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ISSUES IN ASSESSING LONG-TERM LIQUID FUEL AND NATURAL GAS SUPPLIES

ISSUES IN ASSESSING LONG-TERM LIQUID FUEL AND NATURAL GAS SUPPLIES. Presented at the 2007 EIA Energy Outlook, Modeling, and Data Conference March 28 , 2007, Washington, D.C. Roger H. Bezdek. Ph.D., President Management Information Services, Inc. www.misi-net.com. THIS PRESENTATION.

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ISSUES IN ASSESSING LONG-TERM LIQUID FUEL AND NATURAL GAS SUPPLIES

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  1. ISSUES IN ASSESSING LONG-TERM LIQUID FUELAND NATURAL GAS SUPPLIES Presented at the 2007 EIA Energy Outlook, Modeling, and Data Conference March 28, 2007, Washington, D.C. Roger H. Bezdek. Ph.D., President Management Information Services, Inc. www.misi-net.com

  2. THIS PRESENTATION • Is peak oil “nonsense”? • Oil supply and demand trends • Oil supply forecasts • Oil peaking and natural gas • Natural gas forecasts: Past and current • Future natural gas shortfalls? • New paradigm for natural gas pricing? • Summary

  3. IS PEAK OIL THEORY “NONSENSE”? • World oil demand is huge & growing • Peaking is maximum production of conventional oil, not “running out;” beware of red herrings • Most past peaking predictions were wrong. - Hubbert was right on the U.S. Lower 48 - Recent predictions may be right - Wrong isn’t forever • Why reconsider peaking now? • World oil consumption outstripping new discoveries • CAPEX for new energy projects is large and growing • Extensive drilling worldwide - large database • Advanced technology: Modern geology, 3D seismic, etc. • Many experts are pessimistic • The economic consequences are huge

  4. Production Time - Decades WHY WILL CONVENTIONALOIL PRODUCTION PEAK? Production U.S Lower 48 States 2000 1945 Year Oil fields peak Regions (Many fields) peak The world (All regions) will peak

  5. 60 60 Past 50 50 Future Production 40 40 30 30 Billions of Barrels Past discovery by ExxonMobil 20 20 “Growing Gap” 10 10 0 0 1930 1950 1970 1990 2010 2030 2050 WORLD IS CONSUMING MORE OILAND FINDING LESS

  6. WORLD OIL DISCOVERY HISTORY & THREE PATHS FOR USGS RESERVES ESTIMATES

  7. WHEN DISCOVERY DECLINES, PRODUCTION ALWAYS DECLINES LATER -- NORWAY

  8. Texas North America 3.5 15.6 100% 100% 3.4 15.4 3.3 15.2 95% Daily Production - MM b/d 98% Percent of Maximum 3.2 Daily Production - MM b/d 15.0 Percent of Maximum Peak in 1972 Peak in 1985 96% 90% 3.1 14.8 3.0 14.6 94% O 85% 2.9 14.4 1977 1971 1967 1969 1973 1975 1980 1982 1984 1986 1988 1990 United Kingdom Norway 3.5 3.0 100% 100% 3.4 2.9 2.8 3.3 95% Daily Production - MM b/d 95% Percent of Maximum Daily Production - MM b/d Percent of Maximum 2.7 3.2 Peak in 1999 90% Peak in 2001 2.6 3.1 90% 2.5 85% 3.0 2.4 85% 2.9 1994 1996 1998 2000 2002 2004 1994 1996 1998 2000 2002 2004 PEAK PRODUCTION CAN BE SUDDEN & SHARP Will the world behave like this?

  9. TECHNOLOGY & PRICE MAY NOT SAVE USU. S. Lower 48 Oil Production Dramatic Improvement in Oil Field Technology 3.5 Production 3.0 2.5 80 PRODUCTION (Billions of Barrels per Year) 2.0 PRICE (2003 $ per barrels) 1.5 Price 1.0 0.5 0 0 • 1950 1960 1970 1980 1990 2000 Trends were not reversed, and continued decline is forecast

  10. WHEN MIGHT PEAKING OCCUR? Different Approximations Lead to Different Forecasts • ForecastSource • December 2005 Deffeyes (U.S.) • 2006-2007 Bakhitari (Iran) • 2006-2007 Simmons (U.S.) • 2010 +/- Skrebowski (U.K.) • 2010 Campbell (Ireland) • Before 2010 Goodstein (U.S.) • After 2010 World Energy Council 2012 Weng (China) 2016 Doug-Westwood (U.K.) • After 2020 CERA (U.S.) • 2030 or later EIA (U.S) / Exxon Mobil Already 5 years 5-15 years > 20 years

  11. PEAKING FORECAST RELATIVELY INSENSITIVE TO RESOURCE ESTIMATES Already consumed worldwide: ~ One Trillion Barrels Some estimates of remaining world reserves = One Trillion Barrels If so, world oil peaking is about now. [50% of total] EIA:“(Our) results areremarkably insensitive to … alternative resource base estimates… adding 900 Bbbl more oil …only delays the estimated production peak by 10 years.” Others estimate remaining world reserves = Two Trillion Barrels

  12. ADDING ALMOST A TRILLION BARRELS GAINS ONLY 10 YEARS EIA: Add 900 Million barrels, Gain 10 years. Production Some Forecasters: 1 Trillion barrels already consumed peaking about now History : 1 Trillion barrels already consumed Time

