WE ARE AT THE BRINK OF AN ENERGY DISASTER

The U.S. is Facing a Huge Natural Gas Crisis 

            “Our ignorance is not so vast as our failure to use what we know.”    Dr. M. King Hubbert

            As a former member of the Natural Gas Transmission and Distribution Advisory Committees of both the Federal Energy Administration and the Department of Energy, as a former member of the Natural Gas Supply Committee of the Federal Power Commission, as a former chairman of the Natural Gas Task Force of the National Oil Jobbers Council (since renamed The Petroleum Marketers Association of America), as a former president of two oil companies and one who has invested in many oil and gas drilling ventures, I have long been aware that our political leaders – because they have been concerned primarily with short-term benefits that make them popular with uninformed voters have promoted short-sighted policies that have squandered our finite natural gas reserves and have left this nation unprepared for a rapidly approaching gas shortage.  World oil production is also peaking and its supply will soon no longer satisfy the growing demand.  This section explains the reasons behind the worsening oil and gas shortages and why this nation is heading toward an economic collapse with unimaginable suffering and unending despair.       

Hubbert’s Complete-Cycle Analysis and Gas Production’s Decline

            The late Dr. M. King Hubbert was a research geophysicist who was employed by the Shell Oil Company between 1943 and 1963.  After leaving Shell, he worked for the US Geological Survey.  He was probably the best known geophysicist in the world to the general public because of his startling prediction, first made publicly in 1949, that the fossil fuel era would be of very short duration. 

            Starting in 1926, Dr. Hubbert began conducted a continuing study of the energy resources of both the United States and of the world.  The results of his studies were published at intervals since 1949.  They involved the making of estimates of the oil and gas resources occurring in different regions.  But more importantly, they produced a method of anticipating the approximate dates when certain critical events could be expected to occur.  These events are the peaks in the rate of discovery, the peaks in the proved reserves, and most important of all the peaks in production. 

            In 1956, while working for Shell, Dr. Hubbert developed a mathematical model that predicted that U.S. oil production would peak around 1970.  Although he was discouraged from disclosing his findings by his employers because he felt morally obligated to disclose the bitter truth he presented them anyway.  In 1956 there was a meeting of petroleum engineers under the auspices of the American Petroleum Institute.  Hubbert was invited to give an address at this meeting on the overall energy picture.  When he presented his paper, his peers ridiculed him.  At that time there was a favorite dictum of the petroleum industry that stated that “the United States has all of the oil it will need for the foreseeable future.”

            Hubbert’s paper produced a technique of analysis that had not been previously used, which he called “the complete-cycle analysis.” It is based on the fact that the amount of oil or gas in the ground is fixed during any time of interest in human history.  It had taken 600 million years to accumulate that oil and gas and we have been consuming it in an extremely short period of historical time.  Because the amount of oil or gas in any given geological region is both finite and fixed, if a curve is plotted of the production rate as a function of time, this curve will have certain well-defined properties.  The curve begins at zero when the oil or gas is first discovered.  It then rises, usually at an exponential rate, as drilling proceeds and additional discoveries are made.  Eventually, however, the rate of new discoveries begins to decline and the curve of production reaches its upper limits, then declines gradually to zero when production ceases.  Such a curve, extending from the initial to the final zero production rate, encompasses what Dr. Hubbert described as “the complete production cycle for a given region.”  When Hubbert graphed the oil production for the lower-48 states, he discovered that the United States would reach its peak of oil production in between 10 and 14 years.  The actual peak was reached in 15 years, in 1971.                            

            In 1961-1962, while still employed by the Shell Development Company, Hubbert served as a member of the Committee on Natural Resources of the National Academy of Sciences, an advisory group to President John F. Kennedy.  He was chairman of the energy study of that Committee and wrote the Committee’s report, Energy Resources (National Academy of Sciences - National Research Council Publication 1000-D, 1962).  A principal object of the report was to apprise President Kennedy of the energy situation as of 1962 and to alert him to serious impending shortages.  This 1962 report estimated that the peak in the rate of proved discoveries of crude oil in the lower-48 states had occurred in about 1957, that the peak in proved reserves had been just reached in 1962, and that the peak in production would probably occur in about 1968, give or take a year or two.

Hubbert’s Method of Plotting Rates of Discovery, Production and          

Reserves During a Complete Discovery and Production Cycle 

 dQD/dt = discovery       dQP/dt = production         dQR/dt = reserves

Dt = time between discovery and production peaks

The most important thing that can be learned from Dr. Hubbert’s work is that, regardless of the size of the reserves of either oil or gas, production will not climb to a peak and then drop vertically.  It will pass over a peak and then decline to zero.  The peak in production will normally occur when about half of the initial reserve has been produced. Hubbert stated that every estimate of future discoveries is, in effect, a prediction of the approximate date at which the peak of production should occur.  We will have reached that peak when, in spite of increased drilling efforts, it will no longer be possible to increase or maintain production.  This is happening now with North American natural gas because of the increasing production decline rates being caused by depletion.

Some of the so-called natural gas experts within the Department of Energy and within the gas industry have belittled Dr. Hubbert’s methodology because he seriously underestimated the domestic natural gas reserves.  For his 1962 report, Hubbert had estimated that the total amount of US natural gas still to be discovered to be between 958 and 1,053 Tcf (trillion cubic feet) and predicted that the peak in gas production would come in about 1976 and that the peak in gas reserves would come in about 1969.  Instead, the peak in reserves came in 1967 and there were sharp drops in the gas reserves in the years that followed.  The peak in production came in 1973, three years earlier than what Hubbert had estimated in his 1962 report.  Though the gas shortage arrived sooner than what Dr. Hubbert had projected, something unexpected happened.  No one knew it at the time, but the gas shortage of the 1970s had not been caused by the depletion of the natural gas it had been caused by the depletion of that gas that was associated with petroleum deposits.  It had also been largely caused by the federal price controls on all interstate natural gas providing no incentives for producers to search for other sources. 

