Six Major Factors in Energy Planning

1. Six Major Factors in Energy Planning Robert L. Hirsch Senior Energy Program Advisor, SAIC March 1, 2004 National Energy Technology Laboratory

2. Acknowledgements The author wishes to thank a number of colleagues who commented on various drafts of this report. Special appreciation is extended to Roger Herrera, retired geologist, BP Corporation, and President, Northern Knowledge, who provided important geological insights and who helped focus the petroleum portion of this study. Special thanks go to Dr. Marcus Milling, Executive Director, American Geological Institute, for his thoughtful comments. Others whose assistance was greatly appreciated include Rebecca Rubin, Marstel Day, Dr. David Greene, Oak Ridge National Laboratory, Dr. Roger Bezdek, MISI, John McCaughey, veteran energy journalist, and Prof.. William Fisher, University of Texas. Final responsibility for the material herein is strictly the author’s. This work was sponsored by the National Energy Technology Laboratory of the Department of Energy, under Contract No. DE-AM26-99FT40575, Task 21006W. The author is indebted to NETL management for their encouragement and support.

3. Abstract • Energy “crises” over the last 30 years should have been labeled “interruptions.” Only the 1973 oil embargo resulted in significant change. We’ve been “crying wolf.” • Expect slow, modest, incremental attention to • Deteriorating energy infrastructure problems. • Growing dependence on imported oil & natural gas. • Growing dependence on imported petroleum products. • The timing of serious decisions on climate issues is not predictable due to scientific uncertainties, huge costs, and the absence of an international treaty. • Peaking of world oil production could well be an energy disaster, requiring heretofore unimagined change. More understanding is needed.

4. Major Energy Changes Public Attitudes Towards Energy Some Energy History Current & Emerging Energy Issues World Oil Production Peaking Topics Six Factors

5. Major Energy Changes Nation-scale changes in energy generation & conservation are time consuming & often very expensive. • Gigawatt power plants are billion $ class & decade-scale. • 1970s CAFE took roughly 15 years to maximum savings. • Alaska Gas Pipeline: Estimated at $10-20 billion & a decade to build. • Major new electric transmission lines take 5 years - never. • A GW of wind power requires 1000 - 1.0 MW wind turbines. • Refineries are very expensive. None built for so long; costs unknown. Consumer Conditioning: Computers & electronics are small, progressively lower in cost & fast to market. Crash programs are possible but very expensive.

6. 33% of today’s electric generation (~ 900 GW ) by Building 20 new, 1.0 GW power plants each year. Assume a plant takes 5 years to build (no permit delays) & costs $1 billion 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Illustration of Time & Cost of a Major Energy Change Consider replacing ~ 20 years & $300 billion

7. Planning Factor #1: Major changes in the U.S. energy system require decade time scales & can cost upwards of hundreds of billions of dollars.

8. Public Perceptions & Attitudes About Energy • Like air & water, energy is taken for granted. • Low cost, abundant energy is considered a right / expected. • Modest changes in energy prices are an outrage. • Occasional blackouts / shortages are quickly forgotten. • Energy knowledge is limited & often very distorted. • To some people energy companies are greedy polluters. When problems occur, quick fixes are expected.

9. Energy Policymaking • Energy is typically not a “traction” issue with the public. [Traction issues include the economy, jobs, Iraq, prescription drug benefits, the upcoming election, federal budget deficit, Medicare, terrorism, crime, traffic congestion, etc.] • Energy companies lobby & make large campaign contributions. • Environmental groups lobby, make contributions, & are highly vocal. • Issues of states rights often conflict with national planning. • Credible studies by unbiased groups rarely have large impact. • Cost-benefit analysis are rarely a factor in decision-making.

10. Dictionary Definitions CRISIS: An unstable condition … in which an abrupt or decisive change is impending... a turning point. INTERRUPTION: A break in continuity or uniformity.

