The Energy Futurist

The last sip

Posting in Energy

Energy columnist Chris Nelder explains why recent projections of oil independence by 2020 are not only wrong, but counter-productive in the long run.

A fever has swept over American energy observers in recent weeks as they compete to write the most optimistic story of impending energy independence. For example, see Clifford Krauss in the New York Times, Citigroup's Ed Morse in the Wall Street Journal, and Raymond James's outlook covered by Angel Gonzalez for Dow Jones, with perhaps the "Bonanza" theme song in the background.

Or if not a fever, then perhaps a mental illness, or heavy doses of good acid. Because as far as the data shows, none of these projections have any basis in reality.

The vogue suggestion is that North American oil production is about to surge and wipe out our 8.7 million barrels per day (mbpd) of oil imports, making us self-sufficient in oil by 2020. Most of this new oil is expected to come from fracked shales like the Bakken Formation in North Dakota, plus new drilling in the Gulf of Mexico and offshore California, an increase in Canadian tar sands production, and a miraculous reversal of the long production decline in Mexico.

Citigroup, under the leadership of Morse, probably holds the current record for the most outlandish projection. It suggests that North America will add the equivalent of 1.4 mbpd of new production every year between now and 2020, including 0.4 mbpd from tight oil. (That projection was then thoroughly debunked by Dave Summers at The Oil Drum.)

What these optimistic scenarios don't tell you is what they really look like, and what they'll really do to the U.S. in the long term.

Tight oil

The basis of this new euphoria, as I explained in February, appears to be the 0.6 mbpd or so of "tight oil" production from the Bakken. These wells typically produce a mere 80 to 100 barrels per day on average, to 150 barrels a day at the high end. Using the higher production figure, achieving 0.4 mbpd of new production every year through 2020 would require at least 20,000 new wells nationwide.

To see the effects of such drilling, consider this map of oil and gas wells in the Elm Coulee field of Montana, the first commercially successful portion of the Bakken Formation. Some 7 to 10 active oil wells per square mile dot this field.

Source: ESER

But that's more representative of a formation with a single pay zone. Some U.S. shales actually overlap each other, so perhaps instead we should visualize the Denver-Julesberg basin, an area we've been drilling for roughly a century. The basin contains multiple layers of oil- and gas-bearing rocks, including the Niobrara Shale, which is anticipated to produce 250 thousand barrels per day by 2020. This map shows 20-25 producing wells per square mile near Platteville, Colorado.

Source: ESER

That, then, is the onshore portion of the new energy independence vision: A pincushion, where we draw 60 to 150 barrels per day from each hole. And we'll have to keep drilling them like mad, because production from those wells drops sharply in the first year then tapers off to negligible levels after 15 years or so, and eventually becomes uneconomical.

Production profile of a typical Bakken well. Source: North Dakota Department of Mineral Resources

How far can tight oil from these shale formations take us? According to the current Energy Information Administration (EIA) survey of U.S. shale gas and shale oil (tight oil),  we have an estimated 24 billion barrels of undeveloped technically recoverable shale oil in the Lower 48. In 2011 the U.S. consumed 6.85 billion barrels of oil. So the big bonzana of shale oil amounts to about 3.5 years of demand.

Outer Continental Shelf

What about our offshore potential? The oil and gas industry has been agitating for greater access to the Outer Continental Shelf (OCS) since onshore oil production began declining in the 1970s. What if we opened all of it to drilling, without any restriction?

Source: U.S. Minerals Management Service [Click for larger version]

The 2011 assessment from the Bureau of Ocean Energy Management (BOEM) gives a mean estimate of 88.6 billion barrels for the entire OCS. (The data in this assessment varies only slightly from the 2006 data shown in the chart above.) Therefore, if we drilled the entire OCS, it might meet 13 years of demand. If the 95 percent probability estimate of 66.35 billion barrels is correct (and the P95 estimates usually are), then it would meet less than 10 years of demand.

ANWR

After the onshore tight oil in the Lower 48, the offshore oil of the OCS, and the Gulf of Mexico where oil production has modest growth potential, the only remaining serious prospect in America is the Arctic National Wildlife Refuge (ANWR), the target of the most contentious battle for new oil drilling in the last decade. We won't know how much oil is there until we actually drill it, but according to the current estimate from the U.S. Geological Survey, the federal portions of ANWR might have 4.2 billion barrels under the P95 estimate (0.6 years of demand), or 7.7 billion barrels under the mean estimate (1.1 years of demand).

Oil shale

There is another unexploited resource in America known as oil shale, not to be confused with shale oil (tight oil). Oil shale is a dense, hard rock impregnated with kerogen, an "uncooked" form of hydrocarbon that nature hasn't yet converted into actual oil. Oil cheerleaders like to talk about the trillion barrels or so of it that exists in America in places like the Green River Formation of Utah, but as yet no one has figured out how to produce it commercially (at a profit). So we may consider our prospects from oil shale to be a big fat zero.

