ISBN: 9781931498531 Year Added to Catalog: 2004 Book Format: Paperback Book Art: bibliography, index Number of Pages: 6 x 9, 280 pages Book Publisher: Chelsea Green Publishing Old ISBN: 1931498539 Release Date: July 1, 2004 Web Product ID: 25
High Noon for Natural Gas
From Energy Magazine, December 2004
By Julian Darley. Mr. Darley is the author of the just published book, High Noon For Natural Gas: The New Energy Crisis, published by Chelsea Green Publishing Company, White River Junction, VT; Tel: 802-295-6300
The coming shortage of natural gas in the United States and Canada, compounded by global oil peak and decline, will try the energy and economic systems of both countries to their limits. It will plunge first the United States, then Canada, into a carbon chasm, a hydrocarbon hole, from which they will be hard put to emerge unscathed.
For North Americans, the reasons for concern about natural gas are becoming ever clearer. For the rest of the world, there are at least four serious reasons to share that concern. First, whatever America does usually has profound effects around the world. Second, transporting natural gas across oceans entails very expensive decisions with many implications, including military ones, for the producing countries, as well as the
consuming nations. Third, both the industrial and less-industrialized nations are starting to convert many major systems to natural gas, especially electrical power stations. This is a mistake of historic proportions, since global gas supply will suffer the same fate as oil. Well before that happens, many other countries will experience the same kinds of natural
gas shortages as North America. Citizens will likely find their governments similarly unprepared, even as the gas exploration industry knows that we are already using more gas than we find.
Current State of Supply
Although there is much disagreement among authorities, a reasonable figure for the amount of ultimate recoverable conventional gas in the world is 10 Peta cubic feet (Pcf ) or 10,000 Tera cubic feet, with an additional 2.5 Pcf of unconventional gas. In 2001 about 90 Tcf of gas (both conventional and unconventional) were produced and marketed. In the accompanying figure the thin discovery line shows the amount of gas discovered globally reached a very sharp peak in 1970 when the huge field in Iran and Qatar was found, then fell off equally quickly. There was a small recovery at the end of the millennium, but in the years 2001 and 2002, for the first time, less gas was discovered than used. This is highly significant: twenty years after the same thing happened to global oil (in 1981) the world entered the oil peak-plateau.
The thick line shows how the world has increased its production to-date. However, if you take that line and move it back forty years on the graph (the dotted line) one can see that gas extraction has so far followed the discovery pattern (just like oil before it). If extraction continues to follow the general contour of reported discovery, a colossal rise in future extraction would reach an extraordinary peak in 2010 and then drop like a stone. In reality, this is extremely unlikely for a number of reasons, so production will be greatly smoothed out. Since we can only use what we find, if world reserves are over reported or
new fields of natural gas keep failing to replace the amount consumed, then the question is for how long will production (the thick or dotted lines) keep rising to meet the world’s increasing demand?
Furthermore, the amount of infrastructure required to increase gas extraction at the rate to follow the discovery line cannot be built fast enough. Because much of the new natural gas is remote, or “far from market,” a vast matrix of pipelines, much of it serving a colossal new global LNG system, will be necessary to realize the “globalized” gas market now envisaged. This infrastructure will be on a scale so far unmatched on the planet. Though technologically feasible, the sheer scale of these pipelines, along with the LNG tankers and processing plants, may yet stretch the world’s financial system past its capacity. With the United States facing unparalleled financial problems, which may devastate the world’s financial system, it is possible that the enormous investments required will not be forthcoming. There may also be problems with nickel shortages, which could slow down construction of the huge, high-quality steel pipes required for transportation.
These limitations will likely flatten the global gas extraction pattern considerably, though fast rising demand will try to pull production up as quickly as possible. A gas peak-plateau somewhere between 2010 and 2025 seems within the realm of possibility. Three things would change this forecast considerably: there are sudden and new gas finds of immense magnitude; ways of safely and commercially tapping methane hydrate deposits are found; there is an enormous global economic crash. The last item seems by far the most likely. This would certainly stave off a gas decline for a number of years, possibly even a decade or two, depending on its severity. Followers of the “Olduvai Theory of Industrial Civilization” or “Die Off ” devotees might argue that the world economy will not recover from an oil-peak induced crash. These are obviously highly speculative issues, but the stakes are so high, that speculate one must or else give up on all long-term
policy and planning other than the cornucopian, business-as usual type.
