by Richard Heinberg

This is Heinberg’s second book about peak oil, and examines the four major strategies that people might use in dealing with peak oil: “Last One Standing,” “Powerdown,” “Waiting for a Magic Elixir,” and “Building Lifeboats.” Good, clear thinking on a very difficult topic and guaranteed to leave you reconsidering your own future, and how you will deal with the coming challenges.

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Burning the Furniture

March 23, 2007 at 10:38 am
Contributed by:

Folks,

Richard Heinberg, noted peak oil commentator and author of several books on the subject (The Party’s Over,
Powerdown: Options and Actions for a Post-Carbon World
and
The Oil Depletion Protocol: A Plan to Avert Oil Wars, Terrorism and Economic Collapse)
has just sent out his latest monthly “Museletter” and it’s a doozy…a careful and thorough examination of global coal supplies.

He concludes that the global peak of coal production will probably occur about ten years after the global peak in oil and gas…a far, far shorter interval than has been widely projected.

If he’s right, then–as I have often said–there truly is no hope for supply-side solutions. We need to begin a serious, conscious campaign of conservation immediately.

I will likely write an article about this next week, but I wanted to get this info out to GRL readers asap.

Check it out here: Burning the Furniture

–C

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Strange Bedfellows

March 22, 2007 at 9:35 am
Contributed by:

Folks,

Here is my latest, for Green Chip Review. I discuss Al Gore’s testimony to Congress on global warming, and the inextricable relationship between energy and politics.

–C

Strange Bedfellows

By Chris Nelder

March 21, 2007

Ahh—it’s finally Spring!

Maybe now that it has officially
arrived, I won’t have to feel so guilty and worried about the incredible warm
weather we’ve been having here in northern California.

Actually, it’s been Spring here
for a good solid month. The blooms have long disappeared from my plum tree, which
already sports tiny green fruit. Other later blooming trees are in full burst,
throwing off pollen in great clouds—I literally did a double-take when I saw one
this morning—and coating everything in a sticky layer of yellow dust.

And the nest of tree swallows in
the wall just under my bedroom window has hatched, so now I wake up with them,
before dawn has even arrived, spurred out of bed by their hungry twittering.

I just hope that winter, or a
repeat of last year’s deluge of spring rains, doesn’t return. It will really
play havoc with the fruiting and seeding cycle here…which, for some crops, has
already gone awry.

When I wrote about
stumbling around in the heat back in January, I guess I wasn’t the only one.
Turns out this was the hottest January on record, globally.

And according to the just-released
report from US National Oceanic and Atmospheric Administration (NOAA)
scientists, that’s not all: so far, it’s also been the hottest winter since
records started being kept, back in 1880.

I wish I could believe those who
still try to claim, against all reason and evidence, that global warming is
some kind of hoax, perpetrated by the Left…perhaps because of some strange
vendetta against business, or a tendency toward “romanticisation of poverty,” or
because they’re enviro-fascists, or because…something.

Oh, and thousands of scientists
from across the globe are in a conspiracy to hoodwink us into thinking that
global warming is manmade. No, wait—Al Gore invented global warming in
order to sell his movie.

Indeed, there’s a new
‘documentary’ movie out, making just those claims.

(Believe me, I get my share of
such propaganda. Being part of the public face on these issues makes me a
magnet for all sorts of stuff, from the buttoned-down to the tinfoil hatted. No
wonder James Howard Kuntsler just put a notice on his Web page asking people to
stop sending him stuff, period. The load is pretty intense sometimes.)

But no…alas, I’m just another
science-loving leftist, apparently, who can tell you that a week straight of
temps in the 80s in March just ain’t normal ‘round these parts.

I’m sure that a few of my readers on
the East Cost are saying “We should all be so lucky, to have such problems!”
but it really has been a source of consternation.

Projections of grain harvests being off as much as 15% due to unusual
temperatures are trickling in from the Midwest.

And there has been a long series of other recent ominous warnings from every
quarter: soil, water, carbon emissions, melting glaciers and ice caps, floods…a
litany of planetary distress signals. I don’t need to repeat them here, as Al
Gore and others have done a fine job of reporting on the problem.

