The Great Oil Swindle: why the new black gold rush leads off a fiscal cliff
Published in Ceasefire Magazine
UPDATE: Various versions published Le Monde diplomatique, Truthout and other publications
Headlines
about this year's World Energy Outlook
(WEO) from the International Energy
Agency (IEA), released mid-November, would lead you to think we are literally
swimming in oil.
The report
forecasts that the US will outstrip Saudi Arabia as the world's largest oil
producer by 2017, becoming "all but self-sufficient in
net terms" in
energy production - a notion reported almost verbatim by media agencies
worldwide from BBC News to Bloomberg. Going even further, Damien
Carrington, Head of Environment at the Guardian,
titled his blog: "IEA report reminds us peak
oil idea has gone up in flames".
The IEA
report's general conclusions have been backed up by several other reports this
year. Exxon Mobil's 2013
Energy Outlook
projects that demand for gas will grow by 65 per cent through 2040, with 20 per
cent of worldwide production from North America, mostly from unconventional
sources. The shale gas revolution will make the US a net exporter by 2025, it
concludes. The US National Intelligence Council also predicts US energy independence
by 2030.
This last
summer saw a similar chorus of headlines around the release of a Harvard
University report by Leonardo Maugeri, a former executive with the Italian oil
major Eni. "We were wrong on peak oil", read environmentalist George
Monbiot's Guardian headline.
"There's enough to fry us all." Monbiot's piece echoed a spate of
earlier stories. In the preceding month, the BBC had asked "Shortages: Is 'Peak Oil'
Idea Dead?". The
Wall Street Journal pondered, "Has Peak Oil Peaked?", while the New York Time's leading environmental columnist Andrew Revkin took
"A Fresh Look At Oil's Long
Goodbye".
The gist of
all this is that "peak oil" is now nothing but an irrelevant meme,
out of touch with the data, and soundly disproven by the now self-evident
abundance of cheap unconventional oil and gas.
Burning our bridges
On the one
hand, it's true: there are more than enough fossil fuels in the ground to drive
an accelerated rush to the most extreme scenarios of climate catastrophe.
The
increasing shift from conventional to unconventional forms of oil and gas - tar
sands, oil shale, and especially shale gas - heralds an unnerving acceleration
of carbon emissions, rather than the deceleration promised by those who
advocate shale as a clean 'bridge fuel' to renewables. According to the CO2 Scorecard Group, contrary to industry claims, shale
gas "cannot be credited" with US emissions reductions over the last
half-decade. Nearly 90 per cent of reductions "were caused by decline in
petroleum use, displacement of coal" by "non-price factors"
rather than shale, and coal's "replacement by wind, hydro and other
renewables." To make matters worse, where natural gas saved 50 million
tonnes of carbon by substituting coal generation due its lower price, it
generated 66 million additional tonnes across commercial, residential and
industrial sectors.
In fact,
studies show that when methane leakages are incorporated into an assessment of
shale gas' CO2 emissions, natural gas could even
surpass coal in terms
of overall climate impact. As for tar sands and oil shales, emissions are 1.2 to 1.75 times higher than for conventional oil. No wonder
the IEA's chief economist Fatih Birol remarked pessimistically that
"the world is going in the wrong direction in terms of climate
change."
But while the
new evidence roundly puts to rest the 'doomer' scenarios advocated by staunch "peak
oil" pessimists,
the global energy predicament is far more complicated.
Scaling the peak
Delving
deeper into the available data shows that despite being capable of triggering
dangerous global warming, we are already in the throes of a global energy
transition in which the age of cheap oil is well and truly over. For most
serious analysts, far from signifying a world running out of oil, "peak
oil" refers simply to the point when, due to a combination of below-ground
geological constraints and above-ground economic factors, oil becomes
increasingly and irreversibly more difficult and expensive to produce.
That point is
now. US Energy Information Administration (EIA) data confirms that despite the
US producing a "total oil supply" of 10 million barrels per day (up by 2.1 mbd since January 2005)
world crude oil production and lease condensate - conventional production -
remains on the largely flat, undulating plateau it has been on since it stopped
rising in around that very year at 74 million barrels per day (mbd). According to John Hofmeister, former President of Shell Oil,
"flat production for the most part" over the last decade has
dovetailed with annual decline rates for existing fields of about "4 to 5
million bpd."
