View the Web version below the fold, or download the PDF.

Chris Nelder’s Notes on the 2009 ASPO-USA Peak Oil Conference

October 11-13, 2009

Denver, Colorado

These are merely my notes from the conference. I hope they will be useful to others as an index to the volumes of material that were covered. Any errors or omissions are undoubtedly mine. Please send any comments/corrections to me.

My coverage is no doubt incomplete because I can only type so fast and much of the material went by very quickly. Consider this document an index, and go back to the source presentations to double-check the data. If available, the slide decks are linked into the title of each presentation.

My personal comments are shown in [brackets]. (?) indicates information I wasn’t sure I got right. I have boldfaced selected comments that I thought were important.

Since no one can be in two places at once, I could only cover part of the split sessions that occurred simultaneously. I regret every session that I missed!

At the end of this document there is a key to abbreviations, links to more information and speaker bios, and selected links to others’ coverage of the conference.

Your humble scribe,

Chris Nelder

chris (at) getreallist (dot) com
Energy Analyst
http://www.getreallist.com
http://www.energyandcapital.com

Day 1 – Sunday, October 11, 2009

9:00 am – 10:00 am

Charting a Sustainable Future (Session 1 of 2) – Panel

Pat Murphy, Arthur Morgan Institute for Community Solutions

Jason Bradford, Managing Partner of Vital Farmland LP

Dave Bowden, Executive Director, ASPO-USA (moderator)
Pat Murphy – “Sustainability of Passive Buildings and Shared Transit”

• Sustainability needs a new definition, and it can’t be about growth. Increasing CO2, peak oil, etc. implies serious limits.
• Energy consumption correlated to inequity – world inequity now the highest in history
• Sustainability requires 90% CO2 reduction. U.S. CO2 emissions per capita highest in world, now 19.6 tonnes, world average is 4, needs to go to 1 to be sustainable (survival)
• Three technology options:
• Plan A – Black (fossil fuels) – 90% of population
• Plan B – Green (solar, wind, switch grass) ref. Lester Brown’s work. Maintain current lifestyle – 9% or less of population
• Plan C – High satisfaction low energy lifestyle, curtail fossil fuel usage. Reduce current lifestyle – 0.9% of population
• Modern world is an energy world. After 10,000 years of agrarian living, ~250 years of technology living, we think Moore’s Law applies to energy when it doesn’t.
• Energy sources are limited. Not enough fossil fuels, atmospheric tolerance, renewables not ready to scale.
• Energy devices (fuel cell cars, EVs, green buildings, lithium batteries, etc.) are all expensive and very small solutions. Power plants have changed little.
• His book: Plan C: Community Survival Strategies. Also contributed to The Power of Community (film about how Cuba survived having their fossil fuels cut off).
• We must cut energy use – fast! Can’t wait for techno-fixes.
• A “sufficiency” lifestyle is what we need now. Context where curtailment is not suffering. Happiness is relating, not accumulating. Community is a cooperation principle.
• Science of Plan C
• Technology/science driven. Depletion technology, climate science, psychology/sociology, ecological economics.
• Need to understand EROI, embodied energy vs. operating energy.
• U.S. uses 57.8 boe per capita annually. OECD average: 30.9
• Setting 80-90% reduction targets
• #1 Target – Housing:
• Deep building retrofits – German passive house as model, ACI’s 1,000 home challenge. U.S. homes almost twice the size of typical European or Japanese homes.
• 50% of U.S. energy is used in buildings. 40% operating, 10% embodied.
• Green building efforts have been too little too late, reducing 15-25% energy not 80-90%. Takes about 75 years to turn over building stock. We should be investing in thick-shelled buildings not thin shells with massive investment into heating.
• German passive house uses 90% less heating and cooling energy. 20,000 passive houses built worldwide to date.
• Challenge is to retrofit existing buildings – thicken the shells, use heat exchangers, cut energy use by 80%.
• #2 Target – the private car:
• U.S. has 220 million cars & light trucks. Average car trip has 1.5 people.
• Believes small buses and jitneys (or transform private cars into jitneys) will do “shared transit” not mass transit. Use GPS & software solutions to coordinate trips.
• Focus on curtailment and community; cut 2/3 personal energy use; build a high satisfaction/low energy lifestyle.

Jason Bradford – “Sustainable Farming”

• Talk based on Sustainable Agriculture White Paper.
• Defining sustainable: use resources at or below regeneration rate without degrading them, plus fair distribution within and between generations.
• Ecological economics model
• The state of today’s food system:
• Pros: food is plentiful and cheap
• Cons: depletes non-renewable resources; degrades soil air and water; puts 5 billion pounds of harmful chemicals into environment per year; major GHG emissions; unhealthy & unsafe food; unstable economics; etc.
• [Great slide from New Scientist paper showing 24 “hockey stick” charts]
• We are reaching systemic limits: demand is increasing while stocks and arable land decline. Per capita arable land has essentially halved in the last 50 years worldwide.
• Fossil energy in the U.S. food system: 10.3 quads of energy consumed for 1.4 quads of food energy available. Tractors, artificial fertilizer production, seed production, trucking & refrigeration of food produced, processing & frozen foods, refrigeration, cooking. “The hubris of Wile E. Coyote”
• Feedlot food system is massively polluting. Waste is concentrated, corn & feed imported, etc.
• Food production system produces massive “dead zones” offshore where algae suck the oxygen out of water, create anoxic environment where nothing can live.
• Three crops comprise 71% of U.S. crop acres: corn, soybean and wheat. Monsanto, Pioneer and Syngenta (all basically chemical companies) dominate the seed industry with patented seeds. We’re setting up a situation where we have very low diversity.
• The food industry (e.g., meat packing) is highly concentrated with the vast majority concentrated into just a couple of companies. Total opposite of historical arrangement of millions of small family farmers.
• Half of U.S. crop subsidies went to corn between 2003 – 2005. 56% of corn went to feed animals, 18% exported, 13% went to make ethanol…
• Just-in-time food delivery system dominates. 1-3 days of supply all up and down the food distribution chain.
• Climate change poses a major challenge to the finely tuned temperature, rainfall, etc. of our highly concentrated food regime.
• Must restore diversity of natural web, use diverse rotation system, cycle through pasture…
• Organic methods can feed the world. Organic has about 30% yield advantage over commercial farming. Organic also has more resilience to stress, less volatility.
• Can we scale the transition to organic to the whole country, to the world? Only 0.5% of cropland is organic in the U.S.; most of the organic food is imported.
• Costs and benefits of conversion to organic: premiums of 50 – 200%, higher value crops, less fertilizer input costs, etc.
• CSA farmers typically earn 2.5x of what conventional farmers make.
• Total U.S. farmland property value: $1.9 trillion. Average family spends 10% of its income on food (probably the lowest cost in history). Only $0.17 per dollar spent gets to the farmer.
• Picturing a sustainable food system:
• Instead of tilling, use no- or low-till methods (rolling, crimping).
• Instead of importing ammonia fertilizers, fix nitrogen using legumes.
• Instead of being forced to buy GMO seeds every year, farms should be allowed to grow & save their own seeds.
• Pest and weed management can be done using natural methods.

10:15 am – 12:00 am
Analyses from The Oil Drum – panel

Gail Tverberg, The Oil Drum

David Murphy, lead researcher, EROI Institute

Jeff Vail, Associate, Davis Graham & Stubbs LLP

Brian Maschhoff, Contributor, The Oil Drum

Rembrandt Koppelaar, Contributor, The Oil Drum

Kyle Saunders (“Professor Goose”), Founder, The Oil Drum (moderator)
Gail Tverberg – “What’s Ahead? Two Scenarios”

• Two post-peak oil scenarios dominate: slow slide & quick crash
• Slow slide:
• Shortages of lots of things – oil, water, minerals – which gradually grow worse, but we keep muddling through, relying on techno-fixes and alt fuels. We learn to live with less and the world becomes the “new Cuba.”
• Questions:
• How fast will net energy decline?
• Will alternatives scale fast enough?
• Isn’t there a strong BAU assumption that international trade keeps working, lending keeps working, and we can continue making complex equipment with materials from around the world?
• Quick Crash:
• We live in a highly networked system of great interdependence.
• Manufacturing depends on international trade.
• Businesses depend on credit and manufactured goods.
• Business and manufacturing depend on electricity.
• Electric utilities depend on credit and on replacements parts.
• Systemic Risk
• Problem in highly networked interdependent systems
• Like a computer crash – one thing stops working, everything else stops working
• Risk areas: international trade and finance, and credit
• There is a close and complex link between credit and oil extraction. U.S. consumer credit peaked in July 2008, just as oil production peaked.
• Credit enables oil production, and also enables demand for oil, by allowing consumers to buy things made with/from oil.
• Shrinking oil supplies will limit economic growth – leading to defaults, as we did this past year. Forces lenders to cut back on loans, which leads to less supply and less demand.
• Net impact of credit on oil: provides positive reinforcement for oil extraction when it’s growing, and negative reinforcement on the way down. Result: peak oil = peak credit.
• Contributes to systemic risk of networked systems
• If there is a quick crash, international trade will fall off pretty quickly, replaced by bilateral trade – much more limited.
• Manufacturing of all types drops off quickly, imports will be harder to come by. How will we come by replacement parts for energy machines, etc?
• Defaults on debts become more and more problematic.
• Currencies become more local.
• Net impact
• Current model of food production may cease to work.
• Current transportation model may cease to work.
• Re-localization may be necessary.
• Much lower standard of living likely.
• Mythology is that oil will never “run out” and we’ll have a “dribble forever.” But what are the real limits on oil production? Globalization needs high tech machinery etc.

David Murphy – “Recent Advances in EROI Research”

• EROI definition: energy out divided by energy in
• Inputs include indirect (steel production, etc.); direct (oil production); energy to allow use (infrastructure); labor support (social systems, medicine, etc.).
• Corn ethanol is not a new debate – ref: 1979 gasohol debate on whether it had a net energy gain.
• Four recent assessments of net energy of corn ethanol found 0.8 – 1.2 EROI.
• Real fuels are an order of magnitude larger than net energy of corn ethanol.
• Ref. Euan Mearns’ slide on implications of the “Net Energy Cliff” – shows implications of declining EROI.
• Excellent slide of EROI of major types of energy [Examine this closely!]
• EROWI (energy returned on water invested) – Petroleum diesel: 228 vs. corn ethanol’s 0.024 (it’s using massive amounts of water).
• How declining EROI might impact economic activity [great chart] showing petroleum expenditures as a percent of GDP in the U.S. and real oil price. 2008 curve was incredibly volatile.
• YoY changes in GDP, petroleum expenditures as a percent of GDP and real oil prices chart: Major recessions are always associated with petroleum.
• All of our economic theories were developed during a period in which oil production was constantly increasing. As we go down the back side of Hubbert’s Curve, we will have to rethink our theory: Efficiency? Defeatism? Collapsism? Steal from others-ism? Run and hide-ism?
• But with declining EROI, the crucial issue isn’t about remaining oil to produce, but rather how much can be extracted at a profit! Net energy Hubbert Curve falls faster than gross curve.
• An attempt to figure out the minimum EROI of a sustainable society:
  • Three factors: EROI at the source, EROI at point of use, EROI of total society/associated infrastructure etc. (complex data slide)
  • 3:1 is the minimum EROI to run a society, on average
  • Returning to the Net Energy Cliff chart with that in mind […]
  • Suggestions for future work:
    • Need better data!
    • Need to understand energy costs of backup systems (esp. for alternatives)
    • EROI of unconventional gas in the U.S. – esp. shale’s

Jeff Vail – “The Renewables Gap”

• Systemic challenges in peak oil mitigation
• Can we replace energy declines with renewable energy? Can we mitigate peak oil this way? Only if the net energy works out.
• Target: quantifying net-energy loss. The decline in net energy is faster than simple oil decline. Even if oil production remained flat, net energy would decline.
• Scale issue!
• The vast majority of the energy needed to produce renewables comes up front…between 80-90% of the energy you put into solar & wind etc. needs to be made up front before you get energy out of them.
• 1 mbpd oil over 1 year (365 million barrels) = 2.117 quads = 70.78 GW-years of electricity. But:
• Efficiency of burning fossil fuels must be taken into account
• Plus energy cost of rebuilding infrastructure to run on the renewable electricity, grid investment, etc…. Most of which must be made up front.
• You need about 1 Btu of electricity to replace 1 Btu of oil
• What about conservation & efficiency?
• Population increase complicates it: could offset as much as a 30% improvement in conservation & efficiency! Car sales are up 29% in India even during a recession as people buy their very first cars.
• EROI: How much energy do you have to invest up front in renewables?
• Min EROI for renewables: Low bound: 4. High bound: 20.
• Renewables gap: with 5% net energy decline, EROI = 20 (trying to keep up with decline of oil)
• Need to expend equivalent of 7 mbpd in year 1, 2 mbpd in year 2, more in year 3…
• Pessimistic: 4600 GW-years needed in year 1, net energy doesn’t catch up until year 7 [these last two slides were important but too hard to capture in notes – see slides!]
• Can we bridge the renewables gap? [A couple of different scenarios, from simply building renewables to a Manhattan Project type of crash program]
• We will probably have the political will to make the transition at exactly the time when the economy can no longer support it.
• The precautionary principle at work…
• We have a small and shrinking supply of energy, how will we spend it? Will we try to accomplish a transition en masse to renewables? Or will we choose to shrink & delocalize our society?

Brian Maschhoff – “More Saudi Oil? Really?”

• Used Google Maps to try to figure out what Saudi Arabia is doing
• IEA says we need to find six new Saudi Arabias by 2030 to replace declining production from existing fields.
• Prospects for new oil production:
• Rework existing reservoirs (essentially what they’re doing now)
• Developed untapped reservoirs in existing fields (not much success yet)
• Develop new fields (not yet)
• Find new fields and develop them (nope)
• Increasing focus on offshore: from about 1 in 2000 [wells] to about 28 in 2009 [eyeballing the chart – no data]
• Tried to identify & assess Saudi offshore field development using Google Maps (graphic). Seven major fields:
• Safaniya
• ~63 billion bbls OIIP
• Cumulative production > 12 billion barrels
• 28% depleted
• (lots of details on wells, platforms, etc.)
• Qatif and Abu Safah
• 500 kbpd AL
• 300 kbpd AM
• 375 MM scfd [?] gas
• 1.2 mbpd of water! (High water injection program)
• Berri
• 23 billion barrels OIIP
• ~12 billion barrels reserves
• 28% depleted
• By 1991: 1.7 bbo cumulative
• Manifa
• ~10 bbo reserves
• Production fell from 100 kbpd in 1965 to 58 kbpd in 1980 (?)
• [missed data – went by too fast]
• Big project with artificial islands, big water injection program, etc. Freaking huge artificial drilling islands.
• Technology making problematic oil production possible. Not new oil. Is there really nothing better out there than these extreme offshore projects?

Rembrandt Koppelaar, “Oil Megaprojects: A Quarterly Approach”

• Why oil megaprojects?
• Gives a reliable estimate of new production on the market in the next five years
• Estimation of short-term production can be made by combining mega projects with future decline rate estimates over current production.
• But data needs to be improved & is still limited
• See Oil Drum Oil Megaprojects Wiki.
• Mapping out all new megaprojects through 2020 (including tar sands etc.) and comparing with 4.5% decline rate in 2007 going to 6.5% in 2014. Plus OPEC bringing spare capacity on the market…oil production plateau to about 2014 at 89 mbpd.
• After 2014 production declines to 84 mbpd in 2020 and 78 mbpd in 2030
• Future macro-economic effects on the demand side have not yet been included.
• His new study on this data will be published in about two weeks at The Oil Drum.

Q&A

• Murphy: Noted that Biophysical Economics conference is coming up in Syracuse NY [look up Charles Hall]
• Vail: Re: potential of efficiency and conservation, political will remains a hugely important x-factor. Our society is very bad at dealing with long time horizon planning.
• Koppelaar: Megaprojects model is strictly supply based. Political & economic factors need to be factored in—how will a major deflationary situation affect supply? Supply crunch may owe more to demand & investment factors.
• Tverberg: Oil at $75-80 seems to kick off a recession. So we may not be able to get expensive projects going at all.
• Murphy: Doesn’t see a profitable scenario for oil shale in Colorado.
• Vail: Didn’t attempt to include coal and natural gas in his substitution scenario. Has concerns about EROI of remaining coal.
• Koppelaar: To improve modeling done by IEA, et al. and allow us to compare forecasts, we need 1) better data and more transparent data 2) assumptions to be clearly specified
• Saunders: Publicly shared data & models need to be more discrete and comprehensive.

1:00 pm – 2:30 pm
North American Energy System Vulnerabilities – panel

Jeffrey Brown, Independent petroleum geologist

Rick Munroe, Energy Security Analyst, National Farmers Union of Canada

Scott Pugh, U.S. Department of Homeland Security

Sally Odland, ASPO-USA Advisory Board (moderator)
Jeffrey Brown, “Are We in the Early Stages of a Permanent Net Oil Export Crisis?”

• Explained the “Export Land Model (ELM)”
• Cumulative Net Oil Exports (CNOE) of Export Land showed that post peak CNOE is 60% depleted in three years, etc.
• Looking at post-peak major producers Indonesia, UK and Egypt, together shipped 82% of post-1980 peak total (CNOE) by 1996, or 90% of all the oil they would ever ship.
• At peak in 1996, they were consuming 56% of production.
• Their export decline rates accelerated with time.
• CNOE for those three countries post-peak were 53% depleted in three years. Net exports are now down 9% from the peak rate in 1996.
• [Several slides on rates of change in exports for net exporters with recent peaks]
• For Saudi Arabia with URR assumed at 230 Gb, there is a 95% probability that it has already peaked, and approach zero net exports around 2034.
• More slides on expected date of net zero exports for other major net exporters… top 5 exporters in 2005 reach zero net exports in 2032. In three years, they shipped 1/5 of their total expected net exports post-peak.
• [Important chart: Combined net oil exports from Canada, Mexico and Venezuela.]
• [Second-to-last slide shows that the U.S. is being outbid by Kenya for oil!]
• Prescription for the future of transportation: “A desire named streetcars.”

Rick Munroe, “Government Plans for Liquid Fuel Emergencies”

• [Suggests that we refer to the slide deck online since the presentation will go quickly.]
• As a farmer who learned about peak oil some years ago, he went looking for military & government planning directed at the problem.
• One government official assured him that because Canada is a member of IEA and has 200 years of supply in the tar sands, we should relax.
• How prepared are we for a liquid fuel emergency (LFE)?
• GAO [U.S. Government Accountability Office] in 1996 did voluminous studies about peak oil and published it—then was dropped! They criticized the existing DOE plans using some extremely sharp language and criticized the IEA [great quotes, from 1981!]
• Three outstanding studies on LFE: Alan Smart (ACIL Tasman, 2004), Kathy Leotta (PB, 2004); Helen Peck (Defence Academy, 2006)
• The four standard strategies of the IEA:
• Increase supply (surge production) and stock drawdown from emergency reserves. About 90 days’ worth of net imports are required to be kept in reserve.
• Decrease demand: fuel switching, and voluntary demand restraint measures. Mandatory measures are hard to implement.
• IEA notes in 2005 that pre-planning is critical, and that the public must be primed and well informed in advance.
• But there is no local (municipal) plan in North America. No city has any plan. There is no plan to administer a LFE.
• “The fundamental problem is that it is the very efficiency of the nation’s food and drink supply chains, under normal circumstances, that make them so vulnerable under abnormal ones.” (Helen Peck)
• Panic buying and hoarding might result from alerting the public. To prevent panic buying, need a top to bottom intervention plan and lots of pre-planning.
• A major price spike can paralyze a lot of things, yet the belief is that the government should not interfere in price.
• Confidential IEA country report says price pass-through should be unimpeded during a crisis.
• GAO, 1996: “physical shortages…are virtually impossible in a market economy.”
• We don’t need physical shortages to have a fuel emergency. We will have trouble if it’s only unaffordable.
• “It is questionable whether an adequate organization structure exists which could effectively manage a crisis.” – GAO
• Everyone assumes the fuel will be there when we need it, but no administrator wants to do LFE planning.
• Mentioned the Oil Shockwave exercise on June 23, 2005, examining the effects of a 4 mbpd shortage – price tripled.
• Quotes from Richard Haass, James Woolsey and Robert Gates
• The UK, Australia and NZ are well ahead of us in terms of planning. We’re probably the most vulnerable region of the world, yet we’re the most complacent.
• We need to localize the response plan, and ensure affordable fuel to farmers. Invite military scrutiny of LFE plans. Farmers have to work with the seasons, and if they have fuel shortages, food supply could be impacted (can’t plant their crops in time, etc.)

Scott Pugh, “Protecting America’s Electric Grid”

• Secure Grid 2009 war game exercise performed using possible terrorist roadmap: bombs, borders, bugs, business, bodies & buildings
• Energy security depends heavily on electricity – even to produce the other fuels.
• Joint commission on grid security from Feb 2008 with DOD & others found it was urgent.
• DOD working on facility islanding in the event of a grid outage.
• DOE projects electricity generation to increase by 50% by 2030…would require 50 new 1,000 MW reactors, and 262 coal plants (600 MW), and 279 natural gas plants (400 MW) and 93 renewable plants (100 MW). But we’re likely to see a dip in nuclear between now and 2030.
• The grid is congested already, we need to build a new and smart grid to accommodate growth and renewables.
• Today’s grid is broken into three separate parts: East, West, and Texas (“so Texas can secede from the union any time they think they should”).
• Grid is owned by hundreds of transmission utilities & generating companies.
• The transmission grid (HVDC) is different from the distribution grid to end-users.
• The transmission grid has three different voltages: 500 KV, 765 and 345 kV. Transformers are few, lead time 6-18 mos., and are very heavy (100 to 300 tons)
• 25,000 substations in the transmission & distribution grid.
• In 2007 Homeland Security & DOE staged a cyber attack test to see if they could quickly open and shut a circuit breaker and damage it with a cyber attack. They were able to do so.
• 1400 power plants in America produce 95% of the power; any one of them could be shut down & damaged via such a cyber attack.
• War game scenario: Two power plants attacked in Columbus OH, terrorist group claims responsibility, issues demands, threatens to take out 10 more cities…
• Instead of replacing giant heavy damaged transformer, working on a plan to rapidly replace one with three smaller transformers that can be trucked in.
• Smart grid is coming & will be vastly different – compared to today’s grid, will be like banking system before and after Internet.
• Showed video of the war game scenario (mock up CNN broadcast)

Q&A

• DHS is indeed concerned about an attack via EMP (electromagnetic pulse) and is planning around it.
• Q: This was a known problem 20 years ago—what happened? A: The grid is owned & operated by private businesses and the government doesn’t see fit to interfere.
• Q: For Munroe: How would farmers be affected by an LFE? A: If there is full price passthrough, farmers would be hard hit and would not plant.
• Brown: “The lifeblood of the worldwide economy is draining away before our eyes and we’re not doing anything about it.” Could not find one example of any net exporter who attempted to control their exports post-peak. Even absent subsidies, oil exporters have the economic advantage over net importers. The only choice for developed countries is to get off oil as quickly as possible. (Odland: “We can’t all be net importers!”)
• Brown: Mexico’s year over year net export decline rate for 2008 was 25%, up dramatically from the 2005 decline rate. By the end of this year, I suspect they will have shipped 85-90% of their post-peak cumulative net oil exports. The disintegration of the country could interfere with production as well. (Odland: Old saying, “Poor Mexico: So far from God, so close to the United States.”)
• Pugh: The military definitely gets peak oil. They’re paying for fuel in money and blood daily. They’re focused on using it more efficiently. There’s not going to be enough oil to run its transportation system indefinitely, but the military is going to use oil for a long time. There’s always going to be enough oil for the military. It’s the largest single user but uses only 2% of the nation’s consumption.

3:30 pm – 5:00 pm
Connecting Peak Oil and the Recession – panel

Terry Backer, State Representative, State of Connecticut

Steven Kopits, Managing Director, Douglas-Westwood LLC

Nate Hagens, Editor, The Oil Drum

Robert Hirsch, Senior Energy Advisor, MISI (moderator)
Terry Backer, “”Promoting Sound Energy Policy in Cash-Crunched Governments”

• My constituents found their small financial cushion gone after bills & mortgage were paid, were devastated when gasoline hit $4 a gallon and heating oil prices escalated. It stripped away their cushions.
• That’s when they started having trouble paying their bills, and led to trouble in making their mortgages. It was devastating as well to fishermen, who couldn’t afford the fuel to run their boats.
• Connecticut (CT) government doesn’t have the cash to do the things I hoped we could do to respond to the future problems of fuel.
• The best way to motivate people, to sell the peak oil story, is to focus on economics. How can we keep the lights on, keep the police & fire crews working, and so on? If you tell people that their entire way of life is about to end, they just shut down and raise resistance.
• Wrote two papers for laymen about peak oil. Formed a legislative peak oil caucus and got some bills for action passed. Once those doors are opened, people can begin to grasp the full scope of the problem. But after the bills were passed, revenues crashed in the economic downturn, and the whole effort was put on hold because the state couldn’t afford it.
• Most states are not coming out of their deficit problems for many, many years. They’re doing one-off tricks and holding their breath in hopes that the economy will recover. How do we get government to understand that the problem isn’t going away, and that they have a very small window of opportunity to begin preparing for it?
• NASA climate scientist James Hansen decided to stop going to conferences and talk about data, and put aside the lab coat, and go become an activist, getting himself arrested at a coal plant, because the time has run out. “This is not a drill anymore.” Unless we start to work the policymakers and get a succinct message through, we’ll get nowhere. We’ve done the analysis. We’re here. What do we do now? We have to forge this knowledge into a strategy to avoid as much human suffering as we can. Malthus was probably right, it just took a lot longer than anybody expected for that to become clear.
• We can’t solve this at the federal level. We’ve got the best Congress money can buy. We have to start with local solutions and get people to take action.
• “The Paralysis of Analysis” - We have analyzed this enough. We have to reach into legislative bodies and keep hammering away on a succinct and consistent message. We have to decide who we are now.

Steven Kopits, “A Peak Oil Recession”

• Peak oil has a disproportionate effect on the poor; we need to remember that.
• We have reached a turning point…
• Turmoil
• The view that the economic recession was a primarily financial crisis is the standard version. But here’s the oil version.
• After 2004, oil supply stopped responding to price signals. But the lack of oil didn’t keep the economy from continuing to grow. Oil supply expanded by about 2% after 2004 but global GDP grew by 17%–a disconnect equivalent to the production of Saudi Arabia.
• From 2003, prices increased by about 25% per year.
• By 2008, the supply/demand balance had become untenable. When crude expenditures reached 4% of GDP, the U.S. fell into recession. Like every other time since 1972, it resulted in a recession The tipping point was $80 oil.
• Econometric analysis also suggests that high oil prices were an important contributor to the recession. Prices alone would have been enough to put us into a recession. This is our first peak oil recession.
• Oil Supply Outlook
• The Economist in 1999 said we were awash in oil.
• Increase in decline rates from IEA from 3.7% in 2007 to 6.7% per year now.
• Peak oil production capacity in 2009 (Macquarie, 2009)
• Dependence on OPEC to rise to 54% in 2020 from 43% today. (Total, 2009)
• Have 8 out of 10 oil majors passed peak production? Yes, right when Ken Deffeyes said they would, in 2005. Oil majors having a very difficult time increasing supply now.
• China demand forecast
• China is central to demand growth.
• China will overtake U.S. as top consumer of oil by 2018, and double U.S. consumption in 2025 (if supply is there)
• Added coal use equal to total U.S. consumption in just 4 years.
• Meeting Chinese demand will be the central challenge in energy.
• How Do We Adjust?
• OECD are getting squeezed out of the market. EU is locked out at $70 oil, U.S. at $75
• The advanced economies, not the oil producers, became the primary suppliers to the emerging countries after 2004.
• The emerging markets will bid away the advanced countries for oil.
• Assuming 100 mbpd supply by 2030, U.S. consumption would be expected at 14 mbpd, down 1/3 from 21 mbpd peak in 2005.
• Rate of long term decrease: 1.5% per year, 2.3% on a per capita basis.
• Per capita, that still puts U.S. in 2030 on par with Korea or Japan today.
• U.S. is ahead of Europe per capita today.
• It’s bad, but not the end of the world.
• The most recent adaptation to price increases wasn’t smooth or graceful. U.S. consumers hung in and continued to consume even in the face of rising prices. But when demand broke, U.S. consumption dropped by all required and more—in just a matter of months.
• So stubborn resistance followed by catastrophic collapse is one model of accommodation to peak oil. Not a pleasant policy choice.
• Conclusions
• ‘Mean reversion’ of energy consumption in the U.S., back to 4% of GDP. [Good useful chart]
• The economy cannot adjust to higher oil prices instantaneously—it takes time.
• Conservation is not the (full) answer.
• Max adjustment pace historically is about 0.8% of GDP per year.
• Implies recession or stagflation.
• Sets ‘speed limit’ on pace of conservation.
• Without supply increase, road will be rocky.
• Move natural gas to transportation.
• Predictability in prices (parity w/ oil & gas)
• Build buffer capacity to help with short-term fluctuations.
• Don’t ignore oil and gas; don’t be a isolationist–oil will affect the global economy, national and energy security.
• Work with our partners–including the Saudis–to help buffer the transition.

Nate Hagens, “Abstract Energy Gain and the Permanent Recession”

• Peak oil did not cause the credit crisis.
• Energy and debt are the primary drivers of economic growth.
• Humans and energy – a timeline [great graph of energy and population]
• Our brains were shaped by our ancestral environment which has nothing to do with our lives today. Three main drivers:
• We value the present more than the future.
• Sexual selection, moving up social ladder by competing for resources.
• We can be neurally hijacked by our feelings.
• Our belief systems–in money, growth, and so on–can affect us deeply and subconsciously. Many belief systems are hardwired. E.g., dogs care about calories, not money. Humans are a bit different—we pursue energy and resources as part of our pursuit of wealth.
• The average American consumes 231,000 calories per day, of which only 1% is used inside the body.
• As natural capital—real wealth—gets into the system, we issue debt, or virtual wealth. But we act as if the real and virtual wealth were additive and real.
• So what happened?
• Net energy gain from U.S. crude climbed from 1930 to ~1966, then went into long decline. Technology is in a race with depletion and is losing (so far). Gap opening between crude & net energy.
• U.S. oil peaked in 1970.
• Bretton Woods 1971
• All-time peak in real wages 1973
• Financial profits were 16% in 70s, 20-30% in the 80s, and 41% since then [good chart!]
• [Several charts on outstanding debt, household net worth, mortgage debt vs. equity as a % of home value etc.]
• How much debt was added relative to energy consumption? Went up sharply starting in the ‘80s.
• Over the past 50+ years, two components supported growth: energy and increasing money supply (=debt). Today, return expectations put unrealistic pressure on global growth requirements. In U.S., a 1% return expectation requires 5% (real) GDP growth per annum. We cannot pay back the debt we have accumulated.
• Economic recoveries will be met with higher energy prices and more decline, which will be self-reinforcing. Stair-stepping of price and GDP as volatility continues. Energy may not be worth more in nominal terms as we continue to try to throw printed money at the problem.
• [Good chart from Samuel Foucher.] If demand peaks due to debt bubble, investment in projects may decline and supply will not materialize.
• If debt gives us an erroneous signal over and above real wealth from natural resources, we might have a skewed distribution, resulting in a steeper decline on the back of the bell curve.
• Conclusions:
• Debt overshoot caused us to borrow from future affordability of energy and natural resources.
• We are likely in the late stages of the majority believing in fiat currency…
• How far is global debt disconnect from affordable future flows?

Q&A

• Q: How do we deflate debt, and how far do we have to go? Hagens: Some believe that our government wants to try to deflate our way out of it. I don’t know how it will be deflated. If we made fusion work, we might have the energy to do it. But it seems unlikely. Hirsch: I used to run the U.S. nuclear fusion program, and I would bet my money somewhere else.
• Q (Charlie Hall): I don’t know how we can physically pay off all this debt. The money that’s owed is far more than would buy all the remaining resources on earth. Hagens: Basically agree [couldn’t capture his actual words]
• Q (on GDP): Hagens: Anything said about GDP should be +/- GDP because of hedonic adjustments and so on. Kopits: It’s reasonably OK for accounting purposes.
• Q (Skrebowski): Is the rest of the world basically similar in terms of portion of GDP limit? Kopits: [believes so]
• Q: How will peak oil affect students’ ability to repay and get student loans?
• Hagens: It’s a good question. Five years ago I might have given a politically correct answer, but now I will say that it’s basically self-exterminating debt. But our education system is really messed up because it doesn’t teach biophysical economics and so on, and it now functions as reinforcement of the existing dysfunctional system. I think the best schools with the big endowments are going to be fine, but tertiary (state schools etc.) will have a tough time. I think the whole education system is going to change.
• Backer: How many more finance industry graduates do we really need? Where I come from, most people can do anything. But we’ve lost a generation of people like that now, so many people don’t know how to do anything useful.
• Kopits: Right now we’re on a narrow ledge: Houston needs $75 oil to keep drilling but the economy goes into recession with oil at $80. There will be more risk associated with the economy.
• Hagens: I went and got a finance degree and an MBA because it was the thing to do, and didn’t care about learning until later. I just don’t think people going to grad school and so on is the right model anymore.
• Q: Can we use peak oil to reprioritize public spending, e.g., stop spending on roads and put it into weatherization, things of that sort? Kopits: We certainly should.
• Q: How long do I have to stay in school for the government to deflate my debts away? Hagens: Who knows…lots of factors. The recovery needs an asterisk—it’s a paper recovery, not a real recovery. We don’t understand how to deal with long-term pain. We don’t know if the Fed will pull money out at this point, or print more like crazy. We’ll hit social growth limits before we hit resource growth limits [If I got that right.]
• Q: Was speculation solely responsible for the spike to $147 oil last year? Kopitz: I don’t think we have a good model for it. I suspect it’s 3-phase. Phase 1: Marginal cost of producers; 2: Prices can’t resolve supply-demand imbalance; 3: It takes on a life of its own–the greater fool theory. People buying houses for fear of being priced out of the market—emotional, irrational buying. It’s driven by consumers, not producers.
• Q: So if it’s not supply constrained, could we have $147 a barrel again? A: Sure! Hagens: Speculation has had an effect across the entire financial market, not just oil.
• Hagens: The real prime mover was spending well into overshoot, which began decades ago.
• Q: What if the world decides to stop pricing oil in U.S. dollars? Hagens: I’m not of the opinion that the dollar will get destroyed on its own. All currencies are in this together.
• Q: The velocity of money is slowing. Alternative energy has numerous barriers to overcome. Are we heading into deflation as a consequence of a resource constrained world? Hagens: We definitely need new belief systems. More energy, higher GDP isn’t making us happier. We need to change our values and be happier with less.
• Hirsch: My personal view is that with these problems, we’re going to have inflation. But we will get through these things and we will prevail!

Evening Keynote
Opened with a clip from an interview with Sadad al-Husseini (oil consultant, Dhahran, Saudi Arabia) and Steve Andrews and Dave Bowden of ASPO-USA:

• 1.5 trillion bbls reserves are very iffy. Maybe 900 billion are proven, 1.2 trillion probable and potential. We need to agree on definitions of reserves.
• There are not enough new projects in the next 5-6 years to make up for global decline rates, which are 6.5% for non-OPEC, maybe 3-4.5% for OPEC. We are going to see a shortage of capacity in the next 2-3 years. In the short term we definitely have a problem. But in the long term we have another problem.
• Ultra deepwater formations have tight composition and very high prices for drilling, then need to stimulate and fracture the source rock…these are extremely expensive projects. New projects are moving from onshore to near offshore to far offshore & deepwater. Even the new high quality discoveries are fraught with challenges that require new technologies to develop. Discoveries like Tupi come online around 2018 and barely compensate for decline of mature fields.
• Technical factors, economic factors, opportunity issues (access to new areas), general geopolitical issues…The long term outlook is not strictly technical. Yes there are other alternatives like Arctic, CTL, GTL, etc., but the global ceiling (5-6% of global GDP) may prevent exploitation of these alternatives.
• The hidden opportunity may be efficiency and conservation. Crisis and opportunity.

Dr. Marcio Rocha Mello, President HRT Petroleum, Rio de Janiero, Brazil

“Super Giant Pre-Salt Petroleum Systems recently discovered in Offshore Greater Campos Basin, Brazil”

Introduced by Vince Matthews, Director, Colorado Geological Survey

Mello worked for 24 years at Petrobras, worked on characterization of Brazil’s offshore and onshore basins. [Extended bio]

• “Do You Believe in Peak Oil?”
• West Africa and Brazil are the same—continents were separated 240 million years ago—same source of oil.
• How deep can you drill and still find hydrocarbons? Go Deeper! Four times more oil and gas reserves [if we go deeper]! The source of the oil is deep.
• Did you know there are huge oil and gas reserves in most of the Greater Campos and West Africa Basins, Gulf of Mexico, Solimoes and Central Congo Basins–deeper reservoir horizons? It took 10 years to break through the preconceptions that going deeper would not result in finding hydrocarbons were destroyed by high heat and pressure.
• Recognizing deep sources: all petroleum contain diamondoids. They are extremely stable oil components. Using both diamondoids and biomarkers you can see both the shallow and deep sources. Source rock with mature oil can be found below the “oil window.”
• [interesting chart of source rock characteristics, and “post and pre salt potential accumulations in greater Campos]
• The problem of peak oil is that you aren’t going deeper!
• The pre-salt of Campos Basin
• When the African continent separated, ocean water came in to a lake environment, and created an ideal formation opportunity for oil.
• By drilling into the pre-salt in various places along the coast of Brazil, they found numerous strikes of source rock from essentially the same reservoir.
• A massive formation (300-400 meters of pay) of oil in the pre-salt was the source rock that resulted in the earlier discovered post-salt formations.
• Source rocks are very thick and rich, and oil is trapped under the salt layer.
• [Lots of graphical geological models]
• The main reservoirs are the heterogeneous carbonate layered stromatolites and Coquinas carbonates ranging in porosity and permeability.
• API gravity ranging from 28 to 30.
• Almost all of the pre-salt accumulations are oil, not gas.
• Results suggest about 20-30 Gbs of reserves in pre-salt. Potentially 40 billion.
• Tupi is one of about 12 major reserve discoveries in the pre-salt.
• Petrobras has discovered much more oil in the pre-salt than they have admitted to.
• Brazil drills a small fraction of the number of wells that the U.S. drills.
• The pre-salt in the Greater Campos province can be considered one of the more prolific petroleum systems in the planet: up to 130 Billion bbls.
• Everything that you find in Brazil, you find in West Africa. The only difference is that Africa’s temps are a bit higher, so more gas. Otherwise, same source rock, same oil DNA.
• If West Africa is so similar to Brazil, then there should be 230 billion bbls between the two.
• In the Gulf of Mexico, there should also be pre-salt oil.
• By using satellite imaging in certain wavelengths, believes he can identify oil slicks on the ocean from natural sources. Does satellite scans every week. Then send ships to the locations of the slicks, and sense submarines to find seeps. (Essentially same way that Cantarell was discovered: via surface tracks of seeps.)
• In the GoM deepwater, many such slicks have been found via satellite.
• The post- and pre-salt petroleum system of GoM must hold up to 140 billion bbls of oil.
• 99% of all the oil in GoM is of Jurassic origin.
• In the Amazon jungle of Brazil, Solimoes Basin was forgotten after producing half a billion barrels of oil. Again, pre-salt accumulations. Solimoes holds up to 30 Gb.
• In the central Congo basin, there are Paleozoic source rocks as well.
• Only 4 wells drilled in the Congo basin. 15 oil seeps found.
• Potentially 60 Gb recoverable in Congo.
• Conclusion:
• Pre-salt of Brazil and West Africa: up to 260 Gb of light oil
• Pre & post salt of GoM: up to 140 Gb
• Pre-salt Solimoes basin, Brazil: up to 30 Gb of gas & light oil
• Central Congo basin: to up 60 Gb of gas & light oil
• There is no chance we will see the peak of oil in my generation…

Q&A

• Charlie Hall: I can’t argue with your data because I don’t have it. But if you are entirely correct, you have found about 15 years worth of oil in terms of global consumption. It’s important, but it doesn’t change my view very much.
• Mello: There are 1.5 trillion bbls offshore Venezuela (plus other formations).
• Charlie Hall: I challenge you to figure out the EROI of this new discovery.
• Mello: I accept your challenge, and we are going to work on a paper on this together, OK? [Hall accepts.]
• Q: What about CO2? A: Deeper oil has less sulfur, less nitrogen, etc. I don’t have an answer.