How timely,
then, that Gore should bring his campaign to stop global warming back to the halls
of Congress today, this first day of Spring.

It was the first time that Gore had
returned to Capitol Hill since his last day of presiding over the Senate in
January 2001 in his role as Vice President.

And it has been 20 years since he
held his first hearings on global warming in Congress.

He was there for a day of testimony
about global warming, before a Senate committee and a joint hearing of two
House committees, in which he brought a petition with the signatures of over
400,000 citizens who want action on global warming.

He also brought a modest proposal,
one which seems too sensible to survive the political process, featuring such
suggestions as:

An immediate freeze on carbon
emissions, with a 90% reduction by 2050
An expanded cap-and-trade
market-based approach to emissions
A moratorium on coal-fired power
plants, unless they include anti-pollution technology.

On his Web site, where he has been gathering the
signatures, he posted a statement making clear the bipartisan nature of his
effort: “While many of the solutions to the climate crisis will be found within
the political system,” he wrote, “there should be bipartisan and transpartisan
agreement on the basic nature of the crisis and the sense of urgency that is
appropriate for us to solve it.”

There should be, but an obstinate
opposition is still strong. Senate Minority Leader Trent Lott (R-MS) dismissed
Gore’s testimony in advance, saying "Those who believe all his garbage are
going to be excited to death, and the rest of us are going to ignore it."
And James Inhofe (R-OK), who has famously called global warming a “hoax” and who
(like Bush) refuses to see Gore’s movie, grilled Gore about his personal energy
use, trying to embarrass him, and then cut him off while he responded, causing
committee chairwoman Barbara Boxer (D-CA) to bring down the gavel on Inhofe,
saying "Elections have consequences, so I make the rules."

In fact, in classic
shoot-the-messenger style, Gore has been subject to a series of well-publicized
personal attacks in recent weeks, as it becomes clear to his opponents that he
has succeeded in winning the hearts and minds of ordinary Americans on the
global warming issue via his Academy Award winning movie, An Inconvenient
Truth.

But thankfully, the efforts in
Congress are largely bipartisan. Despite the incredibly damaging divisive
politics that have stymied dialogue in recent years, clearer heads on both
sides of the aisle are recognizing that when the water levels rise to inundate
our cities, they will drown the left and the right alike.

Or, to put it more positively, that
free solar energy shines down the same on all of us.

Even the Pentagon, that bastion of
tree-huggers, has realized the significance of the global warming threat. In
2004, a leaked Pentagon report worried that rapid climate change may well set
off global competition for food and water supplies
and, in the worst scenarios, spark nuclear war.

The
Pentagon is also clearly worried about fueling its operations. And well they
should be, since the US Department of Defense (DoD) is the world’s
largest purchaser of oil. They’ve been looking for ways to stop using oil
entirely by 2050.

Apparently recognizing that North
American natural gas supplies are also dwindling, a
recent Army study explored availability and cost scenarios for natural gas,
stating "Current Army assumption is that natural gas may cease
to be a viable fuel for the Army within the next 25 years based on price
volatility and affordable supply availability."

And as I
have reported previously, former CIA heads have come out in force to advocate for
clean, green renewable energy, to address the twin threats of global warming
and peak oil. Their eyes are fixed steadily on China’s burgeoning use of coal
(over one-third of the world’s consumption).

Republican Roscoe Bartlett (R-MD) is
leading the peak oil caucus in Congress, urging demand-side solutions and
wondering aloud if it even makes sense to try to fill the post-peak gap in
energy supplies, knowing that to do so would only delay, even intensify, the
pain of adjustment later.

Perhaps his clear-eyed assessment
of the problem is due to the fact that he is a Ph.D. research scientist and a
medical doctor, a man not afraid of good hard science. He puts partisanship
aside by saying “I may be a Republican, but I try not to be an idiot.” He is
currently sponsoring the Energy Farm Bill, which will offer federal R&D
support to make farms “net positive” in both food and energy.

Republicans and Democrats alike
have sponsored bills before the new Congress to do everything from reducing
emissions, to promoting the development of alternative liquid fuels, to
improving the efficiency of cars and household appliances.

The CIA, the Pentagon, most of the People,
and both sides of the aisle in Congress. Crises do make strange bedfellows.

