Power Hungry (35 page)

European countries see the shale gas revolution as an opportunity to reduce their dependence on the Kremlin-based kleptocrats who control the Russian gas business. The Europeans are justifiably worried about Russia. Gazprom, the Russian gas giant, has repeatedly shown its willingness to shut off gas flows to its neighbors. Those concerns have led European energy companies to invest in some of America's best shale-gas producers. In late 2008, Norwegian energy giant StatoilHydro paid Oklahoma City–based Chesapeake Energy nearly $3.4 billion to gain a stake in the massive Marcellus Shale play in Appalachia.
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And in mid-2009, StatoilHydro and Chesapeake announced that they are assessing shale formations in China, India, Australia, and other countries.
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A host of companies have begun seeking permits to tap shale gas prospects in France.
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In mid-2009, Exxon Mobil started preliminary exploration drilling in Germany, while ConocoPhillips started prospecting on a 1-million-acre section of Poland. Meanwhile, the Italian energy giant, Eni, paid $280 million to gain a stake in a Texas gas field operated by Fort Worth–based Quicksilver Resources so that Eni can learn some of Quicksilver's unconventional-gas production techniques.
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The surge in shale gas production is occurring at the same time that increasing numbers of countries are producing significant quantities of gas. Back in 1970, only about ten countries were producing more than 1 billion cubic feet of gas per day.
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By 2008, there were forty-one countries producing at least 1 billion cubic feet of gas per day.
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One other important development in the megatrend toward increased use and availability of gaseous fuels is that new gas reserves are being found at a faster rate than new oil reserves are. Between 1988 and 2008, global proved natural gas reserves (remember, the numbers for reserves are always smaller than those for resources) jumped by more than 68 percent, reaching 6,534 trillion cubic feet.
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During that same time period, global oil reserves increased by just 26 percent, to some 1.26 trillion
barrels.
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By any measure, that is a tremendous amount of petroleum. But the world's gas reserves are likely to last substantially longer than its oil reserves. In 2009, the reserves-to-production ratio for global proved oil reserves was 42.
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That means that at current rates of extraction, the world's known oil reserves will be exhausted in 42 years. For comparison, the reserves-to-production ratio for natural gas is 60.4, meaning that at current extraction rates—and assuming no more gas is discovered—the world has more than 60 years of proved natural gas reserves left in the ground.
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And those numbers will undoubtedly grow in the years ahead as more gas resources get moved into the reserves category.

The megatrend of increasing natural gas consumption and natural gas availability could scarcely be occurring at a better time. Over the past few years, worries about peak oil, and another possible peak—peak coal—have emerged as serious concerns. And that leads us to our next megatrend.

Peak oil is one of the most emotional and hotly debated issues in the energy business. There is widespread disagreement about when the world will hit peak production. For instance, former Princeton University geology professor Kenneth Deffeyes claims the peak was hit on Thanksgiving Day, 2005.
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Veteran Houston-based energy analyst Henry Groppe says it occurred in 2006, and that the increases in production since then are due to production of natural gas liquids, not of crude.
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Houston stock analyst Marshall Adkins, of the brokerage firm Raymond James, contends the peak was hit in 2008.
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Other energy watchers claim that the global economic downturn has delayed any discussion about peak oil for the time being, perhaps until 2020 or so.
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What will reaching peak oil mean? Well, it will almost certainly mean higher prices. But how much higher? Groppe, the dean of the Houston energy analysts, with more than five decades of experience in the sector, provides a succinct prediction: “The price of oil will have to be whatever is required to cause total consumption to decline.”
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Put another way, oil prices will rise to whatever level is needed in order to make alternative energy sources more economic and thereby cut demand for oil products. As the old saying goes, the cure for high oil prices is high oil prices.

Of course, it's not known how much pain the economies of the United States and other countries will feel when the relatively high oil prices caused by a peak in production begin to kick in. Nor is it clear what will happen with oil demand. In fact, a peak in oil demand may be just as important as a peak in oil production.

The peaking of oil demand in the United States would be driven by a number of factors, including the economy, the age of the population, and the efficiency of the automotive fleet. The stagnating demand at present, due to the economic downturn, the aging of the population, and the increasing efficiency of the automotive fleet, can be seen in the numbers. In 2008, U.S. oil consumption fell to 19.5 million barrels per day, a level that's just 3.5 percent higher than it was back in 1978.
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In June 2009, Cambridge Energy Research Associates issued a report projecting that U.S. demand for automotive fuel would peak in 2014. That outlook agrees with that of the world's biggest publicly traded energy company, Exxon Mobil, which expects U.S. demand for transportation fuel to plateau by 2015 and then fall by about 10 percent by 2030.
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Oil giant BP believes that U.S. demand has already peaked. In November 2009, the company's chief executive, Tony Hayward, declared “We will never sell more gasoline in the US than we sold in 2007.”
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Meanwhile, some analysts are now predicting a similar peak in global oil demand. In October 2009, analysts at Deutsche Bank predicted that world petroleum consumption would peak in about 2015 at around 90 million barrels per day.
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If those projections prove to be correct, then the United States, and much of the rest of the world, may soon have too much oil-refining capacity, and maybe too much oil-production capacity.