            Drilling costs increase exponentially with the depth of a well.  The much higher costs for drilling very deep wells, combined with the risks of drilling dry holes, combined with the low oil and gas prices of that time, had provided no incentive for companies to drill deep exploratory wells.  Then, in the early 1980s, higher oil prices and the phased-in decontrol of the wellhead gas prices, and the introduction of new technologies that lowered the risks of drilling dry holes, increased the payouts.  In an effort to reduce our dependence on OPEC oil, the federal government used price incentives to encourage deep drilling to find more domestic oil.  Although the deep drilling did not find much oil, it did find some nonassociated dry gas that previously had not been known to exist.  Prior to these discoveries, petroleum geologists had believed that natural gas was always associated with petroleum.  As a result of these new deep-gas discoveries and the higher gas prices, the producers began drilling more deep exploratory wells.  This drilling increased the new discoveries, which in turn increased the size of the proved gas reserve base. 

            Just as Dr. Hubbert had previously done to accurately estimate the peaking of US petroleum production, he had based his calculations of the domestic gas reserves on that data produced from past discoveries.  The fact that Hubbert had underestimated the gas reserve base because the data had been skewed, in no way diminishes the significance of his complete-cycle methodology.  Though Hubbert’s estimate of the undiscovered reserve base had been low, the logic behind his analysis had been sound.  The discovery of the deep nonassociated gas simply meant that, instead of the gas production peaking once, there would be a second peak.  

The “Modern” Thinking About The U.S. Gas Supply

            The following two graphs were obtained from a paper entitled Translating Lessons Learned From Unconventional Natural Gas R&D to Geological Sequestration Technology, by Vello A. Kuuskraa and Hugh D. Gutherie.  Kuuskraa is with Advanced Resources International, Inc. and Guthrie is with the DOE.  The graph on the left shows the “old” thinking about the gas supply and was adapted from Dr. Hubbert’s 1974 graph.  It shows Hubbert’s forecast of gas production that was made 5 years before the nonassociated gas was discovered. The pyramid on the right shows the so-called “modern” thinking.  Its green top represents the 870 Tcf (trillions of cubic feet) of gas that has already been produced; the yellow is 157 Tcf of proved reserves; the red under the yellow represents undiscovered reserves, including new fields, coal-bed methane, gas shales, tight gas sands, and low Btu gas. The blue volume below the red represents sub-volcanic plays, new tight sand plays, new gas shale plays, and deep coal bed methane.  The pyramid’s red base represents methane hydrates and “other.”  Methane hydrates are snow-like solids under the seafloor where the pressures are high and the temperatures are low.  Because methane hydrates are solids, they cannot migrate to form large deposits.  They are a big unknown.

  

            Not only does the pyramid include unconventional undiscovered gas reserves that independent geologists believe cannot be commercially produced, the “modern” thinking completely ignores the lead times required to increase production from those unconventional sources to replace that production that will be lost due to the rapid depletion of the conventional sources.  Far more important than the size of those unconventional reserves that may or may not exist, is how fast production can be increased from those sources to maintain production levels, and whether there will be sufficient economic incentives to go after them. 

News Reports Confirm that U.S. Gas Production has Peaked

            The production of North American natural is peaking and the production-decline rates of our producing gas fields are increasing.  The Wall Street Journal on January 31, 2001 ran a story entitled, “Natural-Gas Producers Report That Output Continues to Fall.”  The report stated:  As high natural-gas prices drive up home-heating and other bills, producers of the fuel are reporting that production continues to decline, suggesting that today’s high prices won’t be falling significantly anytime soon.

            “About 20 large natural-gas producers, accounting for close to 40% of domestic production, have so far reported fourth quarter results.  The result: Natural-gas production in the quarter was down 0.8% from the third quarter and off 3.7% from the fourth quarter of 1999, according to figures compiled by Lehman Brothers.  Analysts, surprised by the trend, say gas production will need to start growing for prices to return to more traditional levels.

            “Analysts had been expecting higher natural-gas production in the fourth quarter after record selling prices prompted increased drilling.  Baker Hughes, Inc. an oil-service company, says 879 rigs were actively drilling for natural gas last week, up 41% from the year-earlier week.

            ¼A number of factors have conspired to keep production from growing, industry executives and analysts say.  Because natural gas is difficult to ship, most gas used in this country is produced here or piped from Canada.  During the past few years, producers have used technological advances to squeeze more gas out of older fields in the U.S., Canada and offshore in the Gulf of Mexico.

            “But such new technologies have reached their limits in many cases, and those older fields are being emptied of reserves more rapidly than companies can find new deposits of natural gas.  ‘Technology was winning for a while, but now Mother Earth is winning,’ Lehman’s Mr. Driscoll says.”     

            The following was written by C. Bryson Hull (Reuters, March 26, 2001).  In this report, Mr.Hull quotes Chairman and Chief Executive William Wise of the El Paso Corporation.

            “The production plateau comes despite the highest rig count in 10 years, 1163, reported for the week ending March 23, according to Baker-Hughes, Inc.; (NYSE:BHI - news).  Of the total, 904 of the rigs are drilling for gas.