Sunset Provinces: United States and Canada
In the case of the United States as a whole, the lack of warning about gas decline has been compounded by several factors, including the rise of offshore (Gulf of Mexico) and unconventional-gas production. According to the U.S. Department of Energy (DOE), in 2003 U.S. gas reserves were 183 Tcf. U.S. production fell from 19.61 Tcf in 2001 to 18.96 Tcf in 2002. The number of wells rose from 373,304 in 2001 to 383,626 in 2002, the largest number ever. Although the increasing number of wells is good news for drilling-rig companies, more wells producing less gas is one of the surest signs that production is peaking, and that the situation is not just a blip.
Now that the United States, as the world’s largest gas user and former largest producer, is going over the gas peak, if not cliff, it is important for the American reader (and anyone else affected by the American economy) to know where gas currently comes from in the
United States itself. Otherwise, it will be hard to decode the confusing and curious policy twists coming out of Washington, D.C., or to develop personal and community plans that will be somewhat insulated from U.S. official and corporate policies.
In the U.S. the major producers have now all abandoned onshore exploration. Extraction has followed the discovery pattern remarkably faithfully at a distance of about twenty years, with an all-time extraction peak in 1973, followed by a second softer—and much lower—peak in the late 1990s. The United States is now on the final downhill gas run, just as it is with oil.
In January 2004, Canada’s proven natural gas reserves stood at 59.1 Tcf. Canada produced about 6.6 Tcf of natural gas in 2002. The picture for Canada, which has supplied almost all U.S. gas imports since the mid-1980s, looks, if anything, much worse than the United States.
Canadian production more than doubled in the twenty years from 1980 to 2000. After a brief plateau, production has begun to fall even faster than some of the worst public predictions had suggested. In 2003 Canadian production fell by 5 percent, leading to as much as a 15 percent decline in exports to the United States in 2003, just when it was
trying to make up for its own production decline. In fact, the decline of U.S. conventional onshore gas production has been masked by a large growth in coalbed-methane extraction in several areas of the United States and offshore production, particularly in the Gulf of
Mexico. Without this new production, the United States would have had much earlier warning of the impending supply crisis.
More than half of U.S. domestic gas production comes from the Gulf Coast, on- and offshore, with a large share coming from what is called the Outer Continental Shelf (OCS). The other major area is the Rocky Mountains, which also produce a lot of
unconventional gas. While the governments of the United States and Canada are now publicly admitting that gas production is facing real difficulties, they won’t say that production has peaked, rather that drilling levels are reduced in some places for reasons they cannot entirely explain with market theory. The government numbers all confirm that production is in decline across most of the United States and Canada, with the sole exception of the relatively small gas province of the Scotian Shelf of the coast of Nova Scotia. Gas (and oil) production numbers are subject to revision, up to a year or more later, but preliminary numbers from 2003 not only confirm the picture of decline but strongly reinforce it, with declines of up to 10 percent for some of the largest U.S. and Canadian producers.
North Sea—United Kingdom vs. Norway
The U.K. part of the North Sea is a classic example of what happens when the desire for cheap energy, and later a deregulated, free market, meets a large gas play. Although the North Sea is most often connected with oil, in fact gas was found there (off the Yorkshire coast) in 1965, well before the first oil fields in British and Norwegian waters in 1969.
By the mid-1970s, the southern North Sea was supplying most of Britain’s natural gas. Later huge gas finds in the ferocious waters of the northern North Sea allowed Britain to become highly gas dependent and eventually to export to Europe by the late 1990s, which had, by contrast, fueled its central-heating revolution with oil. This left Europe vulnerable to the oil shock of 1973, but Britain, once the dash for gas was fully underway, was much less affected. Things were rather different by 2003. Britain now has a chronic and serious gas addiction problem, while all of its sector of North Sea gas production is in decline, so much so that it will be importing Algerian gas, as LNG, in 2005.