Day 2 – Monday, October 12, 2009

Linking Energy Supply and the Economy
8:00 am – 8:30 am

Video: Welcome clip from ASPO founder Colin Campbell.

Remarks: ASPO founder Kjell Aleklett

• In answer to the gentleman’s question last night, yes, I believe in peak oil.

Remarks: Denver mayor John Hickenlooper

• Beer sells for about $1000 a barrel. If oil sold like that, I’d still be a geologist.
• [Spoke about the 119 miles of new rail track being constructed in Denver, paid for by a sales tax, to increase the resiliency of the region; and discussed their new “green fleet” of municipal vehicles, CNG trash collection trucks, advanced technology vehicles, etc.]
• The average family in the Denver area spends about 5% of their income on gasoline; for the poor it’s 12-18%.

Remarks: ASPO-USA founder Steve Andrews

• About 28 countries are represented at this conference, and there are an estimated 400 attendees today.

8:30 am – 10:00 am

The Future of Oil Supply in an Unpredictable Price Environment – panel

Randy Udall, Energy Analyst & Co-Founder, ASPO-USA

Chris Skrebowski, Energy Institute in London, Editor of Petroleum Review

Jeremy Gilbert, Barrelmore, Ltd., former BP Chief Petroleum Engineer

Steve Andrews, Senior Analyst & Co-Founder, ASPO-USA (moderator)
Randy Udall, “Overview Remarks on the Future of Oil Supply”

• Regarding Dr. Mello’s presentation last night, some thought it was akin to a Brazilian bikini wax, but I thought it was useful and provocative. The Brazilians need to build the hundred ships and so on to exploit that oil. A dinner conversation that ensued between Dr. Mello and Jeremy Gilbert last night was heated but polite and fascinating.
• Reviewed some of the early attempts ca. 1904-1911 to assess the oil and gas potential of the Arctic.
• Greenspan really illustrates the pitfalls of prediction. From The Oracle to a buffoon. How many of us knew to short AIG one year ago at the last conference? We all want to know the end of the story, but there are shortcomings in our worldview.
• As ASPO board advisor Sally Odland pointed out, instead of thinking about peak oil as a narrative, we should think about it as a journey. We need to prepare for it, to think about our oil addiction. Last fall we experienced a kind of system reset, and we’re still trying to understand it. We’re not sure how much oil is down this hole, nor do we know what the future of demand will hold. We want to know what 2018 looks like, what 2020 looks like, but all we can do is make the journey and try to enjoy the trip.

Chris Skrebowski, “Two Years Remission for Financial Bad Conduct”

• [Extended bio on Skrebowski’s experience as a petroleum geologist and consultant by Steve Andrews]
• Last year, I suggested that peak oil could be delayed by economic recession and high oil prices. All of these things have now occurred, so it’s no surprise, and I now believe that the peak has been delayed by two years.
• I want to address two false assumptions: 1) if the oil is there and we can find it, then it must be worth doing something about; 2) we can always organize financial transfers between oil consumers and producers.
• [interesting flow chart of oil] Rate of discovery is slow, rate of production ex-OPEC is gentle. Mobilization of new oil is slow.
• At the end of 2004, the world ran out of cheap oil. Prices rose to ration supply to meet demand. Upward price trend established as Asian demand rose rapidly. In effect demand was destroyed in the developed world.
• High prices failed to draw forth new supply. By last year the whole thing had gotten out of hand with oversized bets by the financial community.
• As prices crashed last year, OPEC cut, then cut again, but in the process the price came down to the marginal production cost (e.g., tar sands production cost).
• [chart of fully built-up production cost vs. marginal cost for various sources of oil]
• The 10 largest oil production companies are back to 2003 output levels. The big oil companies are struggling to maintain production levels.
• Depletion is running at about 5-5.5%, or 4 mbpd loss per year. Equivalent to all the volume of biofuels, tar sands and heavy oil combined. Or losing the entire North Sea in about 14 months. A huge challenge to replace those lost volumes.
• The Megaprojects database of projects starting up from 2005 peaks in 2009-2010. Delays deflate supply curve, as does depletion. Net new supply each year begins decline around 2014 as depletion overwhelms new projects.
• Slow growth now gives peak-to-decline in 2015 after hitting 92 mbpd in 2010. [Two scenarios charted: Demand at 1.2% and at 2%.]
• Extrapolating demand from curve beginning in 1982 shows demand at 90 mbpd by 2015. Peak demand concept posited by CERA and others has some validity, but only for OECD. Long term the developing world’s demand dominates.
• OPEC is now in the driver’s seat for supply; they take the cutbacks when prices fall and they are the producers of last resort.
• At $147 world economy breaks.
• At $100 all new projects go ahead [etc…big slide].
• Can the world afford the financial transfers for the cost of imported oil? We assume casually that we can, but I think not.
• Hugely import dependent countries far outnumber net exporters [good data slide].
• Can the world afford to develop high-cost oil? Investment cost spikes from $60 to $200 a barrel past about 83 mbpd because of cost of marginal production (e.g., tar sands and deepwater). Scale of financial transfers then become an onerous burden on economies of net importers.
• Last year greedy bankers were trying to handle the enormous amount of money flowing to net oil producers, etc., and decided to monetize the housing asset class…The reality was that after all the housing market shenanigans, it was a problem of managing the money flow.
• Is the wild card gas? Gas utilization is low, sales growing at 3.3%/yr, etc.
• Conclusions:
• The world will not end after peak oil.
• We’ll need more engineers, scientists and creative thinkers to address the challenge of oil supply peaking.
• Solutions exist already to meet many of these challenges.
• The solutions are electrification of surface transport, biofuels, biogas and massive improvements in efficiency.
• “The future is already here. It’s just not very evenly distributed” – William Gibson

Jeremy Gilbert, “Why Won’t They Listen to Us? (and should we sometimes listen to them?)”

• Re: Dr. Mello’s presentation last night. No, new discoveries are not the end of peak oil. Pressures on upstream part of the industry are extreme. Exploration teams need to sell their projects, compete for funding, and tell good stories with great confidence. They must be good salesmen—that’s their job description. They can’t be wishy-washy.
• Dr. Mello’s comments didn’t make me re-think my assumptions at all. Uncertainty is always baked into the models. None of the pre-salt reserves are proved yet.
• What you heard last night was a bright young geoscientist telling his story, but he’s not talking about 400 billion barrels of proved oil. If there are five, I’ll be surprised. But it hasn’t totally changed the peak oil story. Don’t confuse passion with precision. The precision is not yet there, it’s going to take 20-30 years to prove them. It won’t be fully known until perhaps 2080.
• What has changed over the last 12 months about peak oil? Not much at all. The world’s a different place, there are a lot of dollars missing, but not a lot of barrels missing.
• Responding to the recent peak oil denials by Lynch and Yergin in the NYT and WSJ:
• First, I found Lynch’s article difficult to respond to in a reasoned way because he presents simply wrong pseudo-facts. However Yergin’s points are quite reasonable. But why aren’t these people listening to us? Is our message getting out there? Are we converting anyone? Why is the uptake of our message so slow? Is there anything they’re saying that we should be listening to, or are they simply confused and lost?
• [Funny chart of “The ASPO-opiniometer” from “Demented” (Lynch, August 2009 NYT article) to “Our view exactly” (ASPO future production in Scientific American article by Campbell/Laherrère)] Some recent statements from the oil industry still ranking closer to the Deluded/Demented end of the scale, despite the fact that we’re all working with essentially the same set of data!
• ASPO statements aren’t perfect. Responses to deniers are often abusive, lack technical understanding. E.g., ‘water cut’ significance, ‘irreversible declines,’ ‘fuzzy logic,’ R/P ratio significance, ‘running out of oil.’ Some pronouncements from our side often seem to lack technical understanding.
• Key words in reserve/supply estimating: Uncertainty, Uncertainty, Uncertainty… We’re not used to situations where we genuinely don’t know something with any precision, and we tend to be unaware of that or forget it.
• How confident should we be in their supply estimates? IOCs/NOCs/agencies have:
• Detailed data on individual fields
• Sophisticated numerical simulators
• …but not single group anywhere has access to a full global set of reservoir data!
• In ASPO’s case, we have limited reserve data, but on all world producing areas. Potential for ‘decline curve analysis’ and ‘creaming curve’ analysis and other types of technical analysis. ‘Megaproject’ data for short-term predictions. At least our data is unbiased.
• Overall, we live in a crazy world, and nobody has the data to make accurate predictions. We get huge discrepancies in results from disparate calculations. And the quality of the data for independent, impartial analysis is getting worse! This is because production is moving from the transparent IOCs to the much more secretive NOCs.
• Example: In Oct. issue of World Oil reserve changes for top 63 producers through end of 2008: 21 report that their reserves haven’t changed! That’s rubbish! The chances of finding exactly the same amount of oil as was produced in the last 12 months—quoted to two decimal places!—are nil. Nigeria’s own statements are self-contradictory!
• The Twisty Path to the Truth
• ASPO’s early predictions were dead wrong, much to the delight of people like Lynch. We were wrong because we were working with a very incomplete database and we didn’t understand how screwed up the database really was. Problems dealing with reserves growth and the remaining reserves arising from U.S. SEC’s antiquated procedures are now mostly resolved. Timing of the peak was consequently wrong. But ASPO’s post-peak behavior estimates have not changed.
• [Overview of different methods for making predictions—see slide]
• The overall effect is that neither Us nor Them have very good methods of prediction. ASPO’s predictions are about the best we have, because oil industry predictions are more biased.
• Somehow, some world agency has got to take responsibility for bringing about a better and more transparent data set. The plea we saw yesterday by Al-Husseini might be a start…
• Their criticisms of our estimates rest on two main points. 1) Our predictions of success are far too pessimistic. 2) Recovery factors are historically based and don’t allow for hoped-for technological breakthroughs. But our predictions have been a lot closer to real life so far than any of theirs have. We have little to be ashamed of. If our predictions are a bit low, it really doesn’t matter as far as the next 10-20 years of production are concerned. 50-60 years out, our predictions may turn out to be a bit too conservative.
• No revision in “regular oil” yet-to-find is justified. Deepwater yet-to-find may be a little low, but will have little impact on supply.
• On recovery factors—the ability of new technology to improve extraction—in particular:
• We say that technology hasn’t had much impact in the past, so why should it in the future? But they are investing heavily in improved recovery technology, and truly believe that they will have some technical breakthroughs to change the supply picture. This is the crucial point of distinction.
• Consider the Forties and North Sea fields: New technology didn’t improve recovery very much. But can we assume much from this?
• Theoretical recovery efficiency set by rock/fluid properties and physics. Actual recovery efficiency is always less than theoretical value, but higher prices may permit greater investment in technologies which improve recovery. Recovery rates are definitely affected by oil price.
• There are clear parallels with natural selection, in particular with ‘punctuated equilibrium’! Technology development not smooth either.
• ‘Real oil price’ (2008 dollars) was quite constant from 1950-1973 and from 1988-2003. The intervening periods of unusually high oil prices did lead to increased R&D, and improvement into areas like tertiary recovery. But that was led by IOCs before and is now dominated by NOCs. It was the service companies that produced the gains, not the oil companies.
• The technology that we applied in the ‘80s and ‘90s came from the improvements developed in the 70s. In the next few decades, we should see some new, breakthrough technologies that owe to the high price environment of this decade. We’ll see different types of reserve growth than we have seen in the past.
• Emerging technologies allow much more discrete data collection than we have had in the past. A quantum leap in precision may lay ahead, but it won’t much affect us for at least another decade. If new methods are applicable in older fields, increased production could counteract natural decline rates for several decades.
• Demand is not likely to be limited for the foreseeable future.

Q&A

• Skrebowski: If a project isn’t in the pipeline by now, it won’t affect supply before 2015. Brazilians have a history of being late with their new projects. GoM projects have been fairly disappointing in terms of volumes, and so on.
• Q: How significant are NGL in offsetting crude decline? Gilbert: That’s the sort of technical breakthrough we may have, it could become economical to produce NGLs more from stranded gas, etc.
• Q: If opponents are right, why isn’t oil $35/barrel? Skrebowski: Oil prices are higher because it’s in the interest of producers to keep it higher. There is downward pressure from overhanging spare capacity and lackluster demand recovery but there are countervailing forces and producers interested in keeping prices higher.
• Q: Is there a doomer bias to ASPO?
• Gilbert: Yes, there might be. We have certainly tried to remain unbiased, but it’s there to some extent.
• Udall: Sentiment is what matters to some extent, and we are trying to avoid evoking fear and doom.
• Q: What about CO2 injection? Gilbert: CO2 is cheap at the source, but not necessarily cheap when it gets to the oil field. Claims about benefits of CO2 injection have been somewhat overblown, depending on temperature and pressure conditions in the oil field. If the field isn’t miscible, the effect is limited. It’s not an automatic improvement in recovery. It’s a form of tertiary recovery, and there might be more attractive forms of tertiary recovery (heat, microwaves, etc.) to change the viscosity and mobility ratio of the oil. It’s a high-risk activity, not a panacea.
• Q (Andrews): NPC report two years ago said enhanced oil recovery (all forms of tertiary recovery) would add 20 mbpd to supply. So far we’ve had one, where are the other 19, and will they arrive by 2030?
• Udall: We really don’t know about the applicability of these new technologies.
• Gilbert: We also don’t know about the economics of new tertiary recovery methods, or whether that will bring affordable new oil to market.
• Udall: Remember the clip yesterday where al-Husseini argued that proportion of oil to GDP has a limit. Our demand projections may not be consistent with economic realities.
• Q: Has U.S. demand peaked? Skrebowski: Yes probably. We have lots of much more efficient vehicles on offer now, and a changing perception of what’s desirable in a vehicle (from SUVs to more efficient cars). We have a fairly small utility gain from additional consumption, whereas the developing world has a huge utility gain from new consumption. So developing world will continue to lead demand and price out the developed world.
• Q: Should we discount new marginal supply (tar sands etc.) for the additional energy required to produce those sources?
• Gilbert: I wouldn’t recommend it, because it would only further complicate the projections, and lead to more uncertainty. People need to understand and correctly interpret the meanings of words like “reserves” and “resources.”
• Skrebowski: We have to keep pointing out the differences between reserves and flows, between proved and possible, and so on.
• Gilbert: The latest GoM discoveries were reported in the press using all sorts of completely wrong words. The media still don’t understand the difference between reserves and resources.
• Q: Why do most oil companies deny peak oil?
• Gilbert: Because they don’t believe in it.
• Skrebowski: Because oil companies have share compensation packages—you don’t volunteer to be poorer, so in effect it’s got to be done in code and behind closed doors. It’s not that oil company people don’t understand what’s going on—they mislead shareholders and the public and put out excited press releases about new discoveries while never mentioning depletion.
• Gilbert: Oil company people certainly aren’t stupid, and they know that resources are limited. The oil companies are no better informed than we are about the global supply picture—they mostly know about their own bit—so they’re not in a position to speak on the global picture.
• Andrews: [Noting the changing (and declining) projections made by de Marguerie of Total, sees a shifting of projections.]
• Q: Andrews has bet Lynch $10,000 that global oil production will never exceed 92 mbpd. Would you take some of that bet?
• Skrebowski: I’d take a small part of it. It’s not that 92 mbpd isn’t a safe bet for sustained production, but there may be spikes that exceed it.
• Andrews: I’d like to remind Randy that he’s got half the action on that bet.

10:30 am – 12:00 am

Natural Gas Game Changers? – panel

Randy Udall, Energy Analyst & Co-Founder, ASPO-USA (moderator)

Peter A. Dea, President and CEO, Cirque Resources LP

Arthur Berman, Director, Labyrinth Consulting Services, Inc.

Edward Warner, Founder, Expedition Oil Company
Peter A. Dea, “Abundant Natural Gas Supply, An American Treasure”

• New Sources of Abundant Supply of Domestic Natural Gas
• New sources of gas have been widely covered in the press. “We’re drowning in it.” (Robert Hefner on NPR)
• China has outbid Exxon for new drilling in Ghana—would they do that if they were confident about the future of oil?
• U.S. dry natural gas proved reserves are at a 30 year high—238 Tcf
• U.S. production grew by 4 Bcf/day in 2008, driven by shale gas and tight sands gas.
• U.S. future gas supply:
• Traditional 1673 Tcf
• Coalbed: 163 Tcf
• Total potential gas resources: 1836 Tcf
• Proved reserves: 237 Tcf
• Rising trend owes to substitution of unconventional gas for conventional over the last 20 years. Unconventional has basically tripled while conventional dropped off by 25%.
• 10 of the 12 largest U.S.-48 gas fields produce unconventional gas. In a few years we’ll see much more production from shale plays.
• Many shales still undiscovered. Mostly U.S. but some new shales in Canada as well.
• Currently 11-13% of total Canada and U.S. production is from shale.
• [Good complex slide on breakeven costs for shale plays]
• Shale gas and tight sands gas to dominate future production. Implies gas supply rises to 100 Bcf/day by 2016 (but that’s impossible). For demand and prices reasons the trend cannot continue but it does demonstrate the potential for future production. Half of 75-80 Bcf/day of potential additions will be forced off the price curve. If the price signal is there, production can respond.
• Colorado proved reserves started increasing ’87-’97, then took off sharply in 1997, at 22% per year. Proved resources tripled since then. Production growth doubled in the last decade in Colorado.
• World total: Now about 32,560 Tcf, or roughly 300 years of supply according to MIT. About 400 Tcf is shale gas, but that could increase by 50-160%. We will see a lot more discoveries over the coming decades.
• Stable outlook for gas. Offshore potential as well but it won’t be developed until the U.S. takes energy resource planning as seriously as China does.
• Technological Drivers for Recent and Future Natural Gas Supply
• About 25 Tcf used in Canada and U.S. every year.
• Barnett shale production growth has continued despite a tailing off of rig counts, owing to efficiency.
• Southwestern in the Fayetteville shale has lowered production cost from $8 to $5.50.
• Marcellus Shale costs declined by 30-50%.
• Wattenberg Field production curve increased by 50% since 2000 due to improved technology (recovery factor).
• Gas is the common thread of security, economy and environment. GHG reductions, useful as a feedstock, economic benefits ($30 billion in royalties [per year?]), and security enhancing because it’s 85% U.S.-produced and a 100+ year supply.
• Substitution of gas for coal-fired power generation offers most timely and significant CO2 reductions–about 200 million tons per year CO2 reduction.
• 25 Bcf/day of bas applied to U.S. transportation could cut imported North American oil from 44% to 9%.
• 25 Bcf/day of gas displacing coal for power generation could cut coal from 52% of electric fuel mix to 16%.
• 60-75% CO2 reduction possible in Colorado by substituting gas for coal in electricity generation.
• Role of Gas in Energy Policy
• Energy consumption has grown 4-fold in 20^th Century, mostly due to population growth. When will leaders proclaim that population growth is unsustainable?
• The time is right for natural gas. It’s abundant, clean, versatile, readily available, efficient on the surface, and offers benefits in security, economy, climate change.
• Gas for Clunkers: 1 Tcf per year of additional natural gas retires 150 GWh of oldest dirtiest coal-fired plants.
• Our leaders aren’t taking energy planning very seriously. Instead of just “drill
• baby drill” or just solar & wind, we need to take into account a matrix of factors to plan our decision making [good matrix slide]
• Gas plays a major role in electric power, food and many other quality-of-life needs and demands.
• To meet the Colorado governor’s climate action plan, we should cut coal in half, etc. A more environmentally sound plan would have 52% gas, 27% coal, 15% wind, 5% solar and 1% hydro by 2025. Conservation efficiency and waste reduction could keep new demand flat.

Arthur Berman, “Cautionary Lessons from the Barnett Shale”

• I’m a big fan of natural gas but I’m skeptical about commercial production potential.
• Acknowledges his relationship with IHS Energy [parent company of CERA] and use of their data.
• Premise: The mainstream belief that shale plays have ensured the U.S. has abundant supply of inexpensive natural gas that can be produced at a profit.
• Marginal cost of gas production in shale plays is ~$7-8 / Mcf, and considerably more for many companies despite their public statements.
• Little is known about most of the active shale plays because they’re new. Assumptions about decline rates are the sole support for large reserves.
• Evaluating the Barnett Shale – only shale play with enough production history to say anything about their data:
• Standard hyperbolic decline curves are far too optimistic compared with actual production.
• Type curves published by investment banks and operators are wrong.
• Average well life is shorter than predicted and decline rates are higher than most analysts predict. Believes reserves have been greatly overestimated.
• Fayetteville Shale play has sufficient production history to corroborate Barnett conclusions. Early signs also from Haynesville.
• Much of the current oversupply came from over-production of shale gas plays. Most of 39% increase (542 Tcf) since last report of Potential Gas Committee report of June 2009 came from shale gas.
• Shale gas miracles: low risk and high reward simultaneously, plus low prices and high profits (both unlikely).
• Gas companies in shale plays:
• Have high debt loads
• Are always selling assets because they don’t have enough cash
• Are always writing down reserves due to depletion & analysis
• Are overestimating reserves in order to borrow more money.
• Barnett Shale EUR:
• Model for other shale plays
• First commercially developed
• About 12,000 wells
• About 8.000 horizontal and 4,000 vertical
• Most horizontals drilled since 2002
• Barnett represents 70% of all U.S. shale gas today.
• Cumulative production 5.64 Tcf so far
• Average EUR: 0.95 Bcf/well (across ~2,000 wells)
• At $7/Mcf (netback) requires 1.5 Bcf per well to break even—so most wells don’t! Only about 30% of Barnett wells are actually profitable. Most have reached their economic limits.
• Production lags a drop in drilling
• True decline rate: > 25% per year.
• Average well life: ~8 yrs
• Time to abandonment: 4.5 years
• Resource base estimated by USGS at 26 Tcf (technically recoverable). Thinks only about 10 Tcf will be produced, of which 70% is non-commercial.
• $35 billion cost of wells and leasing to date (not the rest of the costs)
• Overly optimistic decline models. True decline rates are:

• Suggests a terminal decline of about 20%. 95% of wells decline exponentially.
• Chesapeake claims they get 2.65 Bcf/well, but only a small fraction of wells have achieved that. Devon claims 2.2 Bcf/well, XTO says 3.3. Mainly through very low decline rates below 15%/yr (hyperbolic decline trends b > 1.0)
• Our study cuts their estimate in 1/3 to 1/2
• Why our estimates are so much lower than theirs: Low terminal decline rate & a hyperbolic exponent b that exceeds all well decline rates and exceeds the theoretical maximum [slides get into lots of technical details on the mathematical modeling]
• In fact, 70% of the value of the well occurs in the first 5 years, and zero value after 20 years. But false results are provided by inaccurate modeling of hyperbolic curves.
• As hyperbolic exponent approaches 1.0, a tiny change in curvature results in a huge difference in EUR and well life. Exponent of 0.5 results in economic life of 6 years and EUR of 2.1 Bcf [etc.]
• Average well in Fayetteville is “profoundly non-commercial”
• Haynesville Shale:
• 90-95% depletion in the first year; very little evidence of flattening hyperbolic curve.
• EUR estimates are 25% of operator claims.
• Ductile reservoir with severe compaction as pressure is drawn down. Overpressurizing either crushes or embeds the proppant.
• Formation damage from frac treatment water
• Average shale play needs $7-8/Mcf production cost.
• Refer to the prisoner’s dilemma: you can go bust by avoiding a bubble. It’s hard to sit on the sidelines. CEOs are trying to boost prices and get in on the trend with rapid expansion (especially Chesapeake). Not unlike securitized mortgages, fear of being punished by investors for not participating.
• Massive debt incurred by leasing and drilling costs. Chesapeake has $14 billion of long term debt with $18 billion valuation. They’re borrowing and making share offerings far in excess of what they should be doing.
• Engineering companies to certify reserves are playing along just as the ratings companies played along with the banks with securitized mortgages—they have a vested interest in giving the right answer.
• Operators are taking big risks that gas prices will increase, reserves will be there, and investors will fund the operations.
• A vicious cycle: leasing frenzy -> drilling frenzy to save leases & book reserves to borrow more and issue more equity, with the option of writing them down later (after the truth comes out).
• Existing shale plays with sufficient data history to evaluate are marginally profitable at best, even with prices > $7-9/Mcf. They’re not commercial at today’s gas prices.
• Methods used to support reserves and profitability in new plays cannot be corroborated with history
• Full cycle economics show that most value is added in first few years. Production beyond 10-20 years is essentially of no value.
• High cost–low price profitability defies logic.
• The game will go on as long as interest payments are made and debt can be deferred or sold.
• Manufacturing paradigm must be discarded: complex reservoirs require careful science.
• Shale plays require critical thinking, esp. in a low price environment.
• John Adams quote: “Facts are stubborn things…”
• Sherlock Holmes quote: “When you have eliminated the impossible, whatever remains, no matter how improbable, must be the truth.”

Edward Warner, “No Guts, No Glory: The Discovery of Jonah Field”

• In 1991, as an independent exploration geologist, I went looking for a large natural gas play. I had been working in tight gas sands since 1971. Had spent most of my career doing E&P in Wyoming. Went to see Presidio, which had acquired a natural gas play which was considered non-commercial. We bought it. Took $36 million to drill and complete. The play had been viewed with disdain for many years; nobody thought there was much gas there. We put the play together and shopped it to 27 companies, and lied to them miserably telling them there was 1 Tcf under it. Thought we might get 200-300 Bcf of gas out of the middle of it.
• We developed Jonah on the premise that technological approaches had been inadequate. It took 4 years to figure out that the geological model didn’t fit the facts. Then we made a new model of it. Turned out to be an incredibly productive play.
• Later, we bought lease in the Pinedale formation for $1 an acre. Pinedale and Jonah increased U.S. reserves by 16%.
• Too many analysts think inside the box, and fail to recognize when their models are wrong. [Related several anecdotes]
• What turns resources into reserves is price and technology, and it’s constrained by intellect!
• Geologists repeatedly demonstrate their ability to use new ideas and make new supply commercial, and occasionally put themselves out of business.
• Jonah and Pinedale were eventually demonstrated to be some of the densest gas plays in the country. Initially economic failures, they became hugely profitable. Produced over 6 Bcf/well from very small vertical areas. Well spacing looks like a prairie dog colony.
• I’m an optimist. Human ingenuity is boundless.
• New combinations of technology, modeling and ingenuity may yet bring much more reserves to commercial status.
• I see a serious failing in American culture in resistance to development of nuclear energy. Fears are overblown. It has incredible potential. Chernobyl was not a commercial power plant–it was military–and failed for reasons that do not equate to what U.S. nuclear energy production might be.
• France has provided a great example of what nuclear energy production could be, and it has been safe and reliable.
• Nuclear waste issue is a political one, and is not based on science. We don’t need 50,000 years of geological stability to store waste, as dictated by politicians. Nuclear waste could be stored in abandoned salt mines safely! Even the definition of nuclear waste is wrong. If you live in Denver, you’ll get more natural radiation exposure naturally in three days than you would have gotten from being downwind from Three Mile Island.

Q&A

• Quick responses from Dea and Berman.

12:00 pm – 1:45 pm
Lunch Keynote and Awards

Presentation of M.K. Hubbert and Whipple awards

• Hubbert Award to Robert Hirsch
• Whipple award to Roger Bezdek (co-author of the “Hirsch Report”)

Keynote: Kevin Phillips, Commentator and Author of Bad Money

“The Nexus of Energy, the Economy and Politics”

• The nexus has been in the U.S. historically, but that’s changing now.
• A huge upheaval has taken place in the U.S. political economy over the last 25 years, where manufacturing used to be 25% of the economy and FIRE (finance, insurance, real estate) was a small part (~12%), to manufacturing being only 12% and FIRE being 20.4% of the economy.
• This is significant because it’s been a “sunset phenomenon” not a sunrise–something that happens late in an economy’s evolution.
• The first major price revolution 500 years ago saw shift of world wealth & economic power to Europe. Now such a shift is happening in the direction of Asia.
• The financialization of America is bad news. A finance bubble is not the solution to our problems.
• [Good chart of rising financial part of the economy and falling manufacturing since 1950] – “The Reversing Origins of U.S. Corporate Profits, 1950-2004”
• U.S. has had 12 major bailouts since 1982 [detailed on slide], along with a massive deregulation spree and Glass-Stegal Act.
• Monetization of the housing sector was the most recent expansion of the FIRE economy but did not produce additional real wealth.
• U.S. outstanding debt from 1974–2006 expanded from $2.4 trillion to $44.7 trillion in 2006. Private debt far outweighs federal debt in this growth. [data table]
• The growth of the financial sector in the U.S. was in part due to its finding ways to expand itself. Domestic financial debt as a percentage of GDP went from 12% in 1969 ($100 billion est.) to 107% in 2006 ($14.2 trillion).
• The media has refused to acknowledge or discuss this transformation at all. It’s a kind of metastasis that we are not confronting, like an ignored cancer.
• Overgrown finance is like a Humpty Dumpty that cannot be put back together again. Why do we not have a national debate about this?
• The vulnerability of world financial powers has historically begun exactly this way, with the overweening influence of the financial sector. The financial sector gets bored with operating on the basis of real resources and real wealth-building activity, and wants to keep expanding beyond those limits.
• Has the U.S. reached the problem point in this financialization, that three previous nations have had? Is the recent recession the beginning of the end for U.S. finance?
• Spain, Holland, and Britain examples discussed…
• If you consider those examples—defaults, bankruptcies, currency crises—we are looking very similar now.
• Each of those three previous declines put an end to each of those powers’ leadership in the global economy.
• We are now seeing signs of the end of globalization because its rules were put in place primarily by the U.S. It’s an exhausted pattern, and won’t decline overnight, but it has to become more about the G20 than the G7.
• Each of the three previous leaders’ hegemony rested heavily on energy exploitation. Dutch with wind, British with coal…
• The U.S. dominance owed largely to domestic oil originally, then as oil sourcing was transferred to the Middle East, we tried to maintain financial dominance via the use of the dollar as a global oil trading currency.
• Asia is heading into a dominance pattern globally. In the 14th Century, there was more money in Asia than there was in Europe, but after the Reformation and the rise of capitalism, financial dominance migrated to Europe. Consider population, finance, and trade trends.
• In the 80s and 90s inflation was widely considered to have been wrung out of the system, then we had “the Great Moderation” but that’s a crock. If you take Japan out of Asia, then you have very substantial inflation. Western economies have acquiesced in their consideration of inflation; consider hedonic adjustments etc.
• A lot of how we have supposedly subdued inflation and so on has largely to do with our definitions of the terms.
• We should see a deflation of financial assets and an inflation of commodity assets now.
• I would like to say that I see a couple of happy decades coming, but I rather doubt it…but then, most of you probably doubt it too.

Q&A

• Q: Comment on deregulation? A: [detailed deregulation of various sectors over the last several decades] “Alan Greenspan never met a financial regulation that he liked.” Look at Ben Bernanke’s statement when he was sworn in—a most effusive embrace of Greenspan’s principles. Things we refused to re-regulate in the 1990s came back to bite us. Deregulation was a huge factor in what happened.
• Q: With the U.S. dollar be replaced as the global reserve currency, and will the dollar be abandoned as the global oil trading currency? A: No idea, but I would guess that we’ll go to a basket of currencies to weigh the U.S. dollar down, perhaps within the next three years. Bernanke’s credibility is going to be hard to preserve in the next 6–9 months. There probably won’t be a crash in the U.S. dollar until it has been pushed down to 25-30% of the basket. The U.S. helped to mitigate the decline of the British hegemon in WWII, but it seems unlikely that anyone is going to do that for the U.S. now.
• Q: What happens to all the debt the U.S. owes when growth can no longer occur? A: Very interesting question. The administration’s strategy has been to block any critical deleveraging (like we had in ’29-’30, when finance had gotten to be 200+% of GDP because it was allowed to liquidate slowly and painfully). Now we’re trying to maintain a 340% share of GDP for finance, resulting in huge write-offs. Total credit market debt is still around $45 trillion. If you asked Bernanke a question about this at a press conference, he wouldn’t answer it. And there’s no way to get that question out there! There are enormous consequences to the avoidance of any dialogue about this. The previous examples (of Britain, et al.) also failed to deal with the same problem.

1:45 pm – 3:15 pm

The Great Recession and Energy Markets

Adam Robinson, Vice President, RBS Sempra Commodities

Dave Cohen, ASPO Writer and Analyst

Eric Janszen, Investor and founder of the website iTulip.com

Steven Kopits, Managing Director, Douglas-Westwood LLC (moderator)
Koptis: Now let’s look at the demand side of the equation, and the effects of the global macroeconomic picture.

Adam Robinson, “Oil and the Great Recession; Physical Reality or Investor Fantasy?”

• RBS Sempra is a joint venture between the Royal Bank of Scotland and the Sempra energy company.
• This is an exploration of the tension between the physical markets and investors.
• The Great Recession and oil fundamentals:
• OPEC surplus production capacity: spare capacity has increased since the recession began. The question is whether and/or when demand will return—what is the macro outlook? It’s why oil and the S&P are trading closely together.
• But the supply side maters if there’s a possibility of a storage max-out. WTI prices cratered as Cushing approached its storage limit. There was no place left to put oil. As supplies were drawn down, macro effects came into play.
• Since February the glut has shifted from crude to distillate, with some fearing that a distillate storage max-out would happen.
• So the market made the spread between near term and long-dated delivery increase. [good chart] Distillate spreads have been lower than gasoline spreads for so long that if possible, storage operators have put distillate in the tank.
• However the market has been able to find an outlet in tankers for additional storage so refiners would have an outlet.
• Now we have another problem: where to put the new gasoline since distillate has maxed out storage? Storage economics link the present to the future, with continued contango. This highlights how sloppy the physical market now is. But with new storage capacity being built, etc. we might not run out of storage. Spot prices can be driven then if you have the ability to store product.
• So what are investors thinking? They’re looking at convergence between falling OECD oil demand and rising demand in non-OECD.
• Will cyclical factors in the economy (PMI, leading indicators, export) financially start to create more U.S. demand? Some banks think so.
• But even if fiscal stimulus turns to drag and the economy does the W, will investors sell commodities? Investors wind up being bullish in either case. If we have a V-shaped recovery, prices will rise. If we don’t get the recovery, then where does the dollar go, and hence commodities?
• Outlays and revenues should also converge, after a large divergence starting in 2008. As a percentage of GDP, outlays have spiked and revenues have tanked.
• U.S. fiscal deficit could be the stagflation trigger. Two scenarios: W -> Rise in US fiscal deficit -> Interest rates rising. Then the Fed has two directions: Do nothing, or loosen policy [complex slide with effects described]
• The Fed won’t take the punch bowl away for a while [slide of rolling 12-month volatility of U.S. CPI since 1970] Volatility of inflation has gotten much much worse. Fed wants to protect itself against a 1-2 std dev drop in volatility, so it targets a 2% inflation rate. But that was based on “The Great Moderation” and it may not hold. Fed will err on the side of looser policy. Bernanke is very afraid of inflation.
• The physical market is sloppy.
• But we have the capacity to store glut.
• Curves are reshaping to make the storage capacity economic.
• Investors can drive the price of oil as long as the Fed doesn’t take the punch bowl away.
• Much of the trade in oil has nothing to do with the fundamentals. CTAs trade solely based on price, because they can make money that way. [graph of bullish/bearish indicators and price] 70% overall returns on the bull side since 2001 [?] and 35% return on the bear side.
• Where does momentum come from in commodities?
• Inelasticity of supply and demand
• Inventory trends tend to persist while trends are being corrected.
• Inventories also relate to prices, to price trends will persist.
• Inventories predict prices, but prices predict prices better…
• Inventories are difficult to observe.
• Past prices are more informative of future prices than observable inventories.
• Which inventories should be counted? In-ground?
• On the long side are pension investors, China and retail players.
• China willing to buy in size at $55 for strategic stocks.
• Either way the economy goes, commodities should outperform other risk markets.
• Momentum traders turned bearish in September…
• The bull case is intact (God is indeed Brazilian, and Transocean is Jesus) and if the economy rebounds before 2015, prices could spike.
• Brazilian deepwater = at least a North Sea of oil.
• Rig market responded but first output 5 years off.
• Alternative energy and conservation important.
• Another price spike is likely before 2015 if the economy rebounds.