            "'The culprit is shrinking* decline rates, which have offset the drilling surge.  Better well completion techniques and technology plus robust commodity pricing have driven steeper decline rates in the Gulf of Mexico,' Wise said.  'Decline rates are now nearly 50 percent per year, as opposed to 17 percent in 1970,' he said. 

            "'What not everybody realizes is the same thing is happening in Canada,’ Wise said.  'Decline rates that moved from 20 percent per year to 40 percent per year from 1990 to 1998, he said . . ."

*Wise meant increasing decline rates, or declining production. A decline rate of 40% means that 40% of their wells must be replaced each year to maintain the same production as the year before.

The Electric Utilities Are Throwing Gas Usage “Out of Whack"

            The gas shortage will not only be caused by the declining supply that follows the peaking of production, but also by the growing demand, caused largely by a shortage of power generating capacity and the threat of rolling blackouts over much of the country.  If we ignore the CO2 that is produced from burning all fossil fuels, the fastest and most environmentally friendly way to increase generating capacity is to install gas-fired “peakers.”  By trying to solve our electric-power problem by using these gas-fired plants, we are only digging ourselves into a much deeper hole.

            A story in the Chicago Tribune of April 9, 2001, entitled, “Surge is seen in gas-fired power plants,” stated that Skip Horvath, the president of the Natural Gas Supply Association, had said that 7,300 megawatts of gas-fired power plants went on line in 1999; 22,400 megawatts went on line in 2000, and another 53,300 megawatts were projected for 2001 for a total of 83,000 megawatts.  If all these new gas-fired generating plants were the most efficient combined-cycle turbines that can operate at efficiencies of 60 percent, they would consume 21.41 million cubic feet of gas per year for each megawatt of capacity utilized.  Multiplying that 21.41 million cubic feet by the 83,000 megawatts of total capacity added gives a total of 1,777 billion cubic feet of gas that would be consumed by all these new plants per year – if they were operated at full capacity.  If they were to operate at capacity factors of 90 percent, those power plants would consume the equivalent of 8.59 percent of the total US natural gas production. 

            The Department of Energy, in their Annual Energy Outlook 2001, stated, “The share of natural gas generation is projected to increase from 16 percent in 1999 to 36 percent in 2020, and that the coal share is projected to decline from 51 percent to 44 percent, because electricity industry restructuring favors the less capital-intensive and more efficient natural gas generation technologies.”  Apparently no one in the electric utility industry or in the Department of Energy has asked the key question: Will there be enough gas to run all those power plants?  Virtually all the independent petroleum and gas experts agree that the answer is no. 

EIA’s Unrealistic Forecasts of Gas Supply Can Cause Disaster  

            The US consumed approximately 23 trillion cubic feet (Tcf) of natural gas in 2001, a volume that, at one atmosphere of pressure, would fill a cylinder having a diameter of 152 feet that would reach to the moon, a distance of 238,856 miles.  With the “easy” gas reserves already produced, with drillers having to probe deeper and further offshore in more complex operations, with the production decline rates of our producing gas fields increasing, the probability that we can consistently find new gas reserves at rates equal to our present extremely high rate of production is so infinitesimally small that it virtually does not exist.

            Though there is no possibility that we can find enough new gas fast to replace those volumes being consuming and even though North American gas production is already starting to decline, the EIA continues to publish forecasts that there is nothing to worry about that there will be plenty of gas and there will be continuing low gas prices until at least 2025.  The following graph is from the EIA’s Annual Energy Outlook 2001 [DOE/EIA-0383(2001)].  The graph shows the EIA’s estimate that domestic gas production would increase to 29 Tcf by 2020 and that imports will increase to 7 Tcf, to allow the total gas consumption to reach 36 Tcf.

 

A Realistic Forecast of US Gas Production

                Colin J. Campbell for many years worked for the oil industry as an exploration geologist.  He is both an academic and a businessman. Educated at Oxford and holding a Masters Degree, he has served as a geologist for Oxford University, Texaco, British Petroleum and Amoco (prior to the BP, Amoco merger).  He has served in executive positions with Shenandoah Oil, Amoco, Fina and was Chairman of the Nordic American Oil Company. He has served as a consultant on oil for the Bulgarian government as well as for Statoil, Mobil, Amerada, Total, Shell, Esso and for the firm Petroconsultants in Geneva. He is the editor for the Association for the Study of Peak Oil and a Trustee of the Oil Depletion Analysis Center in London.  His career took him to oil producing nations throughout the world.  He is now associated with PetroPlan, advising government and industry.  His views are provocative yet carry the weight of a wide international experience.  A few years ago, Dr. Campbell, together with a well respected French petroleum analyst, Jean Laherrére, estimated that the total US discovered gas reserves were 152 Tcf and that the undiscovered producable reserves were 168 Tcf, giving a total for the remaining producable reserves in the lower-48 states of 320 Tcf.  In contrast, the Energy Information Administration (DOE) estimated that the discovered reserves were 177 Tcf and that the undiscovered producable reserves were 1,042 Tcf, giving a total of producable reserves of 1,219 Tcf.  The following graph compares these two estimates.

            By providing their unrealistic forecasts of the future gas supply and prices, the EIA has encouraged the public and industry to make decisions that continue to rapidly increase this nation’s dependence on a fuel that – though plentiful and cheap in the past – will quickly become increasingly scarce and very expensive.  Because so much of our economy depends on gas for both fuel and chemical feedstock, the damage that the approaching gas shortage can cause that economy is very difficult to exaggerate.


