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Insights into five possible energy surprises for 2013

28 Jan 2013 - {{hitsCtrl.values.hits}}

Many experts have given predictions or probabilities on complex scenarios related to future price and supply of energy, economic stability, and political developments in this age of globalization. To this end Kurt Cobb a contributor to “Energy Voices” has identified five possibilities that could happen in the world energy sector and likely alter the lives and perceptions of the   community in 2013. Further any one of the five possibilities would surprise most people and experts and upset the economic plans, expectations of governments, businesses, investors and consumers.

Accordingly, the five possible energy surprises are:
1. US natural gas production declines: There was much publicity given to vast resource of natural gas available to America in the form of shale deposits that it is unlikely that the US natural gas production would fall. However, very low natural gas prices have resulted in drillers to cut back on drilling until the current oversupply is reduced and prices rise. However, most of the people do not know that US natural gas production has remained stagnant in 2012.The annual natural gas production wells in the US taken as a whole has a decline rate of 32 per cent .Accordingly , if there is no drilling of new natural gas wells in 2013 , production would fall by one third. The production decline rate of for shale gas wells is considerably higher than that of the average natural gas well – above 50 per cent in the first year with many shale gas wells declining more than 60per cent from initial flow rates. This means that by the end of the second year of operation 85 per cent of production from any given set of shale gas wells must be replaced to level the shale gas production.

The logistical challenges of shale gas are enormous. These are getting enough rigs and workers expeditiously to the field along with the necessary millions of gallons of fracking fluid (fracking refers to the procedure of creating fractures in rocks and rock formations by injecting fluid into cracks to force them further to open. The larger fissures allow more oil and gas to flow out of the formation and into the wellbore, from where it can be extracted. Fracking has resulted in many oil and gas wells attaining a state of economic viability, due to the level of extraction that can be reached).

However, even more important is that investors took a severe beating in the previous drilling boom and may be reluctant to invest more money to drill wells unless they are absolutely certain that prices will remain high and long enough to reward them. This will mean further delays in reviving drilling once it is apparent that supply is dwindling.

All the above facts add up to not enough rigs, not sufficient personnel and not adequate capital to keep up with the steep production declines in shale gas and even in conventional   gas fields. Accordingly, it will not be a surprise if US natural gas production then falls in 2013.It will also be a bigger surprise if production fails to rise or recovers only marginally once the prices show an increase.

2. Since 2005, the “total oil supply” in the United States increased by 2.2 million barrels a day. Of this 1.3 mb/d or 60 per cent, has come from natural gas liquids, and biofuels, which should not be regarded and added to conventional crude production for the purpose of calculating the available supply. Of the 800,000 b/d increase in actual field production of crude oil, almost all the gain has come from shale and other tight formations that horizontal fracturing methods   recently identified.

It is important to clarify that “ shale oil” and “oil shale “refer to two completely different resources. “Oil Shale” is in fact not shale and does not contain oil, but is instead a rock with great monetary and environmental cost can yield organic compounds that could eventually be made into oil. Although some people are optimistic about potential amount of energy available in U.S. oil shale deposits, some are pessimistic that oil shale will ever be a significant energy source.

“Shale Oil” or more accurate term “tight oil” is often used to refer to rock formations that do contain oil and sometimes actually be shale. The main characteristic is that the rock is not sufficiently   permeable to allow oil to flow out by drilling a hole into the formation. It has been found that if you create fissures in the rock by injecting water (along with sand and chemicals) at high pressure, along   horizontal pipes through the formation, oil can seep back through the cracks and be extracted.

It has been estimated that US can get an additional 4.17 million barrels per day from shale/tight oil plays by 2020. To put this figure in perspective the total US field production of crude oil in 2011 was 5.68mb/d. Further 4.17 mb/d is   22 per cent of the 18.8mb/d currently consumed in the US which is 4.7 per cent of the world consumption. However ,wells drilled into the Bakken formation in South Dakota show an annual production decline rate of 40 per cent and to increase the rate of production more wells have to be drilled to replace the declining wells with enormous costs.

3. Oil Prices plunge to US$ 30 a barrel: this scenario is based on plunging oil demand. The reasons being if EU collapses economically under pressure from its slow recovery of the financial crisis, US goes into a recession if the Congress fails to agree on reducing huge tax hikes, and China’s economy plunges further. In such a situation global commodity prices including oil would decline because of excess capacity and falling demand.

4. Oil Prices go up to US$ 200: this scenario is based on the idea that the civil war in Syria will spill to other Middle Eastern countries preventing oil exports. However, t his seems very unlikely but if it does happen the world economy due to extremely high oil prices , will go into a profound economic contraction. If the fighting continue to rage throughout the year in the Middle East we may get a shrinking global economy but prices will not come down to US $ 30.

5. US Congress bans additional natural gas exports: Even though the US is a net importer of natural gas which is 12.7 per cent of consumption in 2012, it exports small amounts to Canada and Mexico. If Congress does not act ,the Federal Energy Regulatory Commission will continue to grant permits for more LNG export terminals. With LNG prices in Europe and Asia three to four times higher than pipeline prices in the US, natural gas producers will prevent any export restrictions. If Congress introduces a ban it will result in a battle between strong corporations as LNG producers come up against large, well- funded uses of LNG such as utilities, chemical companies and fertilizer manufacturers. However users of natural gas including the 50 per cent of those who heat their homes will be a major threat to the country’s powerful natural gas producers who will lobby for exports.

In conclusion, Sri Lanka should formulate a comprehensive policy to avert an energy crisis taking into consideration the five possible energy scenarios or surprises. The Minister of Power and Energy has stated that the Sri Lanka Sustainable Energy Authority ( SLSEA) is formulating a sustainable energy plan to achieve a fossil fuel free Sri Lanka by 2030.Since this country is presently heavily dependent on thermal energy by burning heavy oil and hydropower, with a coal fired plant operating with regular hick ups, I would suggest that the construction of the Sampur coal fired plant be expedited as coal is the cheapest fossil fuel. Since unconventional renewable energy such as wave, wind and solar are not cost effective and according to the Minister the country will embark on nuclear energy in 10 years ,it is the height of imagination of SLSEA to plan generating fossil free energy by 2030 for the whole of Sri Lanka.

(The writer is a retired Economic Affairs Officer United Nations ESCAP and can be reached at [email protected]. )

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Insights into five possible energy surprises for 2013

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