Friday, March 15, 2013

North American oil independence by 2030?

            In the rush for the greatest attention grabbing claims and statements, peak oil believers tended to make statements that we now regard as rather foolish.  They correctly predicted that conventional oil production would peak around 2005, give or take a few, years.  The IEA confirmed this only in 2010 in its yearly report on global energy.  Until then, everyone claimed that peak oil was just “hot air”, or all sorts of other humorous things.  With the official recognition of the plateau in conventional oil production, courtesy of the IEA, many people thought that finally they will have the recognition they deserve for sounding the alarm about impending energy doom.  They will have to wait a while longer however, because the effect of the 500% increase in crude oil prices we witnessed in the past decade is now showing its results.  Hundreds of billions of barrels in new reserves were added to our potential liquid fuel supply, because of the higher price[i].  This new addition has now led to the pendulum swinging the other way in the argument over our energy future.  We now have tales of decades of plenty, and North American energy independence, and even net oil exports by 2030, according to some, courtesy not only of the higher prices, but also because energy efficiency gains will further cut consumption (care is usually taken here not to mention the effects of continued economic stagnation as one of the factors in expecting less consumption).  It is important to understand that the pendulum has now swung too far to the other side, and we are getting a picture that is as distorted as can be.  We urgently need a return to sobriety and reality.


            It is true that our economy is becoming more energy efficient.  We have more people working from home, or in many cases not at all, given the job market.  We also have increasing fuel efficiency of our transport system.  Airplanes, cars, and other modes of transport are all becoming ever more sophisticated and efficient in their energy use.  There are also alternative power sources, such as natural gas, electric, bio-fuels and other substitutes, which will displace oil consumption.

            On the other hand Canada, the United States, and Mexico, all have a growing population, so thus we get more consumer demand.  As crude oil is replaced with bio-fuels and other liquid hydrocarbons, such as NGL’s, which all have significantly lower energy densities, in other words, a gallon of the stuff will not take you as far, demand in terms of volume will also be driven higher because of this.

            By far the biggest driver of demand in the next few decades will be the oil and gas industry itself.  Currently, Canada produces about 1.5 million barrels of synthetic crude from the oil sands per day, and most of it comes from surface mining, which is less energy intensive than in-situ steam-injection production methods.  Surface mining can only reach about 20% of all the reserves however, so the in-situ method will become dominant by 2030, when production is estimated to reach as high as 5 million barrels per day.  Currently surface mining yields about five units of energy for every unit invested.  In-situ extraction yields less than three[ii].  Therefore, demand for energy in the process of oil-sands production will rise from approximately 300,000 barrels of oil equivalent per day currently, to about 1.5 million barrels of oil equivalent per day by 2030.  Canada currently consumes about 2.3 million barrels of oil per day.  By 2030, its consumption of energy in oil equivalent will rise by 50%, if all the energy were to come from oil.  In reality, most of it will come from natural gas, which means that Canada will go from being a major net exporter, to a net importer by 2030.

            In the US, crude oil extraction has a net energy return ratio of about eleven to one.  In other words, we get eleven units of energy for every unit invested in extraction.  Hydraulic fracturing, which will be the main driver of production growth has an energy return on energy invested of about four to one.  By 2030, US net energy return coming from oil extraction will likely be about six to one.  In other words, while production might be significantly higher by 2030, so will the energy demand of the industry.  The rate of production by 2030 is something of a very hot debate currently, but what cannot be denied is that the industry will most likely add about a million barrels per day of oil equivalent in energy demand to the tally.

            It is hard to get a clear view of what will happen to the oil industry in Mexico in the coming years and decades.  Production could go up, or continue its current slow slide downwards.  The country’s consumption trend however is quite certain, barring a global economic catastrophe.  Mexico is a developing nation, with a population of over 100 million souls and still growing.  If Mexico’s economy will grow by about 4-5% per year, its oil consumption will also grow by about 2-3% per year.  Therefore, by 2030, consumption could go from about two million barrels per day presently to three million.

            From this quick roundup of consumption trends, we get a need to substitute for about three million barrels per day in potential consumption growth in North America, with other sources of energy, such as natural gas, electric sources, such as; nuclear, coal and renewable energy, such as solar.  Even if two thirds of all new energy demand from the factors I mentioned were to come from other sources, we would still have about a million barrels of oil in new demand by 2030. The story of declining oil use in North America can only come true if economic growth will be lower even than current mainstream predictions suggest, which are already well bellow the trend of the last few decades.