Reasons Behind EIA’s Wildly Unrealistic Gas Supply and Price Forecasts

            One reason for the EIA’s overly optimistic projections stems from their practice of always adding the additions, revisions, and extensions of previously discovered gas fields to the current year not to the years when the original discoveries were made.  By not backdating, the EIA has created the false impression that our drillers are continually discovering new reserves of natural gas, when in fact they are not.  The following chart illustrates how, by not backdating, the line that represents new discoveries is climbing, indicating a continuing upward trend of the cumulative discoveries that is projected out into the future by the red arrow.  However, when the additions and revisions are properly backdated, the trend line flattens.   

Based on graph by C. Campbell

In addition to those distortions caused by the EIA’s failure to backdate, they have seriously overestimated the total producable reserves by including large quantities of gas that are locked up in tight sand formations.  A report, New Technology for Tight Sands, was produced by three men each from one of the following organizations: the Gas Research Institute (GRI), the Resources Engineering Systems (Munich), and the Potential Gas Agency of the Colorado School of Mines.  After defining tight sands and stating that they are known to contain significant volumes of natural gas, the paper states that only an extremely tiny percentage of that gas can be produced using existing technologies.  The paper stated that its purpose was to investigate the possibility of a fourfold increase in the annual U.S. gas production in the post-2015 time frame.   The central theme of the paper is to access whether this is a real possibility or maybe simply a ‘pipe dream,’ over the medium-term (20 years or more). The current understanding of the tight gas resource and past experience with production enhancement technique from nuclear detonations to hydraulic fracturing indicate that significant gas recovery can be achieved only by positioning a wellbore in the near vicinity of the formations to be produced.  This would require tens of thousands of wells to be drilled to reach the production levels targeted.  This becomes economically and environmentally challenging   The paper also stated that, assuming that there would be significant technology development, increasing the production fourfold over the next 25 years would require 110,000 wells.  The report also stated that there is “little incentive for the technology efforts required to significantly increase the production from the tight sands due to: the high risk nature of the effort required, the low quality of the resource and resulting economics, and worldwide opportunities in the energy industry with more attractive economics.”  In other words, why invest millions to produce this slow-flowing gas in North America if there are far more lucrative drilling options in other parts of the world?     

            As of now, only an extremely small percentage of the tight-sand gas can be produced profitably by stimulating the low permeability gas reservoirs by hydraulic fracturing.  This involves the injection of sand-containing fracturing fluids into the wellbores under extreme pressures a very expensive process that can cost far more than the drilling costs.  Even where this process is most productive, the capital costs are extremely high and the flow rates are low.  Interestingly, though there is no known technology that can economically produce most of the tight-sands gas, the EIA’s estimates of our nation’s producable reserves include huge quantities of this gas.  Incredibly, their estimates of future domestic production are based on the assumption that the required technology will soon be developed.    

            Another difference between the Campbell and Laherrére estimates and those of the EIA is that the EIA includes in their estimate of producable reserves those reserves that are too small or too isolated to justify the laying of the pipelines required to transport the gas from the wells. 

            Both the estimates of producable reserves from Campbell and Laherrére, and from the EIA include gas from gas shales and coal-bed methane.  Though a percentage of the gas shales can be productive – especially from the Bartlett Shale in and around Austin, Texas – most cannot because of their low permeability.  Although coal-bed methane can be produced economically by removing the water from the saturated coal beds to release the attached methane, those reserves are known to be small.  A common problem with producing gas from both the gas shales and the coal beds is that the extraction processes can cause serious water pollution. 

            The next graph was reproduced from the EIA’s Annual Energy Outlook 2001 [DOE/EIA-0383(2001)].  It shows that, despite the fact that record drilling efforts are failing to boost gas production and despite the increasing production decline rates, the EIA continued to project increasing domestic gas production from four of the five listed sources. The graph shows that the greatest increase would come from the nonconventional sources just described, increasing from about 4.8 to 9 Tcf, for an increase of 87½ percent.  That part of the text that is underlined with red states that the EIA is projecting that most of this unconventional gas would come from those same tight sands that cannot be recovered economically with existing technologies.

      

The next graph, on the left, compares the EIA’s projection from their Annual Energy Outlook 2003 that US gas production will increase to 25 Tcf by 2020 to a far more realistic forecast that our domestic gas production will soon be declining at a rate of 5 percent per year.  The graph to the right was reproduced from the EIA’s Annual Energy Outlook 2004.  I added the red line to show a 5% per year decline in our domestic gas production.  About the only difference between the graphs in the EIA’s Annual Energy Outlook 2003 and their Annual Energy Outlook 2004 is that, instead of the domestic gas production reaching 25 Tcf by 2020, they projected that it would not reach that level until 2025. The EIA graph from Annual Energy Outlook 2001 shows the domestic gas production reaching 30 Tcf by 2020.

  

The EIA Production Forecasts Have Been Influenced by the GRI

Another reason for the EIA’s unrealistic forecasts of gas supplies and prices is that they have apparently been brainwashed by the self-serving propaganda that has emanated from an organization whose members consist of the natural gas transmission and distribution companies.  The Gas Technology Institute (formerly known as the Gas Research Institute, or GRI) does technical research that is funded by various sponsors, including their member companies, government agencies, or any other group willing to fund a research program.  In addition to working on the development of new technology for producing gas from tight formations, coal seams, and gas shale, the GRI also has produced some very interesting supply and price forecasts.  Although GRI’s forecasts were similar to those produced by the EIA, they were even more unrealistic.  In 2001, GRI published 2000 Policy Implications of the GRI Baseline Projection of U.S. Energy Supply and Demand to 2015.  The GRI paper projected that the domestic gas production would reach 27 Tcf by 2015 and that imports, almost all from Canada, would increase the total supply to about 34 Tcf.

