The Week in Energy – September 7, 2007

Note: This will be my last time to post in this format (a block of stories in one post). Others have commented, and I agree, that this is a bit unwieldly. Besides that, I have been setting on some of these stories for nearly a week. Also, it is taking me more time to link up and format these stories than if I just posted them one at a time as they pop up. By staying out of the comments section and taking my e-mail address offline, I have freed up a lot of the time that I had lost. So, I am just going to post things as I always have, but I still won’t be commenting. Sometimes that may mean I go 10 days without posting a story, and sometimes I may post 3 in a day.

Drilling 5 Miles Deep

Another FTC Investigation, Another Vindication

You Can’t Argue With Doomers

The Energy Emergency

You Go, Hugo

Drilling 5 Miles Deep

When I am cruising along in an airplane at 35,000 feet and I look out the window, sometimes I think about the amazing fact that the distance to the ground is approximately equivalent to the deepest part of the ocean. But it’s even harder to comprehend that some deep-sea rigs could reach from my cruising altitude to the ground:

Pumped Up: Chevron Drills Down 30,000 Feet to Tap Oil-Rich Gulf of Mexico

Today, deep-sea rigs are capable of reaching down 40,000 feet, twice as deep as a decade ago: plunging their drills through 10,000 feet of water and then 30,000 more feet of seabed. One platform sits atop each so-called field, thrusting its tentacles into multiple wells dug into ancient sediment, slurping out oil, and then pumping it back to onshore refineries through underwater pipelines.

It’s a business where huge sums are lost (two years ago, BP suffered a $250 million blow when a hurricane took out one of its platforms) but even more can be made. The mother lode of oil in the deepwater Gulf is so significant that Tahiti and other successful fields in this region are expected to soon produce enough crude to reverse the long-standing decline in US oil production of about 10 percent per year.

Even better, a recent discovery by Chevron has signaled that soon there may be vastly more oil gushing out of the ultradeep seabeds — more than even the optimists were predicting four years ago. In 2004, the company penetrated a 60 million-year-old geological stratum known as the “lower tertiary trend” containing a monster oil patch that holds between 3 billion and 15 billion barrels of crude.

Just as a bit of a reality check, if there actually are 15 billion barrels there, and they could extract it all, that’s less than two years supply for the U.S. It may be a monster field, but we have a monster appetite.

The article also describes life on the rigs:

The galley of the Cajun Express is a prisonlike cafeteria of stainless steel and gray linoleum crammed with engineers in blue coveralls devouring their meals. Today the menu is bratwurst, cheese fries, and twice-baked potatoes. At first glance, it’s hard to believe this is the setting for a proposed Food Network special on the high-caliber cuisine 140 miles offshore. But the grub is lip-smackingly good.

The Cajun is equipped with other perks: an Internet café, a gym, and a movie theater — but these luxuries are hardly used. Few of the men have the energy for entertainment or exercise after working a 12-hour shift on the drilling floor — hauling great vats of mud used for drill lubricant, welding broken iron casings, or repairing robotic submarines that fix problems with seafloor equipment. The living quarters, which house up to 150 workers, are the size of walk-in closets, filled with cot-sized bunk beds that fold out of the walls.

“When you’re here, you’re pretty much working or sleeping,” says Siegele. Stout salaries make up for the extreme conditions: Entry-level tool pushers make about $60,000, and high-level geologists and engineers can earn in the mid six figures. Added bonus: a massive testosterone rush. “This is the best big-boy toy you’ll ever find,” says Chevron spokesperson Mickey Driver.

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Another FTC Investigation, Another Vindication

I believe this is now over 30 investigations that have been conducted without finding price-gouging or collusion. What a great use of taxpayer money.

As I have said many times, sure oil companies make more money when prices go up. But they don’t make money by making prices go up. They ride the market up and down just like the speculators who buy oil futures. Because face it, if they could control prices, why would they ever come down?

Big Oil did not manipulate U.S. gasoline prices: FTC

Big oil companies did not conspire to raise U.S. gasoline prices last summer, as it was high crude oil costs and supply problems that caused the spike in pump prices, government investigators said on Thursday.