In fact, the United States already has too much refining capacity. In November 2009, Valero Energy, the biggest independent refiner in the country, announced that it was permanently shutting down its 210,000-barrel-per-day refinery in Delaware because of slack motor-fuel demand. The refinery had been losing $1 million per day. Three months earlier, Valero announced that it was halting production at a 235,000-barrel-perday refinery in Aruba indefinitely. Valero had tried to sell the refineries but couldn't find buyers.
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Though we cannot predict the future, we can look backward and see that the beginning of the latest economic recession—like many recessions
before it—coincided with a major spike in oil prices. History shows that sharp increases in oil prices are often followed by recessions. Those oil price spikes also lead to sharp decreases in oil demand. For instance, in 1978, U.S. oil consumption peaked at 18.8 million barrels per day. But the high prices that came with the 1979 oil shock, the second big price spike in six years, sent U.S. consumption tumbling. In fact, it took two decades for U.S. oil demand to recover after the price shocks of the 1970s.

It wasn't until 1998, when U.S. consumption hit 18.9 million barrels per day, that the 1978 level of consumption was surpassed.
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And it took two decades for oil demand to recover, even though oil prices were remarkably low. From the mid-1980s through the early 2000s, prices largely stayed under $20 per barrel, and they even fell as low as $9.39 per barrel in December 1998.
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As we look forward, we can be sure that any peak in production, or spike in oil prices—regardless of the causes—will make consumers more judicious in their oil use. Groppe has pointed out that oil consumption in the OECD countries peaked way back in 1979 and has been flat or declining ever since. Future increases in oil prices will continue wringing less-efficient uses of oil—such as burning petroleum to make electricity—out of the system.

While peak oil discussions dominate the headlines, peak coal may be even more significant. Over the past two or three years, several analysts have been taking a close look at global reserves and production trends, and they are concluding that the peak in global coal output could come sooner than most people think.
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Among the first to reach this conclusion was David Rutledge, an electrical engineering professor at the California Institute of Technology.
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Although Rutledge spends much of his time working on radio and microwave circuits, he was intrigued by questions about peak oil and became interested in global coal resources. Rutledge looked at coal production histories and the reserves estimates in the United Kingdom, the United States, and other countries. His conclusion: Global coal production will peak at levels far lower than what many reports have projected.
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Although Rutledge is somewhat reluctant to put an exact date on when he thinks global coal output will peak, during an interview in August 2009 he told me that it's reasonable to assume that coal production would peak within the next decade. Rutledge is particularly dubious about
China's ability to continue increasing its coal use. “If something can't go on forever, it won't,” he told me.
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Other researchers are doing work that parallels Rutledge's. Tad Patzek, the head of the petroleum engineering department at the University of Texas at Austin, and Gregory Croft, a doctoral candidate in engineering at the University of California at Berkeley, have come to similar conclusions. Patzek and Croft have concluded that world coal production will peak in 2011. Furthermore, in a report that they completed in 2009, they projected that global coal production “will fall by 50% in the next 40 years” and that carbon dioxide emissions from coal combustion will fall by the same percentage.
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For Patzek and Croft, the implications of the looming peak in coal production makes it apparent that the world must focus increasing effort on energy efficiency and that “new nuclear power stations should also be designed and put online fast, not because of the GHG [greenhouse gas] emissions issues, but because of the insufficient supply of coal.”
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The physical production limits on oil and coal may keep carbon dioxide emissions far below the projections put forward by the Intergovernmental Panel on Climate Change, which has said that carbon dioxide concentrations could reach almost 1,000 parts per million by 2099.
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In his analysis, Rutledge predicted that due to peak coal, global carbon dioxide concentrations will not rise much above 450 parts per million by 2065. If his predictions are correct, then some of the worry about future carbon dioxide emissions may be misplaced.

But N2N offers the most viable way to hedge our bets with regard to both peak oil and peak coal. To be sure, both oil and coal will continue to be key sources of primary energy throughout the world for the rest of the twenty-first century, but it is also apparent that the inevitable production plateaus of those fuels will force consumers to find alternatives. And natural gas and nuclear power are the only alternatives that can provide the scale of energy supplies needed to substitute for some of the expected declines in oil and coal production. In other words, natural gas and nuclear power can be used as a hedge against the looming “twin peaks.”

Embracing N2N can also help the world deal with another megatrend: increasing urbanization. In his book
Whole Earth Discipline
, Stewart Brand wrote, “In 1800 the world was 3% urban; in 1900, 14% urban; in 2007,
50% urban. The world's population crossed that threshold—from a rural majority to an urban majority—at a sprint. We are now a city planet.” According to Brand, “Every week there are 1.3 million new people in cities. That's 70 million a year, decade after decade. It is the largest movement of people in history.”
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The migration to cities requires more clean energy sources that people can use in their homes. Coal and wood won't do; natural gas and nuclear power are the obvious choices to provide the cooking and heating fuel that city-dwellers need as well as the electricity they use to turn on their lights and keep their computers, entertainment centers, and appliances running.

Given these megatrends—decarbonization, increased use and availability of gaseous fuels, concerns about peak oil and peak coal, increasing urbanization, and continuing worries about carbon dioxide emissions—it makes sense for the United States to begin promoting N2N as a winning long-term strategy. Natural gas and nuclear power plants require far less land than wind and solar installations; both have lower carbon emissions than oil or coal; they emit no air pollutants; and both pass the challenges of cost and scale.