Though the GTI no longer publishes their Baseline Projections, they did forecast that the total US gas demand would reach 32 Tcf by 2015.  Both the GTI and the EIA have been counting heavily on that gas from unconventional sources to satisfy a growing demand.  However, even when hydraulic fracturing is used to increase the production from the low permeability gas reservoirs, it can take hundreds of wellbores into those tight formation to produce the same volumes of gas per day as can flow from just one good conventional well. Because few new gas reservoirs have been discovered in recent years, the depletion of our conventional reserves will come too quickly for any efforts to increase gas production from the tight sands to have a significant effect on the supply.

The EIA’s “Flat-Earth” Economists

Another reason for EIA’s unrealistic forecasts is that the Department of Energy employs whom many independent petroleum geologists contemptuously describe as “flat-earth economists.”  These economists tell us that there is little reason to be concerned about our future gas supply, that, as the wellhead gas prices go up, adequate new domestic supplies will be discovered and produced.  These “experts” have not learned the basic law that describes the depletion of all finite resources.  That law states:

               Production starts at zero.

              It  then raises to a peak that can never be surpassed.

  Once that peak has been passed, production declines until the resource is depleated.

            Though  increased gas prices can alter the shape of the production curve, they cannot significantly effect the size of the producable reserves.  The more that is produced now the faster the production will decline later.  The law describing the depletion of finite resources cannot be repealed by Congress, the Department of Energy, or by wishful thinking.  Because of this law, no credence should be given to any supply forecasts for oil or gas that does not include an estimate of when production will peak.


Will Production Increase Because the Growing Demand Will Require It?

            The DOE’s Annual Energy Outlook 2001 contains an amazingly stupid statement to support their forecast of an increasing supply.  The report states, “U.S. natural gas production is projected to increase from 18.7 trillion cubic feet in 1999 to 29.0 trillion cubic feet in 2020, an average annual rate of 2.1 percent, due to growing demand¼  In other words, the DOE was forecasting that the production would increase to 29 Tcf by 2020 simply because our growing demand will require that increase.  This logic can be compared to an owner of an exhausted old gold mine who believes there must be a lot more gold in his mine because he will need that gold to maintain his opulent life-style.

An Example of How the EIA Fools the Public

In response to an earlier paper that I sent Dr. Colin Campbell, he sent me a long e-mail in which he said, “You have to realize that all these government departments, including the DOE and USGS, just cannot bring themselves to face reality because it is politically unpalatable, so all their reports are slanted and misleading.  In fact they show skill in revealing the truth in a manner that no one sees it.”

The following block, reproduced from the World Book, Year Book 2002, provides a good example of how the EIA has fooled the public.  According to the EIA data, domestic gas consumption was at 22.8 Tcf in 2000 and the proved reserves were 167.4 Tcf.  When this block was produced, our domestic production was at about 18.7 Tcf, giving a proved reserve to production ratio of almost 9 years.  According to the EIA, the recoverable reserves would last for 66 years at the then current rate of production.  If we multiply that 18.7 Tcf by the 66 years, we get a total of 1,214.4 Tcf for both the discovered and undiscovered producable reserves - virtually the same as shown in the earlier graph that compares the EIA’s grossly optimistic estimates of total US producable gas reserves to those of Dr. Campbell and Jean Laherrére.  To get their producable reserve figures that high, the EIA included huge amounts of that tight-sand gas that cannot be produced economically with existing technology.

            Although the inclusion of all of that tight-sand gas in the producable gas reserves is a major fault with EIA’s projections, there’s another fault that is even more serious. The EIA stated that our domestic gas reserves would last for 66 years if production remained steady at the then current rate of 18.7 Tcf.  That is a meaningless statement because our domestic gas production will not remain constant at that or any other level for 66 years and then one day drop to zero.  Even though the domestic gas production must peak and then decline, all of the EIA’s graphs show our domestic gas production continuing to increase.   

            The data for past production and imports in the next two graphs is from the EIA.  The yellow block (left graph) represents the EIA’s estimate of the total producable discovered and undiscovered gas reserves that would supposedly last for the 66 years, if production remained at the constant level of 18.7 Tcf.  As previously stated, this estimate includes huge quantities of gas that are locked up in tight formations that cannot be economically produced with existing technology.  The left one-third portion of the yellow block that extends the length of the green bars represents the total discovered and undiscovered producable reserves as estimated by Dr. Colin Campbell and Jean Laherrére. 

            The graph on the right shows that, if our domestic production were to increase to the 25 Tcf that the EIA is forecasting, the total of the two orange areas A and B cannot exceed the gray area C.  If we should accept the EIA’s unrealistic estimate that the total of our producable gas reserve were 1,214 Tcf and that domestic production will reach 25 Tcf by 2025, then the production must plummet after 2025.  Though the collapse of the gas supply in just 20 years would lead to an economic disaster, the situation is actually far worse than that.  Because of the distortions that the EIA has used to inflate their estimates of producable reserves, there is a high probability that the decline in production will much more nearly resemble the curved line that is based on the estimates of the producable supply from Campbell and Laherrére and that the start of the rapid decline is imminent.

