Of Ghosts, Unicorns and Energy Policy: Will Arctic Oil, Natural Gas, MIT, Paris and Pickens Save the Day?

August 6, 2008 at 7:39 am
Contributed by: Chris

In my regular article for Energy and Capital this week, I examine some of the popular new solutions to the energy crisis and attempt to figure out if they’re real or fantasy.

Of Ghosts, Unicorns and Energy Policy

Will Arctic Oil, Natural Gas, MIT, Paris and Pickens Save the Day?

By Chris Nelder

In my past life as a computer programmer, there were two classes of problems that particularly bedeviled me.

The first I called “ghosts,” which are problems that don’t exist. For example, I’d spend hours trying to find a bug in my code, not realizing that the reason it wasn’t working was due to some bug in processes far outside my code. The wrong behavior would mysteriously appear and disappear, like a ghost, when I was running the exact same code.

The second I called “unicorns,” which are solutions that don’t exist. I’d spend hours or days attempting to devise a solution that ultimately could not work, for reasons that weren’t apparent until I actually tried to build it, and realized it was a dead end.

Lately, evaluating our energy policy options has started to feel a lot like programming. It is getting increasingly difficult to determine which options are real, and which aren’t, and when, and to what extent.

I have already addressed a few popular ghosts in recent columns, like those evil oil speculators, the non-existent Chinese oil drillers off the coast of Cuba, and the horrible Demmycrats who have stymied offshore drilling.

This week, we’ll take a look at a few potential unicorns, and see if they’re for real.

Arctic Oil Bonanza!

Two weeks ago, the USGS issued a press release titled “90 Billion Barrels of Oil and 1,670 Trillion Cubic Feet of Natural Gas Assessed in the Arctic,” which claimed to be “the first publicly available petroleum resource estimate of the entire area north of the Arctic Circle.”

Ever willing to jump at any bit of brightly-colored bait, the press swallowed it hook, line and sinker. “Enough supply to meet current world demand for almost three years,” they gushed. “May hold one-fifth of the world’s undiscovered, technically recoverable reserves of oil and natural gas,” and “the race to claim territorial ownership of the resources already has begun.”

Wahoo! Pack up the truck, Jed, we’s a-goin’ ta the North Pole!

More knowledgeable analysts who know how to dig for the details had quite a different view. When it comes to oil and gas production in the Great White North, my first call is J. David Hughes, a Canadian geoscientist with nearly forty years’ experience. In this week’s Peak Oil Review, he explicated the new study beautifully.

The real story is much more nuanced. Those of you who have read my book know that oil and gas reserves are estimated according to their probability. An “F95” estimate means that there is a 95% chance of the stated amount being found, and an “F5” estimate means there is only a 5% chance. (Sometimes a “P” is used instead of an “F.”)

Detailed data stating the probabilities is only available on the USGS web site for 7 of the 25 assessment areas included in the Arctic report, which comprise about 32% of the oil and 17% of the natural gas in the whole. For those areas, Hughes calculated that the F95 estimate was 3 billion barrels, the F50 estimate was 11.8 billion, and the F5 estimate was 95.7 billion. Out of that, the USGS reported a “mean” estimate of 28.9 billion! It’s not clear what their justification for that claim is, but that amount is clearly well above the F50 estimate.

Hughes cites the “West Greenland – East Canada” assessment as a particularly egregious example of fudging the numbers, where the “mean” estimate given had an actual probability of less than 10%!

Sadly, such shenanigans are common in oil data reporting. It takes a keen eye to sort out fact from fiction.

The real bottom line on the Arctic’s resources will not be known until it is drilled. But it doesn’t really matter that much. Even if it does turn out to contain three years’ worth of oil and 16 years’ worth of gas, those numbers are only useful as a rough way of estimating how much is ultimately recoverable. In reality, the production will be hardly noticeable, because it will take many decades to recover, at low flow rates, and it will be the most expensive oil and gas ever produced. And an unknown portion of it, perhaps 25%, might accrue to the U.S.

It might buy us a little more time to adjust to a post-peak world, but by that time I expect the world will either be panicking and disrupting normal commerce in oil and gas, or well on its way to switching over to renewables. Either way, the world’s oil and gas markets will be very different from what they are today.

But you wouldn’t know it from the breathless reports of “90 billion barrels!” in the press.

A 50% Increase in Natural Gas Reserves!

Next in our cavalcade of chicanery is the new report from the American Clean Skies Foundation, a natural gas industry organization founded by gas producer Chesapeake Energy (CHK).