Now, I know that some of my readers
(and perhaps my colleagues too) would prefer that I leave politics out of my
articles, and just focus on the facts about energy.

But I decided long ago that it’s
not only impossible to separate energy policy from politics, it’s disingenuous
to even try.

There can be no policy without
politics. Our national foreign policy is a direct reflection of our energy
policy, which is a direct reflection of our values as a nation, and of our very
capitalist system. They are all one and the same.

Energy IS global warming IS
politics.

Peak oil is merely the flip side of
the global warming coin. It amazes me how so many people, from lawmakers to
environmentalists to investors, still fail to realize that.

In a March 12 commentary, ASPO-USA
co-founder Randy Udall criticized Congress’ grasp of the energy problem,
writing, “Congress is overwhelmingly staffed by lawyers. I have met some of
these notables, and with the exception of Rep. Bartlett, most of them are
energy illiterates, if not energy cretins.”

And I was once personally assured
by a member of the House of Lords that we should stop worrying about peak oil
because we’re going to crack the nut of cold fusion any day now.

So there is still much work—and
politicking—to do. Addressing these common threats together truly must be our mission.
Our grandchildren will not forgive us for seeing the threats, and failing to
take action simply because we placed a greater value on playing politics, or
protecting somebody’s profits, than on the welfare of Man.

As Gore said in his testimony today
that we face an unprecedented challenge, “the most dangerous crisis we have
ever faced, but it is also the greatest opportunity we have ever been
confronted with.”

That Opportunity, with a capital O, is what we’re all about here: How to
bring the best of breed technologies, and the best and brightest of human
talents, to bear on these problems, and make money doing it.

And I think it’s going to be a very profitable spring for renewable energy.

Until next time…

–Chris

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A New Day Dawns for Solar

March 16, 2007 at 5:57 pm
Contributed by:

Folks,

Here’s my latest for Energy and Capital, about the recent awards of $168 in R&D money from the Department of Energy to various solar companies.

–C

A New Day Dawns for Solar

By Chris Nelder

Friday, March 16th, 2007

Normally, I hate Daylight Saving Time. The compulsion to get up an hour earlier rankles . . . it seems so arbitrary. And moving it up several weeks this year, in order to save some energy, got only scornful derision from me when the Energy Policy Act of 2005 was passed, because it seemed like such a cop-out on the hard work of developing a truly sustainable and sensible energy policy.

And perhaps it still is. But, speaking as a guy who is most definitely not a “morning person,” I have been welcoming the wakeup hour since the switch, watching out the window from my bed as the night gives way to the golden light of dawn stealing over the opposite ridge.

The light calls like a claxon, heralding a glorious new day.

Because in the solar world, it truly is a glorious new day. Finally, we’re getting this country on the right track.

I’ll admit, when it was announced back in February I took a skeptical view of the President’s Advanced Energy Initiative, of which the Solar America Initiative (SAI) is a part. But now it looks like the White House has taken heed of the CFR’s call to invest heavily, and broadly, in the R&D side of solar.

Last week, Energy (DOE) Secretary Samuel W. Bodman announced the selection of 13 joint R&D projects with various partners in the solar industry, for a total commitment of $168 million through 2009.

The teams will be led by industry partners, who will foot more than half the bill, so the total funding will be more like $357 million over the next three years.

That ain’t chump change!

The partnerships involve more than 50 companies, including all of the big-name players, plus 14 universities, three non-profit organizations, and two national laboratories . . . a regular solar rodeo.

The goal is to achieve cost parity with grid electricity by 2015, and to build new “zero energy” homes (homes that produce all of their own power). The program aims to accomplish this by increasing the U.S. manufacturing capacity of solar equipment more than tenfold in the next three years–a breathtaking rate of buildout–which should drive the cost per kilowatt-hour (kWh) down from about 23 cents to between five and ten cents, about the cost of grid power today.