The contrast with the way Norway has managed its North Sea hydrocarbons is very marked. Norway has tried, with some success, to extract its oil and gas over a much longer period of time. The irony of the British free-market policy under Margaret Thatcher was that it prompted such enormous gas (and oil) production that it depressed
prices and used up a huge resource very quickly. Now, as the world moves out of the petroleum century into an era of permanent energy shortages, Britain is turning to exactly the same gas exporters as everybody else, starting with Russia, North Africa, and the Persian Gulf.
The folly of this policy can hardly be exaggerated. In addition to producing greater gas dependence, the low prices also strongly discouraged the development both of alternative, renewable sources of energy and of conservation of the considerable resources Britain had discovered. In 2000, it was reported that there were only 2 megawatts of solar generation installed in the whole of the United Kingdom. Britain is not Nevada, to be sure, but even Norway, with less sun and far more fossil energy to spare per capita, has been way ahead of the United Kingdom in solar and renewable energy installations. Energy is at least partly a matter of attitude and will.
As U.K. North Sea gas production declines, Norway’s gas production may increase somewhat and continue for many years, helping to supply a considerable part of Europe’s lusty demand for gas. However, in 2001 for the first time, Norway produced more gas than it discovered, an ominous sign that unless it finds new gas perhaps in the Barents Sea, its reserves too will soon reach their limits. In perhaps fifteen or so years, Norway is likely to run into the same trouble as Britain.
Indonesia has been an oil producer for well over 100 years and was the target of the oil-starved Japanese in the Second World War. Ironically, it later became the largest of supplier of liquefied natural gas (LNG) to Japan and indeed in 2004 is still the largest LNG producer in the world. However, despite having large reserves reported at over 90 trillion cubic feet, Indonesia is experiencing production decline. This may be due to lack of infrastructure, especially in the case of the offshore Natuna field, which contains half its reserves. But Natuna is also a distant gas province and has a very high carbon dioxide content.
It may be that Indonesian production doesn’t surpass the original peak, but if production remains at about the present level of nearly 2 trillion cubic feet per year, then Indonesia should still be producing considerable quantities of gas for at least another twenty or more years. However, the pressure to produce more gas by increasing infrastructure is strong, and Indonesia is very different from the more prudent Norway, not least in having fifty times the population. Looked at in world terms, no Southeast Asian gas producer has anywhere near the capacity of the “Axis of Gas,” and almost all of Indonesia’s gas is already being taken by Japan, South Korea, and Taiwan. As China becomes an enormous gas importer from the middle of the decade, only Malaysia and Australia have anything like the kinds of reserves to service such a giant, and even those will not be able to keep up for long. Energy is soon going to become as critical in Southeast Asia as it is North America.
Now that the U.S. reserves have declined so much, Russia is reputed to have the largest natural gas reserves of any single nation, but there are doubts about this. Its “public” reserves are, according the U.S. Department of Energy, 1,680 Tcf. It extracts just over 20 Tcf per year, and presently exports 6 Tcf and rising. Even this mighty production would not satisfy U.S. demand, which is over 23 Tcf per year, and also trying to rise. Russia, the great hope on which the planet is apparently relying for future gas, is stated to have more than double the reserves of Iran, which appears to have the second largest reserves. It must be a cause of concern then that Russian gas production is not expanding nearly as fast as oil production did.
Because the United States is the dominant user and importer of gas in both North and South America and is also facing the greatest problem with gas supply not meeting demand, the discussion of Central and South America will be from a U.S. perspective. There are lessons here for all governments and citizens everywhere in the world, however, and the case of Bolivian resistance to exporting gas to the United States will
be looked at in more detail, though the account will necessarily be incomplete since matters are still unfolding.
South and Central America have long been of the greatest strategic interest to the United States because of the presence of oil. Mexico has been pumping oil to America since the First World War, as has Venezuela. Between them, they pump almost as much oil to the United States as Saudi Arabia and Canada combined. In addition to oil, Mexico was for some years a natural gas exporter to its northern neighbor. Since the late 1980s, however, Mexico has become a gas importer, so that by 2001 the United States exported about as much gas to Mexico as it imported via LNG. It seems unlikely that this situation will continue for long, since the United States will be growing increasingly anxious for all the natural gas it can lay its hands on.