Combined with "constant growing demand" particularly
from China and emerging markets, he argues, this will underpin higher oil
prices for the foreseeable future.
The IEA's WEO
actually corroborates this picture - but the devil is in the largely overlooked
details. Firstly, the main reason US oil supply will overtake Saudi Arabia and
Russia is because their output is projected to decline, not rise as previously
assumed. So while US output creeps up from 10 to 11 mbd in 2025, post-peak Saudi output will fall to 10.6 mbd
and Russia to 9.5 mbd.
Secondly, the
report's projected increase in "oil production" from 84 mbd in
2011 to 97 mbd in 2035 comes not from conventional oil,
but "entirely from natural gas liquids and
unconventional sources" (and half of this from unconventional gas
including shale) - with conventional crude oil output (excluding light tight oil)
fluctuating between 65 mbd and 69 mbd, never quite reaching the historic peak of 70 mbd in 2008 and
falling by 3 mbd sometime after 2012. The IEA also does not forecast a return
to the cheap oil heyday of the pre-2000 era, but rather a long-term price rise
to about $125 per barrel by 2035.
Thirdly, oil
prices would be much higher if not for the fact that governments are heavily subsidising fossil
fuels. The WEO revealed that fossil fuel subsidies increased 30 per cent to $523 billion
in 2011, masking the threat of high prices.
Therefore,
world conventional oil production is already on a fluctuating plateau and we
are now increasingly dependent on more expensive unconventional sources. The
age of cheap oil abundance is over.
Fudging figures
But there are
further reasons for concern. For how reliable is the IEA's data? In a series of
investigations for the Guardian and Le Monde, Lionel Badal exposed in 2009
how key data was deliberately fudged at the IEA under US pressure to artificially inflate official
reserve figures. Not only that, but Badal later discovered that as early as
1998, extensive IEA data exploding assumptions of "sustained economic
growth and low unemployment", had been systematically suppressed for political reasons according to
several whistleblowers.
With the
IEA's research under such intense US political scrutiny and interference for 12
years, its findings should perhaps not always be taken at face value.
The same
goes, even more so, for Maugeri's celebrated Harvard report. By
any meaningful standard, this was hardly an independent analysis of oil
industry data. Funded by two oil majors - Eni and British Petroleum (BP) - the report was not
peer-reviewed, and contained a litany of elementary errors. So egregious are
these errors that Dr. Roger Bentley, an expert at the UK Energy Research Centre,
told ex-BBC financial journalist David Strahan: "Mr Maugeri’s report
misrepresents the decline rates established by major studies, it contains
glaring mathematical errors... I am astonished Harvard published it."
What the scientists say
In contrast
to the blaring media attention generated by Maugeri's report, three
peer-reviewed studies published in reputable science journals from January
through to June this year offered a less than jubilant perspective. A paper
published in Nature by Sir David King, the UK's former
chief government scientist, found that despite reported increases in oil
reserves, tar sands, natural gas and shale gas production via fracking,
depletion of the world’s existing fields is still running at 4.5 percent to 6.7
percent per year. They firmly dismissed notions that a shale gas boom would
avert an energy crisis, noting that production at shale gas wells drops by as
much as 60 to 90 percent in the first year of operation. The paper received
little, if any, media fanfare.
In March, Sir
King's team at Oxford University's Smith School of Enterprise & the
Environment published another peer-reviewed paper in Energy Policy,
concluding that the industry had overstated world oil reserves by about a
third. Estimates should be downgraded from 1150-1350 billion barrels to 850-900
billion barrels. As a consequence, the authors argued: "While there is
certainly vast amounts of fossil fuel resources left in the ground, the volume
of oil that can be commercially exploited at prices the global economy has
become accustomed to is limited and will soon decline." The study was
largely blacked out in the media - bar a solitary report in the Telegraph,
to its credit.
In June - the
same month as Maugeri's deeply flawed analysis - Energy
published an extensive analysis of oil industry data by US financial risk
analyst Gail Tverberg, who found that since 2005 "world [conventional] oil
supply has not increased", that this was "a primary cause of the
2008-2009 recession", and that the "expected impact of reduced oil
supply" will mean the "financial crisis may eventually worsen."
But all the media attention was on the oil man's oil-funded report - Tverberg's
peer-reviewed study in a reputable science journal, with its somewhat darker
message, was ignored.
What happens when the shale boom...
goes boom?