Dave Cohen, “The Aftermath of the Great Recession”

• What is the global economic outlook?
• Oil demand correlates with global GDP. This is the worst recession since the Great Depression, so where will new demand come from?
• Which path ahead for demand? [IEA slide] Bullish and bearish scenarios.
• Relative sizes of world economies: U.S. has the largest economy, then Euro area, then Japan and China.
• The developed world is 54% of global GDP.
• BRIC together is 14.7 of global GDP. China is 7.3%.
• “Even with global growth resuming, something outside of demand growth in the BRICS will be required to get the world growth back to normal rates [3-4% year].”
• Consider China and America as a single exporter/importer unit, “Chimerica.” Can China grow rapidly despite a weak export markets?
• If Chimerica is not prospering, what will drive GDP growth? Not much.
• America consumes more than produces, China is the opposite [other similar comparisons] – “The financial balance of terror”
• If one economy dies, wouldn’t the other too?
• The Great Recession is a “balance sheet recession” based on excess debt, not a normal recession. The U.S. “borrowed” between $500 billion and $1 trillion each year between 2001 and 2007.
• This shows up in the current accounts (trade) deficit which reached an unprecedented 6% of GDP in 2006.
• Much of this money fueled the housing bubble.
• Consumption has been an astonishing 70% of the U.S. economy GDP in recent years.
• Endless growth based on endless debt is impossible, and impossible things must stop!
• U.S. balance of trade since 1994 [slide]
• The end of American overconsumption
• A “capital flow cycle” where foreign capital floods into a country stimulates an economic book, encourages financial leveraging and risk-taking and eventually culminates in a crash.
• The oil prices shock of 2007-09 also caused and accelerated the crash.
• The massive debt-fueled consumption in the U.S. drove the economic boom of recent years, and thus the oil demand shock of 2002-2007. We can’t have the demand shock again without a repaired balance sheet.
• Real household debt decoupled from real income. Massive debt and asset bubbles drove consumption. [chart] The space between real disposable income and housing debt was debt-fueled consumption.
• Personal consumption expenditures (in GDP) has crashed since 2007. Worse case scenario is occurring. The middle class is broke! The poor aren’t so much in debt because they can’t get credit, the rich don’t need credit, so it was the middle class who borrowed all the money.
• Reasons to worry:
• High & growing unemployment
• A huge loss in household wealth
• Real income fell from 1998-2008
• Wealth decreases but debt remains!
• Continuing weakness in residential real estate for years to come
• Commercial real estate is crashing
• The credit system is impaired, the big banks are on life-support, and many (~1000) small/medium sized banks will fail or be taken over.
• Boomers are retiring starting in 2011; health care costs are soaring.
• [chart of the “Jobless Recovery” from the SF Fed] U3 = 9.8%, going to 11% by 2010. U6 number (fully accounted-for unemployment) is 17%. BLS is about to make a revision in employment numbers in February because they made a big mistake in their “birth/death model.”
• Total household net worth was clearly a bubble in 2000 and 2007-8.
• Wealth increases, but debt remains.
• Tumbling housing equity – no more using your home as an ATM machine! Mortgage debt: $10.5 trillion in 2008.
• First marked credit decline in 68 years! And we’re not going to have a credit-driven recovery now.
• China
• Appearances can be deceptive. China’s recent balance of trade shows that exports have fallen off a cliff. China’s GDP growth through the bubble years has moderated. They’re blowing bubbles in China because stimulus money is going to inflate asset values, not build a real economy. China needs a domestic demand target, not a GDP target. China’s economy is as distorted as America’s is.
• Prospects for Chimerica: China will not provide the engine for the world economy and exports will remain weak, so oil demand will not grow as pre-2008 levels. An L-shaped depression is possible in the U.S., where demand may remain flat or decline now. Global GDP growth will continue to be weak.
• [Out of time – ended presentation]

Eric Janszen, “Debtor Nations Dream of Deflation”

• Inflation or deflation debate…
• Wrote cover story for Harper’s March 2008: “The Next Bubble” suggesting that housing bubble -> economic depression -> stimulus -> alt energy and energy infrastructure
• CEO of two VC-backed tech companies (founder iTulip in 1998). Sold tech positions in 2000, bought Treasuries in 2000, bought commodities in 2001.
• Two mysteries:
• 1) Why no deflation spiral in 2009 after the crash of 2008?
• 2) Why 24 months into the great recession is oil > $70 instead of <$20 as in 2001?
• Are we “Drowning in Oil” (The Economist, March 4, 1999) or suffocated by the U.S. dollar?
• Oil price determined by four factors [went by too fast]…
• Debate premise: US has built unsustainable public debt. Key evidence:
• In 1980 total debt grew by $1 for each $1 of GDP growth, which went to $4.7 to $1 by 2007.
• We’ve had a credit bubble, driven by the financial sector, since 1980.
• We’ve had two massive asset inflation bubbles – the dot com boom and the housing bubble (destroying about $10 trillion in fictitious value).
• Four potential outcomes:
• Liquidity trap and deflation.
• Liquidity trap and stag-deflation
• Stag-inflation…[too fast]
• Deflation spiral case (deflationists): Debt levels are too high, balance sheet isn’t big enough. Monetary and fiscal policy can’t resolve it.
• In Great Depression …[chart]
• U.S. asset bubble policy has been not to interfere since 1994. The best way out of the liquidity trap is not to get into one in the first place.
• How to avoid it?
• Expand the monetary base (official orthodox)
• Run fiscal deficits (official orthodox)
• Reduce long term interest rates (official unorthodox)
• Buy private assets (official unorthodox)
• Depreciate the currency (unofficial)
• Don’t wait until the economy crashes as we did in the Depression. Don’t do what the Bank of Japan did (liquidity trap). Instead, aggressively cut interest rates, and grow out of it. Result: no liquidity trap or deflation spiral. But we got a bunch of new bubbles as a side effect: real estate, stocks, bonds, commodities, etc.
• In 2007, we had a sudden stop: debt deflation bear market as foreign capital fled [charts using Fed data] Since 1968, credit growth was never negative…until now, when it has absolutely crashed. [various charts on debt, auto sales with Cash for Clunkers, monetary base, interest rates, CPI, Treasuries, etc.]
• 2008 response: 100% expansion of monetary base, expanding deficits, cut in long term interest rates, etc.
• What happens? Inevitably, the currency depreciates. It’s not in the Fed statements, but the academic literature. Dollar devalued 72% against gold.
• The point of the UST-backed dollar was to get oil pricing countries to dig up their oil and sell it to oil consuming countries in the U.S. sphere of influence at prices set via global dollar… Dollar devaluation against oil.
• Dollar/oil peg: We’re devaluing the dollar against oil. In the old days we would have deflated the dollar against gold, but we’re not on a gold standard anymore, so we deflate it against oil.

Q&A

• Q: Does Wall Street think peak oil is imminent?
• Robinson: Long-term investors are still very bullish, but not sure if it’s because they believe in peak oil. Contango curve could be seen as validation.
• Cohen: What we had in 2007-08 was an oil price shock, resulting in recession. So oil prices don’t stabilize, but take a stair step pattern.
• Q: The latest EIA Short Term Energy Outlook is out: Consumption 84.1 mbpd, supply 84.4 mbpd. Do you expect a change, and will it pressure price? Robinson: You have to strip out seasonality, but if you look at 2010 numbers, we’ll continue to see stock builds, and contango of futures curve will continue. Spot prices however may not reflect that.
• Q: Will it be deflation or recession?
• Phillips: I would not use broad descriptions, it’s both in some fashion.
• Janszen: CPI composition will change and so will its value, the challenge will be to figure out what’s meaningful. We’re now cornered: we need to depreciate the currency because we can’t cover liabilities, which will have a hidden inflationary effect.
• Robinson: The only way out of the overhang is inflation and Bernanke will do his best to make that happen.
• Cohen: They definitely will depreciate the currency. They’ve already changed the CPI composition to try to hide the deflation of rents.
• Q: With all this debt, how will we pay for the energy transformation we need to do?
• Robinson: There will be a massive commodity boom, stimulus related, and pay for it with depreciating dollars.
• Janszen: I’ll argue the other side. In 2008, high inflation was not good for stocks. In the early stages of inflation, it looks good, but then it turns sour and profits are squeezed, so it will be bad for equities but good for commodities.
• Cohen: If I’m right and global demand for oil stays down, there won’t be any investment in alternatives.
• Phillips: If you look at the way that Britain retooled, it was hugely expensive and did drive inflation.
• Q: Is the deficit running up to $9 trillion out to 2020 doable?
• Robinson: You have to inflate it away. I don’t see how politically you have the ability to pay that back, especially with Boomers about to retire.
• Janszen: High inflation is kryptonite to the FIRE economy—it destroys financial firms. So politically, where’s the will going to come from to let inflation occur? Tension is built-in; we have two masters.
• Phillips: The public’s reaction to a long, drawn-out downturn in the economy and dour public sentiment may result in a weakening of the financial industry’s power and they may take some hits as the public’s disenchantment with them increases. Wall Street-gate could put 400-500 players in jail.
• Cohen: Geithner asked Congress to raise the debt limit, which doesn’t even include long term entitlements debt.
• Q: Are we now on track to repeat the examples of Argentina, Turkey, et al.? Janszen: The political system moves public debt to private. In terms of public debt, we’re sandwiched between Zimbabwe and Jamaica. Only because the debt is denominated in our own currency can we get away with it.
• Q: Is there any way to put a leash on Wall Street?
• Phillips: Politics tends to work in election years only. Washington would prefer not to fix any problem until they have to. So near-term action may be unlikely. In the meantime, the problem will be addressed in the Treasuries market, the bond markets, etc.
• Robinson: The gov’t is moving in the right direction toward greater transparency & higher capital requirements (less leverage). We’ll see more regulation & tighter position limits. There will be a lot of debate on regulation over the next year and reorient incentives to those who actually add value to the economy.
• Q: Should the Fed have raised rates early, even at the risk of deflation, and acted pre-emptively?
• Janszen: Bernanke says we tried to do it in 1998, and we crashed the bond market, so we learned not to interfere. If you look at the dot-com bubble, the real question is political will, not mechanics.
• Phillips: Politicians’ economic goals aren’t necessarily aligned with bubble consciousness.
• Robinson: We fear deflation, and fight it even it would have been healthy for the economy.
• Cohen: We’re not having the recession we should be having now – we’re doing it again!
• Q: Is there any way to avoid a decline in the American standard of living? Janszen: I don’t think so, particularly because of our policy and our $60 trillion in debt. Dollar as reserve currency can’t hold—and that role is largely the source of our apparent prosperity.

3:30 pm – 5:00 pm

Energy and the Media: On the Watch or Asleep at the Wheel?

Peter Maass, Author, Crude World: The Violent Twilight of Oil, Contributing Writer, The New York Times Magazine

Lisa Margonelli, Author, Oil on the Brain, New America Foundation

Richard Heinberg, Author, Blackout: Coal, Climate and the Last Energy Crisis, Senior Fellow, Post Carbon Institute

John Theobald, UC Oil Forum, University of California, Davis (moderator)
John Theobald – Introductory remarks, “Why Do We Ignore This Information?”

• Ownership
• Profit motive
• Complexity
• Resource constraints
• Career ambitions
• Public attention span
• The easy hook vs. difficult subjects like depletion rates
• Trivialization and the need to entertain
• Pictures vs. concepts
• Events trump incremental changes.
• Unreported news lacks a constituency.
• Unmentionable (violates standards of taste, e.g., human waste & its role in passing on disease). Perhaps peak oil falls into the taboo section.

Video interview clips
Jim Buckee: I wonder why the majors aren’t more forthcoming on the peak oil issue. The CEOs are advised by economists who are opposed to engineers and abide by their ideologists. If Exxon were to come clean, it would be world-shaking.

Colin Campbell: They’re looking for expansion and economic growth and the continuation of the successful epoch. Executives don’t wish to say this but they are planning and preparing for it behind the scenes—selling secondary assets etc. because supply will lead to surplus refining capacity. They’re also buying back their stocks. We’re seeing correct hidden messages but it’s not really candid yet.

Jeremy Leggett: What can we do about government? We have to just keep bringing them the message and keep chipping away at them, and then finally, suddenly, the wall comes down. Look at how the media ignored the reality of the financial system until it crashed. But this time, there are many people in the industry, even the IEA, who have been warning about this…and yet still, they’re not listening. At some point though, they will.

Peter Maass, “Crude and Confusing: Why Oil Is Harder to Write About Than Any War I Covered”

• Why is energy so hard to write about?
• Compared to writing about oil, writing about the war in Bosnia was dramatically simple because the reality was all around me, and full of drama. When it came to writing about oil, it was the reverse: undramatic complexity. I had a substance that was underground and then produced and refined, and the most we see was a bit of gasoline at the end of the process.
• In Bosnia, all I had to do was study the history of one place and write about what was happening. Oil isn’t in one place, it has no clear history and no dogma or voice of its own. In order to write about it, I had to travel around the world and write about it: geology, environmentalism, chemistry, and on and on. It’s a difficult and complex beat.
• In 2001, when I decided to write a book about oil, I went to get jobs in the oil industry. I wasn’t roughneck material though, and was accused of being a union spy because I had a college education. After 9/11 though, it became of real importance and it was easier. I went to various oil producing countries and visited the producers. It took an enormous amount of time and financing to do all this. The expenses were into the low six figures (which the NYT covered) and it was difficult to get the support to do it. It’s hard for writers to be motivated to get that support.
• To get at peak oil was incredibly difficult. I wanted to go to Saudi Arabia and do a story on it. I was stymied in trying to get the interviews and it was difficult to get a visa to go there. Finally in 2004 I got an interview with Sadad al-Husseini. I went back to New York and wrote an 8,000-word cover story. It took 4-5 months of work to do that one story. It’s hard for editors to justify all that time and work.
• Looking into the future, what can we expect? I don’t see it getting any easier. Most publications have slashed their budgets and they’re struggling. Most of the focus is now on climate change and so on, not peak oil. I think a lot of attention will be on post-oil solutions.
• One thing that will succeed is people like you. People who are in the industry and can write will have opportunities.
• Another thing is that family foundations and things of this sort will begin to fund the journalism under new models, e.g., Warren Hellman’s new media effort. They will team up with non-profits and other media to get the story out.

Lisa Margonelli, “Predictable Pitfalls: How We Fail To Cover Energy Policy And Alternative Energy…And Why It Matters”

• Funding for news reporting has been gutted. Senior people have lost their jobs and the newbies are hanging on and poorly paid. The media are struggling and coverage quality has changed dramatically.
• Energy policy has also changed dramatically over the last five years. We desperately need a new cartoon to describe the problem.
• I became deeply obsessed with this subject and spent about five years getting educated on it and finding the financing for it. I got a fellowship with the New America Foundation and started being asked to comment on policy, which I found uncomfortable because I saw myself as a critic and not a cook of the soup. It was terrifying. Now I’m actually working on policy and making recommendations.
• At the same time I had the fairly luxurious opportunity to comment on policy.
• A quick tour of energy reporting:
• Hypersimplification – There’s a real push to get the message written to a 6^th-grade level. Example: WSJ “abundant supply” chart from 4/30/09. A small paragraph at the end of the article sort of explains the dynamic of supply and demand. These sorts of depictions which are necessary to get the concepts across don’t talk about all the complexity.
• Just reporting what people say—Quoting certain executives and authorities uncritically, which doesn’t get at the underlying truth. There’s a lot of blowback if you “go rogue” in your coverage and try to cover new ground and offer counter-trend opinions. Plus nobody wants to hear a negative story.
• Jules Verne-ism – They love spectacular, sensationalist stories with gee-whiz flair.
• Complex Spaghetti: The Lawrence Livermore Nat’l Lab’s “Estimated U.S. Energy Use in 2008” chart is as simple as the reality gets [it is a great chart!], but it’s complex, and shows how much waste there is.
• What we need in terms of policy
• We need long-term plans and strategies.
• We fail to understand or use policy tools we have. E.g., the SPR is no solution to short- or long-term problems. Governments don’t seem to understand how the energy markets actually work, and so tend to reach for big hammers like stopping speculators, or turning to the SPR.
• Opportunity costs. Cash for Clunkers was a good idea, but overcome market forces it didn’t. People were happy about benefiting from the program and got covered, but nobody writing about it tried to put it into perspective and explain what the program really accomplished. If we had used the same amount of money to pay the auto industry directly, we could have gotten much more four our money and it wouldn’t have made people feel good or make good news.
• There isn’t really a place for reporters to be critics and offer perspective in the media (although there is in foundations and things of that sort).
• Predictable pitfalls
• Off of oil and onto neodymium! PHEVs and EVs are currently a very small part of the solution. If you just report on the feel-good aspect of it, people like it. But if you ask about the supply of neodymium coming from one place (China), which is a vulnerability of the whole enterprise, it highlights how we need radical policy changes.
• But being cheerleaders of certain energy solutions (e.g., cellulosic ethanol) you become party to the success of individual companies.
• In 2-3 years, you’re not going to have much of a media. We need to turn now to concerned constituencies. You’ve been doing all this crowdsourcing, you have a huge network of people and information and lurkers, and you have a concerned constituency who are tolerant of complexity in a way that CNN watchers aren’t now. We need to build constituencies like this outside of traditional media. You need to move onto action, and away from devastating gloominess. You need to offer people things they can do.
• The media would offer that all you need to do is go to a green dry cleaner, when in reality you have to persuade people to take a much larger look at the problems.

Richard Heinberg, “Report from the Front: A Peak Oil Educator Reflects on What’s Worked and What Hasn’t”

• I didn’t come to the subject with any particular appropriate background, or any interest in oil. I was really motivated by the inspiration of reading Limits to Growth. In 1998, I read the Colin Campbell and Jean Laherrère article in Scientific American and found its projections and conclusions compelling.
• In the 1990s, most of the discussion seemed to be taking place in the Yahoo discussion groups and I participated in them. By 2003 I had published my first book The Party’s Over and found myself in demand as a speaker. I’ve now given 300-400 lectures to various groups about energy. More books followed, along with interviews with various media.
• All of this must sound like quite an accomplishment for an introverted word geek, but I assure you I still have a tiny amount of exposure and the subject will need much better coverage.
• High oil prices created a “teachable moment” whereas low oil prices cause interest to fade.
• Make definite assertions. If you’re not quotable or memorable, you will not be quoted or remembered. Your primary objective is to be credible for one audience, and clear for another. Being able to effectively and quickly defuse objections is important and you have to know your stuff. If you do, you should be able to deflate your opponents’ arguments quickly.
• By 2008 the college where I worked had gone broke, and I was working for Post Carbon Institute full time. The market crashed and the oil price spiked 50% higher than at any time in history. In effect, it was a vindication of what many of us have been saying for a long time. The world has entered an oil trap from which there is no exit. The price that the oil industry needs to maintain production is almost the same as the price at which it causes economic destruction. When prices spiked, the phones were ringing off the hook. When price crashed, attention waned.
• We still need to convey to the public that our theses are supported by the data, and connect it to the efforts under way around climate change and other issues that motivate the public.
• We are in a new economic period and must adapt our messages accordingly.
• Post Carbon Institute has gone through a period of change and are positioning ourselves as a think tank and making 30+ experts available to consult on these subjects, and issue a steady stream of messages.
• Transition U.S. is another organization, the American arm of the Transition Town movement started by permaculture teacher Rob Hopkins.
• But is all this enough? How can we avoid rapid civilizational collapse? How can we communicate the message? And if we can, there’s no guarantee that policymakers will take it up.
• We don’t have decades to build up networks of think tanks, foundations and so on. For the vast majority of funders, our message is barely on the radar. The organizations themselves need to do better at working together. We need unified and coherent messages. We’ll have to use any and all communications tools available to us, and be creative about promoting our messages.
• The crisis far exceeds our ability to respond to it. There will be a need for less analysis and more practical approaches to solutions. We cannot fill those needs directly but we can motivate the public and policymakers.
• It’s a tough message, but we have to put it out there, because we’re the ones who showed up.

Q&A

• Q: Are news outlets abandoning general news and moving to specialized sites? Maass: Generally, yes. And that might be a good thing. Also, meet your opponent where you’re standing on your strengths, rather than meeting them on their turf.
• Q: Margonelli, what did you mean about we might not have much of a media in 2-3 years? Margonelli: Web sites are becoming very important and gathering momentum and offering more expert opinion than is typically available in mainstream journalism.

6:30 pm – 7:30 pm

Evening Keynote

Matthew Simmons, Chairman Emeritus, Simmons & Company International

Video clip: Interview with Sadad al-Husseini

• Roughly 40-45% of the world’s oil comes from giant and super-giant fields which were mostly discovered in the ‘50s and ‘60s. The new “giant” discoveries in Brazil and so on aren’t even comparable—the reservoir characteristics are less desirable and in less desirable locations. So you have to work harder and harder to stay where you are as the older giant fields deplete. At Saudi Aramco we try to be very professional and accurate in our characterizations of our fields and develop them carefully and with a long-term outlook.
• There is resistance to the notion that there is a lack of good discovery prospects, which is based on poor information. The information is there however. If you look at what Chevron has been saying, that the cheap and easy oil is gone, you’ll see that the information is out there. These are realities. But if you don’t talk about them, you can’t fix them. The situation is not going to get better, it’s going to get worse. As the developing world demands more and more oil, it’s important to talk about facts, and solutions, and confront these realities. The push-back to the peak oil message is ill-advised.
• People who are refusing to talk about this are probably doing so with good intention, wanting not to cause panic…thinking that ignorance is better than knowing. But if you don’t get the message out into the public, you won’t have their support to find solutions. The suggestions that we’ll achieve some much higher rate of production in the future are counter-productive and not supported by the data—look at the issues surrounding OPEC production and the flattening of production from non-OPEC. Even OPEC is no rabbit to be pulled out of a hat. Saudi Arabia has a long history of trying to sustain capacity, but Russia is in trouble and countries like Mexico are going into serious decline. Trying to pacify people with the message that there is no problem is not helpful.
• How do you institutionalize the concept of forward forecasting of achievable and sustainable energy supplies? Stakeholders—the auto industry, the airline industry, and so on—are not getting the correct picture and so they don’t offer support for the peak oil mitigation effort. We need to institutionalize the message and not try to sugar-coat it.

Matthew Simmons, “ASPO in its 7^th Year: Accomplishments, Frustrations & Failures”

• Sadad al-Husseini had in fact left his technical papers for somebody like me to discover them before I wrote my book.
• We’ve come a long way since the first ASPO meeting in Spring 2002.
• But the peak oil scoffers still attack the term as “pejorative.” These optimists abound with simple beliefs:
• Energy resource endowments are boundless.
• Advancing technologies make new additions easy.
• Massive new finds are everywhere.
• Shale gas and shale oil will provide bridge to the 22^nd Century.
• The optimists are still too often winning the media battle. Michael Lynch and Dan Yergin, Edward Morese and Amy Myers Jaffe continue to roll out a cornucopia of optimistic theories.
• Energy optimism is still totally faith-based. They honestly believe what they say but their views are totally unsupported by the data.
• It’s time for data reform to end the optimists’ claims. Until then they will continue to win the game for media dominance.
• The USGS just said that we’ll always have abundant oil, but it’s preposterous. These people don’t seem to understand that the Bakken Shale is limited.
• We could end the debate by making the key producers of the world do a third-party audit of flow rate history for all giant fields. It would prove or disprove the notion and end the debate. More importantly, the audited flows would give us a database to allow us to plot a likely future flow.
• It’s time to trust but verify. The world seems happy to trust key oil-producing country reports on flows, recovery capacity, “proven reserves” and quality of flows and reserves.
• There are no independent audits on origin of flow, capacity and reserves. This is like heading into WWII without radar.
• Global data reform would actually be easy to implement, possibly catalyzed by China, and could be done if the G20 leaders demanded key field-by-field audits. They could enact a transparency fine for producers. Where there’s a will, there’s a way. The time to trust blindly is over.
• Why are so many parties content to remain in the dark? Too many people have been lulled into a false sense of security about what are basically wild estimates, including BP’s annual review, the USGS endowment predictions, EIA’s massive reports, IEA’s OMR and other publications. All this data points to varying degrees of proven oil reserves that forestall any peaks.
• There is ample data to connect the dots—the devil’s in the details but if you get them, you can be right most of the time. Getting them takes a lot of hard digging. The data would be enough for most juries, and ASPO has done a remarkable job by impartial experts.
• Key data points:
• Production histories from non-OPEC fields
• Accelerating rates of decline
• Falling flow size
• Disappointing discoveries
• Rapidly declining flows
• Non-OPEC is looking bad
• The North Sea cannot be ignored—they produce the world’s only accurate field-by-field data, and its declines are still accelerating. It’s a showcase for steadily declining fields, the potential of advanced technologies and so on.
• Mexico’s Cantarell field is a classic peak oil surprise. As output began to fall, most experts assumed it was only temporary. Actual declines have confirmed fears. It will end Mexico’s long era as an oil exporter in 18-36 months.
• Too many other key oil-producing countries in irreversible decline. List is long and too important to ignore.
• Most high-quality crude streams are now trickles. WTI is now a blend of many imported crudes because Texan oil is so little. Other key light crudes are getting scarce. (Tapis, Bonny Light, etc.)
• Spare capacity is now probably gone. Actual Saudi sustainable production is probably 8 mbpd now.
• CERA’s “above ground” risks are real too, e.g., insufficient access to reserves, lack of proper investment, technology penetration, etc. The concept is relevant, but their perceived above-ground risks are models. The Zombie list is real, and scary.
• The Zombie list: rust, graying workforce, lack of new workforce and diminishing oil field technological advancement. Those are all real and serious risks.
• Jitters also: Iran’s Twitter revolution is finally shutting down oil system; Nigeria’s MEND morphs into civil war; Venezuela’s upheavals collapse PDVSA’s oil flow; violence in Amazon’s jungles (Ecuador/USA tipping point); terrorist strikes on Abqaiq, Straits of Malacca or Galveston Bay. These events could change our lives more radically than Pearl Harbor.
• The enduring risk is the aging of our key reservoirs; quality of life diminishes and cost to live soars. It’s irreversible.
• Meanwhile, growing demand is unstoppable without a careful plan. Many optimists believe oil demand peaked in 2008! Simply an unsubstantiated belief. BRIC is on the move and rapidly expanding demand. Middle East population is rapidly expanding and struggling to create prosperity.
• Too many key exporters are increasing their internal oil demand, this will result in reduced exports. If Angola and Nigeria ever create prosperity in particular…
• The biggest surprise might be that global gas supply has peaked. The data is much worse than for oil. Gas flows have gone into steep decline in Siberia, North Sea, Indonesia and conventional U.S./Canada.
• We still have new supplies to bring online but they’re either too small to too tough to create. Kashagan (“Cash is Gone”) saw it’s costs soar again. Kuwait just announced it will take until 2030 to increase flows.
• Exxon just proved how expensive it is to create new flows when they bought 24% of Ghana’s Jubilee field for $4 billion, with a projected peak of 120,000, so they paid $200,000 per barrel of flow.
• Onshore oil flows peaked in late ‘70s, shallow flows peaked a decade later, etc.
• 15 years of new field startups barely offset declining base. Almost all new vintages declined at higher rates—a treadmill.
• History of recent planned new oil fields is startling story—only a handful of new oil fields in 2006-09 are able to produce over 100,000 bpd. Balances average 30,000-40,000 bpd.
• Future large fields are getting more scarce: list of 200,000 bpd fields planned is short. None of them are easy and all might never reach full potential.
• Most recent large field additions failed to meet targets. Of 100 fields, only 8 hit or exceeded their design capacity. On average, 100 fields hit 54% of the target in year 2, 56% in year 3, and were down to 47% in year 4.
• Peak oil and gas is a true threat to sustainable society. The reality is that the flows peaked in 2005 and we probably peaked in gas shortly thereafter, but absent data reform, we can’t know.
• Best case by 2020: global crude flow 55-60 mbpd, global gas flows fall faster.
• 2005 set record for oil flows. How long before we accept this?

Q&A

• Q: How confident are you? A: I made a bet with NYT’s John Tierney that if the average price in 2010 is $200 a barrel or higher, I win. If it’s $199 or lower, he wins. It’s crazy to think that oil prices will always fall.
• Q: How high an oil price can the global economy support? A: Don’t know. Before the economy collapsed, we didn’t know the tolerance point. I think we could tolerate $500-700 a barrel.
• Q: Since you wrote Twilight in the Desert, do you have any new information that would change your conclusions? Since 2008, production was almost 9.3 billion barrels, yet you see no evidence of more than 8 billion. A: You can’t find any way to how they might get to 9.3. The new data I have learned (from Saudi Aramco insiders and new papers) says that things have gotten significantly worse.
• Q: What are the prospects for Kuwait reaching 3 mbpd? A: I think the Kuwaitis are actually reasonably honest about their prospects. It needs more investment.
• Q: What about Peter Dea’s idea the new unconventional gas prospects? A: LNG will never be a supply tsunami as people think. There will be a ferocious demand for it elsewhere; it won’t come to the U.S. The latest data I’ve seen for shale gas is the worst I’ve ever seen…the decline rates for Barnett are all you really need to know. Also consider the destruction of potable water that they entail.
• Q: You’ve convinced me that we’re screwed; what do we do? A: We need to stop digging in this hole. We need data reform badly. We probably have 7 years to deal with this. I believe that liquid ammonia will start to replace gasoline and diesel. We need a Manhattan Project to stimulate this transition.

Day 3 – TUESDAY, October 13, 2009
Reactions, Challenges and Opportunities

8:00 am – 8:30 am

Opening Remarks

Dick Lawrence
Eastern Hemisphere: Perspectives and Outlook

Ray Leonard, CEO and President, Hyperdynamics Corp; former VP of exploration, Kuwait Energy

Simon Ratcliffe, Energy Advisory, Department for International Development, Government of United Kingdom

Michael Rodgers, PFC Energy Partner based in Asia; Senior Member PFC Upstream and Gas practice

Kjell Aleklett, President and founder, ASPO International; Professor, Uppsala University, Sweden (moderator)
Interview video clips
Jeremy Leggett

• UK government response has been grossly irresponsible and remiss in not doing a risk assessment on peak oil. “It would be too risky to do that” were there words, because you might scare people unnecessarily. Then former minister Malcolm Wicks did a 100-pg report which dismissed peak oil out of hand and declared his belief in the power of the market to solve all problems. Task force ignored our report and the very existence of our group. The government will live to regret their ignorance of the problem.

Colin Campbell

• The peak in regular conventional oil was passed in 2005, but shrewd traders saw a rising trend and began to play the futures curve, which led to a surge in oil prices. This massive flood of petrodollars to the Middle East needed somewhere to go, so it was recycled back to the West and pumped up the housing market. This is a turning point for mankind. Over the last two centuries there has been a growth in energy and food; as well enter the second half of the age of oil with vast implications for a population of 6.7 billion people. By 2050 there’s only about enough energy to support about 3 billion people at current levels, or more at a much lower level.
• Brazil would be wise to steward its resources carefully and produce them slowly with an eye toward their own long term national interest. Margaret Thatcher, on the other hand, depleted Britain’s surplus of oil at a time of record low prices, and now faces a future of being largely an importer at a time of record high prices.
• Resource nationalism (Chavez in Venezuela, etc.) makes good sense, but it will exacerbate the impact of peak oil for net importers.

Kjell Aleklett – Remarks on ASPO and Peak Oil

• Peak oil is real. It’s not a theory; it’s a fact of reality.
• In October 2001 I talked with Colin Campbell about the monthly newsletter he was writing. I went over to Ireland and met with him, and we talked about organizing a workshop. We wanted other participants from other major countries, so we got Matthew Simmons to come from the U.S., and others from Iran and Russia. I am the Swedish chef of ASPO [picture of the Muppet based on the real Swedish chef Lars Kuprik Backman who used to do a cooking show in the U.S.] so the official language of ASPO International is broken English.
• I got Bruce Stanley from AP to come, who wrote “Global supplies of crude oil will peak as early as 2010 and then start to decline, ushering in an era of soaring energy prices and economic upheaval – or so said an international group of petroleum specialists meeting on Friday.”
• Review of ASPO forecasts [close to correct]
• Today there are 27 ASPO organizations around the world, and we are pleased at our progress.
• Our enemies: OPEC, IEA, EIA [cartoon]
• Dr. James R. Schlesinger, former U.S. Energy Secretary, Cork Ireland, 2007 September 17: “And therefore to the peakists I say, you can declare victory”
• Peak oil was first mentioned in the press in 2002.
• We define peak oil as the peak rate of production.
• The peak we had in July 2008 is the Olympic oil peak, coinciding with $147 a barrel.
• Research papers we have done:
• Giant oil field research at Uppsala University, Sweden: Ph. D. Theses from Fredrik Robelius “Giant Oil Fields – The Highway to Oil” downloadable for free on the Net.
• A decline rate study of Norwegian giant oil fields was done.
• Another important paper: “Giant oil field decline rates and their influence on world oil production” Mikael Höök, Robert Hirsch, Kjell Aleklett
• Paper: “European energy security” on giant gas fields
• New paper: “The Peak of the Oil Age” – review of 2008 IEA World Energy Outlook
• Collaboration: China University of petroleum and Uppsala University, working on forecasts for oil, coal and natural gas in China, working on new publication.
• Paper: “The Long March of the Chinese Giant Oil Fields” doing field-by-field data analysis of both giant and small fields. [chart] In 2030, declines by more than 1 mbpd, somewhat offset by small fields.
• See www.fysast.uu.se
• We have to build a “crash mat” for peak oil now.

Ray Leonard, “Prospects for ME-OPEC and Russian Oil & Gas”

• Came to the peak oil study by working on oil fields with Colin Campbell in the ‘80s. We corresponded about the problem in the ‘90s and I was surprised to discover in our database that the world was using more oil than it was finding. I did a study on it in 1999 which I sent to the Oil and Gas Journal, and it was rejected immediately. Then I approached Foreign Affairs (when I was working for Yukon) and was swiftly rejected again. I then gave a presentation within Yukos about it, translated into Russian, and submitted it to one of the major Russian journals, and it was accepted. It created quite a debate within Russian think tanks and so on, in marked contrast to the closed book I encountered in the U.S. It may have played a role in Russia’s decision to keep production at a certain level. After the U.S. rejection I got a call from Aleklett and Campbell and presented my paper at Uppsala. I said production would peak at 90 mbpd in 2010.
• In 2006 I was invited to join the Kuwait oil company and I have had access to their database and their view of what’s happening.
• “It’s not the size of the tank but the size of the tap” – Addendum: peak oil is dependent on the level of production, and the level of production is not dependent on the level of reserves, but the market…
• At a conference of experts on oil provinces (no think tanks or consultants) which included representatives from the world’s major NOCs and IOCs, the basic data showed in 2006 (King) that world reserve additions (discoveries) were declining [good chart of exploration growth, delayed reporting and reserve growth].
• Reserve growth: Exploration vs. reservoir optimization and cost (Leonard 2006, Papay 2005).
• Exploration reserve additions totaled approx. 240 bbo in 1981-2005.
• Extrapolating trends to future: 400-800 bbo to be added through reservoir optimization, 200-250 MMBO through exploration.
• Full application of tertiary recovery to reservoirs not now using EOR can add up to 200 bbo. [Chart of cost of base, discoveries, optimization and tertiary]
• Oil: World is divided into three segments: OPEC (3/4 of the world’s reserves, 45% of present production); FSU (12.7% of reserves, 16% of production; ROW 13% of reserves… [Chart of the production history of these three segments, plus price… ROW production increased with price, flattened with price crash in the 80s, but when prices spiked in 2004-present, ROW production declined]
• Every year OPEC is producing about 1.5% of its reserves, FSU about 3.5% and 7% for ROW
• OPEC: Arabian Gulf controls 77% of OPEC reserves.
• OPEC dramatically changed their reserve numbers during the quota wars via a function of classification (SEC vs. SPE vs. potential enhanced recovery).
• Limitation on production level for this segment is mostly due to politics, lack of motivation, investment level and type of crude, NOT shortage of reserves.
• Production costs vary from low in Gulf to high in deepwater West Africa and Venezuela (heavy oil)
• Saudi Arabia – OIIP Hyperbolic Creaming Curve (Zagar, 2005)
• About 590 Gb of oil in place, 93% of which is in development now. [complex slide].
• Production through 2008: 118 bbo.
• If discovered OOIP is 590 bbo, 50% recovery factor (RF) indicates reserves of 177 bbo, 65% RF gives 265 BBC. If reserve growth to 700 bbo OOIP as Aramco claims, 50% RF gives reserves of 232 bbo, 65% RF gives 337 bbo.
• They intend to keep about a 9-10 mbpd production rate. I do not believe Saudi Arabia is running out of oil.
• Kuwait produces about 2 mbpd and they have no incentive to increase that rate.
• FSU:
• 60% of production growth from 1999 – 2007 came from FSU. They are unlikely to increase their production rate.
• West Siberia discoveries chart (Leonard 2006). Could get 160 bbo from Siberia if they did tertiary recovery but they seem to be disinclined to do that.
• Russia is going to stay around 10 mbpd, they’re not going to increase.
• ROW has 40% of production but only 13.4% of reserves (not including tar sands) Decline rate of 7% per year.
• Non-OPEC production slide (Laherrère)
• Unconventional oil production (Leonard 2006)
• Conclusion: We’re roughly at peak oil right now, it resulted in high prices, the peak prognosis of 90 mbpd is unchanged by recent events. Demand will bump up against supply ceiling again in 3-5 years and we’ll be increasingly dependent on OPEC.
• Newsweek cover from May 2009 declared “Cheap Oil Forever” on par with Neville Chamberlain’s “Peace in our Time” declaration.

Simon Ratcliffe, “Africa and South Africa: Energy Supply and Security”

• I regard this conference as an island of sanity in a sea of ignorance and denial.
• African overview: curse and vulnerability [oil production chart from Wolfram Alpha]
• Top producers in order: Nigeria, Algeria, Angola, Libya and Egypt
• The cursed: Largely due to wealth inequity.
• Proved reserves (data from BP Statistical Review 2009): Libya has the most, then Nigeria, Angola, Algeria and Sudan. Libya’s reserve status speaks to recent geopolitical events.
• The vulnerable: Kenya, Botswana, CAR, Burkina Faso, Malawi. They’ve got a low threshold of tolerance for oil price volatility – can’t afford imports at high prices, leading to spike in food prices and hence protests, riots, power cuts and job losses.
• [chart of cursed & vulnerable and where their oil goes]
• Chinese oil demand is partly driving their relationships with African oil producers.
• It’s not just oil. A bigger scramble for resources in Africa is under way, for agricultural land (China, UAE, Japan, S. Korea, etc.).
• Interconnecting risks [complex slide] showing relationships between global economy, oil & gas depletion, geopolitical tensions, climate change and food insecurity.
• Summary:
• Small elites control oil in Nigeria and Angola – benefits are not widely distributed.
• Dictatorship is rife.
• Poor countries have low oil price thresholds for price shocks.
• The big powers are competing for Africa’s resources .
• Energy and the South African National Transportation Master plan for the next 50 years – They contracted for a two-year study which did not even consider energy! We intervened and they commissioned us to do a reference piece on the oil aspects of their transportation master plan.
• Methodology:
• Status quo study – transport and energy
• An understanding of peak oil and implications
• Identify key vulnerabilities
• Alternatives – risks and vulnerabilities
• Scenarios and risk assessment
• Conclusions and recommendations
• [Complex slide of primary supply in South Africa (mostly oil) and the energy carriers it translates to. Much of coal goes to CTL production.]
• 78% of petroleum is consumed in transport. Transport system uses 27% of all energy in South Africa, and 78% of liquid fuels, of which 70% are imported. So petroleum is the key vulnerability.
• Implications of peak oil for transport [complex slide] charting likelihood of various events (fall in air transport etc.).
• Approach: Try to reduce oil dependence, but each source of energy has its own strengths and weaknesses.
• Energy alternatives: CTL, GTL, LPG, biofuels, electricity and hydrogen – considering the relative merits of each…
• Status quo: dominance of roads over other modes, 50% of population use non-motorized transport with high mortality rate (e.g., pedestrians).
• Bridging the gap between demand and supply: First step is to reduce inefficiencies in the system (via hybrids, biofuels, LPG, road efficiency, carpooling, etc. [complex slide].
• Rail transport potential, energy efficiency of vehicle types potential, etc.
• Vulnerabilities: private passenger transport
• Looked at alternatives for propulsion, land use, etc.
• How long will it take to reduce dependence on imported oil? Scenario mapping using low to high impact, and slow to rapid transition to alternatives. [chart plotting the result of the scenarios, and table of effectiveness of the measures taken]
• Principles for transport planning: Aim at long term sustainability. The sooner the better. Government should create energy consciousness and change the public mindset. Understand connections between economy, energy, land use, etc.
• Mitigate impact of peak oil with action now. Recommendations for short-term, medium term and long-term. Risk assessments identified and mapped (mostly high impact and high likelihood). Study has become part of the transportation master plan.

Aleklett comment: CTL is not an option because following the South Africa data, to accommodate a 4 mbpd global decline in oil would require 60% more coal consumption in the U.S. and 60% of China’s coal consumption.