Here is a brief summary of the awards (all of the projects get a firm first-year partial investment, with the remaining amounts “available over three years if the team meets its goals.”):

$14.8 million to a project led by Amonix to develop “a low-cost, high-concentration PV system for utility markets.” Translation: systems that use devices like reflective dishes to concentrate solar power on specialized solar cells that can take the heat of concentration and harvest more of the light spectra with cells of over 40% efficiency. Amonix design has already been proven for utility usage in the field.
$13.3 million to a project led by Boeing to develop a “high-efficiency concentrating photovoltaic power system.” Translation: another concentrating solar power system, only using “advanced high concentration non-imaging optics” and high efficiency (30% or higher) cells, not necessarily for the utility market.
$19.1 million to a project led by BP Solar to develop a “low-cost approach to grid parity using crystalline silicon.” Translation: figure out how to make today’s traditional,
standard solar cells thinner and more productive.
$9.4 million to a project led by Dow Chemical for “PV-integrated residential and commercial building solutions.” Translation: work on the building-integrated PV (”BIPV”) market segment, applying Dow’s expertise in adhesives and manufacturing technology to drive down the cost of photovoltaic roofing materials.
$18.6 million to a project led by General Electric to develop “a value chain partnership to accelerate U.S. PV growth.” Translation: figure out how to put solar into any kind of building.
$2.3 million to a project led by Greenray for “development of an AC module system.” This is one of my personal favorites, for it’s an idea I toyed with once upon a time myself, as I pondered the problems of wiring up today’s standard solar equipment: why not stick the inverter right into the PV module? Do that, and you might be able to arrive at a
plug-n-play system that could be installed by homeowners, not electricians!
$3.6 million to a project led by Konarka for “Building-integrated organic photovoltaics.” This is very exciting, cutting-edge stuff, using organic dyes that convert sunlight to electricity, and it has the potential to make solar ridiculously cheap.
$20 million to a project led by Miasole, which will “develop high-volume manufacturing technologies and PV component technologies.” This project focuses on roll-to-roll, continuous manufacturing processes for thin-film PV, as well as integrating electronics into the module and making modules easier to install.
$20 million to a project led by Nanosolar for “low-cost, scaleable PV systems for commercial rooftops.” Nanosolar, of course, is the company that frustrates the hell out of us stock market investors, because it’s a private company that we’re just dying to have a
piece of. Their printing-press approach to solar offers the tantalizing possibility of solar power at a tiny fraction of today’s cost. This project will focus on applying their solar product to large, flat commercial building rooftops. (But one day, I hope to see Nanosolar’s material wrapping entire sides of buildings, and I have personally begged them to focus on that segment.)
$6 million to a project led by Powerlight for a “PV cell-independent effort to improve automated manufacturing systems.” Being one of the largest solar integrators/installers in the country, with an impressive list of very large solar projects under its belt, Powerlight is a natural to lead this effort, which will focus on ways to speed up the system design process and make it easier to install solar systems.
$4 million for a project led by Practical Instruments for “low-profile high-concentration CPV systems for rooftop
applications.” This project will explore the possibility of using high-concentration optics and high efficiency cells in a device that doesn’t stand some six feet tall on the roof, as most concentrating solar power systems do.
$17.9 million for a project led by SunPower for “grid-competitive residential solar power generating systems.” Translation: they will look for solutions to some of the standard problems in manufacturing traditional solar modules–such as how to make silicon ingots and solar cells more cheaply–and they will explore new designs for solar cells and modules.
$19.3 million for a project led by Ovonics for “low-cost thin-film building-integrated PV systems.” Ovonics’ innovative approach to BIPV will be enhanced by increasing efficiency, fabricating cells more quickly, and reducing the cost of other system components.

This kind of investment is exactly what the solar industry has needed for so long, and I expect great results from it.

With it, the program just might make its goal and bring solar power even with grid power in a mere eight years.

It’s very, very exciting. I can’t wait to see what innovations come from it!

Until then . . .

–Chris

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The Cavalry Stays Home

March 10, 2007 at 10:08 am
Contributed by:

Folks,

Here’s my latest for Energy and Capital, about the large oil and gas projects around the world that are being cancelled and delayed due to many factors, not the least of which is cost overruns.

–C

The Cavalry Stays Home

March 9, 2007

By Chris Nelder

“The worst thing that could happen is to confuse ourselves and the public with too much spin about unlimited energy supplies at cheap prices, alternative fuels on a global scale, or energy independence in a matter of years. That kind of thinking simply dilutes our focus, defers the tough solutions that are needed today, and sets us all up for more future shocks and economic disruptions.”

– Sadad al Husseini, former head of exploration and production for Saudi Aramco, in a January, 2007 interview with the Journal of Petroleum Technology

When confronted with the indisputable reality of the peaking and decline of the world’s top-producing oil fields, the cornucopian camp points to new projects as the cavalry that will ride in and save the day. High crude prices, they argue, will make formerly marginal oil projects profitable and encourage the development of new oil fields.

But given recent events, it seems their faith in the Invisible Hand is ill-placed.

Let’s take a look at some of them.

First, the Kashagan oil field in Kazakhstan. Situated on the western coast of the Caspian Sea, it’s the largest new oil field discovery in over 30 years, with a potential production of 1.5 million b/d. That would make it one of the top four most productive oil fields in the world. (Only three of the world’s 4,000 oil fields produce more than 1.5 mbpd, and all of them are either in decline or suspected of being in decline.)

Consequently, production from Kashagan has been eagerly anticipated by cornucopians, who expected it to make up for the depletion of the world’s mature fields.

But two weeks ago, the Italian oil group operating the field, Eni, announced that the startup cost of the project is going to be almost double the initial estimate, at $19 billion vs. $10.3 billion. And that’s just to get the initial phase of the project going through 2011, when it will produce 300,000 bpd.

It’s also going to take about three years longer than previously anticipated, beginning production around 2010, and won’t hit its 1.5 mbpd peak production until 2019!

Since it appears that we’re already at the peak of global production, that means the Kashagan cavalry will show up just in time to clear the bodies off the battlefield.

Just two days earlier, ExxonMobil announced that the costs of its much-anticipated, $15 billion liquefied natural gas (LNG) project in Qatar were running out of control, and so it decided to scrap the project altogether.

“Right now, everyone around us is postponing and delaying projects,” Qatari Oil Minister al-Attiyah said.

Oops, there goes another company of horsemen.

This is a severe blow to the cornucopians, who have predicted a massive expansion of the liquefied natural gas industry. One week ago, PricewaterhouseCoopers released a report saying that LNG will deliver 31% of global gas by 2010, a doubling of the production level in 2005. About two thirds of that production was to come from Qatar.

Exxon’s announcement that they were scrapping the Qatar project was on February 21, a week before the PricewaterhouseCoopers report was released. Presumably the report was nearly done by that time. I wonder if anybody considered revising it, or if they just decided to let the optimistic story stand and hope that nobody would notice.

Across the Caspian Sea from Kashagan, on the northeastern edge, is another highly anticipated oil project on Russia’s Sakhalin Island. Royal Dutch Shell’s Sakhalin II field is the world’s largest combined oil and natural gas project and Russia’s first LNG plant–a very, very big deal.

But, in what has become a well-worn ruse in the ongoing play of Russia renationalizing her resources, the project was accused of environmental negligence and threatened with lawsuits until Shell was forced into minority role, with Russia back in control.

Among the shady shenanigans and nasty allegations surrounding the project is the revelation that Shell executives had known for some time about the ballooning projected costs of the project, but kept the information secret. When the project was taken over by the Russian government, they dropped that poison pill, revealing that the costs were actually going to double: not $10 billion but $20 billion. Putin was reportedly furious.

The cost overrun is definitely going to slow things down in Sahkalin.

Meanwhile, in Nigeria, our number-five top source of oil imports, the militant group MEND issued a press release saying that Italians and Nigerian officials had paid a $1 million bribe in order to secure the release of captured oil workers. One of the hostages escaped and MEND broke off negotiations with the Italians, saying they would keep the remaining hostages until May.

Violence and killings have ratcheted up ever since, and the Italians are now telling their 600+ nationals in Nigeria to get out of dangerous areas.

On the whole, at least 50 foreigners have been kidnapped in Nigeria over the last two months, thousands of foreign oil workers have left the country, and oil production in the swamps is down 20%.

Attacks on the pipelines, and attempts to siphon fuel from punctured pipelines, have also led to the deaths of thousands of locals when the pipelines exploded.