These
scientific studies are not the only indications that something is deeply wrong
with the IEA's assessment of prospects for shale gas production and
accompanying economic prosperity.
Indeed, Business Insider
reports that far from being profitable, the shale gas industry is facing huge
financial hurdles. "The economics
of fracking are horrid", observes US financial journalist Wolf Richter.
"Production falls off a cliff from day one and continues for a year or so
until it levels out at about 10 per cent of initial production." The
result is that "drilling is
destroying capital at an astonishing rate, and drillers are left with a
mountain of debt just when decline rates are starting to wreak their havoc. To
keep the decline rates from mucking up income statements, companies had to
drill more and more, with new wells making up for the declining production of old
wells. Alas, the scheme hit a wall, namely reality."
Just four months ago, Exxon's CEO, Rex Tillerson, complained that the
lower prices due to the US natural gas glut, although reducing energy costs for
consumers, were depressing prices and, thus, dramatically decreasing profits.
This problem is compounded primarily by the swiftly plummeting production rates
at shale wells, which start high but fall fast. Although in shareholder and
annual meetings, Exxon had officially insisted it was not losing money on gas,
Tillerson candidly told a meeting at the Council on Foreign Relations: "We
are all losing our shirts today. We're
making no money. It's all in the red."
The oil
industry has actively and deliberately attempted to obscure the challenges
facing shale gas production. A seminal New York Times
investigation last year found that despite a public stance of extreme optimism,
the US oil industry is "privately skeptical of
shale gas."
According to the Times, "the gas
may not be as easy and cheap to extract from shale formations deep underground
as the companies are saying, according to hundreds of industry e-mails and
internal documents and an analysis of data from thousands of wells." The
emails revealed industry executives, lawyers, state geologists and market
analysts voicing "skepticism about lofty forecasts" and questioning
"whether companies are intentionally, and even illegally, overstating the
productivity of their wells and the size of their reserves." Though
corroborated by independent studies, a year later such revelations have been
largely ignored by journalists and policymakers.
But we ignore
them at our peril. Arthur Berman, a 32-year veteran petroleum geologist who
worked with Amoco (prior to its merger with BP), on the same day as the release
of the IEA's 2012 annual report, told OilPrice
that "the decline rates shale reservoirs experience... are incredibly
high." Citing the Eagleford shale - the "mother of all shale oil
plays", he points out that the "annual decline rate is higher than 42
per cent." Just to keep production flat, they will have to drill
"almost 1000 wells in the Eagleford shale, every year... Just for one
play, we're talking about $10 or $12 billion a year just to replace supply. I
add all these things up and it starts to approach the amount of money needed to
bail out the banking industry. Where is that money going to come from?"
Chesapeake
Energy recently found itself in exactly this situation, forcing it to sell
assets to meet its obligations. "Staggering under high debt,"
reported the Washington Post,
Chesapeake said "it would sell $6.9 billion of gas fields and
pipelines - another step in shrinking the company whose brash chief executive
had made it a leader in the country’s shale gas revolution." The sale was
forced by a "combination of low natural gas prices and excessive
borrowing."
The
worst-case scenario is that several large oil companies find themselves facing
financial distress simultaneously. If that happens, according to Berman,
"you may have a couple of big bankruptcies or takeovers and everybody
pulls back, all the money evaporates, all the capital goes away. That's the
worst-case scenario." To make matters worse, Berman has shown conclusively
that the industry exaggerated EURs (Estimated Ultimate Recovery) of shale wells
using flawed industry models that, in turn, have fed into the
IEA's future projections. Berman is not alone - writing in Petroleum Review,
US energy consultants Ruud Weijermars and Crispian McCredie argued
there remains strong "basis for reasonable doubts about the reliability
and durability of US shale gas reserves" which have been
"inflated" under new Security & Exchange Commission rules.
The eventual
consequences of the current gas glut, in other words, are more than likely to
be an unsustainable shale bubble that collapses under its own weight,
precipitating a supply collapse and price spike. Rather than fuelling
prosperity, the shale revolution will instead boost a temporary recovery
masking deeper, structural instabilities. Inevitably, those instabilities will
collide, leaving us with an even bigger financial mess, on a faster trajectory
toward costly environmental destruction.
So when is
crunch time? According to a new report from the New Economics Foundation out last month, the arrival of
'economic peak oil' - when the costs of supply "exceeds the price
economies can pay without significantly disrupting economic activity" -
will be around 2014/15.