Archive for energy

Peak Oil primer

Posted in Other with tags , , , , , , on February 21, 2010 by Dan

I drafted this article a few months ago for Carbon Retirement‘s newsletter, but simliar ‘peak oil primer’ articles were published around the same time by a couple of big publications and I decided not to publish it. In hindsight, I think this article is a bit more factual and have decided to post it here.

Through the Twentieth Century, we continuously increased the rate at which we drilled oil, but cheap, easily accessible oil may now be running out. This article looks at some of the debates around ‘peak oil’ and starts to explore how it could be relevant to people and businesses.

What is peak oil?

Peak oil is something that happens in all oil fields. The light, good quality oil rises to the top. It is cheap to extract and easy to refine. As the field empties, the remaining oil is thicker and stickier and more difficult to extract and refine. The finished product becomes more expensive to produce and production tails off.

If you add together fields that are at different stages in their lifecycles, you get a similar pattern, suggesting that peak oil also applies to regions. Here in Europe, for example, we are already well past the peak.

Oil production in OECD Europe

What is less certain is whether oil production on a global level is going to peak any time soon, and how peak oil will affect economies, companies and communities.

What evidence is there for global peak oil?

There is agreement on one thing: there is still a lot of oil in the ground. The question is how much of it is accessible at a price we are prepared to pay. Much of it is deposited in places that are difficult to reach, or is controlled by unpredictable or hostile governments.

One important piece of evidence is the rate of new discoveries. A pattern is noticeable in countries where production has already peaked: the rate of new discoveries peaks a few decades before production peaks. In the US, discoveries peaked in the 1930s and production peaked in 1971. In the UK, discoveries peaked in 1975 and production in 1999. Global discoveries peaked in 1964.

A second piece of evidence concerns the recent oil price shock. Higher prices should stimulate more production if there are opportunities to develop new oil fields, but while the oil price increased from around $50 per barrel in early 2007 to around $145 in mid-2008, production hardly changed.

Thirdly, the average amount of energy required on average to get oil out the ground is increasing. According to Simon Ratcliffe of the Association for the Studies of Peak Oil and Gas, in the early Twentieth Century one unit of energy was required to produce oil containing 100 units of energy. In the 1970s, this ratio had declined to around 25:1. Today, some fields are only achieving 4:1.

There are many predictions of when global peak oil will occur. Some say it is happening now or even happened in the past few years. Others believe that production will continue to increase for several decades. The chart below shows a range of forecasts. The International Energy Agency (a forum for industrialised countries) has some of the most optimistic views.

Global oil production forecasts

Global oil production forecasts

Mbpd = million barrels per day CO + NGL = crude oil and natural gas liquids Source: The Oil Drum:

In August 2009 the IEA’s latest research showed that oil production is likely to be lower that previously thought. The forum’s chief economist told The Independent:

One day we will run out of oil … and we have to prepare ourselves for that day. The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously.

The oil and gas companies are often optimistic about oil production. BP, a company that is investing in difficult oil deposits like tar sands in North America, believes that more sophisticated extraction technology will allow affordable oil to continue flowing for several decades. In a speech earlier this year (pdf), David Eyton, BP’s Head of Research and Technology, said:

There has been much debate about if and when we will reach ‘peak oil’. BP’s viewpoint is that there is no shortage of fossil fuels: we estimate that the world has already demonstrated the commercial viability of around 40 more years of conventional oil resources, 60 years of gas and 130 of coal at current consumption rates. Technology can extend all of these timelines well into the next century, in particular through the development of more unconventional resources. In our view, the more pressing challenge in the next decade is likely to be environmental — and more about the ‘peak carbon carrying capacity’ of our atmosphere than the availability of fossil fuels.

Shell’s view is more conservative, but still shows a belief that technology will allow new sources of oil to be gainfully exploited (from the Peak Oil Task Force report):

The global supply of oil will flatten by 2015, in Shell’s view, and if the oil industry globally is to maintain hydrocarbons supply on this plateau, very heavy investment will be required in ultradeep water, pre-salt layers, tight gas, coal-bed methane, in the Canadian tar sands and other areas of unconventional oil production

Until we have clearly passed the peak there will be a range of views, and the oil and gas industry is likely to be at the optimistic end. Several people we spoke to in preparation of this article, including some ex-employees of oil and gas companies, felt that companies like Shell and BP tend to be optimistic about their future production to protect their share prices.

