Peak Oil is dead … kind of

Hi all,

As you might have heard, a truly revolutionary paradigm shift is occurring in the petroleum industry that many are now saying is hard to be overly exuberant about. The truth in this can be found by looking at the markets and the consultancy business, for here realism is key to doing good, profitable business, and the observers once spelling doom and gloom for world energy consumption are now acknowledging that something fundamental has happened.

The revolution lies in something that has existed and been known about for decades. The problem however, is that no one knew how to make use of it in an economical, energy dense way such that it would become a viable competitor to conventional petroleum. The secret is shale. Petroleum in a less geologically developed form called Kerogen exists in shale but until now has been impossible to extract economically. Around 2005 that technological limitation was overcome. It wasn’t until the less risk averse smaller petroleum speculators began smaller operations to recover the lowest hanging fruit from shale, natural gas, that it became evident that this was true. Now, the markets are already being influenced by it and that is the real measure of the reality of this new paradigm. Once more expensive here, natural gas is now about one-quarter the spot price of the natural gas in Europe, which means manufacturing using it as an energy source is more economically sound in the United States than in Europe. This was not true ten  years ago, for Russia had been supplying natural gas to Europe at a relatively cheap price at that time. The paradigm shift was proven in 2012 when the critical mass of transition to natural gas began.

The domestic U.S. supply chain rides on the back of rail and trucking and replacing tractor trailer primary movers with natural gas vice diesel now results in about a 40% reduction in transportation costs. Not oblivious to such a huge economic windfall, the big names in fuel supply for trucks, such as Pilot Flying J, are building liquid natural gas pumps at all their stations sufficient by the end of 2013 to allow coast to coast truck operations on natural gas alone. This is huge. It means that about one-third of all domestic petroleum consumption will now be occurring at a cost of about 40% less than what it has been. This is 40% less consumption of “foreign” oil (read middle eastern) and it will have major reverberations in the U.S. economy. Products at places such as Wal-Mart will almost certainly drop noticeably. International, a major manufacturer of diesel engines, has an entire division now building natural gas engines for trucks and they are working hand-in-hand with fuel supply companies such as Flying J to field new industrial tractors across the United States.

The same phenom is occurring in the rail industry, already evidenced by the affects of the Bakken field in North Dakota, one of the biggest low hanging fruits found so far. This field is already being exploited by the smaller petroleum players (companies like Shell are astutely waiting to buy out the innovators in this early grab) and rail traffic, once declining due to the reduction in coal use in power plants, is now on the rise again. Material coming both in and out of the Bakken field area is affecting rail traffic. While I have not heard of conversions of locomotive primary movers to natural gas, watch for it. Locomotives use diesel engines to charge batteries and the “engines” of locomotives are electric motors that run off of those batteries. There is no “direct drive” from the diesels to the wheels, making them true diesel-electric machines. Because their friction loss is metal to metal, they lose very little energy on the rails. For these reasons locomotives are well-known as incredibly efficient machines for moving heavy cargo. Before long these giant diesel engines will likely be replaced with natural gas engines.

This is the kind of change one needs to see to confirm a paradigm shift. Investors and consultants in the industry now know what the general public will soon learn: an influx of wealth into the United States is about to occur in the same way that it happened in the middle east in countries like Saudi Arabia. The implications of this are indeed exuberant for those of us who happen to be living here. I’ll be discussing the implications of this for the rest of the world in the days to come, but one concern I have is that the only countries with proven shale reserves (though only tiny fractions of the proven reserves in the United States) are Russia, the PRC, Iran and Brazil. Not only that, but the technologies alluded to necessary to make extraction feasible in these countries is far less developed than it is here. This will have implications for our fellow citizens of the world. The one exception might be Canada, whose reserves are still a fraction of the those in the United States, but massive reserves rivaling those here are just a step away from being proven and the extraction technologies are either there or likely to migrate north when the potential is seen (due to the short distance the logistics will more strongly justify sharing of these technological innovations from a purely market-based perspective). Russia was astutely wise in pursuing the Bering Strait tunnel project for these reasons, I can quickly offer that advice for Russia. Such a bridge would likely facilitate migration of technology into Siberia where huge shale reserves are likely to be proven and can be exploited.