In fact, the situation is much more complicated than a first glance would suggest. Mexico may yet have quite a lot more gas to extract, but its nationalized petroleum company, Pemex, is not regarded as one of the most “efficient” at extracting resources as quickly as its northern neighbor and NAFTA partner might wish. This may be a good thing for Mexico in the longer run, since it will leave more in the ground for times when desperation is the order of the day. Mexico also wastes a lot of its gas by simply flaring it at the well site. In September 2003, the U.S. Department of Energy predicted that Mexico would start exporting gas to the United States in 2019, a rather extraordinary statement by any standards, especially as oil and natural gas predictions in these almost certainly permanent “tight market conditions” are now little better than long-range weather forecasts. As a sign of the volatility of the situation now, just three months later, in December 2003, the DOE predicted that Mexico would not become an exporter at all, but
would continue to be an importer till at least 2025.
In the meantime, Mexico’s natural gas hunger is only set to grow, expecting to double its 2000 demand by 2010, so that it will be using almost one-fifth of what the United States is using now—a very large amount of natural gas. This demand expansion, which is likely to lead to unfortunate political and strategic developments, is occurring for two different reasons.
First, gas demand is increasing directly as a result of a growing population that is trying to “develop” economically, and second, indirectly, because Mexico is set to become a gas-transit country, taking LNG for the United States and piping it north either as gas or as electricity. If the latter, then so much the better for the United States, because Mexico gets saddled not only with unpopular and potentially explosive LNG terminals, but also, if the electricity is generated south of the border, Mexico has to deal with the associated pollution and greenhouse gas emissions. This may be quite a problem, since Mexico has signed the Kyoto Protocol, unlike the United States, which famously withdrew from the process in March 2001.
Traveling south, Venezuela has large gas reserves, second only to the United States in the Americas. Colombia has only relatively small deposits. As of 2003, Colombia, previously a modest user of its own domestic gas production, was getting ready to increase its natural gas consumption significantly. The plans of 2002 called for building a natural gas pipeline from Colombia to Venezuela. But, curiously, in its early stages it would export gas from the minnow Colombia to the giant Venezuela. However, the ultimate intention is to send gas the other way. Venezuela, with stated reserves of 148 Tcf is only slightly
smaller than the U.S. reserves. Even so, it extracts gas at barely more than one-twentieth of the U.S. rate. It can be no surprise that Venezuela has discussed building LNG terminals with commercial LNG companies such as Shell and Mitsubishi. Ironically, these discussions have slowed because of the political problems caused by the very nation that would get the most benefit from the LNG. The real irony, however, is that the plan to remove President Hugo Chavez and install a highly pro-U.S. president backfired. Chavez had not even shown unwillingness to sell to the United States, but his anti-free-market political ideology was not to Washington’s taste. Washington may have to be willing to swallow its dislike, because the U.S. consumer will soon be asking where the gas is, and Venezuela still has quite a lot of it. Venezuela may face another problem, which other producers face too, and that is if they extract too much associated gas (gas found with oil), too early, they may harm the prospects for their oil production.
This can happen, because the gas cap so often found above oil deposits helps pressurize the reservoir and increases the oil flow. It usually only makes sense to extract more associated gas when the oil output is well into decline, and of less interest. As gas becomes more and more valuable in North America, the political and commercial pressure to extract associated gas sooner is likely to increase, making the task of the petroleum reservoir engineer that much harder.
Venezuela, then, remains the most obvious gas exporter in terms of size of reserves, but a rather problematic one, in the short term at least. The islands of Trinidad and Tobago may be geographically small, but since their first shipment in 1999, they have grown rapidly to become by far the largest exporter of LNG to the United States. In 2003 they were exporting 29 Bcf per month on average (though there are considerable variations month by month). New LNG trains to ship ever increasing amounts of gas are being built, but this has given rise to worries that Trinidad’s gas reserves may be overstretched by
such prodigious demands, and that it is committing too much of its gas to LNG. In 2002, 36 percent of its gas was exported, but there are estimates that when the fourth LNG train comes in stream 2006 (and two more trains are being considered), it may be using as much as 80 percent of Trinidad’s gas production. Even the lowest estimate is more than 50 percent of production. Trinidad’s domestic economy is heavily dependent on its natural gas. Ninety percent of all the energy that Trinidad uses comes from natural gas, and a great deal of gas is used to make methanol and ammonia, especially for nitrogen fertilizer. Trinidad is the world’s largest exporter of both methanol and ammonia. Trinidad’s remaining gas reserves are thought by some to be about 30 Tcf, and recent exploration drilling has not been promising. At the kinds of increasing extraction rates now happening, Trinidad’s gas will not last much beyond twenty years. After that, it will
be in catastrophic energy and economic difficulties, and with a fast rising population to fuel and feed.