The report claimed that the US has 2,247 Tcf (trillion cubic feet) of gas reserves in place, a 47% increase over the 1,530 Tcf estimate of 2006. They claimed that current technology and prices make it possible to recover much more gas than previous thought from domestic shales like the Haynesville, Marcellus, Barnett and Bakken formations.

“This study authoritatively refutes head-on the mistaken belief that we do not have sufficient supply,” said Denise Bode, president of ACSF.

Again, the press jumped all over it. “Industry report says U.S. natural gas supply abundant,” blared Reuters, and the rest of the press gang were quick to assert that the US now has enough gas “to last up to 118 years.”

Chesapeake CEO Aubrey McClendon was all over the media in the wake of the announcement, and gave testimony before the House Select Committee on Energy Independence and Global Warming. Chairman Ed Markey asked him if natural gas supplies were adequate to reduce our electricity generation from coal to 35% from its current 50% share. “Today, I say yes,” McClendon replied.

A closer look at the numbers reveals a slightly different story. A discussion thread on The Oil Drum pointed out that the 118 year estimate is based on our current production (not consumption) of gas, which is at the rate of about 19 Tcf per year. Our consumption is actually about 4 Tcf higher, at 23 Tcf, reflecting our continued reliance on imported natural gas.

So that 118-year assertion relies on several very questionable assumptions: 1) that we will not increase our current level of natural gas consumption for over 100 years; 2) that we will continue to be able to import about 20% of our current gas supply for over 100 years; 3) that the price of gas will remain near or above its current levels. With natural gas, price is a key determinant in whether or not a given gas deposit is considered “economically and technically recoverable.”

If we intend to shift electricity generation toward natural gas and away from coal, then we can already toss out that first assumption.

Now, I don’t want to sound too critical of Chesapeake. I think it’s a good company and a good investment, and I have owned it and promoted it myself. Nor do I want to appear unduly pessimistic about the potential of the shale plays. After all, we have promoted them vigorously here in the pages of Energy and Capital. I am only trying to put them in a realistic, credible, big picture perspective.

Is there gas in them thar shales? You bet there is. Is it profitable? At today’s prices, yes, absolutely, much of it is. But one has to look carefully at the numbers to guess exactly how much, and realize that ultimately, it’s not the recoverable total, but the flow rates that really matter.

The same is true, by the way, for the oil potential of the Bakken Formation. Truly, it is an enormous and profitable formation, and the companies we have picked out for the $20 Trillion Report are well positioned to profit from it. But ask yourself: do you really know the difference between the 500 billion barrel and the 4.3 billion barrel estimates usually proffered for it? What’s the probability of the 4.3 billion number? Will it bring down US gasoline prices? (If you can’t answer those questions, you should probably read up on our past articles on the Bakken and check out the USGS survey reports.)

I hope this finally puts to rest the questions I keep getting along the lines of “But what about the Bakken?”

Boone’s Wind Boom!

No doubt by now you have heard about the Pickens Plan, the initiative started by Texas oil billionaire T. Boone Pickens to promote his “bridge” solution to a post-peak oil future.

It’s a reasonably straightforward and practical idea: take the 22% of our current electricity supply generated from natural gas, and replace it with wind over 10 years. Then we use the natural gas to run our vehicles, offsetting 38% of our demand for foreign oil. We could generate 22% of our electricity supply from wind with his plan, Pickens claims, and avoiding spending $266 billion a year on foreign oil. (If you haven’t watched his presentation, check it out here. It’s smart stuff.)

As usual, however, the crucial details remain to be explained. How and when will all those natural gas fired power plants, many of which were built in the last 10 years and are far from the end of their useful, fully amortized lives, be decommissioned? What is the cost and the time-to-market for millions of natural gas powered cars?

As I reported in my recent article on plug-in hybrids, the annual replacement rate for vehicles is slow, at somewhere between 3-6% percent. But that is with a normally functioning economy and a normal supply of cheap fuel and cheap steel, which is not an assumption we can necessarily make for the future.

Nor is the financing picture quite clear. On Larry King’s show on Monday night, he claimed that the full $1 trillion cost of the program could be borne by private industry. But critics like Anthony Rubenstein, a sustainability consultant who was the force behind California’s Proposition 87 in 2006, has raised questions about the $5 billion bond measure that Pickens has put on the November ballot in California to support his plan by providing incentives and rebates for natural gas vehicles.