Michael Rodgers, “China’s Oil and Gas Balance”

• The PFC view of peak oil is that peak will be below 100 mbpd – uncertainties around EOR effectiveness, exploration success, and project delays makes it virtually impossible to determine the exact peak rate and timing, but that’s not really important given the policy response.
• China believes that it can modernize and improve its citizens’ welfare and ensure sustainable growth. Gov’t has conceded that it’s going to increase its dependence on the rest of the world’s hydrocarbons in order to continue rapid urbanization.
• Historical crude oil production in Asia [chart]. Production has been mostly flat since about 1999.
• Crude oil reserve balance for Asia went negative in the early 1980s – producing more than discovering. Current deficit about 1.5-2 Gb/year.
• Overall depletion levels are about 60%. It will be impossible to sustain the plateau of over 7 mbpd for very much longer.
• Strip out new production and it’s clear that older mature fields are declining at average rate of 5-7% per year. Declines in these older fields due to small volumes of remaining reserves and high overall depletion level.
• Production from new projects over the net several years will likely just maintain production around current levels.
• Natural gas production forecast for Asia: Currently a net importer of gas driven by 100% import reliance of Japan, Korea and Taiwan. Gap expected to widen significantly beyond 2020.
• Natural gas production growth rates: can grow production up through middle of next decade; however toward the end of next decade growth rates will go negative.
• Oil demand growth driven by emerging markets, esp. China – makes up a large part of recent years growth in demand.
• China GDP growth will average 8-8.5% near term before slowing but still will be high by global standards. Real GDP per capita to rise beyond $7000 by 2030.
• Energy indicators: Efficiency improving and will continue to do so but consumption will increase over time due to massive population.
• Total energy by fuel continue to be dominated by coal and then followed by oil. Other fuels including gas, nuclear and solar grow rapidly but given their low starting point, total volumes remain small compared with oil and coal.
• Accelerating transportation demand: From 2000-2008, 58% of the total oil consumption growth came from gasoline and diesel. From 2008-2020, an estimated 85% of the total oil consumption growth will come from transportation. [very complex slide]
• [Chart of major onshore oil and gas fields – most basins have been highly explored.]
• Chinese NOCs: Three large companies: CNPC, Sinopec and CNOOC. Will continue to be driven by energy security concerns.
• China’s oil base production in decline. Fields producing prior to 2000 declining at rates of 5-7%. Fields which in aggregate were producing 3 mbpd will be producing about 1 mbpd by 2020.
• Overall depletion levels at 60%. Production plateau at 3.6 – 4 mbpd, remain on plateau for next decade. Natural decline rates of 9% for onshore production, mature fields as high as 16-20%, water cut up to 90%. EOR brings decline rate to 6.7%. [China’s own data]
• Production forecast: expected to be near peak, bumpy plateau for next 8-10 years, then catastrophic drop in production.
• Near term oil import needs: about 4 mbpd now, rising to over 10 mbpd by 2020. Moving from 9% of global demand into the low teens.
• Oil import pipeline options [complex slide]: A number under construction for overland transport from Russia and Caspian region, shipped transport from Malaysia etc.
• [Complex slides of what CNPC has bought internationally – 75 projects in 29 countries in last few years. Likewise for Sinopec and CNOOC.] Very aggressively competing with rest of world to secure reserves and export workers.
• Gas import pipelines: In 2008 gas consumption was 7.6 Bcf/day Bcm/y, but should rise to over 30 Bcf/day by 2030.
• [complex slide of gas pipeline import routes and LNG imports] – Pipelines coming from all possible directions.
• Gas production forecast: Domestic gas output will keep going and is likely to reach 16 Bcf/d by 2020. Growth from 1998-2008 averages 16%.
• Has secure gas supplies through 2020. Some additional exploration potential.
• Australasia gas trade: [Complex slide showing exporters, importers, etc. for 2008, 2015, and 2020 scenarios.] Imports become more significant. By 2030 map has changed dramatically and China [?] relies heavily on gas imports, mostly from Australia and points south. By 2030, import demand in Pakistan and Vietnam is expected to pass 2 Bcf/d.

Q&A

• Leonard: Saudi Arabia really has no incentive to increase their production rate. Peak oil will give rise to increased resource and economic nationalism. Russian production will stay flat.
• Ratcliffe: Reports should be available at http://dot.gov.za for national transportation master plan. We recommend that freight and passenger travel should be moved to rail, and additional rail capacity should be powered by electricity.
• Rodgers: Deepwater production growth has come to an end. Size of new discoveries has fallen off, and big discoveries decline at 12% post-peak. Sustain deepwater plateau around 7 mbpd. Only about 250 commercial deepwater fields worldwide.
• Aleklett: ASPO should focus on solutions now more than the problems. Remember that ASPO members, not ASPO itself, are doing the research work.

10:30 am – 12:00 pm

Western Hemisphere: Perspectives and Outlook

David Shields, journalist and author of the book Pemex: The Oil Reform

Vince Matthews, Director, Colorado Geological Survey

RoseAnne Franco, South America Senior Analyst, PFC Energy

Dick Lawrence, Board Member, Co-Founder, ASPO-USA
David Shields, “Outlook for Mexican Oil Production”

• Cantarell decline graph – 1995-2009.
• 17 Gb proved reserves, largest discovery in this hemisphere. Production at 1 mbpd in 1995, peaked at 2.2 mbpd in Dec 2003, maintained it for a few months, then from 2004-2005 on it declined sharply. The case study in extreme depletion of a major oil field.
• Why did they inject nitrogen? To maintain pressure. Does not equate to production increase—that’s due to drilling more wells of larger diameter.
• Pemex denied that decline was a problem and said they would get up to 3 mbpd.
• Pemex doesn’t seem to know what will happen next. They’re now trying horizontal drilling.
• Ideal conditions in Cantarell, great porosity and permeability, gas cap, water base.
• Now getting into the gas cap which is contaminated with nitrogen, so they’re reinjecting gas and nitrogen to maintain pressure.
• Over next few years its sharp downward curve should taper off.
• What’s the outlook for Mexican production for next 10 years? [Chart of stacked up output through 2017 from various fields.]
• Depending almost entirely on Chicontepec (giant onshore reservoir) and future exploration to increase production to 3 mbpd.
• They are expecting Chicontepec to replace lost production from Cantarell. This outlook does not comport to reality at all.
• Considering how we might get up to 120 mbpd by 2030 – increases in Russia, China, Saudi Arabia, etc…all without taking into account cost, resource nationalism, geopolitics, etc.
• But Cantarell is declining sharply, Ku-Maloob-Zap (7 Gb reserves) is projected to decline slowly but that is questionable. Other fields are declining sharply.
• Chicontepec is a collection of tiny fields with extremely complex geology that have never produced very well—reservoir is only doing 30,000 bpd now. Mexico has awarded fat contracts to Halliburton, Schlumberger etc. but they have never properly characterized the fields. Mexican officials are now angry and wondering why production isn’t increasing.
• Pemex has been very poor in exploration. Not one single field worth mentioning in recent years. They won’t do deepwater because they don’t have the legal framework, the expertise, the semi-submersible rigs, crews to man them… Getting one from Korea next that will drill in 7,000 ft of water.
• A more realistic graph that Pemex sent to the Senate to ask for funding (in stark contrast to the other previous graph for public consumption) shows a totally different outlook. Shows Cantarell and Ku-Maloob-Zap but then three other fields not shown on the previous graph: Bellota-Jujo, Samaria Luna, Marina Suroeste. Production here is forecasted to fall to 1 mbpd by 2017, fully 1.837 mbd lower than the ~3 mbpd official forecast (and vs. 2.54 mbpd production level of last month).
• Basic outlook: Cantarell will decline further, but more slowly. The party’s over anyway.
• K-M-Z will decline in 2011 or 2012 and could fall sharply.
• Other fields, on and offshore are mature and small and will decline sharply.
• Exploration efforts have produced no significant results so far.
• Chicontepec is a false hope to replace Cantarell.
• Deepwater efforts are embryonic and are a very long term prospect. Only a few small unsuccessful wells. See no prospect for increased production from them in next 10 years.
• Output is down 1 mbpd in 4 years. Will fall another 1 mbpd or more, over next 8 years.
• Will be down from 3.4 mbpd to 1.4 mbpd in 12 years (to 2017).
• Official statements are completely different from this and totally unreal.
• Mexico will cease to be a net exporter between 2013-2017.
• Will soon begin to import light crude and be net importer of crude between 2013-2017.
• This will impact the country’s economic outlook and require major fiscal reform.
• An Export Land Model type analysis:
• Output (crude): 3.4 mbpd peak in 2004, 2.6 in 2009 and 1.5 in 2015.
• Exports (crude): 1.9 mbpd in 2004 (peaked briefly in 2003?), 1.1 in 2009 and -0.1 in 2015.
• Imports (gasoline) 0.2 mbpd in 2004, 0.3 in 2009 and 0.5 in 2015.
• Possibly become a net importer (zero exports) in 2015, +/- 1 yr
• Possibility of increased imports leading to agitation to build new refinery.
• Email: energia@cablevision.net.mx
• Over 30 years, Cantarell has provided $440 billion to Mexico’s budget, which has now vanished, and was used to meet short-term needs and crises.
• Pemex gets its forecasting wrong every time. They thought they’d be at 4-5 mbpd by now. Pemex officials knew back in 2002 exactly what Cantarell was going to do, but they say exactly the opposite.
• [Wow. Devastating indictment.]

Vince Matthews, “World Mineral-Fuel Demand and Security”

• The world’s natural resources are more constrained than they have ever been before.
• World electrical consumption growth tells the resource story nicely. 8.3 TW increase (70%) since 1990. U.S. 1.1 TW, China 2.8 TW, India 0.5 TW.
• Rest of the world’s demand is also increasing.
• China is #1, #2 or #3 producer in the world for 15 of the most important commodities.
• #1 importer of copper, more than 40% of world demand. [copper price chart] price up 307% since July ’03.
• #1 producer in the world of iron ore, and top importer now.
• The numbers are mind-blowing – 70,000 new supermarkets in 2005. Now #1 car manufacturer. #2 car market in the world as of 2007.
• Price of scrap iron is up 559% since ’03.
• U.S. molybdenum exports doubled since 2003, most of which went to China. Price up 997% since Jan ’03 and stayed high, then crashed along with everything else in 2008. Crashed more in a few months than in the entire Great Depression.
• Many metal prices now staging a comeback, driven by Chinese demand.
• [price increase charts for major metals] Average price increase 379%. Avg price increase 746% of other major metals [15 metal price charts on the slide] Most are sold into long term contracts, not spot. When those contracts expire, spot will spike. Washington doesn’t seem to understand what’s driving all this.
• China knows exactly what it’s doing buying up resources all over the world.
• For wind turbines, you need these metals—niobium, steel, molybdenum… For solar you need all these rare earths. [Chart of 20 important minerals used in renewable energy machines] The U.S. has to import half to 100% of all of these elements, and China controls 93% or better of all of their worldwide production.
• REE: Rare earth elements = 15 +2.
• Rare earths crucially needed to make hybrid cars.
• China is going to clamp down on exports of rare earths, to bring world manufacturing to them.
• China was exporting cement in 2002, and began importing in 2003, resulting quickly in cement shortages in the U.S. Largest producers of cement: China, India and U.S. China consumes half of all the cement in the world.
• Fertilizers: potash, sulfur, phosphate prices spiked. Phosphate world production probably peaked in the late ‘90s.
• Price chart from 2000 to present for energy, fertilizers, agriculture and metals minerals—all but fertilizers fell sharply last year.
• [Charts on U.S. energy composition and imports of primary fuels] 94% of our energy comes from coal, oil, uranium and natural gas. The 6% of renewables is almost entirely hydro and biomass.
• World coal consumption increasing worldwide dramatically, esp. in China. Began importing for the first time in 2006, leading to a near 4x increase in price. We have a lot of coal in the U.S. but we’re going to wake up some day and realize that we don’t own it anymore. Together Indian and China consume half the world’s coal.
• Nuclear: Both India and China want a lot more nuclear production. China plans to build 32 new reactors in 7 years.
• Last US nuclear plant came online in 1996, but we’ve increased our production since then.
• Largest nuclear generator in the world is the U.S., nearly double the next country and triple the #3 country. 436 plants operating, 44 under construction,
• The world’s existing reactors need 180 million pounds of uranium each year, but production is 80 million pounds less than that. We’ve been working through a stockpile of yellowcake and decommissioned weapons.
• Uranium spot prices spiked and crashed.
• Natural gas – Everybody sees a huge future for it, but we need to listen carefully to what Art Berman and Matt Simmons said yesterday. We don’t know that we can actually produce all the gas that’s being projected. I would urge extreme caution on this. Natural gas can’t be a silver bullet, conservation is the most important thing we can do.
• We’re depleting all the world’s natural resources, and still increasing demand. Trying to run up the down escalator, while decreasing our carbon footprint. We need to be realistic about what we’re doing.
• We’re ignoring the natural resource game that’s going on out there and it will hurt us.
• [Woof - That presentation was a freakin’ firehose of data!]

RoseAnne Franco, “Outlook for Oil and Gas in South America”

• Outside the Middle East, Latin America houses the largest proven oil reserves in the world. Critical supplier to U.S.
• Historically the region has had volatile regulatory environment, slowing oil development.
• Likely see improved foreign investment but not like the liberalization of the 90s.
• South America and particularly Brazil set to become an energy hub.
• Latin America is #2 oil producing region in the world after Middle East.
• Largest producers, Mexico and Venezuela, are in decline but Brazil is climbing. Colombia is the one to watch—it peaked in 1999 at 550,000 bpd but gov’t is committed to increasing production.
• A lot of regulatory volatility in South America mostly triggered by high oil prices—gov’ts felt they were denied any upside.
• Fiscal regime: Higher prices increased expectation, but the contracts included no flexible way to reflect the higher oil prices, so govt’s unilaterally adjusted their terms. Top-down changes in Venezuela (driven by Chavez), bottom-up changes in Ecuador, Peru…driven by residents.
• With downturn in prices since price crash in 2008, countries may be expected to soften their terms.
• Columbia and Peru have lowest regulatory risk for new oil sector entry
• Venezuela: Est. 335 Gb bbls.
• But Orinoco Belt development is affected by a desire for domestic companies to work it. However it’s not clear that all these NOCs can meet the industry’s technical challenges and financing needs. Petrobras is in a league of its own, but most other companies are undercapitalized and lack sufficient expertise.
• Chavez knows this and is now taking a dual-track process to develop Orinoco further: bilateral negotiations and tender process. The Carabobo tender appears to have overcome the recent impasse and is giving indications of softening terms (lower royalties, other adjustments).
• Peru, Colombia and Ecuador: Related to Venezuela’s heavy oil, so higher development costs, a further constraint on development.
• Colombia: Oil production peaked in 1999-2000, declined, then slow uptrend in recent years.
• Brazil: Rise of new energy hub in the south Atlantic. New pre-salt discovery makes country a major regional oil producer. Very robust domestic oil services sector and plenty of deepwater expertise.
• What will hinder Tupi and onshore? Increases expected in offshore Uruguay.
• Brazil: 12.6 Gb proven reserves currently (ex pre-salt).
• Petrobras: Capex is up 3x in only 3 years. Seeks to become vertically integrated company, build refineries, etc. Very ambitious development plans without the pre-salt. [Oil production forecast through 2015, most of new production from deepwater & pre-salt]
• New energy actors: NOCs and countries in search of energy security: China, India and Japan. Mainly major consumer countries making agreements with major producers.
• China’s loans for oil deals: Chinese NOCs want to leverage gov’t loans to secure upstream access. We expect this to increase and deepen as time goes on. Increasing refining capacity for heavy crudes, expansion of Panama Canal, Japan and China want to diversify away from Middle Eastern and Central Asian producers.

Q&A

• Q: Might Mexico change its constitution to allow greater participation by foreign companies (IOCs)? Shields: I don’t see any changes soon, Mexico has major hang-ups about this. They’d rather find ways around the constitution. Might find new more attractive contracts by next year.
• Q: What about uranium? Matthews: It has the most promise because we’re not reprocessing like France is, that might solve our import problem.
• Q: Matt Simmons predicted the end of Mexican exports to U.S. in the next 18 months or so, what do you think? Shields: I don’t see exports to U.S. being reduced by more than 100-200,000 bpd in the next two years. In 3-4 years, Mexican oil exports to the U.S. will be marginal, and will dry up altogether in about 5 years.
• Q: How long until U.S. becomes resource nationalist regarding Chinese buying of our minerals? Mathews: No telling what we’ll do but we could go that route.
• Q: What about thorium cycle reactors? Matthews: We have a decent reserve of thorium in the U.S. It’s difficult to open a new mine for anything in this country. Whether we can do it in time is another question.
• Franco: Petrobras may find it’s difficult to fulfill all their new development contracts because it needs to be built domestically.
• Q: Who will provide social services to Mexico and will that pressure the U.S. in immigration? Does it imply Mexican state collapse? Shields: There is a debate in Mexico about whether it is a failed state. Drug wars, decline in revenues from factories supplying goods to the U.S., etc. are all challenging. This week the gov’t took over a major utility company because of corruption and to keep the lights on. We’re going through a very tough time.
• Q: Why doesn’t the National Science Foundation know anything about this? Matthews: I’d love to know. There’s a bit of movement from the NAS to start looking at critical materials, esp. for military’s vulnerability assessment. China is building up strategic mineral stockpile, Japan has already done so. But as of last March, the U.S. was still selling off its stockpile. The lack of knowledge and concern over it in Washington is horrifying and I can’t explain it.
• Q: About water? Matthews: It’s crucial, esp. here in Colorado. Head is dropping about 30 ft per year, and has been falling for 20 years. Will hit the aquifer around 2011. Large sums of water needed for shale development (fracking). It’s not the only problem we’ve got!
• Q: What responsibility has the EIA for not telling the truth? Matthews: They do a good job of gathering information but they ought to be banned from predicting.

12:00 pm – 1:30 pm

Lunch Keynote: Tom Petrie, Founder, Petrie, Parkman Inc. / Vice Chairman of Bank of America Merrill Lynch

Tom Petrie, “Alternative Transportation Energy – A Major Game Changer or Overrated Strategic Option?”

• I came to the peak oil story as a confirmed skeptic, and now I’m a believer.
• Will plug-in vehicles give us such a payoff that we can transform our consumption of motor fuels and mitigate the consequences of conventional oil decline?
• Over 600 million vehicles worldwide, 245 million in U.S.
• PHEVs
• Obama admin has prompted GM to focus on PHEVs.
• Book: Freedom From Oil – David Sandalow (former Clinton admin) Series of briefing papers on what we can do to reduce our oil dependence. Half the chapters are admittedly questionable. Three options matter: fuel efficiency, plug-ins, and generating electricity to run them. Moving from coal to nuclear and renewables. Hydrogen replaced by natural gas as a transport fuel.
• “Plug in electric hybrid vehicles are a game-changing technology–they can break our oil addiction, cut driving costs and reduce pollution. To help end U.S. oil dependence, there is no higher priority than putting millions of plus-in hybrids on the road soon.”
• Sandalow later went to the Brookings Institution.
• With 40 mile battery range, we can get about 134 MPG and cut 60% of gasoline consumption (vs. today’s 21 mpg average).
• Potential savings: 3.5 – 5.3 mbpd in U.S., 7.0 – 15 mbpd globally.
• Problem is, these numbers are basic arithmetic. The real issue is to understand where we really are on the demand side.
• Per capita annual oil consumption:
• U.S.: 26 bbls /yr, down to China & India…
• Oil demand drivers (BRIC and ME): Demand doubles to 42 mbpd by 2030, from 22 mbpd, increase 19.6 mbpd. Even without peak oil, competition for oil supplies between emerging markets and mature countries is a potential problem. The world needs and will actively seek out demand “game changers.”
• Up to 2030, all of the growth in oil demand comes from non-OECD, with China contributing 43%, the ME 20% and other emerging Asian economies most of the rest. OECD absolute consumption falls over next 20 years by about 3 mbpd (IEA projection, WEO 2008). China increases by 9 mbpd.
• Reality checks: (Sandalow’s sequel book for Brookings Institution: “Plug-in Electric Vehicles – What Role for Washington?”)
• Battery technologies
• Lithium critical and resources are potentially limited. Top resource holder is Bolivia.
• Search for new alternatives still goes on. We still get into other mineral limitation issues, e.g., cobalt. We don’t produce or control it in this country (Russia and China are self-sufficient in it) Similar stories for other minerals.
• Performance: Need to be able to extend range to 40 miles and farther.
• Warranty expectations: People think they’ll need a 100,000 mile 10-year warranty. No hybrid battery manufacturer will offer that. Brookings Institution is looking into underwriting new warranty program.
• Electricity source issues
• Coal, natural gas, nuclear, renewables. By charging off-peak, we can better utilize existing capacity.
• Electric grid issues
• U.S. grid composition of three separate grids leads to effort to integrate them and allow load-shifting across them.
• Build-out of vehicles has big impact on electric grid. [% of fleet offset & grid increase chart]
• Performance issues
• Can get to about 2-4 cents per mile, but doesn’t include initial vehicle purchase.
• Vehicle costs
• Chevy Volt – 2010: $40,000
• Mitsubishi miEV – 2009: $48,000
• Nissan Leaf – 2010: $30,000
• Conclusions:
• A large electrified transportation component is an intriguing potential.
• Challenges will take quite a few years to overcome.
• PHEVs offer promise but do not represent a panacea.
• The risk of over-promising PHEV and EV benefits should be guarded against.
• Time frame for meaningful traction likely 2025-2050.
• Developing a diversity of reliable sources of electricity (including nuclear) will be critical for achieving a fully electrified PEV system.
• Full penetration is likely no more than 75% of the fleet. But if vehicle fleet worldwide goes to 1 billion, maybe not.
• Progress in PHEVs can have knock-on effects and encourage other lifestyle changes.
• We have to move very quickly.

Q&A

• Q: What about natural gas vehicles? A: There are about 8 million worldwide now, only about 350,000 in the U.S. They’re a no-brainer. We flirted with it two decades ago here in Denver. Could be 65 million worldwide by 2020 according to a recent paper, and save about 7 mbpd of oil consumption. Boone Pickens says if tax incentives convert 18-wheelers in the U.S., could save 2.5 mbpd. Economies of scale along major interstate highways. Berman makes some good points and I take them under advisement, but I don’t think committing to switching some loads to natural gas is a bad idea. We just need to make sure we don’t get carried away. I’m a relative optimist on natural gas options for at least a few decades as a partial option, but it’s certainly not a panacea.
• Q: What about China’s effort to go to electric vehicles? A: I would not underestimate the Chinese at any time in an area like this. I think they have a goal of ensuring their economic security by increasing supplies and they recognize that they’ll need a portfolio of options including the electric car. They’re a big nation and they drive more than Europeans do. They’re already the #1 manufacturer of autos and #1 marketer, and they plan to dominate the space. A combination of PHEVs and EVs is likely.
• China is now second only to the U.S. in first-class interstate highways. Brazil and India have more miles of road, but they’re not in good shape. Possibly no new ones built in India since the British left.
• Comment from attendee: Gets 120 mpg on his retrofitted plug-in Prius, charged in part from his rooftop solar.
• Q: Studies show cost of maintaining auto infrastructure is $0.42/mile, what if we pass that on to drivers? A: Right, there’s a built-in subsidy that we have enjoyed for a long time. Getting to fully-loaded economics is going to be part of the solution.
• Q: Doesn’t electric rail for freight & passenger like Germany make more sense? A: Yes, that is part of the answer, particularly within our cities. If you’re China building out new, you can do it more easily than if you’re trying to retrofit urban sprawl like we have.
• The answer isn’t accommodating our past growth rates & sprawl topography. We’re going to get a hysterical reaction when the reality of peak oil hits the public. $150-$200/bbl oil is possible if not likely.
• Q: In 2030, production will probably be down, how many cars do you think will be on the road in the U.S., and what will the fleet look like? A: I don’t think there will be very many Hummers, we’ll have exported the last of them to Saudi Arabia. I think maybe pushing 300 million vehicles in the U.S. (or North America), there’s a chance that natural gas could be 25% of that. Plug-in will be on its way to pure-plug in. Perhaps 25% of the fleet will be PHEVs.

1:30 pm – 3:00 pm

Navigating Competing Priorities in Energy, Food and Water Policy –

Michael Webber, Associate Director, Center for International Energy & Environmental Policy, University of Texas, Austin

Jason Bradford, Managing Partner of Vital Farmland LP

Jeff Dunn, Government Affairs Analyst, Southern California Association of Governments

Debbie Cook, ASPO-USA Board of Directors (moderator)
Debbie Cook, Remarks

• Notes article from The Guardian, March 18 2009 warning about a “perfect storm” of energy, food and water.

Jeff Dunn, “Making Sausage: The Evolution of a Bill”

• HR 6186 – “iCap” – Precursor to HR 2454 – Investing in Climate Action and Protection Act. Introduced June 4, 2008 by Rep. Ed Markey.
• Caps GHG emissions at 85% below 2005 levels by 2050.
• Cap-and-trade auction for companies to buy and sell emission credits.
• Bank and borrow emissions credits, and borrow against them.
• Use of offsets by covered entities to meet up to 15% of their annual emissions reduction obligations with domestic offset credits and up to an additional 15% with EPA-approved international emission allowances or offset credits.
• Mandatory performance standards for coal mines, landfills, wastewater treatment operations, including standards for new coal-fired power plants, requiring them to capture and sequester 85% of CO2 emissions within a set timeframe.
• Significant return of auction proceeds to low- and middle-income households through rebates and tax credits.
• Investment in auction proceeds in R&D and deployment of clean energy technologies.
• Bill was not heard by any policy committees of jurisdiction under Bush administration. Waxman replaced Rep John Dingell as chair of Energy Subcommittee.
• HR 2454 developed via series of hearings in 2009, covering energy systems & producers.
• Bill circulated and passed the House in June.
• Emissions Reduction Goals included, and specific reduction targets for 2012 through 2050. Requires EPA to set annual GHG emissions limits or caps.
• Establishes cap-and-trade systems and emissions allowances. By 2030 most allowances will have to be purchased on the open market.
• EPA to schedule auctions 4x a year with first auction no later than March 31, 2011.
• CBO estimates allowances sold in 2012 to be $60 billion market.
• Emissions allocations: 44% for electricity distribution companies in 2012, declining to 7% in 2029. Natural gas distribution companies get 9% in 2015, declining to 1.8% in 2029. Petroleum refiners get 6.2% in 2012 declining to 4.9%.
• Coal and petroleum users get 5% allowance all the way from 2020 through 2050.
• Clean vehicle companies: 3% from 2012 – 2017, 1% from 2018 – 2025 [etc]
• Offsets: forestry and ag activities that absorb CO2.
• Saving & borrowing against future emissions provisions.
• Penalties for non-compliance fines for exceeding limits: Number of tons times price of a ton of emissions. Each ton of CO2 over limit is treated as separate violation.
• Energy provisions: Energy companies (utilities selling more than 4 million MWh) produce at least 6% of energy from renewables by 2012, rising to 20% by 2020.
• Up to ¼ of the 20% requirement could be met with electricity savings from efficiency.
• CCS provisions…
• Electric & hybrid vehicles incentives
• Energy efficiency standards for commercial & residential
• Negotiated provisions: free emissions allowances at first, allowing new coal-burning plants provided they meet new standards.
• Transferred EPA to U.S. Ag Dept the authority to regulate and administer emissions targets programs by buying carbon reductions in ag areas, for farms & forests, soil tillage practices, and CO2 sequestration.
• Reduce nat’l mandate for renewable energy from 25% of power from renewables to 20% by 2020.
• [chart – vote summary] Even with final negotiations, final vote of 135-140. Coal state members got 58 Aye, 87 Nay (22 of 44 Democrats voted nay).
• Ag vote similar.
• Final vote: 219 Aye (one vote to spare).
• S 1733 (Boxer & Kerry)
• Same architecture as HR 2454. Emissions allowance percentages is omitted (will be negotiated).
• More ambitious GHG reduction targets.
• Price collar provision for credits.
• Modest nuclear power title for increased DOE funding for study and R&D.
• Boxer plans to hold bill for mark-up in late Oct or Nov.
• Administration seeks progress before Copenhagen climate summit
• Take-aways: Engage yourself early in becoming involved with legislation and be persistent and continuously visible. Meet with staff as often as possible, attending hearings, hammer staffers with white papers. Offering language is always appreciated (spoon feeding the staff)

Michael Webber, “Thirst for Power: The Global Nexus of Energy and Water”

Cook: Webber teaches a three-day crash course in energy for legislators.

• Control of water is related to economic, governmental and military power in history.
• “Maya lords promoted themselves as divine leaders with powerful supernatural abilities. But, their real power came from their control of key resources such as water, and…” [missed rest of quote]
• Consider Roman aqueducts and Ankor Wat infrastructure for water…
• Sustained droughts are correlated with collapsed civilizations (see Collapse by Jared Diamond, and The Great Warming by Brian Fagan).
• Chinese dynasties: Tang, Yuan, Ming
• Roman empire
• Meso America (Maya) – 900 CE
• Khmer Empire (peaked in 13^th Century)
• Energy and water are even more critical than food, or healthcare, or law and order (e.g., Katrina).
• The hydrological cycle is global – one big cycle (complex chart from Science, Aug 25 2006).
• Freshwater near surface is a small fraction of the total supply.
• Energy and water are interrelated:
• We use water for energy and energy for water. Thermoelectric power sector is the largest user of water in the U.S.: 48% of total water withdrawal (39% of freshwater withdrawals). Withdrawals 1-40 gal/kWh [?]
• 21 gal/kWh national average
• 40 gal/kWh for once-through cooling
• 1 gal/kWh for cooling towers
• Hydroelectric 18 gal/kWh (evaporation)
• 3% of U.S. electricity is used for waste/wastewater plants, ~10% including end-use.
• Water production, treatment and distribution: surface water 1,400 kWh/Mgal, groundwater 1,800 kWh/Mgal etc. Seawater 9,800 and up (including desalination).
• Wastewater treatment: Trickling filter uses 955 kWh/Mgal, up to advanced treatment w/nitrification of 1,900 kWh/Mgal (Stillwell, 2009). Advanced treatment with nitrification, followed by water treatment, is less energy-intensive than desalination
• Water quality impacts as well (oil and coal ash spills, etc.)
• Relationship is already under strain.
• Record heat wave in France in 2003, 15,000 people died. Nuclear plants had to dial back by 15% because rivers were too hot. France has since suspended those limits and takes the risk of cooking the critters in rivers.
• Droughts could close nuclear power plants due to limited southeast water
• Civil war between GA and TN over water?
• Tension over Lake Mead, Last Vegas vs. Los Angeles. Worst 10-year drought in recorded history.
• Trends imply strains will be exacerbated.
• Population growth, economic growth, climate change, increased consumption of meat, and policy choices moving toward energy-intensive water and water-intensive energy.
• Stricter wastewater treatment standards require more energy.
• Aquifer production going deeper.
• Desalination capacity worldwide to double by 2025.
• Long-haul pipelines in China, India and Texas for inter-basin transfer.
• Desalination plus long-haul transfer means more energy consumed for water.
• More water-intensive energy: nuclear, solar and solar CSP.
• Electric vehicles will add to water demands.
• Plus unconventional fossil fuels, CTL, tar sands, etc. Mixed story for shale gas: 2-4 million gals per well for the initial charge to frac.
• Hydrogen (1-500x worse)
• Biofuels (1-1000x worse)
• Corn-based ethanol: production fertilizer, runoff to water bodies, increase nitrate contamination and energy for water treatment
• We need to rethink the energy –water nexus for transportation
• Water conservation and energy conservation are synonymous
• Policy recommendations:
• Better data collection
• Integrated policymaking
• Oversight of water quantity (EPA is in charge of water quality)
• Establish strict federal standards in building codes for water efficiency
• Match water permitting with air permitting for power plants
• Invest in water related R&D.
• Work with USDA to push drip irrigation.
• Push dry cooling systems for power plants.
• Support reclaimed water use for power plants.
• Rethink water markets – they’re not free and infinite anymore.
• “Peak water?”

Jason Bradford, “Food Policy and a Resilient Food System”

• Quote by Wes Jackson of the Land Institute in Mother Jones, Oct 2008. Goal: zero soil erosion, zero fossil fuel dependency, reduced water contamination etc. View food through an ecological lens.
• State of today’s food system:
• Pros: food is plentiful and cheap
• Cons: Depleting, degrading everything, unhealthy and unsafe
• Societal policy goals: Environmental protection, healthy safe food, economic vitality, peace & security. Our current ag policies go completely against these goals.
• Resilience:
• Low diversity & strong connectivity = unstable systems
• High diversity systems are more resilient and stable because connections are weaker.
• Feedlot food system is the poster child of what’s wrong: pumping fossil water to make hay to feed dense populations of cattle.
• Commercial ag also produces dead zones in the GoM from runoff.
• Three crops dominate in U.S. – 71% of crop acres produce corn, soybean and wheat. Low diversity. Seeds sourced from mega corporations – again low diversity.
• Half of U.S. crop subsidies go to corn, 56% of which is used for animal feed.
• Our subsidies can put farmers in other parts of the world out of business (decreasing diversity).
• Refrigerated food & beverage are supplied by just-in-time systems.
• [great chart: Organic Industry Structure: distributor mergers and acquisitions, also retail - many producers in 80s merged down to 2 or 3 operators now (low diversity).
• Ag uses 22% of energy consumed in the U.S. food system.
• Rising input costs & falling crop prices as we saw in the last year hurt farmers. Wild volatility in the course of a single planting season makes it difficult to survive, and reduced number of operators means greater vulnerability.
• Changing rainfall since 1958: 5% increase in annual average rain over last 50 yeas but important regional differences. Some regions much wetter and others much drier.
• Crops vulnerable to climate change: There is a nonlinear relationship between temps & crop yields. Historic temperatures have been in the yield “sweet spot.” Each degree higher Celsius results in rapidly dropping yield curve for soybeans.
• Sustainable ag movement:
• Don’t harm the environment.
• Don’t rely on nonrenewable fuel inputs, etc.
• More resilience shown for organic methods and higher yields with less volatility in output.
• Won’t we starve if farmers go organic? (an idea put out there by the CERAs of the food industry, e.g., Monsanto) Hundreds of academic peer reviewed studies show that organic systems have an advantage!
• Can we scale the transition to organic?
• U.S. organic sales have been growing 20% per year since 1990.
• Currently organic is only 3.5% of total food budget.
• More people are demanding healthier and local food.
• We know how to make the transition. USDA funded programs will help you do it.
• Elements of a sustainable food system [see info from Jason’s previous session]
• We can go from a 1500 mile diet to a 150 yard diet.
• Mobile processing facilities are now able to visit the farms directly.
• Policies:
• Reduce subsidies for animal feed crops.
• Ensure carbon price reflects full cost, no externalities.
• Increase funding for conservation and habitat restoration.
• Fund research for low-input farming systems and public domain seeds.
• Support wellness and acute health care for all citizens.
• President Obama spoke about reading Michael Pollan’s article saying that our entire agriculture system is built on cheap oil [long quote…] in Time magazine Oct 2008.

Q&A

• Dunn: I’m conflicted about cap and trade and I suspect that a carbon tax would be better but a carbon tax at the right scale is probably politically unsalable.
• Webber: We can still use a carbon tax to set a price floor and cap-and-trade to set an emissions ceiling.
• Q: Is the Secretary of Energy a member of National Security Council? Dunn: I think he sits in but is not a member.
• Q: Peak phosphorus? Bradford: Many soils have deep phosphorus reserves. By using organic systems, fungus associated with the roots of plants can bring up phosphorus from 20 feet deep or deeper, unlike shallow topsoil commercial farming methods.
• Webber: Rainwater harvesting is often prohibited by law with oddly contradictory regulations, and they vary from state to state and region to region.
• Q: Why is organic food so much more expensive? Bradford: In part because supply is so much more limited and the vast majority of it is imported. It’s hard for many farmers to make the transition and get out of the rut we’re in.
• Q: How much energy does it take to pump sewage? Webber: Sewage can be put through biogas digester to provide their own energy – one study says wastewater treatment plants can be 97% energy self-sufficient. Potential use of algae to process wastewater too. All of our waste is a potential energy source.

3:30 pm – 5:00 PM

Strategies from the Forefronts of Transition

Robert Hirsch, Senior Energy Advisor, MISI; Lead author of report on mitigating peak oil impacts

Ken Eklund, Writerguy, Alternate Reality Game Creator

Chris Martenson, Creator, The Crash Course

Sally Odland, ASPO-USA Advisory Board (moderator)
Sally Odland, “Strategies from the Forefronts of Transition”

• We now use godlike quantities of energy. We’ve transitioned from Prometheus (high EROI) to Icarus (flying high) to Sisyphus (low EROI).
• The issues are so immense, the systems seem so intractable, it can be paralyzing. Where do you even begin?
• Scenario thinking may be helpful—it’s not proscriptive. Lets you try out different options without suffering real-life consequences.
• A matrix of plausible outcomes [Interesting chart with axes: transition time and level of planning] From nuclear Armageddon to sustainable world economy.
• Resilience starts at home. I stopped reading all the peak oil stuff and started taking action at my uninsulated stucco house in New York: Insulated the house (weaning it off life support); tore up the front yard and planted a vegetable garden.
• But ultimately individual actions won’t change the collective outcome until your neighbors, colleagues, state & country become willing to adapt too.
• Three different approaches to the transition in this session from thought leaders…
• Let’s try a game, “Envisioning the Future”
• You are the protagonist. Your wheels in 2016: what will you do with your vehicle? [Conference participants emailed, texted & Twittered their suggestions to Eklund, who read some of them at the end of the session.]

Robert Hirsch, “Inflection Points”

• After all the oil data of the last few years, we know that it fluctuates and that we’ve been on an energy plateau since 2004. Fluctuations have been in the 3-4% range.
• I believe that we’ll break from the plateau and then go into decline.
• You can’t tell which way things will go until you break out of the fluctuation band, and you don’t know what trend you’re on until you’re a ways along it.
• “Peak oil” is a somewhat unfortunate term because nothing terrible associated with passing the peak has happened. We can’t necessarily say that the recession was due to passing the peak.
• We’ve had both an investment-related decline due to a lack of new production investment and a geological decline.
• We’ll probably see the lost production due to a lack of investment in a few years and we’ll see the geological decline in 2-5 years.
• The public realization explosion: The message is getting out, but people aren’t really paying attention to it. I believe we’re going to have a very sharp event of some sort that wakes up the world suddenly. It could be world leader talking about it, or gasoline passing $5/gal, or a G-20 demand that oil exporters submit to independent auditing, or something of that sort.
• My expectations are based on what happened in the oil interruptions of 1973 and 1979. We live in a different world now but there are many similarities. We’ve seen shock, disorientation, fear and insecurity, and fuel hoarding over the last year, producing shortages in some areas.
• When the sharp awareness event happens, I expect inflation, recession, spiking oil prices. The stock market will drop significantly in a panic, as will bond values.
• There aren’t going to be any quick fixes—the government cannot print oil.
• Attempted fixes will be transitory because of the scale of the problem.
• Priorities for fuel rationing: 1) defense, 2) farmers and the food chain, 3) police, fire and critical services, 4) you and I, and we won’t get very much. Rationing is difficult to implement. We’ll have to go to crash program mitigation because the problem is extremely serious.
• Government decision-making will be slow. Renewable energy will have relatively little impact, as will climate change mitigation.
• Long term we’ll move toward a more sustainable future, but in the short term we’ll have to stay alive.
• The ignorance out there is vast and appalling. Oil is energy but energy is not oil.
• What are you going to do?
• Recession is going to mean an immediate drop in the stock market. You should seriously consider selling. You should hedge your exposure to the U.S. dollar. Interest rates are going to go up and bond values will decline.
• Who will come out winners? Those who produce oil, and to an extent those who work on efficiency. Gold is a possibility as an inflation hedge.
• How this all unfolds is unknowable. We must remain aware and flexible and willing to change course.
• It will take maybe 20 years to accomplish a mitigation crash program, and it’s going to be non-linear.
• We will persevere through all of this, and it’s going to be messy, but we’ll end up stronger.

Ken Eklund, “World Without Oil: Crowdsourcing Our Way Out of Oil Addiction”

• What if our next oil crisis started today? How would your life change?
• World Without Oil – a free online alternate reality game made with some non-profit money for the public good.
• One player had sent in a picture of a burning car. A year later, people started burning their cars in some areas in order to get out from under the payments.
• A year before they happened, players had presaged the mortgage industry blow-up, the explosion of backyard gardening and many other developments that transpired later.
• World Without Oil was a game for non-gamers and players from over 40 countries and all walks of life participated. Not a ‘virtual world’ but a game played over the Net and embedded in the real world. More like an “augmented reality.” It was inherently collaborative. The play was simple: ‘What if the next oil crisis started right now?”
• When the game began, gasoline basically jumped a dollar a gallon overnight.
• People uploaded video blogs, cartoons, imagined events happening in their lives that were nonetheless authentic. There was a phone number you could call and leave a message.
• Now players were essentially living in both the real reality and the alternate reality. The players were in control of the game.
• 1500 personal chronicles from all over the world were submitted.
• In one month of play (May 2007)
• 2,000 people signed up
• 65,000 people followed the game
• 150,000 relevant hits on Google
• About 5,000 blog posts, press interviews, and articles
• Game won several awards
• The game created an interwoven narrative and elucidated a kind of crowdsourced mythology.

Chris Martenson, “Laying the Foundations for True Prosperity”

• October 20 will be the one year anniversary of the Crash Course. It changed my life and it’s been very positive for us.
• One reason why it may have been so successful (over a million views now) is that I left my personal opinions and political views out of it. My intent was not just to share information but to challenge beliefs. I started with money, then faith and authority and government, then went into the idea that resources are unlimited.
• The central thesis is that we have an exponential money system.
• We need to change our culture and the stories we tell ourselves about our lives now. But we need to know where we’re going.
• We need a social movement of some kind. Every crowd needs a message and a vision. You can’t sell scarcity or sacrifice. In fact you can’t even give it away.
• My opposition’s (BAU) budget is orders of magnitude greater than mine, so how do I get my message out there?
• We have a choice to make and opportunity to change directions still, to become good stewards of the remaining energy and select futures in which we can thrive and prosper.
• We need to redefine prosperity, so it’s not just about the Almighty Dollar, but also about personal values—True prosperity. It allows us to play offense and defense at the same time.
• What we need to do now must be about all of us. Not Right vs. Left or the U.S. vs. China or any of those other polarities, but all of us.

Q&A

• Q: You said you’re the proud father of three children. Wouldn’t it have been better to have one? Martenson: Yes, but my children were born before I began all this.
• Q: Is the U.S. still unprepared for a fuel emergency? Hirsch: To my knowledge the government plans for a fuel emergency are ad-hoc and not well planned.
• Q: How do we keep the falling tide from lowering all boats? How do we put a floor under deprivation?
• Martenson: I cut my standard living in half, yet I’m much happier. The correlation between wealth and happiness is much looser than we all think. The best work I can do now is figure out what I don’t need, and shed it.
• Hirsch: Deprivation means different things to different people. It’s all relative.
• Eklund: Oil gives us speed, but then one of the biggest complaints people have is that life is too fast.
• Q: Speak to the psychological confusion of things getting worse and better at the same time, or cognitive dissonance. Martenson: About a year and a half after I became peak oil aware, I started seeing the whole world differently. The emotional adjustment entails figuring out what bothers you and cutting it loose. The process takes time. People approach it at different speeds and in different ways.
• Q: You talked about putting wealth into real assets… Hirsch: Security of assets is something we all have to think about and prepare for in our own ways.
• Q: Are we ever going to end the Federal Reserve? Isn’t that at the root of finding True Prosperity. Martenson: Yes. Something I find shocking is that our country has a 13% debt to GDP ratio, something more often associated with banana republics. The Fed bought more than 100% of the new federal debt that was issued in this crisis, something on a scale that has never happened before. We have a bill to pay now but we’re still trying to kick the can down the road a little farther. We have put the dollar at risk, along with our international standing. Former Fed chairman Paul Volcker stopped inflation dead in its tracks once before by raising short term interest rates to 21%, which made him extremely unpopular (the only Fed chairman to be burned in effigy) but it worked.
• Q: Since the future is unknowable shouldn’t we take a no-regrets approach to what we do next? Eklund: The future isn’t arriving like a freight train; it’s being created in our own minds. The human attitude toward a problem can be changed rather quickly.
• Q: Tell us about your new game, Ruby’s Bequest? Eklund: It’s a new game about caring in America. Will our new future have more caring in it, or less? We can ensure that our civilization moves forward.
• Hirsch: We’re all flawed. We all do smart things and dumb things. Things go well and then they go badly. But society keeps moving forward. We have to motivate our government to make changes, but we also need to make change ourselves.
• Q: Are we stuck with an “every man for himself” situation now?
• Hirsch: We’ve had it pretty darn good in America. We all want clean air, good food, etc….we are all wanting wanting wanting. That’s just the character of things. We’re headed into a very serious problem.
• Martenson: Wealth inequity has reached an incredible disparity with a massive concentration at the top. People have dissimilar advantages. Although it seems unmentionable, we need to talk about wealth gaps.

Colorado Governor Bill Ritter – Remarks

• We need to revolutionize the way we consume and produce energy, and it may not be entirely about peak oil. The world is waiting for the U.S. to take the lead on addressing climate change.
• We’re working on creating an ecosystem to bring new energy strategies to life here in Colorado. NREL, new energy companies, solar companies, Conoco Phillips, Siemens, and a whole bloom of new initiatives around energy are building new projects here. We’re using money from the DOE and the VC community to generate a whole host of things here. We passed the nation’s first voter-passed RPS in the country. Vestas is going to build wind turbines in four new plants here, generating 2500 new jobs. Economic development is part of the new energy economy. So is a climate change action plan, which we have created in this state. We’re also pursuing natural gas as a clean fuel here. We want to embed the idea of changing the way we produce and consume energy in the heads of all people here, and make it a part of our culture. We passed a law on net metering and a law on tax assessments, and came up with creative financing legislation, to support solar PV deployment here.

6:30 pm – 7:30 pm

Nate Hagens, Editor, The Oil Drum

Closing Remarks – “Chicken Little at a Crossroads”

• Peak oil is about a lot more than oil; it’s about fundamental change across a broad range of subjects in the 21^st Century
• Demographics of peak oil awareness and believers have changed a great deal since the first ASPO-USA in 2005.
• The alternative energy/environment crowd is large, then the anti-growth / steady state group, and a few other constituents of the community.
• Where do we go from here?
• Constraints
• It’s no longer just about oil, it’s about the human brain, population, and the intersection of energy supply and demand.
• Animal and human brains evolved up and forward over time, including the reptilian systems, the limbic system, and the neocortex. They work together usually but not always.
• Sexual selection is a core driver of our own evolution and continues to be very influential. (See three arguments why the male peacock’s tail doesn’t make sense, but it evolved anyway because it was an advantage in sexual selection.)
• Steep discounts rates means we value the present much more than the future. Many of our current problems betray our behavioral steep discount rates.
• Our penchant for dopamine neurotransmitter reward systems have been completely hijacked. We’ve come to prefer shorter and shorter time frames in our stimuli.
• Evolutionary hangover: composition of the tongue’s sensors. Leading to eating as a reward activity.
• [Animated slide of obesity rates in the U.S. over the last 25 years.] Our species has never seen an epidemic like this, and we largely haven’t noticed it because it happened fairly slowly.
• Fundamentalist positions over climate change, evolution, oil prediction, and so on…the disparity of opinion on central topics is amazing. Science is not underwritten by genetic algorithms, but many of our beliefs are.
• Optimism tends to increase health and extend lifespan.
• We tend to prefer people with authority and charisma, even if their track records suck, over people who are meek and correct.
• Recency bias also plays a role.
• People’s belief systems are very difficult to change. We like to think we are always learning more as time goes on, but we really don’t know all that much.
• Concept of fundamentalism is rampant in our species. “Our left brain cannot abide a vacuum” and the right brain tends to fill in the gaps.
• If you think about all the generations of hominids that led up to us, we inherited all that wiring, but it’s not necessarily hard-wired.
• [Chart of public acceptance of evolution in 34 countries.] U.S. ranks second to last in our acceptance of the concept of evolution.
• Cognitive load: how much time we spend learning about energy, environment, job, chores, work, etc… The human brain did not evolve to handle all this load. We tend to lose things once we try to remember more than 7 things. Really big threats tend to make our brains shut down.
• When we obtain a new possession, we become extremely interested in protecting our ownership.
• A problem with our message at these conferences is that we tend to try to couch our comments in forms that we think are acceptable to the listener, and not breach social in/out group barriers.
• The Grim EROI Reaper
• Oil companies need $60 to keep drilling, but at $80-$100 the economy tanks. Affordability tends to equilibrate.
• Water is intimately intertwined with energy. Conventional fossil fuels are several orders of magnitude more water efficient that new renewable energy technologies.
• Liebig’s Law of the Minimum – There is always something that creates a fundamental limit.
• The Jevons Paradox – The more efficient we get in using something, the more of it we tend to use.
• Environmental externalities will begin to be priced.
• Wealth & income disparity are at their highest levels since the 1920s.
• We’re not the only species on the planet and we have to start valuing biodiversity – economy is part of the environment and not vice versa.
• We’ve overshot on our abstract belief that debt is real. People are losing faith in our financial theory. (BTW CERA announced today that world oil demand peaked in 2005.)
• Black swans – The credit crisis was a black swan of sorts. A lot of unexpected things could change.
• Corporations were given personhood in 1886. On the supply side they treat energy as if it were the same as any other tradable commodity, even though it’s the basis of everything we do. It’s almost impossible to derail this whole embedded system we have.
• We have an enormous amount of gross renewable energy on the earth—resource is huge.
• Natural systems are pretty forgiving. We have the ability to help the environment regenerate if we work on it.
• With enough resources, we have the ability to change almost anything. Technology is not the problem.
• There’s been an enormous amount of hedonic technology research in the last few years. The Genuine Progress Indicator [alternative measure to GDP] peaked in the 1980s.
• The U.S. uses 38 times the primary energy as the Philippines, but the latter are just as happen. A lot of energy expenditure is just spinning our wheels.
• We need more women in politics and positions of power because they think about the future more. (Or men with very open minds.)
• When we started developing language… when somebody smiles, you can’t help but smile in return. This has lots of implications (copying- mirror neurons).
• Book: Consilience: the Unity of Knowledge by Edward O. Wilson
• There are also white swans – good things that can happen that we don’t imagine now.
• Myriad difference viewpoints and objectives…
• Look at how disparate groups view the future. [funny series of slides modifying a painting from the 40s showing different tribes’ views]
• Conclusions – Looking ahead
• The system we’re a part of doesn’t go backwards – debt, energy, population, etc. We’re likely to change via something disruptive. Hopefully voluntarily and not involuntarily.
• We need energy analysts doing scenario modeling so we can choose our path intelligently. We need specialists for that. But we also need generalists who can see the forest for the trees.
• Model of sustainable human wellbeing. Money is a marker for real capital: social capital, environmental capital, human capital…
• I believe that eventually we will have to go to an energy-backed currency.
• I’m very concerned about the future and it’s tragic to keep borrowing from future generations. We need to get people to see things in this perspective. All of our choices now have winners and losers.
• We need to start making better use of our best resources and make investments that will pay off some years from now, and we need to start now.
• Three options: 1) (U.S. default path) Keep throwing resources at BAU until gradual decline. 2) Keep going down the dead end of investments until we have war. 3) Take advantage of our leading position in the world to take the lead on the necessary transformation.
• Time is an increasingly limited variable. In 5-10 years from now, what would you prefer that you had done more or less of, starting tomorrow, to make your life and those of your community better?
• We have a key role to play now, and the stakes are incredibly high.

[End of conference]

Errata

About Me
Chris Nelder is an energy expert, writer, and consultant. A former software engineer and solar designer, Chris realized that peak oil was nearly upon us after 9/11, and has been researching and writing about energy ever since. He consults and lectures on energy investing and policy, writes weekly columns for Energy And Capital and Green Chip Stocks, does media appearances, and has published over 750 articles in his blog at GetREALList, including hundreds about investing in peak oil and the energy sector in general. He is the author of Profit from the Peak (Wiley, 2008) and the co-author of Investing in Renewable Energy (Wiley, 2008). In the 1990s he published an early online magazine about social and environmental responsibility called Better World.
Other References
See also my notes and articles on past ASPO conferences, including six articles developed from these notes.

Conference presentations: http://www.aspo-usa.com/2009presentations

Speaker bios: http://www.aspo-usa.com/2009denver/ConfirmedSpeakers.cfm
ASPO-international social networking site: http://aspointernational.ning.com

http://ASPO.TV – A brand-new site that was just unveiled to present video from the conference and some of their new video interviews.

Further coverage of the ASPO conference may be found on other sites including The Oil Drum, Energy Bulletin, Post Carbon Institute, Kjell Aleklett’s blog, and others.

Abbreviations Key

[Part 6 of a series of reports on the 2009 ASPO Peak Oil Conference.]

China: The Vampire Squid of Commodities

Why We Should Learn to Stop Worrying and Love Our New Chinese Overlords

By Chris Nelder
Thursday, November 19th, 2009

For my final report on the 2009 ASPO peak oil conference, I must address the world’s new prime mover of commodity demand: China.

With flat-to-declining economic growth rates in most of the rest of the world, the Red Dragon has emerged as the dominant force driving global demand for natural resources.

Adam Robinson, a Vice President at RBS Sempra Commodities who gave an excellent talk on the oil trade and its relationship with the recession, noted that China’s willing to buy oil in size at $55 a barrel for its strategic stocks, providing a natural floor for global prices.

Steven Kopits, the managing director of Douglas-Westwood LLC, said China will overtake the U.S. as the world’s top consumer of oil by 2018. In fact if supply is available, he thinks it could double U.S. consumption by 2025.

Tom Petrie, Vice Chairman of Bank of America Merrill Lynch, essentially agreed. In his model, all of the growth in oil demand through 2030 comes from non-OECD countries, with China accounting for fully 43%. The IEA anticipates that absolute oil consumption in the OECD will fall over next 20 years by about 3 mbpd, while China’s increases by 9 mbpd.

Investors are looking at the convergence between falling OECD oil demand and rising demand in non-OECD, Robinson explained, and after taking monetary policy into account, see commodities winning either way.

His reasoning is astute: Even if the Fed’s fiscal stimulus turns to drag, and we don’t get the recovery, then where does the dollar go? Down – which will be bullish for commodities. And if we have a V-shaped recovery, demand and prices will rise – again, bullish for commodities.

Voracious Demand

In his presentation on China’s oil and gas balance, Michael Rodgers of PFC Energy made one thing abundantly clear: China’s domestic oil production has nearly peaked, while its demand for oil is only going up.

China currently accounts for about half the total oil production of South Asia, Southeast Asia, and Australia combined:

Source: PFC Energy

The crude oil reserve balance for Asia went negative in the early 1980s, when the region began producing more oil than it was discovering. Like the rest of the world, most of its current production is from large reserves discovered in the 1960s and 1970s, supplemented by smaller discoveries since. The region’s current deficit is about 1.5-2 billion barrels per year.

Source: PFC Energy

After years of continuous increase, China’s oil production base is now in decline with overall depletion levels of 60%. Fields producing prior to 2000 are generally declining at rates of 5-7% per year, but mature fields are declining by as much as 16-20%. China expects enhanced oil recovery (EOR) technology to bring the overall decline rate to 6.7%.

New fields should allow it to maintain a production plateau around 3.6-4 mbpd for another 8-10 years in the PFC forecast. But then China will see a “catastrophic” drop in production as mature fields, accounting for 3 mbpd of production now, fall to about 1 mbpd by 2020.

Against a GDP growth rate of 8-8.5%, the stagnant supply picture means that China’s demand for oil imports will grow from 4 mbpd today to over 10 mbpd by 2020. China now constitutes 7.5% of global GDP and 9% of global oil demand, which will soon grow into the teens.

An appetite like that, Rodgers said, means China must do exactly as it has been doing: aggressively compete with the rest of the world to secure reserves, and export workers.

The picture for natural gas is slightly better, but also points to sharply increasing imports. China’s gas consumption is expected to rise from 7.6 billion cubic feet per day (Bcfd) in 2008 to over 30 Bcfd by 2030. Domestic production should keep up with demand until around 2014—at which point imports will have to pick up the slack—and peak around 2020.

China is already building pipelines from every possible direction to import gas. I’m sure I’m not the only one who, looking at the following map, thinks “vampire squid.”

Source: PFC Energy

China’s demand for coal is just as astonishing: In just the last four years, Kopits observed, itsincrease in demand for coal was equivalent to the total U.S. coal demand.

Vince Matthews, director of the Colorado Geological Survey, rounded out the picture with some stunning facts on the demand for minerals and other commodities. China is:

• The #1, #2 or #3 producer in the world for 15 of the most important commodities;
• The #1 importer of copper, accounting for more than 40% of world demand;
• Both the #1 producer in the world of iron ore and the top importer;
• The #1 car manufacturer in the world, and the #1 car market. (Petrie later made a similar point: China is now second only to the U.S. in first-class interstate highways.)

Consider this little factoid: China built 70,000 new supermarkets in 2005 alone. For a little perspective on that number, the 2002 census counted about 150,000 “food and beverage stores” in the United States.

That voracious demand drove up prices across the board. Matthews ran down a list of price increases from various months in 2003 to the present:

• Copper up 307%
• Scrap iron up 559%
• Molybdenum up 997%. Exports from the U.S. doubled, most of which went to China.
• The average price increase of major metals was 379%, and the average price increase was 746% for 15 other industrial metals.

Although prices for many of the metals fell sharply in the commodity crash last year, they’re now staging a comeback, driven by Chinese demand.

Worse, most of these metals are bought via long term contracts, not on the spot market. When those contracts expire, Matthews expects spot prices to spike again.

Even cement demand was disrupted when China when began importing it in 2003, resulting quickly in price spikes and shortages in the U.S. China now consumes half of all the cement in the world.

The resources causing the most consternation, though, are the rare earth elements. As I discussed in September, China has a virtual corner on the world supply of these crucial elements, which are used in wind turbines, solar equipment, parts for hybrid cars, and many of the other solutions for a post-peak oil future.

The U.S. now imports between half and all of its supply of the rare earths, putting it at China’s mercy for some of the raw materials that would be needed for a “Made in the U.S.A.” renewable energy revolution.

Indeed, Matthews believes that China intends to take advantage of its position by clamping down on its exports of rare earths, to bring world manufacturing to them.

But perhaps this should not unduly alarm us.

If China is clear-headed and deep-pocketed enough to invest in the energy solutions of the future while we are not, and they can build them faster and more cheaply than us, then maybe it’s time to stop worrying and learn to love our new Chinese overlords.

Outmaneuvering America

Rodgers has no doubt that China understands peak oil and expects future supply disruptions, which is why it’s accumulating foreign assets and diversifying its import options.

Peter Dea, the president of oil and gas exploration and production company Cirque Resources LP, made the same point a bit more obliquely, rhetorically asking if China had no doubts about the future of oil, why would they have recently outbid Exxon Mobil for new drilling in Ghana?

Putting a finer point the difference between the strategies of the U.S. and China, Dea wryly observed that the U.S. has potential for offshore drilling for natural gas, but “it won’t be developed until the U.S. takes energy resource planning as seriously as China does.”

That doesn’t appear to be in the offing any time soon. Washington doesn’t seem to understand the commodity markets at all, Matthews said, nor the shrewd moves that China is making. While Japan already has a strategic mineral stockpile, and China is quickly amassing one, the U.S. is selling off its key minerals: “The lack of knowledge and concern over it in Washington is horrifying, and I can’t explain it,” he moaned.

Well, I have explained it: America has no energy plan, and we won’t have one until we give up our fantasies about energy independence or drilling our way out, admit that oil is peaking, and get serious about planning accordingly.

While America was busy with its hallucinated wealth meltdown and trying to raise some cash by selling assets at garage sale prices, just one of China’s three major oil companies, CNPC, secured 75 resource projects in 29 countries.

Another of the three, energy giant China National Offshore Oil Corporation (CNOOC), just bought oil assets in the US for the first time. The size of the deal for four deepwater exploration licenses in the Gulf of Mexico was undisclosed, but Norway’s Statoil, the seller, characterized it as “small.”

Still, the purchase is bound to make it more difficult for China to maintain a low profile as it snaps up resources.

Perhaps that’s why it has begun trying to cover its tracks: China OGP, an oil industry newsletter issued by Xinhua news agency, recently announced that it would no longer publish data on China’s stockpiles of crude oil, gasoline, and diesel. (As if that data weren’t hard enough to get already! Killin’ me.)

The lesson on China for retail investors should be clear: Buy domestic reserves while they’re cheap, and hold ‘em, hold ‘em, hold ‘em.

Until next time,

Chris

Editor’s Note: This article is the final part of Chris’s six reports from the 2009 ASPO Peak Oil Conference. See also Part 1, Part 2, Part 3, Part 4 and Part 5.

Related Articles

Chris Nelder’s Notes on the ASPO Conferences

[Part 5 of a series of reports on the 2009 ASPO Peak Oil Conference.]

Oil and Grid Power Security Risks

Can the Free Market Keep Us Safe?

By Chris Nelder
Sunday, November 15th, 2009

On Halloween day this year, I killed part of a beautiful afternoon at a local shooting range with a buddy. It had been quite a while since I did that, and I needed the practice.

[I know some of my gentle readers might find it a little shocking that a peace lovin’ hippie like me would do target practice, but I was raised with it. My parents put us boys through the NRA’s gun safety program at a fairly early age, before agreeing to take us hunting. Later I was certified to carry a weapon in the line of duty as a security officer. I’ve always had a healthy respect, if no real love, for guns.]

I was taken aback when I walked in the door at the nondescript, low industrial building. The place was packed. I could hardly find a place to stand and I waited about 15 minutes just to speak to a clerk. The registers were ringing constantly, taking in $100 – $300 totals at a whack. Where I come from, we call that a gonga business.

The gun business has been strong this year, without a doubt. Guns have been flying off the shelves and ammo shortages have been common (and surrounded by conspiracy theories).

Unfortunately most gun makers are small private companies that make high specification steel, leaving Smith & Wesson (NASDAQ: SWHC) as one of the few good tradeable stocks in the sector. And it has done nicely: up 62% YTD after declining from a huge rally in the spring.

Clearly, the general public has had an increased appetite for guns. And let’s not kid ourselves–they’re not planning to go deer hunting. It’s about fear in an increasingly chaotic world and demand for better personal defense.

From an energy standpoint, that fear is certainly justified.

No Plan for Oil Shortages

At the 2009 ASPO Peak Oil Conference, the security outlook for North America was given a surprising twist by Rick Munroe, a Canadian farmer who learned about peak oil some years ago and decided to find out if the military or the government was doing any planning to address the problem.

His efforts turned up three good studies: Alan Smart (ACIL Tasman, 2004); Kathy Leotta (PB, 2004); and Helen Peck (Defence Academy, 2006). But within the actual gears of government he found naught but denial.

One government official assured him that because Canada is a member of the IEA and has 200 years of oil supply in the tar sands, people should relax. (If you don’t immediately realize what a cretinous statement that is, see “The IEA’s Come-to-Jesus Moment” and “Tar Sands: The Oil Junkie’s Last Fix”.)

Munroe found numerous studies about peak oil by the GAO (U.S. Government Accountability Office), which were apparently dropped from any further consideration. As early as 1981 the GAO wrote: “It is questionable whether an adequate organizational structure exists which could effectively manage a crisis.”

The IEA’s messaging has been clearer. In 2005 it warned that pre-planning is critical, and that the public must be primed and well informed in advance. Yet their strategies for dealing with the impending oil crisis are laughable, boiling down to a short term “surge” in production, and drawing down emergency reserves—at most, a 90-day solution.

Munroe offered a quote by Dr. Helen Peck, a lecturer at Cranfield University in the UK and an expert in complex systems, energy security and national emergency planning, that highlighted the relationship between food and energy I wrote about in my last article: “The fundamental problem is that it is the very efficiency of the nation’s food and drink supply chains, under normal circumstances, that make them so vulnerable under abnormal ones.”

Those who try to plan for such emergencies know that in the absence of a plan, the public usually responds to shortages with panic buying and hoarding. Preventing such an outcome requires top-to-bottom pre-planning.

Yet those who have tried it found that mandatory measures are hard to implement. Energy expert and veteran government researcher Roger Bezdek explained at the 2007 peak oil conference that he worked on an oil rationing program in the ‘70s, and it was “a nightmare.” The team found that they could not improve upon the market, and indeed, he now believes that many of the problems we had in the ‘70s were due to government interference in the markets.

In his research Munroe found a confidential report by the IEA explicitly stating that in the event of a crisis, the market should be left alone and allow price spikes to pass through to all consumers. And as recently as 1996, he says, the GAO expressed its faith in the principle by writing “physical shortages…are virtually impossible in a market economy.”

We know something about what the market does when supplies run short. It caused oil prices to triple up through last July. In fact that outcome was actually anticipated by a 2005 intelligence exercise called “Oil Shockwave,” in which nine former White House cabinet officials convened to simulate what would happen if 4 mbpd of global oil supply were suddenly lost. The predicted result was a near-tripling of the world oil price.

U.S. Secretary of Defense Robert Gates was one of the participants in the exercise, and commented afterward, “The threat is real and urgent, requiring immediate and sustained attention at the highest levels of government.”

Yet, four years later, not one city, state, or federal government in North America has a plan to deal with the effects of an oil shortage. The official plan is to have no plan.

We can rest assured that the government won’t be on our backs the next time there is a supply interruption. As long as we can pay, even if gas is $7 a gallon, there simply cannot be physical shortages! Hurrah!

Grid Security

The U.S. electrical grid has its own peculiar security issues, as Scott Pugh testified in his presentation at the conference. Pugh is a former captain of the U.S. Navy, and now serves with the Department of Homeland Security (DHS).

Few people know this–I certainly didn’t–but our national grid has three parts: East, West, and Texas. A major grid fault can take down the entire western or eastern halves of the country without affecting Texas, so, Pugh quipped, “Texas can secede from the union any time they think they should.”

It’s a good option to have. U.S. grid power is generated by over 1,400 power plants and passes through some 25,000 substations in a network of transmission and distribution lines, all of it privately owned by hundreds of transmission utilities & generating companies. A shutdown at any one of those points can take down large segments of the grid.

In an effort to assess the grid’s vulnerability, DHS and DOE staged a cyber attack test in 2007 to see if they could shut down a substation by damaging it with a cyber attack. They succeeded. Subsequent war game scenarios produced frightful results.

Yet, as it now stands, the agencies are primarily working on alternative ways to respond to an attack, and praying for a rapid smart grid transformation which should make more fine-tuned grid control possible. In any case, their hands are somewhat tied said Pugh, because the government doesn’t see fit to interfere too much with the privately owned grid infrastructure.

Laissez Faire or a Dereliction of Duty?

It may be the most heinous dereliction of duty ever witnessed in the history of democracy, but that’s where we stand in North America. While the UK, Australia and New Zealand continue to work hard on contingency plans for an oil emergency, we remain in widespread institutional denial, complacent that our fuel supply will be assured by the wise hand of Mr. Market.

We don’t need no stinking plans. Panic buying and hoarding—pshaw! We’re going to do the job the free market way, through voluntary demand reduction and switching fuels! Remember how the financial markets worked so much better after the Phil Gramm era of deregulation?

If a supply interruption event should happen, and farmers can’t get fuel to plant their crops when the seasons dictate, well, the resulting food shortages and price spikes will simply have to be the cost of doing business in a free market system. And if oil and gas companies, airlines, trucking companies, farmers–and, well, just about everybody–can’t swing with increasingly frequent fuel price spikes and crashes, then I guess we don’t need them.

Our government’s blithe, laissez faire attitude toward the threats of fuel shortages and grid attacks may be intellectually comforting to free market champions, but I’m willing to bet that should such events seriously compromise national security, they’d turn authoritarian in a heartbeat…and that includes me.

After seeing these presentations my first thought was: This is utter insanity. We need to nationalize the grid and prepare for deliberate fuel rationing asap.

It’s not that the government doesn’t know about peak oil. Some of the most important studies on the subject, and on its likely effects, have been produced there. Indeed, Pugh asserted that the military definitely gets peak oil, because “they’re paying for fuel in money and blood daily.” Their primary focus is on using it more efficiently, he said, but they don’t worry about shortages because “there’s always going to be enough oil for the military.”

I’m sure that’s true. But I’m not at all sure it’s something we want to test.

Failing to plan is planning to fail. The government’s weak, bumbling federal response to Katrina is still relatively fresh in the national psyche. And there is a growing awareness among the rank and file that the free market’s ability to govern itself failed miserably in the financial meltdown of 2008, and laid a heavy burden of debt on the next several generations of citizens.

Is it any wonder that people are starting to think about personal defense? About being able to generate and store their own electrical power? About growing their own food and putting up some extra canned goods, water and batteries in the basement, “just in case?”

Until next time,

Chris

Editor’s Note: This article is Part 5 of a series of Chris’s reports from the 2009 ASPO Peak Oil Conference. See also Part 1, Part 2, Part 3 and Part 4.

Related Articles

Chris Nelder’s Notes on the ASPO Conferences

[Part 4 of a series of reports on the 2009 ASPO Peak Oil Conference.]

The Vulnerabilities Of Complex Systems

Investing by the KISS Principle

By Chris Nelder
Friday, November 6th, 2009

[Part 3 of a series of reports from the 2009 ASPO Peak Oil Conference.]

Can Renewables Replace Fossil Fuels?

Efficiency: The Way to Close the Renewables Gap

By Chris Nelder

Friday, October 30th, 2009

With peak oil already upon us, sustaining oil supply is akin to running up a down escalator.

Or, as Nate Hagens put it at the ASPO peak oil conference earlier this month, “Technology is in a race with depletion and is losing (so far).”

The urgent question then is: Can renewables fill the gap of oil depletion?

Mind the Gap

The most recent global data summarized by fuel available from the EIA is, unfortunately, for 2006 and only preliminary (I know they’re trying to improve their reporting but seriously, they need to do better than that), but we’ll use what we’ve got.

In 2006, the total amount of energy the world consumed was 469 quadrillion BTUs, or quads.*  Charted in percentage terms, the global fuel mix looks like this:

World Primary Fuel Mix, 2008. Chart by Dave Waldorf. Data source: EIA Annual Energy Review 2008 (released June 2009)

If the latest information I gathered at the ASPO peak oil conference is correct–and I think it is, or at least is as close to correct as anybody is going to come at this point–then we should expect oil to begin declining at about 5% per year starting around 2012 – 2014.

Of the 157 quads provided by oil, at a 5% decline rate we’ll lose 7.85 quads per year, or 1.7% of the world’s primary energy supply.

The “Geothermal and Other” category, supplying 1.6% of the world’s primary energy, represents all the renewable sources combined: geothermal, solar, wind, biomass, and so on.

Since 1.7% is very close to 1.6%, we can put the challenge of substituting renewables for oil this way: Starting around 2012 – 2014, the world will need to build the equivalent of all the world’s existing renewable energy capacity every year just to replace the lost BTUs from oil.

Fortunately renewable energy of all kinds is enjoying a massive growth spurt, attracting trillions of dollars in investment capital. On average, the sector seems to be growing at about 30% per year, which is phenomenal…but it’s not 100%.

In terms of BTU substitution, then, it seems unlikely that renewables can grow at the necessary rate.

Not Just BTUs

However, the challenge is more complex than mere BTU substitution.

Replacing the infrastructure, particularly transportation, that’s based on oil with one based on renewably generated electricity will in itself require energy–and lots of it. As Jeff Vail, an associate with Davis Graham & Stubbs LLP, said at the conference, between 80-90% of the energy inputs for renewables must be made up front, before they start to pay any energy out.

Even if renewables were able to make up all of the lost energy from oil, still more would be needed to afford any economic growth.

In all it seems a fair bet that it will take at least a decade for renewables to merely catch up with the annual toll of oil depletion. The gap will likely manifest as fuel shortages in the OECD when the developing world outbids it for oil, and a long economic recession or depression…unless efficiency comes to the rescue.

To that point, Vail speculated that population increase alone could offset as much as 30% of the improvement in conservation and efficiency. He noted that despite the recession, car sales are up 29% in India as people buy their very first cars.

Falling Net Energy

Another driver of the down escalator is that the net energy (EROI, or energy returned on energy invested) of nearly all fossil fuel production is falling.

Dr. Cutler Cleveland at Boston University has observed that the net energy of oil and gas extraction in the U.S. has decreased from 100:1 in the 1930’s, to 30:1 in the 1970’s, to roughly 11:1 as of 2000.

Simply put: As the quality of the remaining fossil fuels declines, and they become more difficult to extract, it takes more energy to continue producing energy.

This begs the question: What EROI must the replacements have to compensate for oil depletion?

Vail presented several models attempting to answer it. In his optimistic scenario, assuming a 5% rate of net energy decline and an EROI of 20 for the renewables, the “renewables gap” was filled in year 3. In his pessimistic scenario, assuming a 10% rate of net energy decline and an EROI of 4 for the renewables, the gap wasn’t filled until year 7.

For a sense of how reasonable those assumptions are, we must turn to the academic literature, since no business or government agency has yet shown any particular interest in EROI studies (much to my dismay).

Studies assembled by Dr. Charles Hall (source) put the average EROI of wind at 18 (Kubiszewski, Cleveland, and Endres, 2009); solar at 6.8 (Battisti and Corrado, 2005), and nuclear at 5 to 15 (Lenzen, 2008; Hall, 2008). No data is available for geothermal or marine energy. All the biofuels are under 2, making them non-solutions if the minimum EROI for a society is indeed 3 (Hall, Balogh and Murphy, 2009).

[A quick aside: The huge range of the nuclear estimate is one indication of how difficult it is to accurately asses the costs of nuclear, which is part of the reason I still haven’t written the article I know many of you are hoping to see some day. I’m working on it, and still looking for current research with appropriately inclusive boundaries and updated numbers. Nearly everyone is still using cost estimates that predate the commodities bull run, not even realizing how it distorts their analysis. So far I have found nothing to change my outlook that the nuclear share of global supply will stay roughly the same for several decades.]

I am not aware of any studies on the EROI of biomass not made into liquid fuels–for example, methane digesters using waste, landfill gas, and so on–but its sources and uses are so varied that if the numbers were available, they probably wouldn’t be very useful. While such applications are generally good, they’re not very scalable—they work were they work, and don’t where they don’t.

Theorem of Renewables Substitution

Where EROI analysis leaves us is unclear; it needs more research and a great deal more data. There are some useful clues in it though.

First, we know that biofuels–at least the ones we have today–won’t help much, other than providing an alternate source of liquid fuels while we’re making the transition to electric.

Second, we know that solar tends toward Vail’s pessimistic scenario, and wind fits the bill for his optimistic scenario.

But here’s the rub: The lowest EROI source, biofuels, is the easiest to do, with the vigorous support of a huge lobby and Energy Secretary Chu himself. Rooftop solar is the next-easiest to do but making up the lost BTUs takes longer due to its moderate EROI. And the source with the highest EROI, wind, is the hardest. (I explained why solar is easier here.)

Therefore I propose the following, slightly snarky Theorem of Renewables Substitution: The easier it is to produce a source of renewable energy, the less it helps.

The Winner: Efficiency

All of these factors–the declining supply, the pressures of the developing world on demand, the renewables gap, and the theorem of renewables substitution–underscore how crucial efficiency is to addressing the energy crisis.

It also underscores how profitable the entire energy sector will be for many, many years to come.

With supply maxed out, and demand at the mercy of a developing world, the name of the game now is doing more with less. More efficient vehicles and appliances, building insulation, co-generation…and all the other ways to eliminate waste.

I know it doesn’t have the sex appeal of, oh, say space based solar power, but it’s where the real gains will be made.

Until next time,

Chris

[This is Part 3 of a series of my reports from the 2009 ASPO Peak Oil Conference. See also Part 1 and Part 2.]

* The thermal values (heat content) of various fossil fuels are typically measured in BTUs. One BTU is roughly equivalent to the heat produced by burning a wooden kitchen match. One cubic foot of dry natural gas contains approximately 1,031 BTUs. For those who prefer their data measured in joules, 1 quad = 1.055 exajoules (EJ, or 10¹⁸ joules). Renewable energy, however, is typically measured in kilowatt-hours (kWh), or the amount of energy delivered by a one-kilowatt source over the course of an hour. 1 kWh = 3412 BTUs.

Related Articles

Chris Nelder’s Notes on Past ASPO Conferences

[Part 2 of a series of reports from the 2009 ASPO Peak Oil Conference.]

The Narrow Ledge of Oil Prices

Why $150 May Be the Maximum Tolerable Oil Price

By Chris Nelder
Friday, October 23rd, 2009

One of the most bedeviling problems for oil producers (and oil investors) is knowing when it’s too cheap to keep producing, and when it’s too expensive to sell.

Last year gave us new boundaries: $147 a barrel was too expensive, and $33 was too cheap. But those aren’t terribly useful numbers in the real world.

We now know that $147 was extra-inflated by too much money sloshing into the sector, and $33 was extra-deflated by the fear and confusion that dominated all markets in December of last year. It’s likely that tighter regulation of the oil futures market will tamp down the former, and the latter will not be seen again so long as the world banking system continues to beg, borrow, and steal its way to stability and “full faith and credit.”

[Part 1 of a series of reports from the 2009 ASPO Peak Oil Conference.]

Reflections on the 2009 ASPO-USA Peak Oil Conference

The Next Oil Crisis is Just Ahead

By Chris Nelder
Friday, October 16th, 2009

I have just returned from the annual conference sponsored by the U.S. contingent of the Association for the Study of Peak Oil (ASPO-USA) with a wealth of new information and perspective to share, so this will be the first of a series of reports.

I look forward to the ASPO-USA conferences all year, because they consistently deliver good, solid data on the state of energy and afford an opportunity for vigorous and stimulating discussion with some of smartest and up-to-date experts in the world-particularly over dinner and drinks late into the night. This year was typically outstanding.

As usual I took detailed notes, which will be uploaded in the weeks to come. (My notes from previous conferences are here.) But I’ll begin with some high-level updates on the key aspects of the peak oil study.

Past the Peak?

Perhaps the thing that struck me most was how much the outlook on peak oil has changed since the first conference in 2005.

Those who thought conventional oil had probably peaked back then were considered extremely pessimistic, where the consensus view saw the peak another 5-10 years off, and the optimists put it 20 years away or more. Some thought the peak rate of “all liquids” would be around 100 million barrels per day (mbpd), up from 85 mbpd at the time. Most thought non-OPEC production would increase up through 2010. Biofuel boosters were sunny about their future.

Four years later, the view on oil and biofuel has grown considerably worse.

We now know that conventional crude did in fact hit its peak-plateau in 2005, having remained around the 74 mbpd level ever since. The expected growth from non-OPEC mostly failed to materialize, as depletion of mature fields took its toll and the cost of new projects soared—especially for deepwater and production from marginal sources. More pessimistic observers now think the 87 mbpd all liquids peak recorded at the height of the 2008 boom was the peak, and the more optimistic ones have cut their expectations to under 100 mbpd, with 90 mbpd looking more likely.

Biofuels now have a black eye from the corn ethanol frenzy of 2007-2008, which has all but collapsed. Ethanol from algae and cellulose still looks about as far in the distance as it did in 2005, as no one has figured out how to produce either one at commercial scale or with an acceptable net energy return. And biodiesel has remained a minor player, with little expectation for it to scale up any time soon.

But the most surprising change has been the outlook for North American natural gas. In 2005, the majority of observers seemed to think it had peaked for good, and saw gas prices remaining in a high range of $11-15/Mcf. I don’t think any of them expected the recent boom in North American shale gas, and there was certainly no suggestion that gas prices would crash to nearly $2 this year.

In fact the main worry about gas now seems to be that the shale gas boom will prove to be short-lived, and sucker us into building more vehicles and infrastructure to use it just as it sputters out. We only have a couple of years of data to work with on shale gas wells, and the only good data is from the Barnett Shale.

Running down the depletion numbers on shale gas, analyst Arthur Berman found that in the first year of production decline rates have been in excess of 50% for Barnett wells, and 90-95% for Haynesville Shale wells. The average well in the Fayetteville Shale is “profoundly non-commercial” he said, and predicted that most shale gas wells will be abandoned in less than five years after their first production because the output will be so low.

There is also a fear, which I have articulated previously, that with an average production cost of $7-8/Mcf for shale gas and prices through most of 2009 staying around $4 or less, new wells simply haven’t been getting drilled. The effects of that lapse should show up next year and cause our “glut” to disappear quickly, taking prices much higher.

Supply Decline Rates

With the end of growth in the rate of global oil production now either in the past or looming in the next few years, attention is progressively focused on the depletion rates of mature oil fields and the rate and date of overall decline.

Most observers believe the globally averaged depletion rate has risen from 4.5% per year in 2007 to about 5 – 5.5% now, which will accelerate to around 6.5% per year by 2014. This is more or less in line with the average rates from IEA’s report last year. Petroleum geologist Chris Skrebowski pointed out that a 5% per year decline rate means a loss of 4 mbpd per year, equivalent to all the volume of biofuels, tar sands and heavy oil combined, or losing the entire North Sea in about 14 months, and that it would be a huge challenge to replace those lost volumes.

Analysts using the Megaprojects database (of large oil projects started up after 2005) generally agree that production will peak in the 2009 – 2010 time frame. Net new supply each year is expect to begin declining around 2014 – 2015 as depletion overwhelms new projects. Supply may reach as high as 92 mbpd in 2010, then plateau to around 89 mbpd in 2014, then decline to 84 mbpd in 2020 and 78 mbpd in 2030.

That view was generally in line with comments from oil consultant and former head of exploration and production for Saudi Aramco, Sadad al-Husseini, in a video interview clip. Seeing insufficient large new projects in the next 5 – 6 years to compensate for decline rates of 6.5% in non-OPEC and 3 – 4.5% for OPEC, he expects a shortage of capacity in the next 2 – 3 years.

The poster child for decline rates is, of course, Mexico with its crashing Cantarell field. Matthew Simmons projected that its decline would end Mexico’s long era as an oil exporter in 18 – 36 months. David Shields, an author and expert on Mexican oil production, delivered a devastating indictment of the country’s political leaders and its oil company Pemex, asserting that Pemex officials knew exactly what Cantarell was going to do as far back as 2002, but said exactly the opposite in public. A chart that Pemex shared with the Mexican Senate showed that production from its largest fields would fall to 1 mbpd by 2017, a full 1.8 mbpd lower than the official forecast of about 3 mbpd. If political manipulation is distorting the public impression of Mexico’s near-term oil potential (and I believe Shields on this point) then it could be very bad news for the U.S., for which Mexico is the #3 source of oil imports.

Demand Growth Rates

On the whole, I would say there is now a strong consensus (at least among analysts who prefer data to faith) that global oil production will begin to decline in the 2012 – 2015 time frame. The later-dated estimate is based on the notion that the global recession of the last two years has probably given us that much longer before terminal decline sets in.

Peak oil deniers who have projected continued growth for many decades hence and ultimate peak rates of 120 mbpd or more have obliquely capitulated in the face of the recent evidence and switched to a “peak demand” argument: It’s not that supply couldn’t keep up for geological reasons, it’s that demand wasn’t strong enough to support high enough prices to raise supply further.

It’s a classic tactic to try to change the game if you can’t win it, but the peakers aren’t buying it. As Skrebowski pointed out, the peak demand argument only really holds for the OECD, where demand is off a few percent from the peak.

The real demand story is shifting quickly to the developing world, particularly China. Analyst Steven Koptis projected that China would overtake the U.S. as the top consumer of oil by 2018, and if supply is available, would double U.S. consumption by 2025.

Indeed, as petroleum geologist Jeffrey Brown pointed out in his presentation of the Export Land Model, the U.S. has already been outbid by Kenya for oil. According to the model he developed with Dr. Samuel Foucher, the top five oil exporters in 2005 will in aggregate reach zero net exports by 2032, and most of that will be shipped early on. In just three years, they shipped 1/5 of their total expected net exports after 2005.

Petrobras’ Promise

As a counterpoint to the generally gloomy data on global oil supply and demand, a razzle-dazzle keynote was given by Dr. Marcio Rocha Mello, president of HRT Petroleum and a 24-year veteran of Brazil’s oil company Petrobras (NYSE: PBR). He asserted that the recent pre-salt finds in very deep formations off the shore of Brazil, like the much-hyped Tupi field, indicated that there was a great deal more oil in the pre-salt layers—we just need to drill deeper.

In an extremely animated presentation that at times seemed more like a carnival sideshow than a serious analysis, Dr. Mello served up combination of stratigraphic charts and contrarian theory to make the case that between the pre-salt of Brazil, West Africa, the Congo basin and the Gulf of Mexico, there are another 500 billion barrels yet to find.

While entertaining and humorous, I don’t think Dr. Mello made too many converts in the room. As former BP oil exploration chief Jeremy Gilbert pointed out the following morning, none of the alleged pre-salt oil is yet proved, and in fact he’d be surprised if there were 5 billion barrels of proved oil there. “Don’t confuse passion with precision” he warned, and noted that it would take 20 – 30 years to prove the resource. In short, it doesn’t change the peak oil story at all. By the time pre-salt barrels come online, we’ll be well down the back side of the production curve. Rising resource nationalism in Brazil also bodes poorly for very many of those new barrels to make it to foreign markets.

I’ll conclude this report with a brief comment on oil prices. As I mentioned in my update three weeks ago, the outlook for oil prices has been murky for months as they traded in a $60 to $75 range. I was long oil but cautiously bearish, and watching for signs of a new signal. This week, that signal came as oil breached the $75 level and touched $78 this morning. It’s a decidedly bullish move and I think it portends higher prices to come, at least in the near term.

I took the opportunity to beef up my oil exposure with positions in EOG Resources (NYSE: EOG) and, naturally, Petrobras. Even if Dr. Mello is wrong about the pre-salt, Petrobras is one of the most sophisticated and aggressive oil companies in the developing world, and they are positioned better than most to mint money for years to come. And if he’s right…well, it will be a great position to hold long term.

Stay tuned to this space for much, much more from the cutting edge of peak oil analysis in the coming weeks.

Until next time,

Chris

Related Articles

Chris Nelder’s Notes on Past ASPO Conferences

Highlights of the Peak Oil Conference, Part 2

China, Coal, and Renewable Energy Take Center Stage

2008-10-22
By Chris Nelder

Highlights of the 2008 ASPO-USA Peak Oil Conference, Part 1

Oil Peaks in Two Years, But America Sleeps On…

2008-10-16
By Chris Nelder

For those who aren’t inclined to wade through all 57 pages, here are some highlights.

On the whole, I detected a distinctly different tone from the previous ASPO-USA conferences I have attended. The range of forecasts seems to have narrowed considerably, and there was a marked sense of urgency in many of the presentations. Most of the presenters have been studying energy and peak oil for many years, and warning of the potential results, but we have done little about it, and have been delayed by politics and propaganda. I think the general feeling of the conference was that we are truly out of time to mobilize a response.

The presentation by Jeremy Gilbert, the former Chief Petroleum Engineer for BP, was a good example. He noted that while the world has had multiple “wake up calls” about peak oil, and that the ASPO has been doing conferences detailing the problem since 2001, nothing seems to have changed. Oil discovery peaked 40 years ago, and despite the most intensive and technically advanced drilling in history, it continues to fall. We now only discover about one barrel for every 4-5 we consume, and that trend is only getting worse.

The major international oil companies (IOCs) like ExxonMobil have not invested in future production as had been hoped; new technology has not dramatically improved recovery; and wells drilled over the last few years have nearly doubled but production has remained flat. Yet demand continues to rise and per-capita usage in the US and Canada is little changed. He rather directly chastised America for continuing to dream that exploration and technology will save the day, when the data is abundantly clear that they cannot.

The IOCs, for their part, have access to only about 6% of the world’s remaining oil reserves; the reserves of Exxon, the largest of the majors, rank only #17 worldwide. The rest is in the hands of the National Oil Companies (NOCs), which take much larger shares of the revenue (around half), are often rife with corruption and have uneasy relationships with their governments. Jim Buckee of Talisman Energy noted that the NOCs are also far less efficient, producing only about $5.25 of revenue per barrel vs. $15.28 for the IOCs.

Recognizing that the remaining large supplies of oil are in geopolitically challenging areas, there was a considerable focus on the geopolitics of energy. Jeff Vail noted that oil is part of the intersection of nation and state, and that global feedback loops among nations tend to increase resource nationalism, and exacerbate the peak oil problem. Oil is increasingly being used as a weapon, and addressing the root causes of the tension will require radical restructuring of our economies. However, finding realistic solutions remains a challenge, and trumps geological factors in affecting oil production.

Supply Outlook Dim

OPEC, of course, is the geopolitical prime mover of the oil markets, producing 43% of the world’s crude. A great deal of attention was given to its oil reserves, and its production outlook. Dr. Peter Wells emphasized that OPEC producers have long horizons for their investment decisions, and an increasing concern for saving some oil for future generations. Their ambition is not to pump it as fast as possible, but to seek the maximum sustainable rate. It is in their interest to keep the spare production capacity as low as possible while keeping prices rising but moderate, without disrupting the markets. He noted that the price floor for oil is no longer set by spare capacity so much as it is by the needs of Saudi Arabia’s budget.

Since non-OPEC production appears to have peaked, the world is looking to OPEC to satisfy additional demand and make up for the decline of non-OPEC. But it is looking increasingly unlikely that OPEC will be able to meet that expectation, as their large fields are mature, and exploration successes peaked 40 years ago. Wells believes that OPEC production will never exceed 40 million barrels per day (mbpd), as compared to its 37 mbpd today (EIA), mainly due to political decisions.  

Saudi Arabia will likely peak within about five years, after which any further growth is essentially out of the question. Prof. Kjell Aleklett, a founder of ASPO International, quoted King Abdullah of Saudi Arabia: “The oil boom is over and will not return. All of us must get used to a new lifestyle.”

This is where the depletion question becomes important. If the global depletion rate is roughly 5% (a broadly accepted figure for now, but it is increasing), and today’s production is approximately 87 mbpd, then we are currently losing 4.35 mbpd of capacity each year just due to depletion.

If Wells’ estimate is correct (many at the conference believed it was on the optimistic side) and non-OPEC is indeed in terminal decline (which I believe is true) then the total OPEC additions won’t even offset the global decline. Accordingly, we are now relying entirely on the non-crude “unconventional liquids” like natural gas liquids, oil from tar sands, biofuels, and coal-to-liquids to increase the production of “all liquids” at all.

But as Jim Buckee of Talisman Energy pointed out, even these unconventional liquids may not be able to fill the gap of crude decline. By his reckoning, conventional oil reserves are 750-1000 billion barrels, and the decline in production amounts to 50-60 mbpd over 10 years. Natural gas liquids (probable), yet-to-find oil (10-20 billion barrels), enhanced oil recovery technology, plus tar sands bitumen and extra heavy oil all put together equals about 300 billion barrels, and can’t make up for the decline of conventional crude. (Something ASPO founder Colin Campbell has been saying for a long time.)

Peak Oil In Two Years – It’s Crunch Time

Estimates of the global peak of oil production varied, as always, but I would say that there was a strong consensus around the 2010-2013 time frame for “all liquids.” Natural gas is expected to occur between 5 and 10 years later. This is in line with the estimates I used for Profit from the Peak.

One such outlook was offered by Ken Verosub, a professor of geology at UC Davis. For the world, his calculation shows a peak around 2015, +/- 2 years. His simple math on the outlook for US domestic oil production was quite clear:

• Total US reserves: About 20.9 billion barrels
• Total US daily consumption: 20.7 mbpd, of which we import 11.7 mbpd
• Domestic oil, daily production: 9 mbpd
• Domestic oil, annual consumption: 3 billion barrels per year
• 20.9/3= 7 years

Therefore at current rates, our domestic oil production would be kaput by roughly 2015, +/- 2 years! In actuality though, production doesn’t speed along at a high rate and then quit, but rather tails off in a bell curve. So what this really tells us is that by the end of the next presidential administration, we will be almost entirely dependent on oil imports. Verosub summed up his presentation by saying, “It’s crunch time!”

As for the undeveloped oil regions of the US, several presenters noted that increased production from the Outer Continental Shelf (OCS) and the Arctic National Wildlife Refuge (ANWR) would make only a negligible difference in production and prices, due to the long lead times (roughly 10 years) and the low flow rates that might be achieved. Newt Gingrich’s “Drill Here, Drill Now, Pay Less” campaign was widely mocked as being altogether unclear on the concept of oil flows. Gilbert stated that if all of the OCS were opened to exploration, it would only increase US reserves by about 20%; that’s about 4 billion barrels, or the equivalent of six months of our current domestic oil production.

According to Gill Mull, a retired geologist from the Alaska Geological Survey, the P50 (50% probability) estimate for ANWR is about 10 billion barrels total, or roughly a three-year supply as compared with current US domestic production. However, due to the flow rates, all of the new fields in the region put together couldn’t overcome the decline rate of the North Slope.

Simmons Warns of a Run on the Pump

The most shocking presentation, though, had to be the one given by Matthew Simmons, author of Twilight in the Desert and one of the world’s top oil investment bankers. You could have heard a pin drop in a room of 500 people while he was speaking. The hurricanes and high prices have driven inventories to an extremely low level, he said, and he was very concerned about the possibility of a “run on the bank” with fuel supplies, which could easily breach the system’s minimum operating levels.

He presented an example of how quickly we could “break the bank” of oil supply:

·         220 million vehicles

·         20 gal capacity each

·         Average tank has 5 gals in it (an estimate supported by recent research)

·         If everybody rushes to top off their tanks, at ~15 gallons x 220 million = stock draw of 78 million barrels.

·         But our current finished stocks are only about 87 million barrels!

Even a few weeks of cold winter could deplete the usable stocks of heating oil, he said.

When the stocks deplete, he warned, food supply could be in jeopardy within a week. The economy would slow to a crawl, and the financial markets would panic, as the country finally grasps the energy risk. And yet, this risk is unpriced. Nobody knows the odds. Nobody does charts of peak oil, even though it has ominous parallels with the financial crisis. Most global leaders have no idea of any of the risks that face the energy markets. Whereas it took 5 months to melt down the financial markets, he said, the energy markets could unwind in less than a month.

Very sobering stuff, and that only roughly covers the first half of the conference. In part two of this article, I’ll take a look at coal, China, the airlines, and renewable energy…and explain why one presenter believes that the massive increase in oil demand from China and India could, paradoxically, spell the end of globalization.

Until next time,

Chris

My coverage is no doubt incomplete because I can only type so fast and much of the material went by very quickly. Consider this document an index, and go back to the source presentations to double-check the data.

My personal comments are shown in [brackets]. (?) indicates information that I probably got wrong.

Since no one can be in two places at once, I could only cover part of the split sessions that occurred simultaneously. So coverage of these sessions is limited.

For bios on the speakers, see http://www.aspo-usa.org/aspousa4/ConfirmedSpeakers.cfm

For the presentations, see http://www.aspo-usa.org/aspousa4/proceedings/
(some presentations may not be posted yet; check back)

See also the list of others’ notes from the conference at the end of this document.

Please email me any comments or corrections.

Your humble scribe,
Chris Nelder
chris (at) getreallist (dot) com
Energy Analyst

http://www.getreallist.com

http://www.energyandcapital.com

DAY 1 – SUNDAY, SEPTEMBER 21, 2008

1:30 pm – 3:00 pm

Reporting the Oil Story – panel discussion

Erica Etelson, San Francisco Chronicle

Bart Anderson, Energy Bulletin

Neil King, Wall Street Journal

John Theobald, University of California at Davis, Moderator

Started with a hilarious clip from The Daily Show with Jon Stewart.

Neil King

• A “sea change” this year in reportage on peak oil. A higher acceptance of the notion, primarily driven by price & public alarm.
• If the price remains below the pain threshold, we may see coverage diminish and a loss of momentum in more efficient vehicles etc.
• It’s been a very strange year for the oil business, with wicked volatility but no major geopolitical events. What lessons should we draw from this? What are the bigger concepts?
• Various factions…from techno-optimists to hardcore doomers. Analysts, journalists, traders…all focus on different aspects of the story, be it inventory levels, or official announcements, or trading patterns.
• The Oil Drum is one of the few domains where the conversation is factual and interesting and intelligent. But there is an element of willful blindness also that we are working against in the media; when gas prices fell below $4/gal, a lot of ears started to close.
• “Our problem is that the supply is old and the demand is young.” – quote he heard at an IEA meeting in Paris last week.
• Doomers vs. arch-optimists: the reality will lie somewhere in between, but where?
• He ran a couple of informal polls amongst his contacts to predict the price of oil 6 months in the future…and everybody was very wrong.

Erica Etelson

• Peak oil was one of the most censored stories of 2005, but we’re past that now. Still, many articles seem to studiously avoid the term.
• Google the term “peak oil” and you find yourself in a deep, dark realm where the collapse of society is a foregone conclusion.
• Media has short attention span and when the pain/price level falls, media coverage falls too. Most journalists would be happy to see the price fall and stay down so they don’t have to write about it anymore.
• The framing of the story is a problem. It’s currently framed as an industry problem, with no sense of government accountability, even though gov’t has known about this issue for decades and done nothing about it. The Hirsch Report in 2005 should have been greeted with screaming headlines, likewise the GAO report; in fact there were no headlines at all. Journalists have failed to hold politicians’ feet to the fire or ask them the hard questions about these glaringly serious issues.
• Industry isn’t going to somehow save the day with some new technology. Journalists really need to ensure that stepwise changes are made. E.g.,
  • Ask for meetings with the editorial boards of news organizations.
  • Contact ombudsman’s office for newspapers and ask for coverage.
  • Don’t forget about local media. Write your op-eds and letters to the editor. At the highest levels of government, they’re asleep at the wheel, but at the community level, there is much being done.
  • Try to reach sympathetic ears in your alumni networks & publications.
  • Minority journalists for communities of color need to get the word and get the word out faster, because they will be hit by the effects first and worst.
• There actually is quite a bit of good reporting out there, but we don’t make adequate use of it. Every time you see a good article on peak oil, send it to everyone you know, including elected officials.

Bart Anderson

• The peak oil meme is more common now than it was, but the understanding is very shallow and driven by price pain.
• Oil isn’t the only crucial thing at peak. Consider peak phosphorus!
• Presentation: “The Evolution of Peak Oil Coverage”
  • Problem at the beginning: little awareness; media & gov’t uninterested; nowhere to publish; few ways to communicate
  • Around 2004, some new books (Simmons, Kunstler, Heinberg, Goodstein, Deffeyes); a few media mentions; new sites (peakoil.com, Energy Bulletin, LATOC, etc.)
  • Around 2005, new communities: ASPO-USA, TOD, PCI; personal blogs & new writers; documentaries (“The End of Suburbia”), Gov’t reports (Hirsch Report, GAO Report); media interest (but little depth)
  • 2008: Mainstream now, with more books, web sites, documentaries, new writers, investors, regular coverage in the press esp. the financial press, and a spike in prices.
• There are now 4.3 million hits on Google for “peak oil”. New interest from industry and governments, and local groups (PCI, Transition Towns)
• A continuing role in critiquing energy technologies, lobbying, monitoring, & working with media and allies (investors, planners, environmentalists)
• What we’ve done right: networked, non-hierarchical; non-partisan; more volunteers; welcoming; stimulating, constant stream of content (“like an ongoing graduate seminar”)
• Limitations: It’s all volunteers; limited to information and persuading – we can’t actually do things; narrow demographics (mainly white technical professional males in English-speaking countries)
• Trends: climate, politics, economics, food & ag, urban design & transportation
• Other peaks: fossil fuels (nat gas, coal, uranium), other minerals (phosphorus), water, eco-systems (we have only a 13-year supply of indium at current rates(?))
• New voices: Third World, women, farmers, blue-collar workers, small business, artists

Q&A

• What about the “drill here, drill now” crowd? What about peak oil and invading Iraq?
• Kjell Aleklett: How do we reach non-English speakers? How do we share materials that originated in other languages to English-speaking audiences?
• Chris Nelder: How can we improve the factual reporting of peak oil? Etelson: Send the Peak Oil Media Guide to editorial boards. Anderson: Contact the writers directly, be nice, don’t be accusatory. King: Try to establish a dialogue with journalists and editors.
• How do we get economists involved? Anderson: economists are not our friends, they are a hotbed of opposition! Try to find the sympathetic ones. Etelson and Anderson: Paul Krugman, and the editors of Freakonomics are sympathetic.
• Mike Ruppert: Optimistic stories are always above the fold; negative stories are always on p. 22. What’s up with that? King: Disagree; new articles on difficulties of oil sands, shales, offshore, etc. have regularly appeared on p. 1 of the WSJ. There is a greater sense of urgency about peak oil now than there once was.
• Ron Swenson: Desperation is driving us to oil shale, tar sands, extreme technology, etc. with greatly over-optimistic expectations, while at the same time solar and other renewables are regularly dissed. Can coverage become a little more balanced about renewables, or an improving trend? King: There are a lot more energy ads now than ever before. Energy stories of all kinds are certainly dominating the news.
• Etelson: I write about permaculture regularly but I don’t call it permaculture because I want to get it published.
• How can we get more politicians to talk about it? King: Roscoe Barlett has been giving his talk many, many times to a mostly-empty chamber. It’s a hard thing to get politicians to talk about a story that nobody wants to hear.
• Liz Warren (who covered peak oil as a “most censored story” in her thesis): We seem to expect media to be entertaining; how can peak oil be presented in a more entertaining way, and how can we reach youth? Etelson: Youth are particularly interested in community gardening, permaculture, etc. King: Props to Oily Cassandra and KrisCan! [Hear, hear!]
• Do IEA officials express privately a different sentiment than what is reported? King: Yes, absolutely, there are folks at EIA, IEA, Saudi officials, even President Bush who know that the options are limited going forward.

3:30 pm – 5:00 pm

Analyses from The Oil Drum – panel discussion

Robert Rapier, Oil Drum Contributor, R-Squared Energy Blog, Accsys Technologies,

Jeff Vail, Oil Drum Contributor, Davids Graham & Stubs LLP

Brian Maschhoff, Oil Drum Contributor

Kyle Saunders, Oil Drum Editor, Moderator

Robert Rapier: “The Energy Information Providers“

• His first ASPO conference because his previous employer, ConocoPhillips, didn’t want him to come!
• Review of the most common energy information agencies: EIA, IEA, CERA
• EIA is good for:
  • Current data on exports, consumption, optimistic forecasts, etc. Good statistics. Outlook reports, etc.
  • This Week In Petroleum (TWIP) – weekly – has the power to move markets because it has the inventory updates.
  • How I use the EIA: To debunk the claims made by confused politicians, etc. To get good shared information, e.g., import data. For current reporting, e.g., gasoline stocks during a hurricane.
• What I don’t use the EIA for:
  • Price forecasting: over the past 12 years, have been consistently wrong, by as much as 127%. Average error was 53%.
  • Supply forecasting: consistently too optimistic. But the problem is that everyone uses their forecasts for policy planning!
  • Zoom in on 2008 Annual Outlook: expects oil imports to suddenly drop after a long period of constant growth!
• IEA (International Energy Agency): Energy policy advisor to 27 countries
  • IEA Oil Market Report, World Energy Outlook, other good reports, special reports, statistics on oil, natural gas, coal, etc.
  • How I use the IEA:
    • Monthly OMR (Oil Market Report) has the most current estimates of world oil supply. Excellent source of worldwide inventory data, world refining margins, etc.
    • Understanding supply/demand risks. Watch the charts, e.g., stock builds, days of forward cover.
    • IEA has adopted a more pessimistic tone than the EIA….downward revisions of OPEC spare capacity, impending supply crunch, “peak lite“
• CERA:
  • Clients are big oil companies, and CERA reports the story they like.
  • Forecasts have been terrible since 2002. E.g., prediction of $20s – $30s in 2005 for oil price, actual was $65/bbl
  • Forecasts of supply wildly overdone
  • In 2008, they reversed course and noted a “perception” of supply issues.
• Misc sources:
  • BP Statistical Review of World Energy
  • Drumbeat on TOD
  • Oil Price information Service (OPIS)
  • Platts
• The major agencies do a great job of reporting data, but a terrible job of forecasting. Government and business leaders who depend on this data for their decisions will be badly misled.

Jeff Vail: “The Geopolitics of Energy“

• “Rational extraction sets the stage for geopolitical problems.” Geopolitical challenge rises as geological challenges increase (?)
• “Market-driven conservation & efficiency increase in elasticity.” More extreme measures are needed to ensure supply.
• “Highly theoretical disputes drive very real conflict.” Oil as a subset of the intersection of “nation” and “state.” E.g., disputes between legal owners and moral owners of oil resources. How do you meet the needs of all stockholders together?
• “Actors seek to secure their slice of a shrinking pie.” If we seek to maintain our current share of energy supply as others’ shares shrink, who loses? Pipelines are a good example of this, predetermining who has access and who doesn’t. “Military adventurism.”
• “Tactical evolution increases geopolitical threat to energy.”
• “These developments act as positive feedback loops”
• “Geopolitical feedback loops exacerbate peak oil” [interesting graph!]…Production under geopolitical reality (feedback loops) will make the reality considerably worse than the geologically feasible production curve.
• “This is a global feedback system.” Mexico’s events affect Iraq, affects Nigeria, etc.
• “‘Solving’ symptoms leads to alternative negative outcomes.” A lesson in unintended consequences.
• “Addressing causes requires radical restructuring.” Radically: Decentralized? Renewable? Vernacular modes of consumption? Realistic? What is a realistic way to choose and then implement an approach to stopping geopolitical feedback loops? Really, geopolitics is a force of nature.
• Our energy future isn’t solely determined by what is possible geologically, politically, or economically. Geopolitics can always trump those factors.

Brian Maschhoff (“JoulesBurn” on TOD): “Saudi Aramco and the Art of Oilfield ‘Maintenance’“

• What does “maintenance” mean? It really means production…maintaining a certain level of production. But “production” isn’t right either, because you’re not making anything, you’re extracting.
• Maintenance: Putting wells where no well has gone before (unswept zones). Reworking existing vertical wells (simulation, horizontal tracking)
• What about existing Saudi Aramco megaprojects? 2003-2011…delays are common. A lot of inflated numbers on the heavy oil side for KSA
• Madness: Monitor Saudi Aramco from the comfort of your own home. Classify and quantify oil field infrastructure from satellite photos. On a paltry budget. But we can’t measure oil flowing from wells, nor make money from doing it.
• Methods: Google Earth, Digital Globe imagery (Quickbird Satellite), finding wells, counting, aligning and comparing imagery with dated maps (find what has changed)
• “Jeopardy!” slide…what fields are really being discussed in the press?
• Looking at satellite photos, it can be tough to distinguish what is what…e.g., gas wells vs. oil wells.
• North Ghawar shows major overhaul, after 40 years of operation. [Numerous slides showing progression of oil wells drilled in various parts of Saudi Arabia.]
• Diagnosis: Old production is being replaced daily. But they’re running out of dry rock in Ghawar. Still a lot of oil, but they’re out of giant fields. Expanded production will depend on a collection of a lot of smaller fields.

Q&A:

• How concerned is the US military and what are they doing? Vail: Studies are being conducted into the energy footprint of various options. Military is clearly concerned but they may not yet understand the long term implications of it.
• Why didn’t Robert Rapier include USGS data? Because the data is pretty worthless.
• What about population? Vail: Third world is getting priced out, but there don’t seem to be any good (implementable) and equitable solutions.
• How much oil is left in Saudi Arabia? Maschhoff: We can only go by the information they put out there.
• When will Russia’s exports fall to zero? Vail: Russia is one of the few cases where population (decline) is actually working for them. But Russia is also exerting more control over the FSU countries that surround them.
• What about water? Vail: Used to work on water reclamation. Water is even less substitutable than oil.
• On a question about unconventional oil production, Rapier: “It’s a fact that there is more than a trillion barrels of oil in shale; it’s also a fact that it will take more than that to get it out.”
• On the Pickens Plan: Maschhoff: Transportation fuel is a huge gaping mouth that you can throw anything into and it still won’t be enough.

6:30 pm – 7:30 pm

Dr. Peter R. A. Wells: “OPEC Dilemmas, Issues, and Responses“

• Introduction by Steve Andrews; Toyota has known about peak oil since 1992, internalized it, and thus became the Prius.
• OPEC produces 42.8% of the world’s crude, proportion will grow as time goes on
• When OPEC increases capacity, they get stuck with a loss in demand. How much spare capacity should they invest in? Spare capacity currently 1.5 million barrels per day (mbpd)
• OPEC is diverse; price hawks in Venezuela, Iran, Iraq; others like Qatar, KSA and Kuwait with higher per capita GDP are less keen on expanding capacity
• Decision making is very slow; national heritage, timing of investment, etc…save some for the grandchildren. When should they time the investment? How not to get stuck in the same situation they were in the in the 1980s? Why expand to reduce prices? Politics…Iran, Iraq, Venezuela, Nigeria, Kuwait
• Fields are old, and there is competition between the old & newer producers. Kuwait, Qatar, UAE, KSA: $1,5 trillion invested, mostly in the US. They don’t want the price to go too high for demand destruction, and they don’t want to hurt the US too much for the sake of their investments.
• New production capacity is also high risk.
• Exploration success in OPEC peaked 40 years ago
• The large OPEC fields are mature (fields >2 billion bbls reserves)…not much has been discovered to replace the older fields. Fields are being replaced at a very conservative rate.
• World liquids supply model: OPEC is expected to make up the loss for non-OPEC supply.
• Crude oil makes up 86% of the “crude oil” supply [the rest is natural gas liquids, etc.] (?)
• But it’s not just geology; marginal cost of supply alters the mix and the size of reserves
• Balance & interaction between geology, money and politics. Balance affected by long lead times in supply projected 5-15 years forward, and ultimately the finite nature of supply. Insufficient spare capacity leads to high oil prices and demand destruction. Excess spare capacity weakens oil prices and can reduce supply at the margin.
• Most of the time, spare capacity doesn’t matter to price. It mattered in the 1980s when there was too much spare capacity, but that floor was set by the needs of the KSA budget and it stuck for 20 years. Around 2002, KSA capacity started to fall, in part due to increasing demand from China, but there was also the declining production from non-OPEC. Then price started to rise dramatically. Now high prices will lead to some new capacity and a short period of lower prices.
• We have produced 864 billion (bn) barrels (bbls) to date; 1,111 bn remaining & TBD (HIS data)
• According to USGS/CERA, another trillion bbls remain to be discovered. But we have nowhere near that.
• Enhanced Oil Recovery (EOR): In US peaked around 2000 via miscible non-hydrocarbon gas injection (CO2, N2)
• US EOR: specific to field, reservoir, oil type, location…works best in poor reservoirs with light oil; not so much for deepwater. No gains for light-medium oils in good quality reservoirs
• Global EOR: potential 220-470 billion barrels (CERA: 592 billion barrels) and most of that is in OPEC, so we won’t see it for a long time in the future.
• Total potential: ~ 3 trillion barrels
• Peak around 2012-2013 for conventional crude. (CERA estimate way, way higher, assumed to be filled by exploration success and EOR)
• Methodology: using simulation model approach to crude forecasting, using probabilities, time between discovery & first production, field-by-field specs
• EOR: good match to historical production for non-OPEC.
• Most non-OPEC, non-FSU EOR projects are offshore (80%!) (?)
• 625 bn bbls produced, 530 bn to go for non-OPEC; we’re at the peak for non-OPEC.
• Most of OPEC is “above ground” risk; for non-OPEC, “below ground”
• OPEC: issue is not reserves but maximum sustainable rate and pace of getting there.
• KSA field-by-field assessment: total remaining: 278 bn bbls; production to end of 2007: 115 bn bbls
• Iran: produced to end of 2007: 61 bn bbls; Total remaining: 90 bn bbls
• Iraq: produced to 2007: 31 bn bbls; remaining: 177 bn bbls

• Venezuela: 58 bn bbls produced by end of 2007; remaining: 322 bn bbls…will mostly be produced after 2020 because it’s undesirable heavy oil
• OPEC production forecast: Will reach 40 mbpd, no higher, mainly due to political decisions
• Challenges for OPEC
  • Balance creation of capacity to guesstimate future call on OPEC
  • Difference between non-OPEC liquids and demand
  • Excessive investment needed…
• Natural gas liquids (NGL): Peak around 2020; non-crude oil liquids (CTL, GTL, tar sands, etc) peak around 2025 (?)
• Peak liquids: ~98-105 mbpd around 2020 (2017-2030)…demand has surprisingly little impact
• World crude oil peaks around 2015; around 2015 will be a major crisis in price.
• Other liquids like biofuels, tar sands, etc. help to defter world liquid peak by 3-5 years, but cannot ramp up quickly. They take a long time & a lot of investment.
• Does not believe that north Ghawar is about to water out. They will have to start EOR in the region within the next few years because it will then begin to water out.
• Re: Kashagan, the problems are technical and environmental. Expensive gas extraction & processing & reinjection; also impacts on sturgeon. 2013-2015 is when oil production might begin, and will ramp up slowly, disposal of sulfur will be an issue.
• Estimating yet-to-be-discovered oil is “an opinion.” About 300 bn bbls yet to be discovered; few oil geologists agree with USGS.

DAY 2 – MONDAY, SEPTEMBER 22, 2008

8:00 am – 8:30 am

Opening Remarks

Debbie Cook, Mayor of Huntington Beach, CA, ASPO-USA board member

Steve Andrews, Co-Founder, ASPO-USA

Kjell Aleklett, President, ASPO-International

Andrews: Comments about the meltdown in the markets…we are at the most severe point in the markets in our lifetimes.

There will be an update on the bet with CERA. ASPO does not believe that world oil production will reach 100 mbpd by 2017…

Kjell Aleklett

• ASPO International formed in May 2002 by Aleklett, Colin Campbell and others.
• Some general comments about what peak oil means, and a brief history of the organization.
• Reviewed some per capita data from various countries.
• Discussed the impact of the net export problem.
• Regarding African production, “It’s the biggest robbery in history.”
• Quoting King Abdullah of Saudi Arabia: “The oil boom is over and will not return. All of us must get used to a new lifestyle.”
• Made a bet with Tony Hayward (of BP) that in 10 years, oil production will be lower than it is today, and the amount of the bet is the price of a barrel in 10 years.

Watched a clip from the movie Three Days of the Condor

8:30 am – 10:00 am

OIL: Once Cheap, Never Easy

Panel discussion

Ken Verosub, Professor of Geology, UC Davis

Gill Mull, Alaska Geological Survey, retired.

Jeremy Gilbert, Barrelmore, Ltd. formerly BP Chief Petroleum Engineer

Sally Odlund, ASPO Board Member (Moderator)

Gill Mull is ill and was unable to attend but his presentation is posted online.

Ken Verosub: “Petroleum 101“

• Recalling Sinclair oil company and the notion that oil comes from dead dinosaurs. Oil in fact calls from small marine micro-organisms in the ocean, which fall to the bottom when they die, to become incorporated into source rock as they decay. A porous rock like sand or carbonate reef then must be deposited to collect the material. On top of that there must be a cap rock to secure the deposit in a trap, and keep it from migrating to the surface. Then the organic material must be cooked at just the right temperature: the “oil window.” Most oil comes from rocks that are hundreds of millions of years old.
• Reviewed various kinds of stratigraphic traps.
• Reviewed seismological methods of surveying traps, like “thumper trucks” and “geophone arrays” that listen for the thumps, on up through 3-D computer models.
• All of the easy oil has been found. Efforts to find oil are getting more extreme and technologically complex.
• Reviewed the rough bell curve of an oil field’s production, the Hubbert Curve, and his correct prediction of the peaking of US oil production in 1971.
• Discussed the relationship between discovery and production curves. We are long past the peak of oil discovery, and have been running a growing deficit for years.
• Ridiculed the scientific illiteracy of Newt Gingrich’s “Drill here, drill now, pay less” campaign, and the unsubstantiated claims of Wall Street analysts who claim that we just need to drill more (most of whom, thankfully, probably don’t have jobs anymore)
• Deepwater offshore is where much of the remaining oil is to be found. But we won’t find any big fields…reviewed Hubbert Curve of oil discovery, showing the declining size of oil finds.
• Even if we did have some large new finds, it takes about 10 years to bring any of it to market.
• How much time do WE have left?:
  • Total US reserves: About 20.9 billion barrels
  • Total US daily consumption: 20.7 mbpd, of which we import 11.7 mbpd
  • Domestic oil, daily consumption: 9 mbpd
  • US domestic oil, annual consumption: 3 billion barrels per year
  • 20.9/3= 7 years
  • So: we only have until about 2015 +/- 2 years for remaining domestic production!
• Global competition for remaining oil, with a likely global peak around 2010, means that prices must rise to resolve the tension.
• World:
  • 32 billion barrels per year (bpy), call it 35 billion bpy/365 or ~100 mbpd is the theoretical peak.
  • Again: 2015, +/- 2 years…”It’s crunch time!”
• Official future production estimates defy this reality…
• As consumption rises fairly slowly in industrialized countries, it’s rising much faster in developing countries, leading to a fairly sharp global increase in the rate of oil consumption.
• “This is a global problem!” In China, everybody wants to drive an SUV, and aspire to a US standard of living.
• Since 1965, US consumption has increased 70%, while China’s has increased over 3000%
• 100 mbpd on the chart is likely to be around 2016, the maximum theoretical peak.
• “In about 7 years, demand for oil will exceed maximum total oil production. Then what happens???”
• Why can’t we be like the Europeans, and use far less oil per capita? Are you ready to live like a European and cut your oil consumption in half? Then which two of your family’s four cars are you willing to give up? Which processed foods will you give up? Which half of your wardrobe? Etc.
• But because there are so many more people in the developing world than in the US, a 50% reduction in our energy consumption only gives them a 33% gain. Inversely, if the rest of the world were to increase their consumption by 100%, we would have to reduce ours by 80%.

Gill Mull: “Alaskan Oil: Prudhoe Bay Discovery and Outlook for North Slope Oil“

• Mull is ill and unable to attend, so some slides were highlighted by Sally Odlund of ASPO.
• TAPS has min capacity of 200 Kbpd to keep it flowing.
• Some photos and maps of ANWR and various wells
• Alaskan oil production peaked in 1988
• ANWR has surface seeps, rich source rocks with anticlines and caps
• P50 [50% probability] estimate for ANWR: About 10 billion bbls in aggregate
• All of the new fields put together can’t come close to overcoming the peak profile caused by the North Slope

Jeremy Gilbert: “Peak Oil Global Overview, An American Wake Up Call“

• “It’s time for you guys to wake up!”
• First wake up call: [ASPO conferences in] Uppsala 2001, then Denver 2005….Now, after 7 years, what’s changed?
• While America slept:
  • Discovery rates continue decades-long fall
  • Calculations suggest reserves can’t meet demand projections
  • Some recognition of political, investment risk in developing resources
• 2008: No improvement in resource situation. New, more accurate calculations of supply define earlier and clearer peak. Political will to increase supply clearly absent; prices not stimulating investment to increase supply.
• IOCs are not investing the way we have hoped and expected.
• Oil consumption per capita: The US, Canada and the Middle East use the most by far, and there has been little changed on a per-capita basis. [Excellent morphed maps!]
• IEA’s wake up call: “There are three problems: Geology, investment, and policy of main producers. These, taken together, make the future of oil very difficult.” – Fatih Birol, IEA Chief Economist
• Some wild statements of wishful thinking… “In your dreams”
  • The explorers will fix it; there’s lot of oil out there – think of Jack and Tupi; add in the OCS (Outer Continental Shelf) and ANWR (Arctic National Wildlife Refuge)
  • Worldwide reserves/production ratio is still 40, there’s lots of time to find other energy sources.
  • Technology will deal with the problem: add just 10% to recovery efficiency and we’re fine.
• While we still have people like Kissinger and Gingrich giving us palliatives, we’re not in a dream, we’re in a nightmare.
• Discovery peaked 40 years ago; production increases all the time, but what we’re producing is the oil we discovered 40-50 years ago. Once the cushion of discoveries from the 1940s-60s is used up, where will we turn? We discover about 1 for every 4-5 bbls we use today.
• If all of the OCS were opened to exploration, we might get a 20% increase in reserves. You have to look 15-20 years ahead to see any substantial amount of that oil come to market. “This is not going to help you!” It will not move the peak.
• The reserves/production ratio…oil production doesn’t go flat and then hit the end and plummet to zero; it declines in a curve over time.
• The world falls from ~85 mbpd to ~18 mbpd in 40 years, and ~8 mpbd in 60 years! So yes, the oil will be produced, but not at nearly the rate we now have.
• New technology: Little indication that recovery efficiency is increasing in established fields. Main benefits seems to be in dealing with unexpected problems and in finding small accumulations.
• We’re trying harder and drilling a lot more wells, which close to doubled over the last few years, but production has been flat.
• Russian oil production was counted on to keep non-OPEC production growing. But their production has fallen from about 9.9 mbpd in 2007 to about 9.7 mbpd in 2008. It looks as though their production has peaked (for whatever reason).