  

Thirteen LNG Terminals Will Not Prevent the Gas Shortage

            On December 18, 2003, Secretary of Energy Spencer Abraham announced that the US will need up to 13 liquefied natural gas import terminals by 2025 to supply the additional gas that will be needed to produce electricity and for industry.  He said that the LNG imports could account for 15% of total US natural gas supply by 2025.  The Secretary grossly underestimated the LNG requirements because he believed the propaganda coming from his own Department of Energy’s EIA. 

            Even though US domestic gas production has remained flat at about 19 Tcf, the DOE is projecting it will increase to 25 Tcf by 2025.  The DOE is forecasting this 31.5% increase, even though there have been few new gas discoveries, production from the producing fields is declining, and only a small fraction of the tight-sands gas can be produced economically with existing technology.  For all these reasons, instead of our domestic gas production increasing to the 25 Tcf that the EIA is forecasting, it is much more likely to decrease to less than 10 Tcf.   

            The US presently has four LNG unloading terminals.  If our domestic gas production should decline to 10 Tcf, to import enough LNG to satisfy the DOE’s projected consumption of 29.4 Tcf, we would need to import 19.4 Tcf.  Instead of the 9 additional LNG terminals that the Secretary said that we will need, we would need 54.  Based on the $800 million cost of the LNG facility that ChevronTexaco is planning on the Gulf, those additional facilities would cost roughly $43 billion.  To those costs must still be added the costs of all the insulated tankers needed to transport the gas, each costing about $150 million.  

            On May 14, 2004, The Wall Street Journal ran a front-page article entitled “Fears of Terrorism Crush Plans for Liquefied-Gas Terminals.”  The article said,The vocal opposition to LNG terminals comes as the fuel grows ever more crucial to the U.S.  Demand is rising for natural gas in this country -- but most North American supplies are flat or in decline, leading to soaring prices and growing risk of heating-fuel shortages and blackouts.  Ninety-six percent of the world’s natural-gas supplies are located in places that are geographically remote, such as West Africa or Qatar  

Other Countries Will Also Be Importing More LNG and Oil

            The US will not be the only nation needing to rapidly increase its imports of liquefied natural gas.  Other countries also will be increasing their imports of both LNG and oil because of their own increasing demands and the declining production from their own gas and oil fields. The International Energy Agency (IEA), an adviser to 26 industrialized countries, raised its forecast for world oil consumption for 2004 for the sixth straight month, as the US economy recovers and world demand surges. 

            The biggest increase in the demand for oil is coming from China and India.  The exploding demand for imported oil in Southeast Asia is the result of their rapidly growing economies. China’s oil consumption has been increasing by 10% each year, doubling in just seven years, and it is now exceeded only by that of the United States.  Because China knows it will need more oil, it is making long-term oil deals in the top exporting countries, including Saudi Arabia, Russia, Nigeria, Sudan – and even Canada.

In other countries much of the increasing demand for oil and gas imports is being caused by the depletion of their own reserves.  Oil production has peaked for more than 50 oil-producing nations, including the US in 1970 and Britain in 1999.  Libya’s oil production peaked in 1970, Iran topped out in 1974, Saudi Arabia in 1981, Indonesia in 1997, Europe as a whole peaked out in 2000.  The list goes on and on. 

A report entitled Petroleum Potential of the United Kingdom Continental Shelf in Promote United Kingdom 2003 was published by the United Kingdom Department of Trade and Industry.  This report contains the following amazingly forthright graph that projects the decline of their oil and gas production to near exhaustion by 2020.  These estimates support earlier forecasts of UK production made by Dr. Colin Campbell and the Association for the Study of Peak Oil & Gas (ASPO), a network of scientists, affiliated with European institutions and universities, having an interest in determining the date and impact of the peak and decline of the world’s production of oil and gas due to resource constraints.  Because of the UK’s declining production, their requirements for imported oil and LNG will explode. 

 

            Unfortunately, the United Kingdom is only one of many of the industrialized countries that will be experiencing a growing imbalance between their growing energy demands and the declining production from their own domestic fields.  These imbalances will place impossible demands on the fuel exporting countries, most of which are also some of the world’s most politically unstable. 

World Oil Production Is Peaking

            The Christian Science Monitor (January 29, 2004), stated, “The rate of discovery of worldwide oil reserves, after declining for 40 years, has slowed to a trickle.  In 2000, there were 16 large discoveries of oil, eight in 2001, three in 2002, and none last year, notes James Meyer, director of Oil Depletion Analysis Centre in London.”

            The next two graphs were produced by ASPO.  The first graph shows ASPO’s projection of petroleum and natural gas liquids, those conventional liquid hydrocarbons

            
     

that can be produced from wells and do not have to be dug from the earth.  The graph is divided into geographical areas, with the zones indicated in the key.  The second graph projects the world’s production of all fluid hydrocarbons, including natural gas.

 

The United States consumes approximately 20 million barrels of oil per day, or about one-forth to the world’s total production.  When we had the oil embargo of 1973, we were importing 35% of our oil.  In 2004, we imported 58%.  In 1973 there were still many oil fields around the world that had been discovered but had not yet been fully developed.  Today new discoveries are down sharply and no oil can be produced that has not first been discovered.  The Association for the Study of Peak Oil is predicting that the peak in oil production will come in about 2007.  Because of the growing economies around the world, worsening shortages of oil can be expected before then.      

Web Sites on the Peaking of Energy Production

            More information on the energy crisis can be found on the following web sites:

www.energycrisis.com
www.simmonsco-intl.com
www.lifeaftertheoilcrash.net
www.hubbertpeak.com
www.peakoil.net

Introduction

Why Canada’s Tar Sands Will Not Help

There are those who believe that we need not worry about an energy crisis because we can obtain all of the oil we will need from the Canadian tar sands.  The amount of oil that is considered to be recoverable from those tar sands is truly huge, being between 280 and 300 billion barrels – more than the estimated remaining reserves of Saudi Arabia.  Unfortunately, there are reasons why these tar sands should not be used. 

Tar sands are a combination of clay, sand, water, and bitumen that is being strip-mined for the thick bitumen that is then refined into synthetic oil.  The bitumen is a residue from oil that has seeped from deep reservoirs over the last 90-110 million years, and has lost its more volatile components.  The tar sand contains about 18% bitumen, of which about 90% can be recovered.  In the extraction process hot water is added to the sand, and the resulting slurry is piped to the extraction plant where it is agitated in giant separation cells and the oil skimmed from the top. The combination of the hot water and the agitation releases the bitumen from the oil sand, and allows small air bubbles to attach to the bitumen droplets.  The bitumen froth floats to the top of the separation vessels and is further treated to remove residual water and fine solids. Because the recovered bitumen is extremely viscous, it must be mixed with lighter petroleum so that the fluid can be transported by pipeline for upgrading into the synthetic crude oil. 

The processing of the tar sands produces very large quantities of wastewater.  Syncrude, a consortium that includes Exxon, is the largest producer of the synthetic crude from the tar sands, having an estimated total output for 2005 of between 80 and 86 million barrels.  Their processing plant is near Fort McMurry, in northern Alberta, where they must heat water and pump water slurries where the winter temperatures can drop below –50 degrees Fahrenheit.  For each barrel of oil that Syncrude recovers, 2.5 barrels of liquid wastewater are pumped into a pond that, a few years ago, was 14 miles in circumference and contained 20 feet of murky water floating on top of 130-foot-thick slurry of sand, clay, and unrecovered bitumen.  An additional 9.69 billion gallons of wastewater are being added to that pond each year.  Three tons of the tar sands are required to produce one barrel of bitumen.  To produce enough oil to supply the US at the 2004 level of 21,731,000 barrels per day for one year would require the processing of 23.811 billion tons of the tar sand.  Because those tar sands should weigh about 2,600 pounds per cubic yard, there would be about 20.769 cubic feet per ton.  That means that the 23.811 billion tons of tar sands would need to be mined each year, which would have a volume of 3.36 cubic miles. 

Although the horrendous environmental damage to the boreal forests caused by the tar sand operations provides a good reason for why the Canadians might not allow these plants to operate to produce oil for the United States (a country that is consuming 25% of the world’s fossil fuels and which is unwilling to permit the extraction of oil and gas from under its own wilderness areas), there is another reason that trumps them all.  In the fall of 2005, while watching C-Span, I saw Representative Roscoe Barlett (R-6th/MD) give a presentation about the peaking of oil and natural gas.  In his presentation, he stated that the production of the synthetic crude from the Canadian tar sands had a negative net energy balance.  In other words, more energy was being consumed by the strip mining and processing of the tar sands than was contained in the synthetic oil that was being produced.  Barlett said that the additional energy was coming from a nearby natural gas field from which there is no pipeline to transport the gas to consumers. If the tar sand processing plants are operating with negative net energy balances, than more total energy can be obtained from the combined tar-sand and gas resource by simply building a pipeline to transport the gas to consumers and leaving the tar sands alone.   

 

Why Producing Ethanol from Corn Worsens the Natural Gas Crisis

The National Corn Growers Association (NCGA) and the politicians from the corn growing states have pushed for and got a 51-cent per gallon tax incentives to increase the use of corn-produced ethanol in gasoline to increase the corn prices.  Because they believe that the methanol’s energy is coming from the sun, some people are even advocating the use E-85, which is 85% ethanol and 15% gasoline, as a motor fuel.  Though the greater use of any fuel that is being produced from the sun’s renewable energy sounds like a winner, when you look at the total amount of fossil-fuel energy that is being consumed to produce the ethanol from the corn, the program loses its appeal. 

Estimating the energy input for determining the net energy balances of corn ethanol involves adding up all the energy that is required to grow the corn and process it into ethanol.  The same DOE that planted the myth that the US has large gas reserves has concluded that the net energy balance for producing ethanol from corn is 1.34.  In other words, for every unit of energy that goes into growing the corn and turning it into ethanol, we get back about one-third more than what we put into it.   

I have seen net-energy-balance figures for corn ethanol as high as 1.64 (from the NCGA) and as low of 0.59.  The low figure is from a study by Dr. David Pimentel and associates (Journal of Agricultural and Environmental Ethics, vol. 4, pp 1-13, 1991).  With a net energy balance of 0.59, it would take 1.7 times the energy to produce the ethanol than the ethanol would contain.  An important difference between the Pimentel study and those made by others is than it is the only study that included that energy that went into the construction of the ethanol plants.  The fact that the other studies ignored that energy, because of it being very difficult to estimate, does not mean that the findings of the Pimentel study are invalid.  Just because something may be hard to measure does not mean that something does not exist. 

The variations in the net energy balances for other studies were caused by differences in crop yields, whether the crops were irrigated, the amount of crop drying required, the efficiencies of the ethanol plants, whether the energy contained in the dried-distiller-byproduct was considered, and on the quantities of ammonia fertilizers used.  A Department of Agricultural report, Estimating the Net Energy Balance of Corn, (July 1995) by Shapouri, Duffield, and Graboski gives a weighted average for 9 mid-western states.  Although the actual weighted average from the 9-state study gave a net energy balance of only 1.083, the paper somehow concludes that, when the fertilizers are produced by modern processing plants, the corn is converted in modern ethanol facilities, the farmers achieve normally good corn yields, and energy credits are allocated to corn byproducts, the net energy balance for producing ethanol from corn is 1.24.  The ethanol that is being produced from corn has low net energy balances because of all natural gas that is consumed to produce the nitrogen fertilizers that are being used.  In the 9-state study, roughly 40% of the total energy consumed to produce the ethanol was from the natural gas that was consumed to produce those fertilizers.        

The primary justification for the corn ethanol program was that it was supposed to utilize this nation’s supposedly vast natural gas reserves to reduce our nation’s dependence on imported oil.  The reality is that the producing of the ethanol from corn will worsen the nation’s energy problem because those vast producible gas reserves, which the EIA said we had, simply do not exist. 

(It is possible to produce ammonia-based fertilizers without consuming any natural gas or other fossil fuels. Fritz Haber, a German chemist, won the Nobel Price in 1908 for developing a method for producing ammonia from the hydrogen in water and the nitrogen in air. The nitrogen and hydrogen mixture is pressurized to 3,000 psi and heated to between 750 and 1100 degrees Fahrenheit in the presence of a catalyst mixture of iron oxide, uranium, osmium, cobalt, and other metals. The energy needed to produce the ammonia could be provided by a nuclear reactor or hydropower. Although producing the ammonia without the natural gas would increase the net energy balance from about 1.2 to about 2.00, that would still would be much lower than that of biodiesel.)  

 

Other Crops Can Produce Fuels Much More Efficiently than Corn 

Just because producing ethanol from corn wastes our valuable reserves of natural gas, does not mean that we should not produce fuels from other green plants.  Not only can sugar beets and sugar cane produce ethanol, sunflower oil, safflower oil, peanut oil, coconut oil, palm oil, jojoba oil, mustard seed oil, canola oil, and soybean oil can all be used to produce biodiesel. 

The DOE and the USDA co-sponsored a study entitled, Life Cycle Inventory of Biodiesel and Petroleum Diesel Use in an Urban Bus, published in May 2, 1998.  The report stated, “Biodiesel yields 3.2 units of fuel product energy for every unit of fossil fuel energy consume in its life cycle.”  With the soybean-produced biodiesel having a net energy balance of 3.20 and the corn’s ethanol having a net energy balance of about 1.17, the net energy gain for the biodiesel would be 220% and the gain from the ethanol would be 17%, which would make the gains from the biodiesel 12.94 times that of the ethanol.

The biodiesel produced from soybeans has a much higher energy yields than the ethanol from the corn mostly because the soybeans, being legumes, have a symbiotic relationship with nitrogen-fixing bacteria that are able to convert the inert elemental nitrogen that is in the air into various nitrogen compounds that can be used by all growing plants to produce proteins.  Another reason for the biodiesel’s much higher net energy balance is that it takes less energy to convert the soybean oil into the biodiesel than it does to convert the corn’s starch into distilled ethanol.

 Not only would the production and use of the biodiesel be far more energy efficient than the ethanol, it creates a carbon-dioxide emission-absorption cycle that can remove more than 12 times the greenhouse gases from the atmosphere.  If all of the energy input to produce the biodiesel were supplied by the soybeans (31.25% of the energy being produced), than all of the energy in the fuel would be coming from the sun.  Although the soybean and other crops can help reduce the severity of the future oil crisis, they can not help solve the imminent and more serious natural gas crisis.   

 

Economic Impact of the Gas and Oil Shortages

The most frightening aspect about the approaching energy crisis is that so few Americans are aware of its imminence or the impact that it can have on their lives and upon our society.  The wealth of this nation and of the entire developed world has been created largely because of those technologies made possible through our use of cheap fossil fuels.  Those days are now ending.  Because the demands for both oil and natural gas are inelastic, the increasing shortages will cause their prices to rise to unimaginable levels (see the section Gas Costs and Gulf Stream Turbine Profits for an explanation of demand elasticity and realistic forecasts of future natural gas prices).  And, as the prices of these hydrocarbons increase, the costs of everything that is made from them must also increase.

The rising fuel prices will cause a type of inflation that will be very different from those demand-pull inflations that we have experienced in the past.  A demand-pull inflation brings increasing profits, increasing wages, and economic growth.  This type of inflation can be controlled by the Federal Reserve decreasing the money supply by either increasing the interest rates or by increasing the reserve requirements of the banks.  In contrast, the depletion of oil and natural gas will cause a cost-push inflation that will increase the costs of virtually every product that uses those hydrocarbons as fuel, feedstock, or for transportation.  Unlike a demand-pull inflation that can bring prosperity, the cost-push inflation will bring decreasing demand, disappearing profit margins, increasing bankruptcies, increasing unemployment, increasing interest rates, a collapsing stock market, and evaporating federal revenues and exploding unfunded government obligations to the holders of its securities and to the people. 

The enormous sizes of the National Debt and trade deficits raises the increasing possibility of a severe international economic crisis should foreigners start to dump the dollars they hold in world’s currency markets.  Those who have been funding our budget deficits and heavy consumer spending through their purchases of our government securities and other debts will eventually stop buying them or will buy them only at deep discounts, which – in effect – will increase the interest rates. The possibility that the energy crisis will cause a total economic collapse is very real, and that possibility will become a certainty if we fail to quickly replace oil and natural gas with sustainable energy sources.  The need is huge and time is short.  Never has this nation faced a greater danger.

 

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