How might society be impacted?

A reduced oil supply will have a particular impact on transport because 99% of transport fuel is petroleum (BERR 2008) – a product of oil. Food will also be affected because fertilisers are made from oil and the global food supply chain relies on transport for moving food between continents.

Let’s think about what could go wrong. Trade will reduce as transport becomes more expensive, and countries and local communities will be forced to diversify to produce food and energy. With less total energy going into the global economy and less labour specialisation, economies will shrink.

More competition for resources will lead to military occupation of oil rich areas. Politics will become nationally focused as countries seek to secure their energy and food supplies.

People differ in their view of the severity of these changes. Nathan Hagens, an energy researcher at the University of Vermont, identified four views  of our future:

  1. The ‘renewable energy’ contingent, who generally subscribe to the belief that solar based flows will eventually replace fossil fuels in a somewhat seamless transition and that Peak Oil is probably a good thing with respect to the environment;
  2. The energy technologists, who believe that even in face of near term peak, that better drilling, seismic, and recovery techniques combined with increases in unconventional fuels will keep us roughly on a business as usual path. (BP falls into this group);
  3. The End of Growth group – who think we have overshot resource limits (not just energy) and must generally powerdown to some cocktail of both more sustainable means and aspirations; and
  4. The Dieoff Crowd – that some large proportion (possibly all) of humankind will perish due to biological tenets based on fact that we are akin to a plague species, our rapaciousness trumps our ingenuity and ability to plan for future…essentially humans are not smarter than yeast.

In some countries, local communities have begun to organise to increase their resilience to these changes. These movements are called Transition Towns. They seek to reduce their energy use, grow food locally and improve community links. In short – to break their reliance on global energy systems.

How is peak oil relevant to a business manager?

It’s tricky for a manager of a company that is not directly involved in energy to engage closely with peak oil. The debates are complex and technical, with different points of view. As a result, most people who think about peak oil are geologists or involved in the oil and gas industry, and sustainability managers are not usually engaged with the issue. Peak oil is in a similar place to climate change ten years ago – which was mainly a concern for campaigners and atmosphere scientists.

However, a decline in oil supply would have a big impact on every economic sector. Oliver Dudok van Heel, a sustainability expert, believes that “some carbon intensive businesses will not survive. If a business model is based on liquid fossil fuels being available at a low price, they will have to change the way they operate. Overall, economies are likely to grow less and possibly shrink.”

As a business manager, you need to think about the resilience of your business model. Here are five questions to start you off.

  • How sensitive is your business to higher energy prices? What would be the impact on profitability of a long term increase in the price of oil?
  • How reliant on oil are your customers? Do their businesses depend on transport, for example? If their businesses suffer, yours will suffer too.
  • Are there commercial opportunities in a more limited energy scenario? Even if the economy shrinks, some businesses will be successful if they can help local communities to diversify and meet their immediate needs.
  • Are there ways that your business can support local food and energy production?
  • What are other organisations in your sector doing about peak oil?

Is carbon still following oil?

Posted in Climate Change with tags , , , , on August 23, 2009 by Dan

In January I looked at European oil and carbon prices to show how they were reacting to the economic recession. Today I had another look at these two markets to see what’s happened over the past six months.

The graph below (click to expand) shows the December 2009 EUA contract (from ECX) and the Europe Brent spot price (from the Energy Information Adminstration, converted in Euros using currency data from OAndA). The prices have been indexed to January 2007. Historically, carbon has largely followed oil.

In 2009 the trend seems unclear. While daily trading news is full of headlines like “carbon nudges higher on strong energy complex”, carbon seems have recovered less than oil. In January 2009, the nominal prices of oil and carbon were both around 70% of January 2007. At the end of last week, oil was at 110%, while carbon was at 80%.

Performance of EUAs vs crude oil

Performance of EUAs vs crude oil

I don’t have any clear commentary to offer just now. Glancing at the graph, it looks like carbon has fallen behind oil by about three weeks, but that doesn’t feel like a very plausible theory. I’d be interested to hear any thoughts.

Europe: irrationally inefficient

Posted in Climate policy with tags , , on September 11, 2008 by Dan

McKinsey published a report today (pdf) today that shows how all our energy and carbon targets can be met through productivity improvements alone (i.e. our energy supply does not need altering). And even better – unlike most GHG abatement technologies, all energy productivity improvements are reported to have a positive NPV.