The next step, the one Shell oil and others are sitting on right now, is the extraction of Kerogen, and the refinement thereof, to extract actual fuel oil such as gasoline, diesel, etc. This also can be extracted from shale and it, too, will have a massive impact on the global petroleum picture. What we are in fact learning is that the “conventional” petroleum we’ve been extracting for the last 100 years was just the technolgoically easier one to extract and that most of Earth’s petroleum isn’t there. Its in shale.

Those who have followed this also know it is not without controversy. A technique called “fracking” has been used to extract gas from shale. But fracking is the technique used for gas. For petroluem fuel oils, where the real long-term change is likely to come from, now appears to be headed for extraction by an in situ heating process that causes the oil to seep from the rocks (unlike “conventional” petroleum, shale oil is locked inside rocks that have very low permeability such that the technolgoical hurdle in extracting it has always been how to get the oil out without devestating the environment to get it – early attempts relying on bringing all the shale to the surface and crushing it rather than just heating it – something the PRC and Germany are doing somewhat inefficiently now with what are called “retorts”).

With fracking a horizontal well is dug and shaped charges are detonated in the finished pipe and casing to shatter the shale and cause gas to flow. The biggest problem is that gas inevtiably flows into ground water contaminating it for consumers of water above ground. In the in situ heating process a “freeze wall” is used to prevent this. Both heating and the freeze wall were what made it economically infeasible before they figured out how to do that cheaply. Also, large amounts of water are used to force the oil out. Heads up: shale is found in even bigger reserves offshore where water is abundant and freeze walls and even heating might not be necessary there. And relatively shallow drill depths would be needed to exploit this. The cost of offshore operations would likely be offset by these advantages.

So, what is the cautionary note? While history is supposed to be a good source of learning about our future, seldom does this work so well. What we know from history, especially here, is that per capita energy consumption is increasing geometrically and too many have a hard time getting their head around what this means numerically. Per capita energy consumption is on a fast path to what I call the fossil-fuel boundary. Before long no amount of fossil reserve will be able to offset the per capita energy consumption rates of the United States (and hopefully of the rest of the world, too, since all should share in what is the truest word for bounty). At some point, which I now estimate at about 30 to 50 years out based on shale oil consumption, we will be right back to peak oil again. In other words, the second, much larger chunk of petroleum mother Earth has locked up for us will go much, much faster than the first half. At that point we will either figure out how to use the atom safely and soundly or we will die. And fission power plants are not the answer. Their energy density is way, way too low (suprisingly, it shouldn’t be, but because of the major issues associated with safe radiation handling – which isn’t even up to safe standards in todays designs – the realized energy from it is far lower than what we can get from petroleum). And we will die because the infrastructure will naturally expand (along with population) to such an extent that much lower per capita energy consumption will be insufficient to survive, much less prosper.

The only sound solution is fusion power whose radiation emission is essentially zero. This is the only safe way, in my opinion, to use nuclear power. It is fundamentally different than the existing fission technologies in use today, which are dirty, risky, loaded with radiation and downright scary as hell. In fact, that any fission reactor design was ever approved for use above ground is astonishingly irresponsible. The only remotely safe way to operate a fission reactor is to entomb it in a concrete sarcophagus about 200 feet below ground (below the water table) – and then only with the safest designs currently available. To me, this is common sense. But I digress. Any and all natural or deliberate events to create havoc must be intrinsically controlled for in such designs. We do not currently do that. The horror that occurred in Japan is just the tip of the iceberg. Had it been properly entombed the entire affair would have simply been an insurance write-off for the plant and nothing more. Statistically speaking, as fission plants are built in the thousands, no matter how safe you make them, one of them is bound to fail miserably. So, it will happen again. Designs of such reactors should assume failures and be designed so that such failure has no impact above ground. But such designs would clearly make fission power economically infeasible. Hence, fusion.

We’re going to need the energy bonus of shale oil to continue development in fusion power sources. Wind power, improvements in energy efficiency (work done vice energy consumed), etc. are also energy dense and sensible, but these measures cannot keep up with this geometric consumption monster. Nothing can, except the atom. A first generation, low power fusion plant could provide the power to sustain the current, total energy consumption of the United States continuously twenty times over: thats a single power plant!

My recommendation to my buddies at CFR and K Street is this: use the shale oil respite to pursue feasible, non-radioactive fusion power plant technology with all possible haste and don’t waste the opportunity that history has tried to warn us about once already. Failure to do so might be viewed by future observers as criminal negligence, especially when you are enjoying this respite while the rest of the world just suffers.

– kk

Shale

Shale

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