            Currently, North American oil, or better said liquid fuel consumption is about 23.4 million barrels per day.  Production is about 17.5 million barrels.  It is this six million barrels per day gap plus about a million barrels per day in new demand I identified, which would have to be closed, or even surpassed, in order for the continent to become a net oil exporter.

            Mexico is not likely to contribute much to closing this gap.  In fact, they may become net oil importers by 2030.  Currently, they supply about a million barrels per day to the rest of the world.  Even if they manage to keep production from declining further, domestic consumption will eventually erode that export surplus.

           Canada’s oil sands projects stand a decent chance of living up to the hype.  Canadian oil production is forecast to nearly double from the current daily production rate of about 3.8 million barrels in total liquid fuels, to over 6 million barrels per day by 2030.  Therefore, we are looking at a potential increase of about 2.5 million barrels per day.  Not a bad bite into that 7 million barrel per day gap we identified, which needs to be closed in order to reach North American oil independence.  There are of course more risks to the downside, than chances of surprise to the upside.  Resistance from environmental movements, water availability, ability to get the oil to the market, may all play a role in reducing the expected gain in production.  We have to acknowledge nevertheless that the potential to meet this forecast is there.

            It is up to the United States then to close a 4.5 million barrel per day gap, if there is to be true North American oil independence.  If one were to ask some of the cheerleaders of the current fracking boom unfolding, they would surely respond that increasing production by such a large amount will be a “piece of cake”, so no worries.  A more sober assessment of future US oil production comes from the EIA's 2013 report.  They predict an increase of about 3 million barrels per day in liquid fuels in the US by 2020.  Interestingly however, they also predict that production will then decline gently by about a million barrels per day by 2030.  A total increase in production of 2 million barrels per day is therefore expected for the United States by 2030, which is significantly less than the 4.5 million barrel per day gap that still needs to be accounted for.  The report also pointed out that US liquid fuel independence will be at its highest in 2020, so just seven years from now, and it will be able to supply 66% of its needs from domestic production.  By 2030, they will only supply 63%, despite projecting continued declines in consumption, which might not necesarily happen, unless the economy will be weaker than currently projected.

            I should also point out that there are more downside risks than potential for upside surprises, just like we identified in the case of Canada.  One of the potential downsides is the breakeven cost of some of these fields.  For instance, in the article I wrote earlier this year on the Eagle Ford shale oil and gas field, I pointed out that based on projected expenditures in this field, compared to potentially recoverable resources, the breakeven price for the field as a whole seems to be at $90 dollars per barrel of oil, and a price for natural gas, which would need to at least double from current levels.  While many people believe that we are headed for much higher oil prices, I pointed out that due to economic factors; this is not likely to happen for a sustained period.  In fact, there is a greater chance of oil prices heading down, not because of plenty, but because the global economy is shaky.  Eagle Ford is thought to be responsible for as much as one million barrels per day of production by about 2020.  If by then it becomes clear that most companies will be losing money, drilling activity might just stop entirely, and by 2030, that one million barrels per day of production could dwindle to almost nothing, or the whole field may be abandoned altogether.  This could easily happen, in which case, by 2030, we may consider it a blessing if oil production will not actually be lower in the US, than it is now.


            The best case scenario we can expect given what we know is that North America will be 90% oil independent, with 10% still having to be made up through imports, including from the Middle East.  It would most certainly be a big improvement over current conditions, but complete oil independence it is not.  This means that North America will not be able to become an island and hope to insulate itself from events unfolding in the outside world as many hoped.  It also means that oil prices in North America will continue to reflect the global market, no matter what policy politicians may contemplate in an attempt to fight this reality.

            Even if unconventional production methods will proliferate from North America to the rest of the world, it is increasingly obvious that the global growth in supply of liquid fuels will not suffice in ushering in a new era of global economic expansion like the one we saw in the 1945-2008 period.  We are in a new era now, and the longer we pretend it is not so, the less time we have to lessen the pain, and adapt to the new reality, as well as prepare for far worse times to come in a decade or two.  It is time to sober up!



[i] The hundreds of billions of barrels in new potential reserves I am referring to include the fracking boom, as well as the expected higher recovery rates from existing conventional fields.  As well as the addition of the expensive oil coming from deep-water projects.  It is important to understand that this is a one-time event we are witnessing.   It is more about price than technology, and because the global economy could not withstand another such increase, there will not be another similar event.
[ii] Conventional oil production methods currently yield an energy return of about 25/1, and less than a century ago, the ratio was 100/1.  A trend of continued decline in energy return on energy invested is a global phenomena, and there is nothing that technology can do about it, which is something which is proven to us by the continued decline in energy return for almost 100 years now.


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