  13. PEAK OIL AND NATURAL GAS • Peak oil – properly defined – must be seriously considered • Prices, technology, and new supplies are important, but world demand is simply outstripping supplies of conventional oil • Even an additional 1 trillion barrels of oil only buys us 10 years • Mitigation options (transportation efficiency, alternate fuels, etc.) will require decades and trillions of $ • Consequences of failure to anticipate peak oil can be severe NATURAL GAS TO THE RESCUE? • Some analyses rely on natural gas to fill the gap • Many have erred on U.S. and North American NG production, and past NG forecasts have been revised downward • More recent NG forecasts need to be assessed • Estimating techniques have improved, but difficulty of estimating future supply & demand has increased • Adverse impacts could be severe

  14. ’02 3 4 . 0 ’03 3 3 . 0 3 2 . 0 3 1 . 0 3 0 . 0 2 9 . 0 ’04 Tcf/Year 2 8 . 0 ’05 2 7 . 0 2 6 . 0 2 5 . 0 2 4 . 0 0 2 3 . ’06 2 2 . 0 2 1 . 0 2 0 . 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0 2 0 1 2 2 0 1 4 2 0 1 6 2 0 1 8 2 0 2 0 2 0 2 2 2 0 2 4 2 0 6 2 0 2 8 2 0 3 0 2 RECENT NG SUPPLY FORECASTS REVISED DOWN DOE EIA Forecasts of N. American Natural Gas Supply to U.S. Looks good 4 years Trouble! Forecasting Oil & Gas Supply Is Difficult!

  15. ASSUMPTIONS NEED TO BE ASSESSED • NG prices forecast to decline but: 1) U.S. production increases for next 15-18 years, then stabilizes; 2) Demand increases modestly • Assumes that, in a tight global market for petroleum, U.S. can increase LNG imports at prices 40% below oil-equivalent Henry Hub Cash Price (left axis) vs. U.S. Total Natural Gas Consumption Natural Gas-Crude Oil Price Ratio ($/mmBtu), AEO 2007 vs. historical

  16. FUTURE U.S. NATURAL GAS PROBLEMS? • Risk that NG needed by U.S. economy may exceed forecasts • Price increases may be required to balance supply and demand Potential Future Natural Gas Supply Gap

  17. U.S. NG PRODUCTION HAS HIT A WALL Past 6 years, U.S. drillers have greatly ramped up drilling, with little impact on production • EIA has reduced estimate of future production every year • Are further reductions warranted?

  18. CANADIAN NG PRODUCTION Canadian imports likely to decline precipitously -- single greatest problem facing U.S. market • Production already falling rapidly: • -- Production in Western Canada has plateaued • -- Decline in Canadian drilling rate • -- Increased demand for oil sands production

  19. POWER SECTOR IS THE KEY • U.S. dependent on gas-fired generation to meet high percentage of incremental power demand • Are we underestimating likely growth in power sector demand? Dependence Upon Gas-Fired Generation Likely to Continue to Grow Electric Generation Capacity Additions by Fuel Type

  20. A ROSY SCENARIO? Nearly all of incremental U.S. supply is expected to come from just two sources: 1) Alaskan NG pipeline by 2018; 2) Massive increase in LNG imports -- But there are serious risks and uncertainties to both -- Until Alaska NG pipeline, we are dependent on imported LNG Projected Incremental Supply from Alaska Pipeline and LNG, as percentage of Increase in Total Projected Natural Gas Supply Total Supply to U.S. from LNG Imports and Alaska

  21. DO EIA’S NG PRICE FORECASTSNEED TO BE EVALUATED? • Beginning with AEO 2006, EIA implicitly decoupled the forecast relationship between oil and natural gas prices • If it had not decoupled the relationship, the forecast NG prices in AEO 2006 and AEO 2007 would be much higher • This could have important consequences for energy markets and infrastructure • Using regression analysis and monthly data, the Dallas Federal Reserve Bank estimated the historical relationship between natural gas prices • Use of the Dallas fed regression formula yields higher forecast NG prices

  22. IMPLICATIONS OF DECOUPLEDNG AND OIL PRICES If prices had not been decoupled, AOE 2006 and AEO 2007 forecast NG prices would be higher EIA 2025 Natural Gas Prices Estimates (High Oil Price Case) Compared to Those Derived Using the Dallas Fed Formula

  23. IMPLICATIONS FOR FORECAST2030 NG PRICES Applying the Dallas Fed formula to the AEO 2007 reference case oil price indicates that there is a 50% difference in the implied NG price Applying the formula to the AEO 2007 high oil price case oil price indicates that there is a 75% difference in the implied NG price Discrepancy in Potential AEO 2007 2030 Natural Gas Price Forecasts (Reference Case) Discrepancy in Potential AEO 2007 2030 Natural Gas Price Forecasts (High Oil Price Case)

  24. SUMMARY • EIA work is critical: They have large resources and a huge responsibility • Planning for our economic well being is dependent on them covering the range of variables and risks at this very challenging time in our energy development • We cannot afford to ignore, ridicule, or downplay the possibility and the consequences of peak oil – risks are too great • When oil does peak, there are no silver bullet solutions • Reliance on adequate future supplies of NG at moderate prices is unwarranted and risky • U.S. NG production has peaked and this has implications as significant as those of U.S. oil peaking four decades ago

  25. THANK YOU! ROGER H. BEZDEK, PH.D. PRESIDENT MANAGEMENT INFORMATION SERVICES, INC. 202-889-1324 rbezdek@misi-net.com www.misi-net.com

  26. www.ASPO-Australia.org.au Association for the Study of Peak Oil and Gas International Australia LOCAL CONTACT INFORMATION While in Australia through July 6, Dr. Bezdek can be contacted via ASPO Australia

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