There is another important question about the Pickens Plan: How does it square with the assertion that we have “118 years’ worth of natural gas?” If we switch over to natural gas for vehicles, I think it’s safe to say that we cannot make any of the assumptions that I discussed in the previous section. Our rate of consumption will almost certainly go up. Our natural gas imports are far from certain over the next 100 years, and our recently-built LNG import facilities are suffering badly from poor economics.

Nor can anybody predict what the plan would do to prices. Such a transition would almost certainly raise the price of natural gas to bring it into parity with oil, while at the same time depressing oil prices. Imported oil may continue to be attractively priced in such a scenario, making the possible offset of foreign oil less certain than Pickens claims.

Still, it’s a reasonably good idea, and it deserves closer attention. It sure beats the pants off most of the ideas I’ve seen from Washington lately. But it could be a unicorn, if it’s not done right.

MIT Hydrogen Breakthrough!

Finally, we must take a few minutes to take a closer look at the much-ballyhooed “breakthrough” announced by MIT last week, which made headlines like “MIT Scientists Unlock Nirvana of Solar Power Storage” and “‘Major discovery’ from MIT primed to unleash solar revolution.”

The gushing press that issued from the announcement was enough to drown a sane man. “This is a major discovery with enormous implications for the future,” enthused one analyst.

So what is this “major discovery?”

Remember when you studied electrolysis in school, hooking up a battery to a couple of probes in a glass of water to make hydrogen and oxygen?

Well, it’s like that. Only the MIT design uses a catalyst made of cobalt and phosphate, so theirs is a “catalysis” process instead of a straight electrolysis. The advantages of the design are that it can run at room temperature in regular water, using materials that are abundant and cheap, and that it is apparently more efficient (note: I have not been able to verify these claims).

The hydrogen thus produced can be stored and then consumed in a fuel cell to generate electricity, so it opens a path to storing energy without batteries.

Thus, the technology has been billed as a breakthrough for solar, because it could store energy overnight, when the sun isn’t shining. But that’s really a hyped-up misdirection. It’s not about solar, it’s about hydrogen.

Unfortunately, the crucial details here are still unexplained. What’s the net efficiency of using this catalyst to generate the hydrogen? I was able to turn up one reference stating that it might be 80%, vs. 70% for standard electrolysis, but I wasn’t able to verify that by press time. If you have read my article on the hydrogen economy last year, you know that losses in storage reduce the net energy of any fuel cell based system. Finally, the efficiency of the fuel cell stack-typically cited as 50% but variable depending on the conditions-must be taken into account.

Because this is strictly a laboratory development, and has not yet become an application in the real world, we also know nothing about the relative cost of the proposed system.

We do know however, without consulting any numbers, that using solar PV to generate electricity to drive off hydrogen from water, then storing the hydrogen, then using it in a fuel cell stack to make electricity again, will incur far more losses than simply collecting the original solar-generated electricity and storing it in a battery. According to the Second Law of Thermodynamics, every time you convert energy from one form to another, you lose a little, usually in the form of heat.

Without knowing the relative costs of each approach to storing energy, or being able to calculate how many such systems could be built and deployed, and when, it’s impossible to say whether the MIT “breakthrough” is even interesting.

We can already deploy regular solar PV systems with battery backup in the field as fast as we can build them, which isn’t nearly fast enough. And those systems are simpler, stabler, and have been proved in the field for over 30 years. For applications where more storage is needed than is economical with batteries, there are other technologies also under intensive R&D that might prove more efficient and economical than hydrogen, including thermal systems, flywheels, and hydraulics.

This new approach to the hydrogen fuel cell is unlikely to become commercial for at least another decade, and even then it will still be a more “lossy” approach to energy storage. It may work some day as small residential-sized energy storage system, but leaping from this process to fantasies about hydrogen powered vehicles makes no sense at all, when the efficiency of straight electric vehicles is practically and theoretically much higher.

Professor Daniel Nocera, who led the MIT project, dismissed the obstacles ahead blithely: “The basic science is done,” he said, “now it’s engineering.”

That reminds me of another old saw from my software engineering days. We rolled our eyes when some marketing type breezed in with an impossible-to-build idea, and then dumped it on us with the standard line, “Implementation is left as an exercise for engineering.”

Lots of great ideas never made it off the shop floor, because in the real world, they turned out to be impractical or uneconomical. It’s far too early to say if this MIT development is a unicorn or not, but I think I see a bump on its forehead.

Paris’ Latest Score

On a lighter note, one of the most sensible energy proposals I have heard yet came out of the mouth of the unlikeliest of sources: Paris Hilton. If you’re one of the six people who haven’t seen it yet, you can watch it here.

If only our political leaders had as much sense as Paris does.

Until next time,


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