11. Since the LATE 1970s, the U.S. has experienced a number of events that were called “Energy Crises” • 2003 N.E. Electricity Blackout • 2002 Natural Gas Price “Shock” • 2000 Calif./West Coast Blackout • 1991 Oil Price Runup • 1986 Oil Price Collapse • 1979 Oil Price Escalation Weren’t these more like Interruptions = “breaks in continuity” rather thanCrises = “turning points”?

12. Oil prices increased ~ 4.5 x (Saudi crude) Gasoline rationed (Even/Odd days) Gasoline lines & spot shortages. GDP dropped two years in a row (recession). Interest rates spiked dramatically upward. Inflation increased sharply. There was a huge wealth transfer to OPEC. Only One Energy Event Was Arguably a Real Crisis --A Turning Point: The 1973 Oil Embargo Some of What Happened in the U.S.:

13. U.S. Actions Resulting From the 1973 Oil Embargo • Price controls enacted. • CAFE implemented. • Higher efficiency mandated in a variety of sectors. • National speed limit (55 mph) enacted. • Domestic oil & gas exploration & production spiked up. • Federal energy R & D dramatically increased. • A major effort in synthetic fuels initiated. • Windfall profit taxes levied. • U.S. government reorganized to form ERDA, FEA & FERC. • IEA formed. • Strategic Petroleum Reserve established. • Formulation of a coherent national energy policy initiated. • Foreign policy adjusted to new realities.

14. Today’s Often Mentioned Energy Concerns • Local air pollution due to energy use. • National Security (oil import vulnerabilities). • Global climate impacts of energy use.

15. Commentary on Today’s Primary Public Energy Concerns Concern Actions-to-Date Current Situation Energy-related - Major progress over - Most regions doing well but AIR POLLUTION recent decades some merit more effort - Midwest coal an issue OIL IMPORTS - Synfuels Corp. failed - Defacto it’s easiest to (National Security) - Decades of talk use the military but no action - Hydrogen a distant option More on Global Climate later

16. Planning Factor #2: • Energy policymaking will continue to be slow, modest & incremental, absent a major new energy crisis.

17. Global Climate Change • CO2 is a greenhouse gas & is increasing in the atmosphere. • Fossil fuel burning is a contributor. • 95% of the greenhouse effect is due to water vapor for which there is no long-term historical data & little real understanding. • Climate is incredibly complex / many unknowns, so legitimate scientific differences are likely to persist for sometime. • For some, the potential is so dire they want significant action now. • For others, expensive action now would be irresponsible.

18. The World CO2 Situation • Every country emits CO2. • Small U.S. reductions might be symbolic but not physically significant. • Major, unilateral U.S. cuts would be costly, disadvantaging the U.S. economically. • If major unilateral U.S. action, the self-interest of others would be delay. • Kyoto is effectively dead. In new international treaty negotiations, countries will vie for strategic advantage. • Underdeveloped countries will want others to pay. • Renewed treaty negotiations will be difficult & time consuming. • U.S. targets are undefined: 25%? 50%? 75%? By when?

19. Planning Factor #3: • The timing & magnitude of major U.S. climate change actions are not now predictable.

20. Emerging Energy Concerns • Worsening condition of the U.S. Energy infrastructure. • Growing dependence on natural gas imports (lng). • Growing dependence on petroleum product imports • Peaking of world oil production.

21. Energy Concerns Outlook • Concern • Outlook • Breakdowns / shortages likely. • Fixes will be made as needed. • Costs will be spread over time. • U.S. Energy Infrastructure Deterioration • Shortages possible. • High prices almost certain. • Large price volatility likely. • Less-than-projected gas use. • Natural Gas Use & LNG Imports • PRODUCT QUALITY? • Shortages possible. • Higher prices possible. • Petroleum Product Imports (Gasoline, Diesel, etc.) • Peaking of world oil production discussed later.

22. Planning Factor #4: • Energy Infrastructure problems will be addressed as needed, & we will muddle through. • Planning Factor #5: • Growing natural gas & petroleum product imports will be accepted & allowed to grow.