Due to the danger and uncertainty, major oil companies have announced that they will postpone planned projects in the Nigerian swamps, including LNG plants worth about $20 billion. Those plants have been highly anticipated as critical sources of future imports for the U.S. and the U.K.

And in Ghana, a natural gas supply line currently under construction to bring Nigerian gas to African energy generation plants is delayed because the Niger Delta militants keep vandalizing the pipeline.

Chalk up another company of horsemen that won’t be riding to the rescue.

In addition to its losses in Kashagan and Nigeria, Eni lost production last year in Venezuela as Chavez seized their Dacion field. They have now asked the World Bank to arbitrate the dispute with Venezuela. (I wonder how far they’ll get, with Paul Wolfowitz, architect of the Iraq war and a bitter antagonist of Chavez, heading up the Bank?)

It’s tough to be an oil company out on the frontier of development. Very tough.

A few days ago, Venezuela made another unpleasant announcement to the six foreign oil companies that are being forced out of their investments there under Chavez’s renationalization program. Instead of being compensated in dollars, they will be paid in vouchers that will give them reduced equity stakes in future oil projects. Ouch.

Back in December, Occidental Petroleum announced it was going home after a long legal battle with the native people of northern Peru. For 30 years, Oxy failed to clean up their chemical waste from drilling operations there, leading to numerous health problems for the locals. Oxy has also been forced out of a $60 million investment in Colombia, where residents have struggled to stop the oil developments for over a decade, engaging in demonstrations, threatening mass suicide, and even being gunned down by paramilitary forces allegedly hired by Oxy.

In short: The people down south want a safe and clean environment as much as anybody else, and they don’t see the need to sacrifice that in order to satisfy our need for oil imports.

Turning to Iraq, a senior oil ministry official recently said that the country is losing up to 400,000 b/d of production due to attacks on the oil infrastructure, most of them targeting pipelines. In 2006, there was an attack about once every other day.

Pipelines are notoriously difficult to protect, and with the country verging on civil war and U.S. forces unable to secure even Baghdad, hopes for restoring the oil infrastructure in Iraq are fading fast.

So much for their being able to finance their own reconstruction, too.

As we have noted before , in some cases the price of oil itself is stifling oil projects. For example, at Shell’s Alberta oil sands project, the cost of producing a barrel of oil, after a planned 100,000 b/d expansion, will be six times higher than the cost when the project first started! That announcement last year had investors fleeing for the exits, and mercilessly took down the stocks of the companies involved . . . no doubt slowing those projects down as well.

The overriding theme should be clear:

Cost overruns are the norm, not the exception, and projects are running over budget by two times or more.
Foreign oil companies are taking some serious hits in their far-flung projects, and are adopting defensive postures. They will not be rushing out to the frontiers of Africa and the Caspian to develop the world’s last major sources of untapped oil and natural gas any time soon.
The fossil fuel cavalry, if it ever leaves home at all, won’t be arriving in time to delay the peak or avert shortfalls.

Last week, legendary Texas oil man and oil market prophet T. Boone Pickens confirmed that we’re at the global peak of oil production: “If I’m right, we’re already at the peak,” he said. “The price will have to go up.”

Need another reason to believe him? Pickens’s bets on the oil market have netted him 800% returns since 2001.

A technical analysis last week by Stuart Staniford of The Oil Drum supports the notion that we’re at the peak, concluding that Saudi oil production went into decline at the rate of 8% a year in 2006. If Saudi Arabia is in decline, then by definition the world is in decline. An 8% decline rate there cannot be made up elsewhere.

So where does all this bad news for fossil fuels leave us?

You already know the answer: renewables.

They don’t need to be deployed in remote and dangerous parts of the world. They require no blood to protect, and do not bring disease and death to local populations. They emit no greenhouse gasses. And when the cost of oil projects spirals out of control like this, they start to look downright cheap, especially if you can think beyond next quarter’s balance sheet and see these trends extending a decade or two into the future.

I don’t believe the Street has priced in just how expensive the future of oil production is going to be, or how cheap renewables will be by comparison in a very short while.

But that’s what we’re here for: to give you the heads-up so you can get in on the ground floor and make a killing.

Until next time,

–Chris

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