• Consider that energy growth is relative to GDP growth, then realize that non-OECD is way behind us.
• High gasoline prices produced a decline in gasoline consumption growth since December 2007, with about 100-150 kbpd of gasoline consumption decline per month
• Looking at long queues for fuel when shortages developed in China and Scotland recently.
• WAKE UP, AMERICA!

Q&A

• Gilbert: The biggest problem is the general ignorance of the oil supply/demand situation. Proposes that those who take a 10-hour class in supply and demand on oil get a 10% cut in their income tax. [If I may: A capital idea!]
• Verosub: The message needs to be that the problem is real, it’s huge, it’s global, and it’s transformational. Some people will die from famine, disease, etc., but civilization as a whole will survive. This will change the world in a way that we have not seen since the industrial revolution! We need to throw resources at this problem in an international way. And we should stop throwing money away on space trips to Mars, bad biofuel policies, bridges to nowhere and other wasteful projects.
• Gilbert: Can’t account for Nansen Saleri’s much more optimistic expectations for reserve growth. New tech does in fact give higher efficiency & greater recovery, with recovery factor increasing from 30% of oil-in-place years ago, to as much as 50% today, but we need that new technology to deal with the more extreme characteristics of the remaining fields. [The implication being that net production will not grow due to EOR.)
• The fact that remaining oil is largely heavy and sour will make life more difficult.
• Verosub: Cuts will be in manufacturing, food production, etc., not just driving less.
• Gilbert: About a half-trillion dollars per year flows into the Middle East for oil. We'll see wars, we'll see famine, we'll see increased blackouts and shortages.

10:15 am – 11:45 am

Pipedreams: Oil & Gas Delivery Bottlenecks

Panel discussion

Morey Wolfson, ASPO-USA Board Member, Utilities Program Manager at Colorado Governor Bill Ritter's Energy Office

Matthew Simmons, Simmons & Co. Int'l

Randy Udall, ASPO-USA Co-Founder (Moderator)

Udall: Check out good report on shale gas by Deutsche Bank Securities Inc. research analyst Shannon Nome, "From Shale To Shining Shale: A Primer On North American Natural Gas Shale Plays"

Morey Wolfson: "Google Earth Fly-over Global Energy Infrastructure"

A breathtakingly fast, head-spinning tour of major world energy projects using satellite photos from Google Earth. [To see it, first install Google Earth, then open this file: ASPO-USA_Global_Energy_Infrastructure.kmz]

[I could only take very fragmented notes of this presentation, it went by fast. I'm not sure I got all the stops. Notes are from Wolfson's verbal commentary.]

• Sakhalin Island, a huge Russian project, $20 billion project. Massive time and cost overruns.
• China: Three Gorges Dam. Huge hydro project (600′ tall, 1.5 miles long).
• China: coal fired generating station. China will build about 1 plant a week for the next decade. China has overtaken the US as the top emitter of GHG.
• Newcastle coal plant in Australia…largest thermal coal facility in the world. Japan is their top coal customer.
• Australia: Uranium mine…Oz has the largest uranium reserves in the world
• Bangladesh: At sea level, likely to have mass refugees from rising sea levels
• Ras Tanura refinery in Saudi Arabia
• Ghawar field in KSA, producing 5 mpbd
• LNG terminal in Qatar, the largest gas exporter in the world. New export facility is the largest such facility in the world.
• Nuclear reactor in Iran…expected to build 6 new plants by 2021
• Antwerp refinery, with 360 kbpd production, second largest in UK (?)
• Copenhagen wind farm, a huge offshore wind farm.
• Nigerian port, largest exporter of oil in Africa.
• Brazil: sugarcane ethanol facility.
• Columbia: a coal port from a nearby coal mine (world’s largest open pit coal mine)
• Venezuela: oil port facility
• Gulf of Mexico, Thunder Horse oil platform ($1 billion platform)
• Houston Ship Channel, approx ¼ of US refining capacity
• Lake Charles LNG importation terminal
• Iowa corn ethanol facility…US uses more ethanol than any other country in the world
• Palo Verde nuclear facility outside of Phoenix, AZ
• Nevada CSP plant – 64 MW
• Palm Springs wind farm
• Powder River basin in Wyoming, huge coal operation, 25% of US coal production
• Alberta tar sands project
• Alaska pipeline, terminal in Valdez, AK
• Choke points: The Strait of Hormuz, where 25% of the world’s oil is moved
• Pakistan: Gwadar Port, project in partnership with China
• Red Sea strait, 3+ mbpd flows through
• Suez Canal, transports 4 mbpd
• BTC pipeline
• Turkish straits, 2.4 mbpd flows through there
• Strait of Gilbraltar
• Panama Canal, 0.5 mbpd flows of oil…may not be expanded because the Northwest Passage is now a reality (saving 4000 miles)
• Straits of Malacca, a chokepoint in Singapore

Udall: Coal train leaving Powder River basin is about 150 miles long (?!)

Matthew Simmons: “Grappling with Energy ‘Risk’”

[See video and related interview at the conference here.]

Aging Infrastructure, Workforce, etc.

• The combination of Ike, Bernanke and Paulson made for a week that will go down in history. How casually we take the concept of risk!
• Era of deregulation, “transparency,” globalization of capital markets and securitization were suppose to take out “financial risk”
• Derivatives were supposed to disperse risk “elsewhere.” Risk has reached 300 or 400-to-1 in some cases. We’ve made a situation that is far worse than the 1920s.
• Proper size was deemed to create a system that’s too big to fail
• LTCM was a prelude…Enron happened 7 years ago and was a prelude to what might happen next
• And the lava gushed…Merrill, Fannie, Freddie, Lehman…
• Risk is a very real term, still exists, leverage can be extremely dangerous. The greater the risk, the faster big systems can fail
• Peak oil and gas has ominous parallels to financial crisis. Most observers do no graphs of peak oil, (?) or how savage a post-peak world can be
• Were Gustav and Ike the initial tremors of the big bang crisis?
• Recent collapse in petroleum prices created a false sense of security
• Hurricane aftermath: GoM has been offstream since early Sept (~30 million barrels not produced)…many plants still not producing…LOOP pipeline and HSC were crimped. This is all draining inventories.
• Could we have a “run on the bank” with fuel stocks like we have in the financial system and breach MOL [minimum operating levels]?
• Topping off tanks literally creates a run on the bank.
• An example of how fast we could break the bank:
  • 220 million vehicles
  • 20 gal capacity each
  • Average tank has 5 gals in it
  • Topping off ~15 gallons x 220 million = stock draw of 78 million barrels.
  • Current finished stocks: ~87 million barrels!
• What happens when stocks deplete?
  • Food supply in jeopardy within a week
  • Economy slows to a crawl
  • Financial markets panic
  • Energy risk is finally grasped.
• If heating oil also becomes scarce, a cold winter will be a disaster in the US. A few weeks of winter could deplete usable stocks. 9-10 million homes rely100% on heating oil for winter heating.
• What are the odds? No one knows. Reported petroleum stocks are only estimates; there is zero data on secondary/tertiary stocks. The odds of this eruption occurring are higher than another hurricane occurring.
• “How could the world’s most prosperous, advanced society move into harm’s way so fast?”
• Peak Oil is like Gustav/Ike squared. The ebbing of supply is equivalent to current crisis…are we flying blind into a Cat 6 storm?
• We need to demand country-by-country production data, including key fields, various grades…
• Key fault lines:
  • Energy intensity to create usable petroleum from unconventional crudes (shales/tar sands).
  • Drilling rig tightness & shortages, but we have no data! (No rig count! We just have estimates).
  • We lack realistic expectations…
• Is the size of oil markets “too big to fail?” 85 mbpd is the world’s largest single industrial market by several fold. But there are no regulators like the Fed, etc.
• Other risks:
  • The straits: Malacca, Hormuz, Yucatan/Cuba passage, etc.
  • Key facilities: Abqaiq, LOOP, TAPS
• What about insurance? SPR is limited and should not be used to manage prices. Untested EIA member country energy stocks. Line fill in pipelines and tank bottoms, then we’re out of gas (finished product). Afterwards, we are in an uncharted sea and probably “out-of-gas.”
• Could an energy pandemic really happen?
• Most global leaders have no idea of any of these risks. Peak oil is still barely understood.
• It took 5 months to melt down the whole financial markets.
• Energy markets could unwind in less than 30 days. Risk is real, energy risk is real risk squared.
• Rust is also energy risk squared. 98% of the infrastructure is built out of steel…a ticking time bomb.
• Energy oxymorons:
  • Energy independence: 100% impossible.
  • Improved technology: zero impact on any of these risks.
  • More drilling: we have no spare rigs and few places to drill with timely high impact.
• We live in a dark world of hidden data on energy.
• All past great crises were also ignored until we hit the tipping point.
• Peak oil is the singular and most ominous risk of the 21^st Century.

Q&A

• Topping off tanks could cause shortages, and it will take a long time to rebuild the supply cushion. Running out of food is the most serious implication. Shelves can go empty in 5-7 days.
• This last week was potentially the “big bang”
• The Council on Foreign Relations (CFR) hasn’t had a serious energy event since 2004. They’re almost energy illiterate, despite being geopolitical experts.
• If we radically increase tight sands and gas… Barnett Shale has saved us from some serious gas supply issues. Net energy of Barnett Shale (traveling 70-80 miles per day to the rig, plus transport of rock, etc.) is questionable…it could be a net energy loser. We have real limitations of rigs, people, etc. We’re not gonna flood the world with shale gas.

• I wouldn’t want to be in a presidential cabinet for one minute…
• Peak oil is so much more real, and more immediate, and serious than global warming, but we have a large consensus about the latter (when the data is even less clear) and near total illiteracy on the former.
• Comment on Peter Wells’ more optimistic assessment of KSA reserves last night: We really don’t have any idea how much is there. 110 billion proven, 260 billion est. What we really need to know is how much is light sweet, and when/how fast will the largest fields decline?
• If I could get over the worry about people topping off their tanks, I’d be more optimistic. We’re going to have to rebuild our energy infrastructure. The Starbucks economy came to a grinding halt, and we’re going to have a long period of Wall Street remorse.
• Dr. Sadad al Husseini says that the world basically has no spare production capacity left, and I believe his estimate.
• The fact that we have to guess at the global depletion rate should make us all nervous. Why don’t we have better data on depletion?
• When will it be possible for an American politician to tell the truth about energy? I think it’s possible, based on my experience in speaking before many audiences in the last several years.
• Re: the new IEA report in November…Birol has been working on it full time for months. For the first time we’ll have a supply driven model. Birol is having a terrible time finding any significant pockets of good news. All of the agencies are under incredible pressure to cheer up their news. Stay tuned for November 15, it should be a shocker!
• We need to liberate the workforce and let people work from home…that day might finally be here.
• We can’t actually ration anymore. What we did in the 70s with even-odd days required service station attendants…only about 1 out of 4 stations has attendants anymore! We will need to print up rationing coupon books like we did in WWII to prevent a “run on the banks” in gasoline. Evidence suggests that many people are running around with $5 or less worth of gas in the tank!
• Get rid of vulnerable investments. Buy infrastructure companies because we have to rebuild everything (Baker Hughes, SLB, RIG, etc.)
• Re: the Energy Watch Group report saying that oil actually peaked in 2006. EIA’s databook shows that 2005 production was the all-time peak near 74 mbpd, slight decline since then. Newest data just barely exceeds that all-time peak, but it is subject to further revision. It’s very hard to imagine how we could ever get to 75 mbpd of crude.
• Should we try to print our way out of the financial crisis? We’re lucky that foreign countries are still willing to ship us any oil!
• Check out The Hunt for Black Gold program on CNBC with Maria Bartiromo, including an interview with Simmons this Wed night!

12:30 pm – 11:45 am

Awards

Julian Darley, John Theobald and The Oil Drum received awards

Jim Buckee, Talisman Energy: “Peak Oil and Resource Nationalism“

• World oil field sizes: the top three fields (Ghawar, Burgan, Cantarell) are huge compared to everything else. Ghawar is unknown, but the other two are in decline.
• 97% of the world’s known reserves are in 10% of the fields.
• Prudhoe Bay (and indeed all fields) go into exponential decline.
• Samotlor, Forties, West Texas – all in terminal decline. [Charts showing numerous fields in terminal decline.]
• On average, fields decline after 50% has been produced, on average decline at 10% pa. Depends on quality of the reservoir, facility constraints, etc.
• Demand growth 1.5% pa. World decline: 5-7% pa. Decline will be 50-60 mpbd in 10 years (6 Saudi Arabias).
• [Numerous detailed maps and charts on Saudi oil fields…Abqaiq is good, north Ghawar is good, but south Ghawar is bad.]
• Ghawar 174 x 16 miles…190 bn bbls OOIP (assuming 60% recovery factor). Reserves 80-90 bn bbls… 5 mbpd current production.
• Cantarell…massive decline rate
• Sadad al Husseini: “natural declines in existing capacity are real,” getting KSA to 12 mbpd of production would “wreak havoc within a decade.”
• Chairman Farouk Al-Zanki: Burgan “peak output in 2007 at 1.7 mbpd not 2″…reserve uncertainty
• Daqing (16 bn bbls): liquids 3% decline
• Alternatives: rate vs. volume. World NGL production will peak in 2010-11 (over 9 mbpd)
• World XTL (anything-to-liquids)…peaks at 2.5 mbpd in 2012.
• If conventional oil reserves are 750-1000 bn bbls, decline is 50-60 mbpd over 10 years. NGLs (probable), yet to find (10-20bn bbls), EOR, plus bitumen/extra heavy all together equals about 300 bn bbls, and can’t make up for conventional decline.
• Why Majors are quiet on peak oil:
  • In a big company, CEOs are advised by economists: “commodities always go down,” “ingenuity overcomes scarcity,” …Club of Rome, Malthus cast ridicule on scarcity arguments
  • “There is plenty of oil we could get at it” – ignores volume vs rate argument!
  • “Low cost producer wins” – true but opportunity missed.
  • Political implications? Heavy implications!
  • There are signs of change: “end of cheap oil”
  • Predicting oil price is difficult
• Industry Outlook
  • Exploration is tough – F&D [finding & development cost] is rising
  • Industry is extremely tight: people, services, equipment
  • Costs have doubled in the past 3-4 years
  • Industry fights declines every day
  • No opposite of a train wreck. Things don’t suddenly get better than they have been.
• Resource nationalism is rampant!
  • Host gov’ts want sovereignty and control, not tax collection. Also a rebalancing of power and status with the West.
  • Mineral resources deplete – finite pie to cut up
  • Not limited to OPEC!
  • But oil in the ground has no value!
  • Governments should maximize value…leave some in the ground
• Various slides on the share of revenues depending on the PSCs [production sharing contracts]
• Resource nationalism
  • IOC [independent oil company] motivation is to grow production, reserves, hence revenue
  • But host government motivation is more complex
  • How much money is enough? An empty purse is bad but in high prices other factors play
  • Do mechanisms exist to spend money usefully?
  • What to do with petrodollars?
  • Oil as a weapon (Venezuela, Russia, etc.)
• Current account balances are terrible for India, China, etc., and are huge for Venezuela, Libya, etc. Remaining fields with access to outside investors have extremely low financial returns.
• Rise of the NOCs [national oil companies]
  • Libya takes 55% from Oxy
  • Shah takes 55% from Anglo Persian
  • Venezuela takes 60%
  • KPC took over Gulf Oil, etc.
• Majors are rather minor in terms of reserves! Exxon, the largest of the “majors” is only #17 worldwide in terms of reserves!
• Rise of the International NOCs (INOCs): Statoil, Yukos, BP-TNK, etc. Benchmarking and chest thumping. ONGC, CNPC, Sinopec, CNOOC etc. are serious competitors.
• NOCs have problems
  • Uneasy relationship between NOC and government
  • Often used as a piggybank by gov’t, starving reinvestment (Pemex, Petronas)
  • Upper echelons often choose other than by merit
  • Corruption – money siphoned off
  • Contract and sourcing sub-optimal
  • NOCs reflect the national culture…deference, unwillingness to say no, promotion by status or age, bad news messenger gets shot…
  • Inefficient: $15.28 revenue per barrel for IOC vs. $5.25 for NOC
• Exports fall faster than production. Population growth, food prices, subsidies for fuels, etc. In Indonesia, subsidies are 30% of the state budget!
• NOCs and INOCs get priority
• But NOCs provide more certainty for complex projects, and are aligned with host governments (as opposed to service companies)
• Not all governments want neo-colonialism
• The problem of reserves stalls progress.
  • Oil companies are partly valued in the stock market by booked reserves
  • In order to book reserves there must be “ownership”
• Gap between supply and demand increases relentlessly between 2005 and 2050. The world is expected to consume over 693 bn bbls of oil and over 2,500 tcf of natural gas from 2005-2025. By 2050, oil is very expensive and limited to transportation.
• On the demand side, OECD is still falling but non-OECD is still growing
• World produces 30+ bn bbls pa, replaces < 10 bn bbls
• World’s reserves dominated by large fields
• Signs of decline in largest fields
• Alternatives can’t offset decline rate
• Nationalism reduces access for IOCs, reduces efficiency
• Demand is still increasing
• Price of oil is going up

Q&A

• Natural gas and oil have different uses, so gas is a very limited substitute for oil. Not enough overlap. Thermal equivalents of oil and gas reserves are about the same!
• But peak gas is actually about 5-10 years after peak oil.
• Is it possible that the Club of Rome predictions could be true, but late?
• Ingenuity will not solve this problem.

1:30 pm – 3:00 pm

Economic Impacts of $100 Oil: Energy is the Original Currency

Panel discussion

Jeff Rubin, Chief Economist, CIBC World Markets

Herman Franssen, International Energy Associates

Jim Puplava, Financial Sense (Moderator) 

Jeff Rubin: “Triple Digit Oil Prices Will Reverse Globalization”

Rubin was unable to attend, but a video presentation of his remarks with charts was shown.

• Transport costs have to become incidental. Globalization must be reversed.
• At $100 oil, transport costs are 40% of total shipping costs. At $200 oil, it’s 80% of total shipping.
• Global trade is now about shipping and logistics, not the lowest labor costs.
• At $150 oil, it will be a quadrupling of tariff rates.
• This will take us back to the 1970s…
• Cost of shipping a standard 40′ shipping container from Shanghai to NY: Went from $3000 a few years ago to about $9000 today.
• Cost of shipping ore to China to make hot rolled steel and then shipping it back to US adds about $90 to an $800 unit. Consequently US steel production is actually up now.
• Who would have thought that high oil prices would breathe new life into the Rust Belt? But that’s what’s happening. And it’s not just steel – it’s in many industries and products.

Herman Franssen: “Adjusting to a High Cost Energy Economy: Winner and Losers“

• OPEC meeting in Sept 2008. OPEC leaders are getting very worried. Price hawks wanted to cut production to defend price, but collapse of US financial markets took prices back up again.

• US inventories are below the 5-year average. Inventories for gasoline are extremely low – panic in Arkansas and elsewhere for gasoline supply.
• Will be surprised if this year’s global demand growth is over half a million barrels per day. IEA estimates 0.69 mbpd growth (0.8%) for 2008, 0.89 (1.0%) for 2009. (IEA, Monthly Oil Market Report, September 2008)
• Huge increase in demand in OPEC this year.
• North America supply growth in 2007-2009 depends on biofuels and tar sands growth
• Call for OPEC oil down in 2009 (~ 1 mbpd less than in 2008) according to OPEC. This is a function of weak demand, strong supplies (crude + NGLs + biofuels)
• OPEC’s view was that non-OPEC supply would increase by 10.4 mbpd even without Angola and Ecuador over 2000-2008!
• EIA thinks surplus capacity will increase by over 1 mbpd in 2009
• OPEC believes OPEC spare capacity will grow from 3 mbpd in 2008 to 6 mbpd in 2010! [Ed: 3 mbpd of spare capacity today is highly doubtful.]
• No major energy legislation between Carter and second term of GW Bush
  • Post 1980: Energy left to market forces. By contrast, Europe and Japan increased fuel taxes; Europe moved to diesel (25% more efficient) and Japan developed the hybrid engine.
  • 1985-2006: US oil consumption rose by 5 mbpd; Europe’s by 3 mbpd. US oil production fell from 10.6 to 6.8 mbpd; Europe’s rose from 4-5 mbpd…
  • Result: Expanded EU of 450 million people and Japan’s 130 million people consume about the same volume of oil as the US with 300 million people.
• Revised EIA Outlook for energy through 2030 of March 2008
  • March 2008 EIA Outlook: US oil consumption to rise from 21 to 25 mbpd by 2030.
  • Oil imports stable at around 12.2 mbpd in 2015, rising to 12.7 mbpd in 2020…
• US slowest in the move towards efficient cars, behind EU, Japan, China, Australia, Canada, and California.
• Oil consumption is an indicator of the wealth of nations.
• Huge increase in demand in China and India spell the end of globalization?
• Expecting about a doubling of cars between now and 2025
• With 9.5 billion people by 2050, we would use 138.8 mbpd worldwide at 1% demand growth!
• A French study showed that if there were absolutely no constraints on further oil development, liquids production would peak at around 2020-2028 just shy of 100 mbpd.
• The oil supply outlook;
  • Assume that supply will always meet demand at reasonable prices
  • If projected supply fails to materialize, “there is no Plan B.”
• IOCs only have access to 6% of the world’s remaining reserves. Oil reserves held by new Russian companies: 6%. Less than 25% of worldwide reserves are accessible to private international capital.
• What kind of peak? Mt. Massive, CO (long flat “peak”) or Mt. Rainier (peak with short plateau at top) or Matterhorn (sharp peak)
• As regards OPEC, “they may be sons-o’-bitches, but they’re our sons-o’-bitches”

Andy Weissman: “Time to Stop Playing Russian Roulette with the U.S. Economy –Urgent Need for a Realistic Strategy“

• Electricity & gas crisis could be just as severe as peak oil. Impact of $100/bbl oil not limited to transportation.
• Electricity & nat gas = 56% of total energy use
• Could lead to $150/200 bbl electricity
• Global LNG price already near parity with oil. Spot price already near parity this winter despite multi-year low US imports
• While prices could moderate in ‘09 and ‘10, premium pricing likely by early next decade.
• We’ll see shortages of global LNG by 2012-2013.
• Potential doubling of both nat gas and electricity prices.
  • Half a trillion dollars per year increase!…$5 trillion impact over 10 years.
  • Prices exquisitely sensitive to supply/demand balance as first part of 2008 demonstrates
• Need new approach to energy planning.
  • Needless supply risks should no longer be tolerated
  • Future of US & global economies at stake
  • Requires far more realistic, more hard-nosed approach to developing comprehensive strategy.
  • Critical not to over-rely on lowest common denominator, feel-good solutions. Feasibility & cost-effectiveness must be rigorously demonstrated.
  • Minimizing consumption growth & ensuring reasonable supply are not competing strategies!
• Five essential steps
  • Far greater sense of urgency required. Few other issues likely to affect nation’s future as deeply.
  • Replace EIA to provide realistic estimates of supply & demand. We can’t tolerate bad forecasts any longer! We’re currently flying blind! Estimates mislead rather than inform. Requires a new National Energy Security Supply Board. There is absolutely no time left to develop a comprehensive program to meet our energy needs. The precise date of the peak isn’t that important when it takes 7-10 years to develop mitigation strategies. Until the federal government issues more realistic numbers, the oil companies aren’t going to do anything different.
  • Develop comprehensive national energy strategy applicable to energy use across the board. Must include electricity & natural gas, not just oil. Integrated planning essential. Market will ruthlessly seek out lowest cost BTUs and push prices to parity.
  • Maximize use of all cost effective domestic resources that can be developed in an environmentally sound manner. What’s going on is crazy at the national level! We can’t afford to rule out resources or rely on pipe dreams. We have no national energy plan, nor an effort to develop one. Instead we need the most rigorous planning possible.
  • Use best expertise available to evaluate limitations of every supply option in objective, cold-blooded manner. Include limitations on available capital.

Jim Puplava: “The Economics of Credit – The Worst Is Yet to Come“

• Recession vs. “Muddle Through”
  • Chicago Fed National Activity Index, using 85 indicators, shows that we are likely heading into a recession
  • Fed of Philadelphia, State coincident indexes showing distress in the economy
• Data on losses and writedowns
• Credit crisis phases:
  • Phase I: writedowns, raise capital
  • Phase II: Bailouts
  • Phase III: Monetization
• Debt tsunami: US nat’l debt went from $1 trillion in 1998 to $9 trillion in 2007
• US Fiscal Crisis – Baby boomers 78 million @ $50K year in SS payouts = $4 Trillion annually!
• Current future liability of the US government: $70 trillion
• Inflation on the wane: PPI less Fed funds rate near all-time high
• Commodity bubble: corn and barley supplies are near all-time lows. Copper and aluminum inventories extremely low.
• [Good charts on relationship between energy and population.]

Q&A

• Weissman: We have an increasingly unstable situation, and it’s frightening.
• Franssen: We must hope that the EIA will start to take depletion into account properly in their models. Latest IEA models assume sharp increases in imports, totally unrealistic. So the price mechanism will resolve the tension.
• Weissman: When you take the covers off the energy data, it’s ludicrous to think that non-OPEC oil will increase. We’re talking about the wrong set of solutions right now. We need to talk about the impending oil crisis in a whole different way.
• Franssen: Viable scenarios for taxing oil consumption to reduce demand? Not a snowball’s chance in hell that any politician will support more taxes. Consumers stretched to the breaking point couldn’t take it anyway.
• Puplava: 90% of the time, the markets are irrational, so they’re not a good allocator of resources in the short term, but in the long term, they basically are good at it. Weissman: if we wait for markets, which respond to very short term signals, to address this long-term challenge, we will be very disappointed in the results.
• Franssen: If OPEC suppliers were fully rational, they would either freeze or lower the current levels of oil production, but they would never tell us!

3:30 pm – 5:00 pm

4 Billion New Consumers: What Asian Growth Means for East, West and the World

Panel discussion

David Fridley, Lawrence Berkeley National Lab

Vince Matthews, Colorado State Geologist

John Theobald, ASPO-USA, UC Davis (Moderator)

David Fridley: “China and Energy in the 21^st Century“

[Missed first part of presentation]

• 80% of electrical energy is generated by coal in China
• Just last year China added 105 GW of power generation (equivalent to building California’s entire base twice a year) almost all of it from coal.
• China has third largest reserves of coal. China is moving toward net coal imports, largely due to price differentials with imports/exports
• CTL and coal-to-chemicals is growing.
  • Total CTL capacity is forecast to reach 50-60 mt by 2020. Current CTL requirements: 4-5.5 ton of coal per ton of product; 10 tons of water per ton of product.
  • Shenhua is commissioning a 1 million ton direct coal liquefaction plant in 2008
• Coal-to-chemicals production, targets & requirements
  • Methanol production is displacing biofuel production
  • Coal is increasingly viewed as a chemical feedstock
  • In 2007 China consumed 9 million tons (Mt) of methonal; 2.7 Mt blended with gasoline
  • 2010 production capacity is expected to reach 39 Mt
• Can China produce the coal it needs?
  • If Chinese steel and cement peaks in 2015, and all Asian countries meet their efficiency targets, and we don’t have a global financial meltdown, then the scenario shows that the IEA’s demand-driven forecast shows a gap opening by 2015.
  • EWG report supports similar outlook (actually worse)
  • Prime coal exporting countries to China are declining: Vietnam, Indonesia, Australia (short term problems)
  • Chinese coal imports increasing for a lack of alternatives; India way up due to cost issues; Japan due to nuclear & LNG problems.
• China’s CO2 emissions just from coal will exceed total emissions by US by 2010. China wipes out the entire EU commitment to Kyoto by 2012.
• China’s crude production has plateaued, imports are skyrocketing. China is 50% oil import dependent. Decline rate is 4% pa. Daqinq looks a lot like Prudhoe Bay in profile.
• The decline of the giant and large fields has increased the energetic costs of extraction. Energy inputs have increased to about 1/7 of the oil they produce.
• China has the second-most complex refining setup in the world. But China is a diesel-based economy. Diesel demand is 40% of a barrel.

• Oil consumption in China supports fewer discretionary activities than in other large consuming countries. 43% is for transportation. Most of new buildings are dependent on diesel.
• Personal cars are not the main driver of Chinese oil demand! Moving stuff is. China is still a very material economy.
• The first thing they have to move is…coal! 50% of China’s coal now runs on rail, with very efficient rail. Inadequate coal rail transport capacity drives oil demand higher. The rest has to run by transport truck running on diesel, increasing the energy needed for transport by 16x. This is also forcing transport for other goods to road transport.
• Subsidies for all fuels greatly exacerbate the problem.
• Ambitious plan to expand natural gas use relies heavily on imports. Spot cargoes coming in at $22/mmbtu. They’re now seeking new supplies everywhere, like Turkmenistan via pipelines through other “’stans”
• China’s coal soot is now the largest source of mercury deposition in California.
• Major explosion in cement and steel production has caused growth in energy demand to far outpace growth in GDP. China is now the largest cement producers in the world, and most of it is being used domestically. This offset their long-term decline in energy intensity.
• The loss of control led to imposition of new 2010 target of reducing energy/GDP intensity by 20%.
• Quotes from a Chinese official:
  • “The model of economic development that we are currently pursuing is unsustainable.”
  • “China’s current supplies of energy and natural resources are unsustainable”
  • “China’s environment is unsustainable”

Vince Matthews: “China and India’s Ravenous Appetite for Natural Resources – Their Impact on the US“

• Population is driving growth, 1.3 billion for China vs. 1 billion for India and 0.3 billion for US
• By 2030, China is likely to pass the US in GDP. Average growth of 10.4% per year for the last 4 years
• World electrical consumption growth increased by 8 terrawatts in the last 10 (?) years, 2.7 from China.
• 2005: China opened 70,000 new supermarkets
• 2006: Became #3 car manufacturer
• Minerals:
  • China’s share of world mineral production is #1, #2 or #3 of all major metals.
  • China is #1 importer in the world of copper; they import about half of what they consume.
  • Thefts of copper have increased all over the US. Increasing prices are the impetus; cost increased by 457% from 2003 to 2006.
  • Iron ore: China is #1 producer in the world, and the #1 importer. Went from 1 to 300 skyscrapers since 2001.
  • Price of scrap iron up 559% in the last five years
  • Charts since 2003: [ASTOUNDING CHARTS of the price increases of all major metals!]
    • US molybdenum exports doubled; price nearly doubled.
    • Gold prices up 205%
    • Silver 367%…plantinum, palladium, etc….similar price increases.
• Coal: Spot prices for coal went from $17/ton to $37 from 2004-2005, although contract price in 2004 was $24.4/ton…in 2007, $29.75. This is a natural resources driven price inflation. This is not a normal inflation and shouldn’t be fixed with monetary policy.
• Cement: China began importing cement in 2003, with consequent shortages in half the states in the US
• Cement producers: #1 China, #2 India, #3 US
• China is going around the world and tying up every raw material in the world, anywhere they can get it…buying mines, everything.
• 94% of US energy comes from traditional sources (coal, oil, uranium, nat gas). All have increased 200-400% in prices since 2003.
• Natural Gas
  • China imports NO natural gas! US nat gas production has plateaued, we now import about 16% (?) of our usage.
  • Nat gas consumption in the US declined from 1971 to 1985 due to various events and policy changes, then grew again as we attempted to replace coal with nat gas for electricity generation. We import about 4 Tcf from Canada…but Canada’s gas production has been flat since 2000…and production in 2006 required 5000 more wells per year than in 2001.
  • Domestic natural gas production vs rig counts: as rig counts have gone up, and with nat gas at the highest price in history, production fell…it’s lower than 2000 levels now.
  • US nat gas production has been basically flat since 1995, but wells drilled went from 8,900 to 30,180 from 1995 – 2007
  • Price of nat gas has tripled since 1999
• Coal consumption in China:
  • Began importing in 2006. Prices went from $38/ton to $140/ton.
  • India coal growth enormous as well
• China oil consumption: imports over 50%. India imports over 2/3, so does the US
• Nuclear:
  • China and India are both dramatically increasing nuclear…India plans 17 new reactors in 7 years.
  • US generates far more than any other country in the world.
  • World’s 439 nuclear reactors currently need 180 million pounds of uranium each year. We’ve been living off the stockpile we built since Three Mile Island and consuming old weaponized uranium.
• Oil shale (in Colorado) is being looked at again. The notion that oil shale is being blocked in the US is simply wrong. Open bidding was conducted, 20 proposals received, 6 approved. Companies were granted free access to the lands (without royalties) to begin production. 30,000 acres total granted for the six acres; equivalent to 60 billion bbls of oil. And yet, there isn’t even an active permit to produce that oil.
• Alternative energy requires significant amounts of rare metals etc. [good chart]
• A 690 unit apartment complex in Beijing will use a huge ground source heat pump project.
• Overall impacts:
  • Coloradans will suffer from effects of inflation
  • Coloradans may see increasing shortages of critical materials and pressure to produce raw materials and develop new resources.

Q&A

• Fridley: China largely uses crop residues (corn husks, etc.) for home heating; wood gathering has been largely banned.
• Fridley: “Clean coal” is a complete oxymoron. US is going big with IGCC gasification process about 60% (?) efficient. Whereas China has gone with a supercritical process. Accordingly, there is no real cooperation between China and US to do carbon sequestration. CCC costs about 25% of the energy in the coal.
• Matthews: What about lithium for batteries? Can’t really get any useful information.
• Matthews: The claim that the cost of producing commodities falls over time is simply wrong
• Matthews: The increasing switch from high-Btu black coal to poorer grades of bituminous coal is a treadmill. Over half the mining claims in the US in the last three years were from foreign buyers!
• Fridley: 95% of China’s coal production is bituminous.
• Matthews: Is cement traded across oceans? Yes, 22% of US consumption is imported.
• Matthews: Half of all copper ever produced is now in landfills. It’s probably inevitable that we will eventually resort to mining landfills.
• Matthews: Shale gas in the Rockies is a serious treadmill; you have to drill more and more to keep production flat. Decline curves tail off rapidly after first production, and it costs a great deal more than conventional gas. If we stopped drilling for a year, production would tumble.
• Fridley: We are in competition with China basically everywhere for all natural resources. This is leading to conflicts like the one in Sudan. Conflict is brewing over access to resources in the South China Sea, between Vietnam, Philippines, etc.
• Matthews: China already controls 98% of the rare earth metals in the world. What they’re doing is far beyond what the US is capable of. Their strategy is all-encompassing and it will corner the global markets.
• Fridley: The US demand for Chinese products is not the primary source of China’s emissions; more like 10%.
• Fridley: China has a bad data problem just like we do. Provincial governments have been feeding bad data to the central government; now that is changed and it goes directly to the central gov’t so it’s a little better now. New data is more discrete and hopefully will result in better policy planning now.

Robert Hirsch: Reflections on the conference so far

• Terminology: “peak oil” implies sharpness, but really it’s been a fluctuating world oil production plateau since mid-2004.
• Onset of decline of world oil production is the greatest problem, and the timing is uncertain. (Est. 3-5% pa)
• Careful attention to small numbers is important!
  • 5% decrease in US oil – Recession (1973)
  • 1% of world oil consumption is huge: ~860,000 bpd
  • 3-5% changes in oil production cannot be identified as true trends until years later, because the plateau is that bumpy.
• Time frames
  • Production decline will likely start in 2-5 years, but worldwide physical mitigation will require maybe 20 years.
  • A precise forecast of the decline point is impossible but not critical to planning & early action.
• Consider where you have your money, and how you will adapt in your personal life: personal, business, national, int’l.
• The meltdown in the stock markets is prototypical of what will happen when peak oil consciousness hits the public. It is not realized yet! The bad things that happened last week will happen again, only worse, because there are no quick fixes to the problem!
• One-liners:
  • “Willful human blindness” – really describes the problem we have communicating this stuff with decision makers.
  • Talk about discussing peak oil and global warming in the same way isn’t really quite right. When people are losing their homes, cars, etc., people will be screaming for a fix right now.
  • “Peak roads” – We probably have enough roads now, but think about going up against the road-building lobby and associated special interests!
  • “The proactive choir” – That’s us at the conference. As we try to convince people, follow the KISS principle! Keep it simple, and don’t mix the message with other things.
  • Point was made that panic is probably necessary to inspire real action. As distasteful as that idea is, it’s probably true.
• On the issue of rates of change, we should start doing some calculations…how long does it take to build new CTL plants, etc? The more you look at it, the more you see that the problem will outrun our efforts.
• This shock will have widespread effects. It will severely impact state & local budgets, further impacting services like fire and police.

• With all the other pressing problems like Medicare and SS, how do we get people to focus on peak oil?
• Denial…Faith in technology…Faith in government…these things stand in the way of getting the message out.
• “biggest robbery in history” re: African oil production Yes, we contribute to African misery by consuming their oil, but we also have “The biggest wealth transfer in history” under way as we send trillions of dollars overseas for oil.
• Kudos to the organizers of the conference!
• Don’t think of this as an energy problem! It’s a liquid fuels problem! We can’t start running cars on PV panels right now, but in the near term, we have about $50-100 Trillion of investment in the existing fleets of vehicles and ships! We have to keep that stuff running or we’re going to have total anarchy. We need to have substitute liquid fuels regardless.
• Re: environmental problems of hydrocarbon production. Don’t think about the world of the past. Think about the world of the future. What compromises can we make? We will have to save ourselves and prioritize environmental protection. We’re going to have to be pragmatic above all.
• The transition will spell enormous opportunities for those who offer solutions, who will prosper amid the coming miseries.
• I would love to see a politician, or a president, who will tell the straight story. But when it’s said, people will freak out, so it has to be said along with a plan to get us out of the problem. Or we could see the kind of chaos we saw in 1973 when OPEC cut us off.
• People have been staying politically neutral about energy and that’s important; it can’t be a partisan issue.
• This is not the end of the US. This is not going to be like the end of the Roman Empire. I have not lost my optimism. We are going to come out on top (after a difficult period of adjustment) because we’re Americans, and that’s what we do.

6:30 pm – 7:30 pm

Visions of a Post-Peak Oil Future

Panel discussion

Denis Hayes, creator of Earth Day, founder of the Bullit Foundation

James Howard Kunstler, author of The Long Emergency and World Made By Hand

Randy Udall, co-founder of ASPO-USA

Richard Brenne (Moderator)

[This was a nearly impossible session to take notes for…the jokes went by quickly…but I did my best.]