23. Peaking of World Oil Production • Oil is the lifeblood of modern civilization. • Oil is found in reservoirs of all sizes, depths, & characteristics in a limited number of places in the world. • Super-Giant fields (the very largest) are generally the easiest to find & least expensive to produce. • Most geologists agree that at some future date, world old production will reach a maximum -- it will peak. • Peaking is not “running out;” it’s roughly half-way to depletion. Notional Production from a Typical Oil Reservoir Production Time - Decades

24. Peaking of World Oil Production (Cont.) • Oil is hard to find because it’s normally buried deep in the earth & normally doesn’t show at the surface. • Once found by an exploratory well, many more wells are required to achieve optimum production and enable a good estimate of reserves. • When natural forces diminish, water flooding, and Enhanced Oil Recovery (EOR) can extend production for years. • Two oil classifications are “Conventional” & “Unconventional.” MOST OIL NOW PRODUCED IS “CONVENTIONAL”.

25. Peaking of World Oil Production (Cont.) • World petroleum demand is huge and growing. • Past peaking predictions: “It’s coming in 10 - 20 years” - WRONG! • What’s different today? • Extensive drilling worldwide. • Modern geology & seismic technology is very advanced. • Reserves / well have been dropping for ~ decade. • Many more credentialled specialists are pessimistic. • World oil peaking could be economically disastrous.

28. Production from an Oil Reservoir - Three Cases A. Notional Production - Constant Price Production Time - Decades B. Production When Price Increases After 5 Years C. Production When Price Increases After 10 Years

29. World Oil Production = Output of All Reservoirs Thought Exercise: Sum Just Three at Different Stages of Production 1 2 A. 3 B. Assume this individual reservoir profile Production Assumed stages of production Time - Decades C. 1 Sum of three profiles Production 2 3 Time - Decades

30. World Oil Production = Outputs of All Reservoirs Total World Oil Production- When is the peak ????

31. As noted, conventional oil has been the mainstay of modern civilization, because it is most easily brought to the surface from deep underground reservoirs, and, additionally, it is most easily refined into finished fuels. The U.S. was endowed with huge quantities of petroleum, which fueled our economic growth in the early and mid twentieth century. However, our resources are finite, and growing demand resulted in the peaking of Lower 48 U.S. oil production in the early 1970s. It has been in decline ever since. Because demand for petroleum products continued to rise, the U.S. became an oil importer. Today, we depend on foreign sources for almost 60% of our needs, and future U.S. imports are projected to to rise to 70% of demand by 2025[11]. Exploration for and production of petroleum resources has been on-going since the mid 1800s and in the last 50 years has been an increasingly more technological enterprise, benefiting from increasingly more sophisticated engineering capabilities, geological understanding, instrumentation, computing power, materials, etc. Today’s technology allows oil reservoirs to be more readily understood sooner than heretofore. Accordingly, reservoirs can be produced more rapidly, which has significant economic advantages to the operators but also hastens peaking and depletion. Oil production in the world today can be viewed according to operating approach: 1) Oil reservoirs that are produced at their maximum economic rate -- essentially “flat out” -- and 2) reservoirs whose production is limited by operator choice to less than than the maximum possible. These later reservoirs -- called “swing capacity” -- are primarily managed by the OPEC countries, which self-limit their production in order to maintain world oil prices near their target levels.____________________________________ [11] EIA. Early Release AEO 2004. December 16, 2003.

32. 5 0 4 0 3 0 Billion barrels 2 0 1 0 0 - 1 0 - 2 0 1 9 4 0 1 9 5 0 1 9 6 0 1 9 7 0 1 9 8 0 1 9 9 0 2 0 0 0 World Oil Finding / Consumption Balance • “With the world now finding less than one barrel for every four it consumes, the pressure on capacity can only increase in the future. The gap is growing wider.”

