This post is a little side trip from the issues facing our electrical system. Fossil fuel production has a direct bearing on how investment in electrical generation plays out, so questions of resource limits do have a direct bearing on understanding whether the people who run the US electrical system are making good decisions or bad decisions.
One of the main drivers of US electrical generation for the past ten years has been the glut of natural gas that has flooded US markets. Gas has undercut coal as the preferred fuel for new electrical generation, leading to an increased dependence on natural gas in the US.
The US media has been touting the idea that analysts who claim world fossil fuel production is at or near peak production have been proved wrong by the recent “shale revolution.” In fact, what we are seeing is exactly what analysts have predicted from the beginning: that as world production levels off, and prices rise, new drilling technologies will emerge that allow the production of poorer quality “plays,” but the production from these plays will be short lived and not nearly as productive as past discoveries. The result will be big, short term floods of new production, followed by abrupt shortfalls leading to wide swings in price over shorter and shorter time periods.
None of the new production will contribute much to increasing overall world production. Peak oil analysts refer to this period at peak production as “the bumpy plateau” before a steady decline trend takes hold.
In a recent discussion of the bumpy peak, energy expert Chris Nelder pointed out:
BP: So back in 2005, plenty of analysts were suggesting that the world would soon hit a ceiling in annual oil production. How has that panned out?
CN: The predictions weren’t monolithic. But what everyone agreed on was that at some point in the near future, maybe five or 10 or 15 years away, the rate of oil production would stop growing. Some said we’d hit an absolute peak in a specific year. Others said we’d reach a “bumpy plateau” that might be five or 10 years long. But everyone agreed that sometime after 2005, within 10 or 15 years, global oil production would stop growing.
And that’s exactly what happened. The growth in conventional oil production ended in 2004, and we’ve been on a bumpy plateau ever since.
WP: It looks to me like there was an uptick in 2012. Doesn’t that mean we’ve finally broken the plateau?
CN: Not necessarily. In 2005, we reached 73 million barrels per day. Then, to increase production beyond that, the world had to double spending on oil production. In 2012, we’re now spending $600 billion. The price of oil has tripled. And yet, for all that additional expenditure, we’ve only raised production 3 percent to 75 million barrels per day [since 2005].
The increasing uncertainty about fossil fuel production, particularly oil and gas, are further detailed in a just released study by the Post Carbon Institute called Drilling Deeper: A Reality Check On U.S. Government Forecasts For a Lasting Tight Oil & Shale Gas Boom by David Hughes. Here are the key findings of this report taken from the executive summary:
The seven tight oil plays and seven shale gas plays analyzed in this report account for 82% of projected tight oil production and 88% of projected shale gas production through 2040 in the EIA’s Annual Energy Outlook 2014 reference case forecast. A detailed analysis of well production data from these plays resulted in these key findings:
1) Tight oil production from major plays will peak before 2020. Barring major new discoveries on the scale of the Bakken or Eagle Ford, production will be far below EIA’s forecast by 2040.
a) Tight oil production from the two top plays, the Bakken and Eagle Ford, will underperform EIA’s reference case oil recovery by 28% from 2013 to 2040, and more of this production will be front-loaded than the EIA estimates.
b) By 2040, production rates from the Bakken and Eagle Ford will be less than a tenth of that projected by EIA.
c) Tight oil production forecast by the EIA from plays other than the Bakken and Eagle Ford is in most cases highly optimistic and unlikely to be realized at the rates projected.
2) Shale gas production from the top seven plays will likely peak before 2020. Barring major new discoveries on the scale of the Marcellus, production will be far below EIA’s forecast by 2040.
a) Shale gas production from the top seven plays will underperform EIA’s reference case forecast by 39% from 2014 to 2040 period, and more of this production will be front-loaded than EIA estimates.
b) By 2040, production rates from these plays will be about one-third that of the EIA forecast.
c) Production from shale gas plays other than the top seven will need to be four times that estimated by EIA in order to meet its reference case forecast.
3) Over the short term, U.S. production of both shale gas and tight oil is projected to be robust—but a thorough review of the production data indicate that this will be unsustainable in the longer term.
These findings have clear implications for current domestic and foreign policy discussions, which generally assume decades of U.S. oil and gas abundance. Other factors that could limit production are public pushback as a result of health and environmental concerns, and capital constraints that could result from lower oil or gas prices or higher interest rates. As such factors have not been included in this analysis, the findings of this report represent a “best case” scenario for market, capital, and political conditions.
The prospect of more volatile swings in fuel prices poses significant problems for long term investment in projects like big electric generating plants or natural gas pipelines. What investors would be willing to invest in a 50 year project when price instability might severely impair the ability of the project to pay for itself over such a long term?
The competition among fuels also illustrates what may really be behind the coal industry’s current push to fight regulation of coal burning in US electric generating plants. Right now, coal is the big loser in the energy price war. Given Hughes’ analysis, however, we may see rapid rises in natural gas prices as shale production drops rapidly. If the US coal industry can block further expansion and enforcement of the Clean Air Act, the industry will be poised for a big boom as gas prices rise and coal becomes more competitive.
Sarah Tincher, the energy reporter at The State Journal, has a good story on the interplay of these forces in the coal industry. As Ms. Tincher’s story points out, gas prices would have to rise pretty high for Central Appalachian steam coal to become competitive, because the resource in the region is now so degraded and costly to mine, but western and midwestern coal would be much more likely to rebound.
The volatility problem would also be a limiting factor to any coal rebound in electrical generation, however. Right now, there are almost no new coal-fired power plants being built in the US. Because of the current gas glut, many high cost, obsolete coal burners have been shut down. In order for power companies to take advantage of coal’s possible new competitiveness, they would have to make new 50 year investments in building new plants. Would they do that if they faced the uncertainty of wild swings in coal’s competitiveness?
Even if a fossil fuel gains a price advantage over another fuel, industry may not be able to use that advantage effectively, because it cannot make needed long term investments in an increasingly unstable market environment. So, all environmental considerations aside, renewable power becomes increasingly attractive, because renewable power needs no fuel. Once the long term investment is made to build generation, there is no fuel price uncertainty for the future. Renewable power investments can also be made in very small units, unlike building a coal-fired power plant, so each new investment is inherently less risky.
We could be on the bumpy plateau for twenty years or fifty years, before fossil fuel production establishes its long term decline. Everyone will have to adjust to wild swings of fuel prices, investment decisions and our economy. Hold onto your hats.