• Brenne gave a hilarious and ironic introduction to the panel.
• Could Kunstler’s apocalyptic visions come true?
  • Hayes: Yes, and the financial market meltdown is a prelude. Only with radically different leadership could we avoid it. A combination of other countries mobilizing to address the threat, coupled with a great flow of venture capital, could potentially make a difference in averting it. With the right advisors, Obama could succeed in making a difference.
  • Udall: How many of the members of Congress are lawyers? 4/5? Every once in a while we have a great president, and even McCain could be a great president. You need to have hope as a companion rather than fear.
  • Kunstler: The long emergency is only one scenario; there are others. I just wanted to come up with a vivid description of what life might be like in the future.
• What are the other things peaking you’re concerned about?
  • Kunstler: Well, peak women my age…and this isn’t the place to go looking for them!
  • Udall: Well there’s impotent and “Aspo-tent”
• Are we nearing peak stupidity?
  • Kunstler: We’re good at measuring things but not so good at doing something about them. Especially in the environmental community, there is a problem with “techno triumphalism” or “techno grandiosity.” The idea that we can conjure up solutions…the idea that we’re entitled to an orderly transition to the future.
  • Hayes: Well we were certainly much more stupid in 1998, when oil prices were so low. We were stupider yesterday, when oil was $27 cheaper.
  • Kunstler: It ought to be obvious that the airline industry is dying, and we have to restore the rail system asap, or else we’re not going anywhere.
  • Denis: Hell if the Italians can do it, the French can do it (Kunstler: the Bolivians do it!), the Chinese can do it, then we can do it!
• Richard Heinberg’s new book is called Peak Everything…let’s talk about the order of things you’re concerned about peaking.
  • Udall: Energy, courage, and time (“Kind of a haiku of where we’re at right now.”)
  • Kunstler: at the TED conference, the winner was this idiot who did a presentation about flying cars…right out of Popular Science 1953. The most preposterous thing you’ve ever heard in your life…that’s what the Silicon Valley geniuses thought the future would be all about…it was very demoralizing.
• Brenne ([what was that question??]…
  • Hayes: the opposite of TED would be DE(b)T…between all the forms of national debt, when we refuse to tax ourselves, when our debt is 5x our GDP, options for the future are limited.
• Oil, natural gas, coal, and uranium…is that the order of things to be concerned about peaking?
  • Kunstler: Yes, but this is basically a liquid fuels problem.
  • Hayes: Energy isn’t anywhere near my top peak worry. I know how to solve the energy problem…that’s easy compared to racism, religious bigotry, water shortages, the loss of topsoil…those are really tough issues.
  • Udall: Peak oil just punctures everything; it augurs a new era. It could be tragic or it could be a glorious time. Thank God this banal 30 years is over. We should welcome and celebrate peak oil in our lives.
  • Hayes: When you throw coal and uranium into the mix…if this were a different type of group, and you asked them which issue is their top concern, they would say climate. Iran has a very sensible approach to their long-term energy survival by pursuing nuclear. The problem isn’t the scarcity of coal and uranium, it’s the abundance of them!
• From the localized “London fog” of coal smoke, up through the larger problem of acid rain, up to climate change which is clearly a global issue. Are we at the point where all of these problems are global, not national, and we have to think of ourselves as citizens of the Earth?
  • Kunstler: that’s a sweet sentiment, but it’s wrong. The world isn’t flat, it’s ever rounder, and we’re going to be retreating into our various corners. We’re fooling ourselves if we think we’re going to have a worldwide Kum-ba-yah and a festival of worldwide cooperation.
  • Hayes: Worldwide, people are building networks in which boundaries are irrelevant, and global communities around certain things are tighter than physical neighborhoods. We must resolve bigotry and racism if we are to solve our problems. The great successes are local; fighting a freeway through town, etc. But against the combined might of all these energy industries, auto industry, etc., we have maybe $100K total on our side, yet we can still win our objectives in Congress, because we’re right.
  • Udall: A lot of the achievements we made in the 60s and 70s were made possible by coal and cheap oil. We must recognize our debt to cheap energy and food, or we’re doomed. We have 4 million Chinese underground today in pursuit of the black rock that would be the road to prosperity. We can’t go forward without recognizing our indebtedness to all forms of energy.
  • Hayes: The entire science of ecology is about how you get energy in the most effective way, from photosynthesis to higher primates and everything in between. If we have an attractive future, it’s information dense, it makes use of abundant renewable energy…maybe the fuels of the past are transitional bridges to the post oil and gas world.
  • Udall: Flows are different from fuels. Half of us wouldn’t be alive without natural gas made fertilizers. The future belongs to flows, efficiency, and conservation…but we can’t go there until we recognize how we got here. We won the wars because we had more domestic oil than they did in Germany, etc. We’ve always had a land ethic in this country; we’ve never celebrated the value and beauty of energy, and this is a mystery because it’s part of our genius.
• What metals are you concerned about peaking? At current rates of consumption, we have basically less than 25 years’ supply of most of the important metals. Does that concern you?
  • Hayes: Yes. Gold is basically a storehouse of value.
  • Kunstler: My book isn’t an ‘end of the world’ book, it basically describes a discontinuity to interrupt our assumptions and extrapolations about the direction that things are going. We’re going to have to make do with less of that stuff. But I certainly believe we’re going to persevere.
  • Hayes: What we got out of these stocks of energy is 6.3 billion people moving up almost inevitably to 9 billion people, but at that level, the access to metals, foods, etc is much more limited than it would be if we had 2 billion people. But the world isn’t necessarily better off at 9 billion than it would be with 1.5 billion people.
  • Udall: We may go back to 1.5 billion, but the journey may be fascinating, or bleak…it remains to be seen.
• Could we actually have a water infrastructure to support 9 billion people?
  • Udall: I don’t think that’s the most important limit. I would argue that food is the key limit. Water is cheap and isn’t the most important limit. Grain production is key, and is the source of the water limits.
  • Hayes: If you depend on a finite supply of water, and you’re growing exponentially, you’ve got some serious, albeit localized, problems.
• What if the limits to all these things turn out to be bell curves.
  • Udall: We’re living in a strange, bizarre, amazing moment where we live like gods and goddesses…it’s a moment.
• Kjell Aleklett thinks we might be at peak democracy…
  • Hayes: It depends on how things devolve from here. If we have self-contained and self-sustaining urban villages, we might actually have a good story for real democracy in the future. I’m interested in a principled, constitutional democracy that is removed from such forces.
• Are peaks symptoms of a more fundamental problem?
  • Kunstler: Some people didn’t like the supernatural bit at the end of my book, World Made By Hand. The point is that our beliefs about reality, our consensus, would yield to something more magic and an apprehension of a more supernatural reality outside of the bounds of life as we know it. The biggest problem we have is constructing a coherent consensus about what reality is.
  • Udall: So who is offering this new narrative?
  • Kunstler: To me, this is like the 1850s, which preceded the last great convulsion that America went through, when all of our beliefs and conventions fell into disrepair. The Whigs vanished almost as fast as AIG. The Democrats were the party of slavery. The leadership of the 1850s was made of empty cravats, and into this void stepped a lawyer with a clarifying rhetoric that defined the convulsion that was going on…and that’s sort of where we’re at today. I want to redefine and re-brand the Republican Party as “the party that wrecked America.”
  • England didn’t abolish slavery until we had abundant coal…Energy is key to overcoming these issues.
    • Udall: Ingenuity will substitute for energy.
    • Kunstler: We’ve reached peak crybabies.
    • Hayes: There are little chances for profound change in our polity. [Stories about Johnson & Nixon…] I think the Enlightenment was of crucial importance…
    • Kunstler: Don’t be surprised if all of that yields to the reality of what will happen to us.
    • Udall: We had elements of paganism, naturism, etc…
  • Is peak oil the best gateway to understanding the problem of resource overshoot?
    • Kunstler: it’s a bitch-slap upside the head: “Yo, wake the fuck up!”
    • Hayes: I don’t think people have ever had a better connection to reverence for nature than today. Pre-Enlightenment, it was all about witch hunts and craziness…
    • Udall: We’ve got a lot of that now…
    • Brenne: There seems to be an agreement between Islam, Christianity and Judaism that none of them can share an Enlightenment at the same time.
  • (They all join arms and sing Kum-ba-yah)

DAY 3 – TUESDAY, SEPTEMBER 23, 2008

8:15 am – 9:45 am

Fuel Substitutes: Reality Check on the Prime Candidates

David Hughes, Canadian Geological Survey (ret.)

Andy Weissman, Editor-in-Chief & Publisher, Energy Business Watch

Robert Rapier, Accsys Technologies PLC

Steve Andrews, Moderator

David Hughes: “Coal: Some Inconvenient Truths“

• [Some good quotes]
• Something about how we’ve got a turkey syndrome going here: Turkeys get three squares a day, a nice warm place to sleep, and everything seems to be going just fine…until Thanksgiving.
• China has been building a coal plant each week….They will have 5000 more over the next 6 years. India 200 more over the same period
• In US, 28 coal plants under construction…more in Europe. Seaborne supplies are tight, and prices have doubled in the last two years
• History
  • Chart of phenomenal reproductive success of the human race since 10,000 BC
  • Population and energy consumption since 1500…extremely high correlation
  • World energy consumption is up by 190% in the last 40 years
  • [Great charts on energy growth by region and fuel type!]
  • Per capita world energy consumption is up 761% since 1850. The average world citizen consumes as much food (?) as the average person in 1850, but uses 2.5x more energy
  • Coal is 2/3 of the total remaining hydrocarbon energy.
  • 28.6% of the world’s primary energy consumption in 2007, second only to oil…Lowest cost heat source.
  • Double the carbon footprint of gas using conventional technology….clean coal and reduce emissions almost to that of gas
  • Total world coal consumption since 1850 has been straight up…90% of the total was consumed since 1910
  • Enormous world consumption of coal since 1980s
  • On a Btu basis, 57% of the hydrocarbon energy we used in 2007 was coal
  • Middle East has no coal!
  • Price of hydrocarbons:
    • Oil: $16.15/Gj
    • Gas: $7.61/Gj
  • By energy content, peak of coal was 1998, even though tonnage is going up, due to the lower energy content of Powder River Basin coal. US now imports about 30 million tons/year from Columbia
  • Net US coal exports: 20% of production in 1981, now about 3%
• How much coal is there? Quotes from US National Academny of Sciences, June 2007
• EWG report from 2007 suggests global peak of coal in 2025, China peak in 2020.
• Uppsala forecast of 2008 says peak will be around 2030
• According to Dave Rutledge (of CalTech), we have 4.7 Tboe fossil fuels (oil, gas coal) and 90% of it will be consumed by 2076. Does not believe that there is enough recoverable carbon to meet the lowest IPCC projection on emissions (“production constrained projection”).
• EIA electricity growth: World: 92% total increase 2005-2030. Coal up 115%, nat gas up 145%, hydro and renewables will contract in market share
• 57% of US electricty generation will be from coal by 2030
• 90% of our generation capacity since 1990 is from gas, but in the future will be largely coal
• What about “clean coal?”
  • CO2 can be reduced by 25%, with 99% reduction in Sox, NOx, and 90% in Mercury
  • The most efficient technology is ultrasupercritical (USC) combustion at 43.5%, compared to 34% for a ‘60s era subcritical plant
  • Denmark is the world leader in ultrasupercritical plants
• Challenges with CCS…
  • MIT study 2007, “The Future of Coal”: Capture of emissions typically requires about 23-37% of the capital cost, depending on the type of plant. IGCC is the cheapest.
  • Best tech with heat capture vs IGCC with CCS
  • USC: 43.3% efficient
  • USC with heat capture: 70% efficient
  • CO reduction vs Old Coal with Best tech /HC: 51% efficient
  • IGCC: 38.4% efficient
  • IGCC with CCS: 31.2% efficient
  • CO2 reduction vs old coal with CCS: 85%
• Proponents of CCS often assume there is no energy problem because of the belief that coal is so abundant
• Scale and complexity of CCS…Vaclav Smil quote from Nature, May 2008…”Beware of scale!”
• Managing carbon and global warming by energy intensive and complex means such as CCS, and uncontrolled geoengineering experiments with Space Shields, seeding the atmosphere with sulphate crystals, and seeding the oceans with iron filings only compounds and exacerbates the energy issue.
• China will top out around 1.4 billion people by 2030…India will go to over 1.5 billion by 2030, to become the world’s most populous nation
• Per capita, Canada is the worst energy consumer, Europe is less than half of US per capita
• China will be the world’s top energy consumer by 2030
• World pop in 2030 will be over 9 billion, plus adding as many cars as we added people in 2007.
• Total per capita energy consumption in 2030…65x as in 1850, 89% of it non-renewable, almost all of which will peak in the first half of the century
• “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” — economist Kenneth Boulding, early 70s
• “The term ‘sustainable growth’ is an oxymoron.” – Albert Bartlett, 2000
• Joseph Tainter 2006 – Sustainability, Resilience, Complexity and Collapse
• Ever increasing complexity is one problem-solving solution to a sustainability, provided the resources are available to pay for it – both in financial and energy terms. Eventually though, it leads to collapse.
  • The Sustainability Game (Tainter 2007)_
  • Complexity…”The party’s getting close to last call”…declining EROI
• Crucial questions:
  • Will we think our way down to resilience, or will we keep our pedal to the medal to collapse?

Robert Rapier: “Biofuels: Facts and Fallacies“

• Currently works on wood acetylation technology to impregnate softwood with carbon to make it as strong as steel and other building products, making it a carbon sequestration technology.
• Has written about 150 essays for The Oil Drum and hundreds more for his blog
• The biofuel contenders: Ethanol, renewable diesel, misc. [e.g.,methanol, butanol, etc.], algae, anything-to-oil, etc.
• Corn ethanol: sets up a food vs fuel crisis, and essentially is a jobs program for the Midwest. But it’s just a bridge fuel…unfortunately it’s a bridge to nowhere and we should say “Thanks but no thanks” [Deft, oblique reference to Palin's political statements]
  • We have single oil refineries that out-produce any corn ethanol producer
  • By subsidizing ethanol we’re really subsidizing fossil fuels [!]
• Can the US emulate Brazil?
  • Sugarcane ethanol is keyed on the bagasse waste, which is a good fuel for boilers to make the ethanol (in the US we use it in animal feed). For tropical countries, sugarcane ethanol works. But it’s a solution for them, not for the US.
• Cellulosic ethanol…we’ve been working on it for 40 years. Serious logistical problems.
  • A small (50 mgy) cellulosic ethanol plant would consume a small forest of trees every year
• Ethanol from biomass gasification
  • It’s really pseudo-cellulosic ethanol
• Diesel
  • Biodiesel is an alkyl ester, not a hydrocarbon diesel
  • Green diesel is gasification/FT process with any biomass, or hydrocracking to use waste oil via hydrocracking to make a true hydrocarbon diesel.
• Misc contenders
  • LS9
  • Di-methyl ether…methanol produced from syngas, converted to DME, which can be used in gasoline or diesel engines
  • Butanol is an industrial chemical produced from propylene and synthesis gas. Bio-butanol is produced via the acetone –> butanol –> ethanol process. Commercial production via this route is not viable
• Contenders
  • Our most pressing problem is energy storage, because it enables all the renewables.
  • Various fuel options… [dense slide]
• Can we emulate Brazil?
  • Oil usage in Brazil is still 90% of Brazil’s energy needs. Annual oil usage in Brazil is 4.3 barrel per person; ethanol, 0.4 per person!
  • To be like Brazil, the US would have to quadruple its oil production or cut consumption by 75%
• The thermal depolymerization (TDP) story
  • Discover magazine had a gushing article in 2005 that was basically sci-fi…costs turned out to be much higher in 2006 update
  • Hard to scale from the lab to the commercial
  • Claims about ethanol are similarly overblown
• Algal Biodiesel
  • Algae could produce 15,000 gals oil per acre per year (1998)…
  • Biodiesel costs make it a far-fetched reality…comparable to retrieving the trillions of dollars of gold that are dissolved in seawater
• Techno-hustling: algal biodiesel investing hype
• Where politicians fail
  • By misleading the public (“we can be like Brazil”)
  • By changing energy policies every year, lack of long-term planning
  • Lack of political courage
• Solutions
  • Cease the delusion of “cheap gas for everyone”. Need a frank discussion with the public! Increase fossil fuel taxes…rebates, income taxes to make it revenue-neutral

• • Encourage energy conservation
  • Encourage alternatives
  • Encourage mass transit
  • Stop waging war with the oil companies; they have the experience!
  • Encourage behaviors that reduce energy consumption, including rebates for solar hot water (SHW), fuel efficient cars, etc.

Andy Weissman: “Time to Stop Playing Russian Roulette with the U.S. Economy –Urgent Need for a Realistic Strategy“

• Electricity & gas crisis could be just as severe as oil. All of our energy costs could go to parity (or a premium) compared to oil.
• Global LNG prices already near parity with oil. Spot prices already near parity this winter. Prices could go lower in ‘09 and ‘10 with increased LNG supply, but premium likely by early next decade.
• Demand could far exceed supply, far beyond EIA estimates, even in status quo scenario…EIA severely underestimates likely demand…projects little or no year-over-year growth! More likely, increase at least 3 Tcf/yr. Cancelling of coal-fired power plants in the last 24 months locks in the likelihood.
• Adverse impact of rising grid prices on US economy could be severe …half trillion a year shock to the US economy
• Natural gas demand could explode in the next decade
• Demand is set to spike starting right now, but it takes years to get ready for that…
• EIA just doesn’t get it about nat gas demand growth for power sector, the key driver
• Annual Energy Outlook reports for 2006, 2007, 2008 all badly underestimated power sector demand for nat gas. We have about 400 Bcf growth per year in recent years
• Future long-term projections are equally bad: say that long term growth will be satisfied by coal. Long-term nat gas demand forecasts still assumes coal provides > 80% incremental electricity. Will only occur with CCS…
• Gas use in power sector is already growing
• If CO2 restrictions enacted, increase in nat gas could be staggering…CCS can’t satisfy restrictions for 10-15 years!
• Decision-makers flying blind: EIA understating future US gas demand by as much as 6-10 Tcf/yr (16-27 Bcf/day)…leaving producers, regulators without any reliable basis for decision-making
• Potential adverse consequences from such misleading signals
• We’ve seen this story before by expanding number of gas-fired plants, only to see prices spike.
• How do we avoid being in that situation again, and having to turn to LNG?
• Urgent need for a new comprehensive strategy…
• Must assess energy efficiency first. Huge potential savings, esp. with PHEVs, CHP plants, etc. But programs often undershoot, are unrealistic, difficult to motivate implementation. We need radical and large-scale solutions, replacing most the commercial HVAC systems, including forced cut-backs, to achieve major reductions in a short period of time.
• It’s all about risks. We fall well short of our goals, resulting in spiking prices (to destroy additional demand).
• On-shore production skyrocketing, but pace not sustained due to various problems…
• LNG imports have been actually shrinking y-o-y, but that could change in the next 1-2 years for a temporary period of excess supply
• Emerging shale plays, e.g., Barnett Shale…Studies expect a potential glut, but most of the growth in unconventional gas is from tight sands and coal bed methane (CBM) and Barnett Shale. Barnett could peak early next year…takes 10 years to reach 4 Bcf/day. Haynesville shows promise but is only getting started, and is unproven. We need more evidence to see if the other shale plays are really exciting and comparable to Barnett or not.
• Conventional supply could rapidly decline over the next decade…expected decline of onshore conventional and imports from Canada.
• Factors to slow development of shale gas…
• US is dangerously dependent on LNG—we’re already committed to that without realizing it. Growth in supply certain to level off.
• Scaling nuclear…unlikely to make major contribution before 2025 or later…cost projections exploding, capacity to fabricate components limited, etc.
• Wind also likely not a near-term panacea…huge long term potential with sufficient capital. Renewables’ share of total US electricity in 10 years remains small.
• Burden for future grid growth thus falls on coal, but without CCS its future is dubious. CCS must move forward because increase in coal consumption is basically guaranteed. Under any plausible scenario, global coal use will increase > 2 billion tons per year (tpy), but we can’t achieve aggressive CO2 reduction goals without CCS.

Q&A

• Rapier: If bagasse is burned instead of returned to the soil, is it sustainable? Some waste is composted, plus ash from the burning, so it’s much better than the essential strip-mining of soil via corn ethanol…some studies say it is sustainable.
• Hughes: World coal exports are probably tight…China and India both just became net importers. US is only a slight net exporter of coal on a net energy basis. Expect prices to remain high and supplies tight.
• Weissman: Re: Barnett and other shales, much of the gas is extracted in the first 6 months, then flows quickly tail off (to a long thin tail)
• Hughes: How can we achieve a planned descent to a lower energy future? The North American way of life cannot be propagated to the rest of the planet if you look at per capita data…there isn’t enough energy in the world to do that. We need to forget BAU. The low-hanging fruit is efficiency, rethink infrastructure (e.g., suburbia), save fuels for their highest uses (e.g., CTL requires a lot of infrastructure). Reduce consumption, intelligent deployment of renewables. Realize scale problems! There are no silver bullets.
• EROI for cellulosic ethanol and algal biodiesel? Rapier: EROI for cellulosic ethanol of 18+ is nonsense, requires that residues are burned and that has never been commercially demonstrated! The 18 for sugarcane ethanol depends heavily on the value of bagasses residues. USDA has done some highly misleading work on corn ethanol, e.g,. hide energy inputs of distillers’ grains. Actual net energy of corn ethanol is probably 5% gain.
• Weissman: Isn’t Mackenzie Valley gas good for 5-7 years? The project has already been greatly delayed and its future is uncertain due to pipeline costs. Initial project target dates are based on hope, but reality falls short. Same problem has greatly delayed long-anticipated LNG supply. Grid operators assume that more gas will be available when it might not.
• Weissman: Applauds T. Boone Pickens’ Plan for getting the dialogue going. Pickens probably knows this stuff better than energy policymakers. But the full evaluation of his approach still needs to be made and quantified.
• Aleklett to Hughes: China will have to go deeper to increase its coal production, how will this affect production? EROI is an issue. We’re getting into thinner seams, decreasing EROI, and will need much increased investment to maintain production.
• Rapier: Ethanol can be useful as an octane booster, even corn ethanol (in Iowa). Where ethanol doesn’t work is as a commercially scaled substitution for gasoline.
• Rapier: Algae are good for wastewater treatment and other benefits. It’s a good area for research. It may have a future, but we need to clear away the hype first and do a sober assessment.
• When can renewables replace traditional fuels for power generation? Hughes: I don’t think there’s a hope that we could replace today’s scale of hydrocarbons with renewables…intermittency is an issue, and the scale is too large. We need to reduce demand. Feebates, using grid as storage, demand response, etc. all that are useful and should be pursued, but there’s no way to maintain BAU.

10:15 am – 11:45 am

Burn, Baby, Burn: Fossil Fuels and Climate Change

Michael Webber, Director, U of Texas, Austin

Pamela L Tomski, Managing Partner, EnTech Strategies, LLC

Randy Udall, ASPO-USA Co-Founder

Michael Webber: “Coal-to-Liquids: The Good, the Bad and the Ugly“

• Coal is an abundant resource, US has the largest reserves in the world
• Coal satisfies 53% of our power generation in the US; Petroleum is only 2% (was 17% in the 1970s)…we then switched to coal deliberately to reduce petroleum use
• Coal price is less expensive and less volatile than oil and gas, making it more attractive to investors.
• Older pulverized coal plants had 30-35% efficiency; new plants are 40-45% efficient, with heat capture goes up to 70%, vs. nat gas combined cycle plants which are ~50% efficient.
• Modern scrubbers for SOx, NOx, solids are quite effective
• CTL fuels have excellent performance characteristics, esp. for aviation. Cleaner (lower sulfur) and already flight-rated for B-52 in 50/50 blends, etc.
• CTL tech is well known and developed; originated in the 1920s, demonstrated by the Germans in WWII. There are dozens of Fischer-Tropsch plants installed worldwide with the capacity to produce hundreds of millions of barrels per year
• Bad news: resource estimates are out of date. CTL is very expensive and water intensive, etc.
• US coal definitely sufficient for 20-25 years, but might be sufficient for 100 years (NAS, 2007)
• Coal reserve estimates based on older reports with questionable methodology and optimistic recoverability estimates from 1970s.
• Running joke: CTL cost is the price of oil +$10/barrel. It’s not clear that CTL works without gov’t subsidies. Expensive up-front capital costs.
• Great Plains Synfuels Plant (Beulah, ND) started 20 years ago, profitable for the first time because of high NG price. Uses 18,000 tons of lignite to make 160 Mcf (?) of nat gas
• 4.3 million acres are under permit for coal mining, and surface mining is on the rise. Shift to surface mining driven by demand for low-sulfur Western coal…tunnel mining has been flat for decades.
• 1/3 of the energy from a coal fired power plant goes up the flue; 1/3 goes to heating waste water.
• Very carbon-intensive…CO2 emissions and carbon emissions from CTL are much higher than from other fuels.
• Carbon balance of CTL is at best even with conventional petroleum. CCS only makes sense for large stationary point sources like power plants, CTL, GTL. Carbon capture does not work with tailpipes. CTL will never be carbon neutral.
• A lot of water is needed…nat’l average for a thermoelectric plant: withdrawals are 21 gal/kWh, consumption [assume this means evaporation] is 0.5 gal/kWh.
• Water scarcity can be a limiting factor for CTL plant permitting. CTL requires ~7:1 water to fuel ratio. Conventional gasoline uses 1-2.5 gal water per gal of fuel produced. Irrigated biofuels use 1000+ gallons per gal of fuel.
• Outlook confusing: Unclear policy setting, technical issues, etc.
• Projections of coal use vary from 70% increase by 2030 over 2005, to possible 50% decrease over the same time!
• Key uncertainties: carbon policy, availability of alternative resources, CCS
• Coal future is highly affected by carbon policy and energy policy…emissions policies are key
• Will CCS work? Will IGCC (integrated gas combined cycle) work? What’s the best way to sequester carbon? Will renewables work? At what scale, and when?
• CO2 is approximately the same mass and size as other flue gases (O2, N2, H2)
• Carbon capture lowers efficiency and is expensive and capital-intensive. Requires significant materials and heat input. Capturing 90% of the CO2 lowers output by 30%, and requires significant absorbing chemicals. Scalability is really unknown.
• 2/3 of coal is transported by railroads, which are already operating at capacity. Tonnage has increased even as rail miles have decreased. Plus delays and increasing prices. Can rail ramp up for CTL adoption?
• USAF wants alt liquid domestic fuels. USAF is the world’s largest energy customer. Buying fuels from the countries we attack with those fuels just doesn’t feel right…deep philosophical problem for USAF. USAF goal: fuel 50% of its fleet by 2015 with CONUS sources…total demand: ~3.3 B gal/yr of jet fuel. Fuel of choice is CTL, but also looking at biofuels: algae and cellulosic ethanol.
• EISA 2007 section 526 essentially blocks CTL due to emission limits! Unless carbon footprint is less than “conventional petroleum sources” then it will be prohibited. What’s “conventional” though?
• The Energy Problem has three components: resource depletion, national security vulnerabilities, and environmental degradation. US solution must balance these three priorities. Most options for new fuels or technologies solve one or two priorities, but not all three.
• Coal is the elephant in the room. The energy transition will be partly determined by whether we replace coal with something better, or fix coal’s problems.
• While we have this ambiguity we don’t know the way forward.

Pamela Tomski: “Commercial CCS Deployment: Current Status and Reality Check“

• Assumptions:
  • Population and economic growth will drive demand
  • Coal will continue to dominate
  • No silver bullets
  • A solution to the CO2 problem should provide at least 1 Gt [gigaton, or billion tons] carbon/yr by 2050. Total US coal plants produce about 2 Gt/yr
  • CCS can play a key role
  • No climate change legislation this year or next but it’s on the horizon
• Key CCS developments:
  • [Key milestones from 1991-2008]…CCS more central to the policy debate worldwide
• A long list of issues that affect commercial CCS deployment…Human capital, policy, legal, technology, regulatory, NUMBY (not UNDER my backyard)
• Scientific consensus is that substantial CO2 reductions are possible, 15-50% for stabilization.
• Three primary CO2 capture approaches…
  • Geological storage: saline formations, EOR, enhanced CBM, depleted oil & gas fields
• CO2 capture pros and cons
  • Commercially available but not large scale.
  • Cost, cost, cost
  • Energy penalty from 20-40%
  • Post-combustion is retrofit opportunity.
  • Oxyfuel – 100% capture potential but not commercial; O2 production energy intensive
  • Only two IGCC plants in operation in the US
  • CO2 transport: well-established network, ~3,600 mi for CO2 EOR. Excellent safety record. Dedicated interstate CO2 network unlikely…uncertainty about size, configuration and cost. Europe is looking at tankers for export of CO2, looking at subsea sequestration, or send to ME via tanker for EOR.
• Geologic storage options. Saline formations offer greatest potential. Analogues available in oil and gas reservoirs, gas storage, acid gas disposal, long term storage tech
• Injection activity vs. CO2 emissions chart: we do have experience with long term large scale injection
• CO2 EOR/storage potential: increased domestic oil production of ~48 b bbl. A “clearer path” to storage.
• CO2 trapping mechanisms:
  • Injection > 1 km deep
  • Primary trap beneath low permeability rock
  • Secondary trap: dissolves in water, grabbed by capillary forces, converts to solid
• Complex slide: Leaks, Releases, Remediation. Potential leakage routes and remediation techniques…
• CCS systems must be close to sources and linked to storage sites.
• World CCS projects under way…dozens of sites
• First CCS project was Sleipner (North Sea) Snovhit (Barents Sea) in Norway, started in 1996. 1 million tons CO2/yr injected into reservoir.
• Another major CCS project: Salah, Algeria…test bed for CO2 monitoring, started in 2004, 1 million ton CO2/yr injected.
• World’s largest storage project: Weyburn, Canada. Started in 2000. $80 million+ project by EnCana. Est. 30 m tones CO2 stored over life of project
• DOE regional partnerships: field validation tests. FutureGen could have been (and may one day be) in Illinois. Would have been the world’s first large scale CCS demo using IGCC tech but was quashed and is now being restructured.
• Reality checks:
  • Scale: 1 Gt carbon/yr = CCS for 800 coal plants (equiv to doubling the efficiency of the world’s car fleet)
• “Trust NO cost estimates” – CCS configurations can vary significantly on location, tech, fuel type, etc. Commodity & materials costs have gone through the roof. Methodological assumptions vary…
• Roughly 40-80% increase in grid power costs estimated due to CCS costs
• Mixed views of CCS: the public, NGO, institutional investors, Greenpeace, NDRC
• There is currently no regulatory framework for commercial CCS. Various states are working on it, as are IPCC, World Resources Institute. EPA has a proposed rule published July 29, 2008, public hearings to be held in October.
• Human Capital: energy industry faces severe human capital shortages even without CCS. CCS summer programs under way to train new people…
• [Slide on policy developments]
• China and India coal demand growth regardless of what US decides to do about CCS
• Maslow’s pyramid of energy policy needs: Access to commercial energy at bottom, then security of supply, then cost efficiency, then natural resources efficiency, then social acceptability at the top

Randy Udall: “Peak Oil and Global Warming: What’s Missing from the Climate Debate“

• Has studied coal emissions for 20 years…is convinced of anthropogenic CO2 issue
• Warren Isley: “Man’s long adventure with knowledge as been a climb up the heat ladder…”
• 4 million Chinese entered a coal mine this morning; 100 of them will die this week
• Global carbon emissions exploded exponentially with fossil fuel exploitation since rough 1950
• Some of our emissions today will still be there 500 years from now
• About 2 billion of the world’s 6 billion people are still cooking over animal dung and other low-density fuels, and living low on the energy food chain.
• Are we taking the smoke for granted, and the fire for given?
• All the EIA charts are great if you just change supply to demand. [Great snark!] Appetite for fuel is soaring in the future, and this worldview is widely shared, including among environmental groups.
• In the cornucopian view, fuels are both abundant and cheap in the coming decades. World oil price projections are laughable.
• IPCC models seem absurd to the peak oil community. Climate modeler responded that they are extremely skeptical of the peak oil (and peak energy) notions, “We’ve done a few 300-year scenarios that have some shortages in them, but even that may not be realistic. This is especially so with coal!” “Do you really think there is only another 60 years of fossil fuel left? I don’t think so.”
• Roger Bezdek has a new paper showing that total world fossil fuel projection will peak ~2017 at ~11.5 BTOE/yr. [Wow, a more pessimistic forecast than I have seen previously.]
• The gap between these two worldviews is staggering…it blows your mind…how can these views be so opposed?
• What are the climate change modelers missing?
  • They believe that coal is 5,000-8,000 GtC (gigatons of carbon)
  • Unconventional fossil fuels: 15,000 to 40,000 GtC
  • Soils: ~1,500 GtC
  • Biomass: ~ 500 GtC
  • Nat Gas: ~250 GtC
  • Oil ~270 Gtc
• Climate modelers really don’t understand energy, and have dismissed out of hand any “Mad Max” type scenarios…
• Nested assumptions:
  • Energy scarcity is a myth
  • Fuels are superabundant
  • No reason to hoard or fight over them
  • Globally traded from haves to have-nots
  • Coal-to-anything will expand significantly
  • Fuel will remain cheap for a century
• What the IPCC is saying is that there is plenty of fuel for another century of exponential energy consumption
• Consider Al Gore vs. Charlie Maxwell:
  • Charlie says we will hit $300 a bbl for oil by 2015
• Is our obsession with climate change dangerous? It’s distracting us from the more immediate peril we’re in. Consider the example of a suicidal pilot hijacking Egyptair 990… [tells story]
• Gore’s Flight Plan: Protect posterity. We’re headed to 550 ppm by 2100, committing us to a 3 degree C increase, with sea level rise; global emissions must be controlled
• Charlie Maxwell’s flight plan: Preserve prosperity, energy is the original currency and we should save and conserve with utmost efficiency.
• If oil exports are peaking, then we are facing the most serious crisis in the history of manned space flight…
• How big is our “carbon budget?” James Hansen [now] says 350 ppm (which we passed 25 years ago). EIA vision (BAU) gives us over 6 degrees C increase. Path for 50% chance of avoiding delta T avg > 2 degree C is much more demanding than path for 50% chance of avoiding > 3 degrees C. Disagreement over the target befuddles global efforts.
• Hansen’s model of fuel peaking: you have to begin phasing out coal globally by 2025
• “Wyoming boasts enough coal to weld every tie that binds, drive every wheel, change the North Pole into a tropical region or smelt all hell!” Fenimore Chatterton

• Bumper sticker: “Earth First! We will drill the other planets later”
• Peak oil is going to make resolving the climate problem much easier. It’s really a gift!

Q&A

• Webber: CCS for EOR is favored because the pipelines & infrastructure already exist…it’s really a way to “practice” CCS…but the carbon balance isn’t really there.
• Tomski: When might we hope to achieve the target of 1 Gt C/yr? Really depends on when we start…cancellation of the FutureGen project was disappointing. Needs proper political support.
• Webber: US points out China is largest emitter; China responds that they’re much better per capita (and with a one child policy has avoided 300 million users)
• Udall: Our “global” problem is really among about 10 nations, a quest for sustainable energy solutions. Consider the enormous funding and scientific talent thrown at climate change vs. almost nothing for peak oil, which is going to arrive with all the subtlety of an atom bomb…it’s enough to drive you crazy.
• Webber: Some economists are beginning to recognize environmental constraints (limits to growth), if not the energy constraints.

Lunch

“Congressman Roscoe Bartlett Award”: Given to Rep. Terry Backer and Debbie Cook (Mayor of Huntington Beach, CA and ASPO-USA Board Member)

12:00 pm – 1:30 pm

Michael Boyd, President, The Boyd Group Inc.

Introduced by Randy Udall, ASPO-USA Co-Founder

Udall: A retrospective on the history of flight: The Wright Brothers, Charles Lindberg, Amelia Earhart. Today 8 million flights carry 600 million passengers each year.

Michael Boyd: “US Airline Industry Trend Forecast: Not New Metrics. A New Industry“

• An airline is an excellent investment…just use your ex-wife’s money and get even.
• Oil prices = Change in business fundamentals. The entire system of travel, distribution and logistics is in line for major changes…It was built on cheap oil. Whole shifts in the way things are made and sold are coming.
• “Just in Time” warehousing may need to revert back to the traditional
• Proximity of goods & raw materials is more important than just-in-time inventory practices.
• We may have a global economy in the future, but it will be different from today
• Think of the air travel industry like the old Roman Empire…Barbarians are forcing it to shrink
• Fuel costs reducing the number of profitable businesses using air travel.
• Air cargo, charter airlines…
• New fleet mixes…smaller jets are coming out, that means some of the markets they used to service will shrink too.
• Less potential for new service….more potential for reduced service.
• Mr. Wizard isn’t coming to the rescue.
  • In the past, breakthroughs in technology have offset cost increases in the airline industry.
  • The average cost of air travel, adjusted for inflation, dropped 50% from 1978-2004. That’s going to change, big-time.
  • No tech breakthroughs will address the fundamentally higher costs of fuel.
  • Conclusion: changes in business patterns. Changes in spending patterns.
• Other problems:
  • Air Traffic Control. No upgrades from Washington represent real improvement. Plan of delays and higher fares. Nothing is being done.
  • Air Service Rationing: With no real plan, the “solution” will be to constrict the air transportation system. Gee, will airlines cut service to Phoenix, or to Pellston?
  • Larger airlines, larger costs. Airports will need additional funding to accommodate new fleets. Washington has no clue.
  • The funding of the industry is a joke with various small fees expected to support airport expansion, etc.
  • Labor: unhappy campers. They’ll leave the bargaining table with big increases. Or with strike posters. One or the other
  • Environment vs. second social agendas: Air travel is a positive part of our economy. There are two things you never criticize: religion, and Amtrak.
• Responding to the market
  • Flights are essentially full – over 75-80% is “full”…and flights have been “full” for the last 4-5 years.
  • A diverse fleet is needed to assure air access for communities!
  • We aren’t Europe. Very limited ground transport. No air service in a region means a problem for economic growth. We can put a man on the moon, but are totally incompetent at creating a rail network that works!
  • Realities of air service: access to the globe, frequency, and matching capacity to demand.
  • (Somewhere in) Mississippi, huge businesses are making parts for helicopters, rail, air, etc., but mostly for Asian companies!
  • Common belief: it’s all due to fuel prices. Reality: it’s mostly due to myopic vision and rearview-mirror planning.
• The new traffic dynamic:
  • It’s not just Tokyo-Newark. It drives rural America traffic, too.
  • Point: a exec from Taichung isn’t just going to Detroit, he’s going to AL and CT and OH too. There are many interrelated economic development opportunities from a single flight
  • India: highly developed economy, stable legal system, expanding investment in the US
  • China: number one global economy…Chinese investment in US will grow geometrically in the next decade. Huge potential for business growth in both directions. Watch for inroads by Chinese carriers, and Latin-China growth
  • US is key stopover/transfer point from China to South America
• Global Portal:
  • Dubai is example of being a global portal between areas. E.g., Dallas-FW, Detroit/Metro.
  • A traditional airline hub inter-connects cities.
  • Mega-connect points between regions, cities
  • If you want to go from Sao Paolo to Asia, you’re going through the US
• Forecasts:
  • US enplanements in 2008: -2.5% to -3.2%
  • 2009: -7.5% to -9.2%
  • US fleets: 100-120 small jets gone; 3-5% retirements
  • Off-schedule flights (aka delays): up at least 10% from 2008
  • Bankruptcies: On the margin. No majors. (Big carriers won’t go bankrupt)
• Myths
  • There is no real over-capacity. In fact there is increasing price traction in the industry
  • The hub system is outdated & inefficient: See what happens to Lubbock, El Paso & Ft. Wayne without it! There isn’t one single market to support air travel for Ft. Wayne Indiana.
  • Southwest is “The Model” for all airlines. They don’t make any money. Without the fuel hedging, they would lose money.
• Non-Solutions
  • Peak period pricing. Capping flights. Penalizing small aircraft.
  • The DOT has a plan to fix things: force people to pay more, or they can just stay home
  • The problem is that these clowns are taken seriously.
  • This isn’t the 7^th avenue Subway. There are no “peak periods” per se.
  • People and business can’t be reservoired like water: one 747 can’t replace 7 small frequent flights
• US fleets will gravitate toward the mid-capacity sizes
• As of June 2008 the average fare all-in was $191; net to airline was $160-ish…. Airline industry now has only a 14% profit margin. So they’re nickel and diming us.
• Every airline in the world is obsolete at $100/oil.
  • Flying less, and parking airplanes will only make the large dysfunctional system smaller
• Not “better”, just “less bad”
  • 20% of flights are “defect”…failed to deliver as promised. Differences between “best” and “worst” are minor. Airlines assume moving airplanes is the main objective, but it’s not. “Airlines operate on automatic pilot.”
  • Airlines have no production management
• Get the data right
  • Bureau of Transportation Statistics is stuck in the Eisenhower age. Data shows that fuel consumption went down