33. Unconventional Oil - The Two Biggest Resource Size Est. Recoverable (Trillion Barrels) (Billion Barrels) Canadian Heavy Oil 1.7-2.5 315 Venezuela Heavy Oil 1.2 270 Approx. Totals 3-4 600 100+ MM bbls / day total world demand 40 billion bbls / year How long will 600 billion bbls last? Canada + Venezuela Unconventional Oil Production III II I Time Conv. Oil Peak Unconv. Oil Peak Now

35. 2000 2010 2020 2030 Various Views on the Timing of World Oil Peaking Simmons: Peaking is at hand: 3-5 years • Skrebowski: Conventional oil peak after 2007 • Campbell: Conventional oil peak around 2010 • Laherrère: All H/C liquids peak during the 2010s • EIA: Nominal Case ~ 2030

38. Planning Factor #6: • World oil production peaking is unavoidable, but its timing is uncertain. It might well mute other planning factors.

39. Six Important Factors in Energy Planning • Major changes in the U.S. energy system require decade time scales & can cost upwards of hundreds of billions of dollars. • Energy policymaking will continue to be slow, modest & incremental, absent a major new energy crisis. • The timing & magnitude of major U.S. climate change actions are not now predictable. • Energy infrastructure problems will get fixed as needed, & we will muddle through. • Growing natural gas & petroleum product imports will be accepted and allowed to grow. • World oil production peaking unavoidable, but its timing is uncertain. It might well mute other planning factors.

40. Appendices I. Energy Policy Commentary II. Note on Global Climate Change III. Statements on World Oil Production Peaking IV. Aspects of Oil Production Peaking

41. Sample “Crisis” Commentary - 2002 Natural Gas Price Spike • Secretary Abraham: • There are no quick fixes to the (natural gas) price spikes and volatility ... witnessed in recent years. • IPAA: • The government... not ... listening to important warning signs. “…policymakers have not yet enacted previous recommendations..” • Alliance to Save Energy: • Given our nation’s long history of short memories when it comes to energy crises… (commends the NPC study). • Wilderness Society: • Environmentalists are not opposed to drilling. We just want to see more energy efficiency and conservation.”

42. Appendix II-1 Commentary on Global Climate by a Long Standing Environmentalist [16] “Some 20-plus years ago, ... a House Science Committee (heard from) Harvard environmental guru, the late Roger Revelle, and the distinguished Carnegie Mellon University environmental economist Lester Lave. ….the committee had asked the academics to advise the legislators on what to do if global warming is real…. “Both Revelle and Lave, from two very different disciplines and of two different political inclinations, agreed: adaptation is the only practical policy option. Climate warming, they said, was a slow-moving problem, if real. But it was also huge, and its implications were so diverse that it would be impossible to mount a global consensus on significant reductions in carbon emissions. “The under-reported truth of Kyoto is that the highly-touted treaty would have virtually no impact on worldwide CO2 emissions. Everyone who has studied the subject in any depth, including those who continue to advocate the treaty, acknowledge this. Those who support Kyoto upon principled grounds ... argue that it is only a first step, and that much more will be needed by way of carbon reductions. They are wrong and dangerous. “To deal with climate change,” says Kendra Okonski, editor of Adapt or Die and director of the sustainable development project at the London-based International Policy Network, “we should adopt policies that promote human well being, both today and in the future. We could do this today by eliminating disease and poverty, developing new technologies, and reducing humanity’s vulnerability to climate change. In contrast, the Kyoto Protocol requires huge expenditures today for negligible benefits in the far future.” “Attempts to control the climate through restrictions on greenhouse gas emissions would have little effect on the earth’s climate,” says Okonski, “but would harm our ability to adapt to climate change by slowing economic growth and diverting resources into inappropriate uses.” _____________________________ [16] Maize, K. Adaptation - The Right Greenhouse Stuff. The Electricity Daily. December 15, 2003. Kennedy Maize is the founder and editor of Electricity Daily. Previously, he worked for the Associated Press, Congressional Quarterly, The Energy Daily, the Union of Concerned Scientists, and Friends of the Earth. He lives in a passive solar home in northern Maryland.