The Federal Trade Commission said that about 75 percent of the rise in gasoline prices was due to a seasonal increase in summer driving, higher oil costs and more expensive ethanol that was blended into gasoline.

The other 25 percent of the price increase stemmed from lower gasoline production as refiners moved to using ethanol as the main clean-burning fuel additive and lingering damage from hurricanes Katrina and Rita that reduced refining capacity.

“Our targeted examination of major refinery outages revealed no evidence that refiners conspired to restrict supply or otherwise violated antitrust laws,” the FTC said. “We therefore conclude that further investigation of the nationwide 2006 gasoline price spike is not warranted at this time.”

Many lawmakers at the time had accused oil companies, which were raking in billions of dollars in record profits, of overcharging U.S. consumers at the pump.

And they will make those same accusations the next time prices spike, probably next spring. There was a brief dissenting statement by one of the FTC commissioners. The vote was 4-1 that no price-gouging took place, but Commissioner Jon Leibowitz released a statement that read in part:

The oil industry, which posted record profits in 2006, should not view this Report as in any way a vindication of its behavior. Commission staff identified some plausible justifications for the unexpected and dramatic price spikes that bedeviled consumers in the Spring and Summer of 2006, and that raised the average price of gasoline to more than $3.00 per gallon in August of that year.

It was clear that “record profits” got under his skin, and he equated this to bad behavior. I guess Leibowitz prefers “Out of Gas” signs, or gas rationing, instead of allowing prices to dictate demand.

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You Can’t Argue With Doomers

My friend Euan Mearns, also a contributor at The Oil Drum, recently published an essay in which he examined Saudi Arabia’s oil reserves:

Saudi Arabia – production forecasts and reserves estimates

I read the essay before he published it, and I warned Euan that despite his scientific approach, he should prepare for mud from the dedicated doomers. And as predicted, they did not disappoint, casting aspersions and accusations his way. As he later wrote to me in frustration, “It’s virtually impossible to debate with them. But it strikes me they are overly defensive of their position which betrays fragile egos.”

Euan also lives in Aberdeen, and we had dinner together a few months ago and discussed how some doomers react when their positions are challenged. Some of them simply lash out, as if their world will end if the world doesn’t end. It is just hard for me to understand.

The gist of the argument revolves around trying to figure out what Saudi Arabia’s oil reserves are. Now, I certainly do not advocate counting on Saudi for our energy security. I think we need to eliminate our dependence on Mideast oil ASAP, as we reduce our overall consumption. But since I don’t expect our government to actually do that, I want to know exactly what’s going on with Saudi’s oil reserves.

Some have latched onto a technique called Hubbert Linearization, which in my opinion is akin to dowsing for water, for information on Saudi’s reserves. They believe this technique shows that Saudi Arabian oil production has peaked, and this is why their oil production is down over the past year. I maintain that they are cutting production to keep prices high. After all, Saudi has cut a lot of production, and yet prices are still where they were a year ago. If their cuts were involuntary, as the HL proponents claim, I would have expected oil prices to skyrocket.

One funny aspect to this argument is that the HL technique is pointing toward a remaining reserve number for Saudi that is impossibly low. If you go back to 1982 when Saudi’s reserves were still open, and merely subtract out the oil that has been produced since then, you end up with 95 billion barrels remaining. This is an argument I made in:

A Different Approach to Calculating Saudi Arabia’s Oil Reserves

But that would presume that Saudi 1). Has not been able to increase the efficiency of their oil extraction, or 2). Has not found any new fields. To put this in perspective, over that same period of time, the U.S. produced 57 billion barrels of oil, but only pulled down reserves by 6 billion barrels because of discoveries and improvements in extracting the oil.

But the HL believers point to the model for Saudi and insist that Saudi only has 65 billion or so barrels left. The model trumps historical measured reserves! And they can be rather nasty about defending this viewpoint, as I found out when I pointed out that the HL technique doesn’t actually predict anything:

Does the Hubbert Linearization Ever Work?