There is another strange complication with gas in this region, which is a direct result of the huge long-term investment in LNG export facilities in Trinidad, without enough gas to keep it supplied beyond two decades. In fact, Trinidad shares a gas province with
Venezuela, the Deltana, which some have suggested will be needed in future to keep the LNG trains supplied. This is not likely to be favored by Venezuelans, who are considering exporting the gas themselves. It has been conjectured that this matter is of such importance to the U.S. gas market, that it is one of the reasons for past and continuing efforts to remove President Hugo Chavez.
The rest of South America is, like Colombia, planning to increase its use of natural gas—in many cases by a great magnitude. Chile is perhaps the most aggressive, and possibly most foolish, case in point. It increased its gas use by almost a factor of five from 1991 to
2001, and plans to increase by another factor of four by 2011, yet it has reserves of only 3.5 Tcf, and falling production. It is now totally dependent on Argentina for gas imports, which amounts to over 80 percent of Chile’s gas consumption. This has made it vulnerable not only to Argentinean currency problems, but also to other man-made and
natural problems, such as labor unrest and the landslide that caused power outages in Chile and Argentina in 2002. It has also found now familiar problems with overly optimistic ordering of natural gas electricity-generating power plants, which are then canceled, leaving the pipeline operators with a bad investment. This suite of problems highlights the underlying and disagreeable fact that everybody wants to consume more gas, but few can produce enough to do so.
In South America, Bolivia has the largest amount of gas to spare: it is estimated to have somewhere between 24 Tcf and 52 Tcf of gas reserves, and everyone has their eyes on it. In fact, Bolivia has much more gas than Mexico, at least according to current estimations it is 8.8 Tcf (which may be too miserly). Peru also has generally untouched reserves, and Argentina has sizeable reserves, though both have considerably larger demand than Bolivia, and plan to increase their reliance on gas considerably.
The giant in the region is Brazil, which is desperate to become energy independent and has tried for a number of years to develop a stable relationship with Bolivia for importing gas. Various problems have continually upset most plans, ranging from currency difficulties, more over ordering of gas power plants (in reaction to a drought induced
power crisis in 2001) and then cancellations, and the extraordinary complexities of pipelines and transportation. There is also the matter of desecration of a whole section of what remains of the Amazon. However, Brazil’s gas situation has recently changed dramatically, with the discovery by its own petroleum company, Petrobras, of large offshore gas deposit in the Santos basin estimated to contain 14.8 Tcf. Petrobras feels certain that this is just the beginning of many more finds, though others are more cautious. Nonetheless, this find almost doubles the EIA estimate of 8.1 Tcf for Brazil’s reserves. However, Brazil’s gas consumption is rising fast, and unless it either caps its gas-demand growth or discovers still more gas, it will find itself, in some years hence, once again looking for gas imports.
Axis of Gas
Most of the countries that have large remaining gas reserves are in politically sensitive or dangerous conditions. Having considered some of the possibilities and difficulties of natural gas supply south of the U.S. border, it remains to look at why the natural gas supply may never be really stable or reliable for much of the world. Those with greatest market power will be better served, as usual, but even they will be in difficulties relatively soon.
The reason for what some may regard as a pessimistic view of gas supply stability is that the over-consuming, highly industrialized world, with the exception of Australia and Norway, has used most of its cheap and easy gas, just as it has done with oil. This now leaves Russia, the Middle East, the Caspian basin, and Africa to fill the supply chain. All
of these regions face formidable political, economic, and environmental problems, and most of them have population problems of fearful proportions as well. Their population problems are second only to those of two of their largest potential new customers—India and, especially, China. The energy and political situation of all of these countries is discussed in detail in my unabridged work, High Noon For Natural Gas: The New Energy Crisis.