43. Simmons Highlights • Over the period 1996-1999, $410 billion spent by 145 E & P companies to keep production flat. • $150 billion spent by big five to barely grow production 1999-2002. • North Sea: U.K. sector peaked in 1999 / Norwegian sector in 2002. • Early 1990’s: Caspian Sea was thought to be the next Middle East. 20 dry holes out of 25 wells were drilled in 2001. BP & Statoil then sold out. • Saudi Arabia: No major exploration successes since the1960s. Almost all fields have high & rising water cuts. • “Proved reserves” dropped 37% after the sixth well in Canada’s Sable Island oil field. • All the great Middle East finds happened years ago. • Forecasting next year’s declines is an art form. Peaking is at hand, not years away. The world has no “Plan B.”

44. World Oil Mega Projects Decline Skrebowski, C. Oil Field Mega Projects - 2004. Petroleum Review. January 2004 • Approach: Detailed tabulation of actual oil projects worldwide. • + Considered 54 approved mega projects • - Over 500 million boe. • - Over 100,000 b/d potential. • + Mega projects provide ~80% of world oil supply. • 25-33% of world oil production now in decline. • After 2007 new capacity likely falls short of demand and depletion. The world may be entering an era of permanently declining (conventional) oil supplies in the coming decade.

45. Laherrère Highlights. • Data quality impacted by definitions, sources, confidentiality, politics, & physical uncertainties. • Pessimists use confidential technical data, optimists use political data. • OPEC production quotas are based on “reserves.” From 1986 to 1990 “reserves” increased by ~300 Gb, while only ~10 Gb were actually discovered. • US reserves are conservative / FSU based on maximum theoretical. • World oil discovery peaked during the 1960s. Production of all hydrocarbon liquids could peak during the 2010s.

46. Recent New York Times: Forecast of Rising Oil Demand Challenges Tired Saudi Fields. • Serious doubts Saudi Arabia can increase oil production. • Former Saudi oil executive: Increased oil production is possible, but global markets will be short by 2015. • Saudi Aramco official: Attempts to increase output would wreak reservoir havoc. • Another Saudi executive: “(Production) declines are real & must be replaced.” • ExxonMobil: More than 50 percent of oil in 2010 must come from new fields worldwide. The problem is much larger now because the world’s demands are so high. • Saudi Aramco: The decline rate for its mature fields “is in the range of 8% per year.” Additional investment might slow that decay rate (but not increase peak production). • Every oil field is unique, and experts cannot predict how long each might last.

47. What DOE Fossil Energy Says • Oil a finite resource / production will eventually peak. • Some analysts: conventional oil might peak in 2015. • If resource twice as large, peak about 20 years later. • Alternates are needed.

48. EIA WORLD OIL PRODUCTION PEAK PROJECTION 2030

49. Shell Adjusts Reserves Downward • Shell announced January 9, 2004, a downward recategorization of reserves: 3.9 billion barrels of oil equivalent or 20% of its worldwide total. • Of the recategorization two thirds (2.7 billion barrels) relates to crude oil (and natural gas liquids) and one third natural gas.  • Shell did not expect the recategorization to have a material impact on near-term production. • Shell expects production to be broadly flat for 2003 – 2005. • Shell said proved reserves were equivalent to 13.3 years of production. • Finally, they expected 2003 reserve replacement to be 70- 90%.

50. Other Statements • Shell Oil: “We think oil supplies, including unconventional sources and natural gas liquids, will not peak before 2025 and could be later.” • Campbell: “The precise date of peak depends very much on demand…and in any case is unlikely to be delayed much beyond 2010.” • Bakhtiari: “Middle East (oil) production should …peak early in the next (decade).” • Bentley: “The last (oil) shocks were no more than minor tremors, but they tipped the world into recession. (The coming) shock is very different; it is driven by resource constraints, not politics; it is permanent.” • CERA: “We anticipate that global liquids capacity will... be sufficient to meet projected demand through at least 2020.”