Personally, I don’t put much stock in a model that 1). Doesn’t have a good theoretical basis for why it should work; 2). Can be shown in case after case that it didn’t work. The funny thing is that you can take any random number, increase it by 1% each year, and then do an HL plot on it and get an “answer” for the ultimate amount of oil that should be recovered. The fact that this answer is constantly shifting is hand-waved away by proponents who say “I don’t know why it works, it just does.” You don’t need to know a thing about the oil fields, economics, technology, nothing. It will spit out the answer. Pseudoscience at its best. Think about that: It points to an ultimate recovery rate for the reserve base even if production is increasing at a constant rate. Nonsense. As one person put is succintly:

As it stands, these rationalizations of HL seem to fall in the same category of endless rhetorical arguments. Rhetorical arguments, by definition, are described by the spoken word, so that the only way to keep this up is by producing more rhetoric.

Poor Euan learned the same lesson I learned: You can’t argue with some doomers.

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The Energy Emergency

Mort Zuckerman believes we have a problem:

The Energy Emergency

In 1930, we found 10 billion new barrels of oil and used 1.5 billion; in 1964, we discovered 48 billion barrels and consumed approximately 12 billion; in 1988, we found 23 billion barrels and used 23 billion barrels; in 2005, we found 5 billion to 6 billion barrels and consumed 30 billion barrels. With countries like China and India now in the mix, worldwide demand is growing by an average of 2 million to 3 million barrels a day every year. The world has to discover a new Saudi Arabia-size oil supplier every five years to meet this demand. But it’s just not going to happen. These overwhelming numbers could produce oil prices above $100 a barrel in short order, which will ultimately have massive consequences for the world’s economy and the way we live our lives. They might well cause a global recession.

This is why I proposed Peak Lite: Demand is growing by 2 to 3 million barrels a day each year, but supply is not keeping pace. And it doesn’t look to keep pace in the foreseeable future, meaning upward pressure on oil prices will remain.

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You Go, Hugo

Venezuela Expected to Devalue Currency

The Venezuelan economy, under the direction of President Hugo Chavez, is starting to unravel in the currency market.

While Venezuela earns record proceeds from oil exports, consumers face shortages of meat, flour and cooking oil. Annual inflation has risen to 16 percent, the highest in Latin America, as Chavez tripled government spending in four years.

“This has been the worst-managed oil boom in Venezuela’s history,” said Ricardo Hausmann, a former government planning minister who now teaches economics at Harvard University. “A devaluation is a foregone conclusion. The only question is when.”

Chavez, who is seeking to end presidential term limits, has taken $17 billion of foreign reserves from the central bank and expropriated dozens of farms that he deemed underutilized.

He nationalized Venezuela’s biggest private electric and telephone utilities and took majority stakes in oil projects owned by Exxon and ConocoPhillips. Foreign direct investment was a negative $881 million in the first half as foreign companies pulled out money.

Chavez terminated the broadcast license of the country’s most- watched television network in May, sparking weeks of student protests. He has threatened to take over cement makers, hospitals, banks, supermarkets and butcher shops, saying they were not obeying price controls.

“It’s like our director of marketing, our director of sales, our director of manufacturing is President Chavez,” said Edgar Contreras, who runs international operations at Molinos Nacionales, a Caracas-based food manufacturer that employs 1,500 people. “We can’t go on like this.”

Contreras called the government-set prices on many products “fantasy prices” that are below production costs. Milk, chicken, coffee and flour have disappeared from store shelves in Caracas at times this year.

No comment.

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3 thoughts on “The Week in Energy – September 7, 2007”

  1. The TOC links are ok, but the Return to Top have a link to the post edit page and are broken.

    You want to have a bare “#questions” in the Return to Top a href tag.

  2. If the Tahiti field can reverse the long standing 10% a year decline in US oil production, it sounds pretty big. Just curious though, how long will it be able to reverse decline? Will it be two years and then back to a decline of 10% or will the decline be less?

    I tend to agree that most of the investigations into price gouging are a waste of taxpayer money, but I think some investigation is worth it just to discourage companies from the temptation of gouging. Why risk gouging if you know that there will be yet another investigation. I wish there’d been something to discourage Enron, et. al. from gouging California electricity customers in 2001.

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