Improving energy productivity involves things like energy efficient buildings and recovering heat from industrial processes.

The chart below from McKinsey’s report shows just how important energy productivity is. When we compare with CCS, which has the potential to deliver 3% of Germany’s GHG abatement potential and according to most industry estimates requires a carbon price of EUR 40 – 75 to be commercially viable, it seems obvious that our obsession with clean coal being necessary to deliver safe levels of emissions is misplaced.

So why isn’t the market delivering these improvements? Even with no carbon price, energy productivity makes economic sense. According to McKinsey, most productivity gains are dispersed among consumers who have insufficient capital and information to make the right investments. Product standards are the only way to address these barriers.

It feels like there’s something missing to me – it just seems like too big a market failure. I’m afraid I don’t have an answer right now but will mull it over.

Energy 2020: Closing remarks

Posted in Climate policy with tags , , on June 30, 2008 by Dan

There were two things I heard consistently today:

  1. The support of the public is essential – both to get the right planning and policy decisions and because individuals are directly responsible for a large part of the UK’s carbon footprint. In some cases, the speakers seemed to have a point that individuals don’t have enough information to make a judgement about what is in their best interest. Average homeowners are not in a position to calculate the impact of microgenerators on their energy bills and the value of their home, for example. But I’d say that most people do have sufficient information about their energy costs and act quite rationally. The issue is that their demand is inelastic. When fuel prices go up, people continue driving. This is why cap-and-trade (either upstream, like the EU ETS, or downstream, like the personal carbon trading scheme being designed by the RSA) is an attractive mechanism: the price at which people are prepared to change is discovered. If people had carbon rations they would start taking note of their meters.
  2. The planning process is jamming up the whole renewable industry and needs to be reformed. Everyone was politely horrified with the UK’s planning and it seems an obvoius place to start if the UK is to achieve its target.

Thanks to the RSA for inviting me to blog at this important Summit. I’d encourage you to take a look through the Energy 2020 Action Plan.

Energy 2020: Resource availability

Posted in Climate policy, Energy markets with tags , , on June 30, 2008 by Dan

Sir Ben Gill, Hawkhills Consultancy. Where is the resource going to come from? 3 places:

  1. Virgin materials – there is an enormous untapped resource from forests. The most wooded area of the UK is the south-east, and these woods could provide woodchips for biomass plants. Energy crops still have high potential – for biomass energy and transport biofuels. Virgin materials also could be used much more extensively in construction and manufacturing.
  2. Non-virgin materials – many things thought of as waste are useful resources. Up to 10m tonnes of timber are being put into landfill each year – this could easily be turned into energy. Energy from manure and the organic elements of packaging and other types of waste can be extracted through combustion, digestion etc. Food from wasteful processing, homes and supermarkets has a lot of embedded energy.
  3. Other renewable sources – waves, tidal power, rivers etc. are abundant in the UK.

Energy 2020: Major infrastructure

Posted in Climate policy, Energy markets with tags , , on June 30, 2008 by Dan

Stephen Balint, RES. The UK has good natural resources and could even exceed the 2020 target, but revision of the UK’s infrastructure is a prerequisite.

The planning process must be driven by the renewable energy strategy. Many applications have been stuck for 6-7 year. Public buy-in is critical to making these plans work and is key to planning decisions.

The National Grid is not delivering for new renewable generation – there is a long queue for connection.

The price-cap regulation for energy is stifling investment. Ofgem needs to prioritise sustainability. These changes will affect consumers – but in the long term, the switch to renewable energy will reduce consumers’ exposure to volatile energy markets.

The 2020 targets are only a milestone and plans must look beyond this (other speakers echo this).

Energy 2020: Consumers and Waste Energy

Posted in Climate policy with tags , , on June 30, 2008 by Dan

Phillip Sellwood, Energy Saving Trust. Consumers are key – transport and domestic sources are 45% of our current CO2 emissions – but we’re spending 25% of our time looking at them. Without consumer support, real progress will impossible.

Consumer action means modifying day-to-day behaviour: choosing energy efficient products, how and when we travel, the source of energy we use, our use of water and how we deal with waste. It doesn’t mean radically different lifestyles.

Consumers are vital across all the sectors being discussed in this summit. Transport in particular needs tackling urgently. If everyone chooses the most efficient car, individual carbon footprints would go down by 25%.