All resources

For a final point of reference, there is the EIA's 2010 assessment for the entire U.S. Although it uses 2008 data, I believe it is their current overall assessment. It shows 198 billion barrels of technically recoverable resources (not "proved reserves") for the entire country, excluding areas where drilling is currently prohibited and areas within 50 miles of the Atlantic coast. By this assessment, the U.S. could meet 29 years of demand. Including "undiscovered technically recoverable resources"—like ANWR, OCS and tight oil—we might have enough to last about 41 years in total.

Finally, for reasons I have explained in previous columns, I do not believe that biofuels or tar sands can be significantly scaled up from current levels. The expectations for these fuels in the 2020 independence stories are simply not supported by the data.

The real prospects for U.S. oil production

So if all limits on drilling in the U.S. were removed, and if the estimates of undiscovered, unproved oil are correct, there is enough oil remaining on U.S. soil and in federal waters to meet demand for about 41 years, including 17 years' worth from ANWR, OCS and tight oil shales.

But at what rate could we produce it?

We can't know the production rates of OCS and ANWR until we produce them, but as I explained last month, exploiting those resources would be a long-term effort: probably 10 years to bring the first oil online, and 15 years or more to reach maximum output around 2 to 3 mbpd. By that time, it would be hardly noticeable as it compensated for the loss of oil production in the U.S. and elsewhere due to the depletion of mature fields.

Suppose we forget about all these niggling realities for a moment and just take the Citigroup projection at face value. Let's assume that U.S. petroleum production climbs from 5.8 mbpd in 2011 to 10.2 mbpd by 2020 as they forecast. Let's further assume that all limits on drilling are removed. What does this increased rate of production do to the lifespan of our resources?

It cuts it nearly in half.

At today's production rate, we would exhaust all of the proved, inferred, and undiscovered oil in the U.S. in 133 years. But if we ramp up to Citigroup's 10.2 mbpd rate and hold it there, we'd exhaust it in 76 years. Leaving out undiscovered resources, we would exhaust U.S. oil in 39 years at the current production rate, or in 22 years at the "energy independence" rate.

What "energy independence" really means

So now we know what the "energy independence" strategy really means.

If we take the status quo path, maintaining imports and overall production at current levels, but do not drill ANWR or OCS and do not increase tight oil production, we might have about 40 years to prepare for the day when U.S. oil production goes kaput. (Actually, it would be a gradually declining production rate over a longer time, but let's not overcomplicate the math here.) If we maintain imports and overall production at current levels but gradually drill everything, and the remaining prospects lived up to expectations, we might have 133 years before the oil dried up.

Alternatively, if we take the "energy independence" path and turn all of America into a pincushion, open all the wilderness, accept all the risks of freshwater contamination from fracking and saltwater contamination from offshore spills, and improbably raise oil production to meet all of our oil demand, we might have 76 years of output left. If we drill everything and raise production to meet all of our liquid fuels demand (which is currently met by natural gas liquids and biofuels in addition to oil), we might have 41 years. And if we try to drill everything and meet all of our needs domestically, but the undiscovered oil turns out not to be there, or not to be commercially viable, then we could drain the dregs in just 22 years.

As veteran petroleum geologist Dr. Colin Campbell says of peak oil, “As any beer drinker knows, the glass starts full and ends empty and the faster you drink it the quicker it’s gone.”

All the talk of incipient energy independence is a mere pacifier and a distraction. It's a way of avoiding the fact that at some point we must take action and prepare for the day when the oil is finally gone. Yet we know that it will take many decades to transition most of our infrastructure to electricity, and that if that electricity isn't generated by renewables, it will be powered primarily by coal and natural gas. . . until they too run out.

The fact is, 40 years probably isn't enough time to make that transition. As I discussed last November, we really needed to begin it 40 years ago. We will probably wind up drilling everything anyway because we'll need the oil to rebuild our infrastructure, having started on the transition so late. But maximizing our production now to satisfy a short-term political need, or to temporarily plug a structural trade and budget deficit, would be stupid and counter-productive and foreshorten our already too-short window for transition.

Our remaining prospects aren't a fresh full pint of beer, and drilling them is no solution to peak oil. If we were to achieve the energy independence production rate we might feel better for a decade or so, but it would come at the price of decades more of greatly diminished domestic production later on—at the very time when global oil exports are declining fastest and becoming intolerably expensive.

So that's your real choice, America. You can slug down that last swallow and go home early, or you can linger awhile, sip it slowly, and stick around 'til closing time.

Photo by Chris Nelder

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Chris Nelder

Columnist (Energy)

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure