OilVoice Magazine | October 2012

American shale E&P growth is creating a global energy independence transformation What does the Mars Lander tell us about our industry?

Edition Seven - October 2012

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OilVoice Magazine | OCTOBER 2012

Adam Marmaras Manager, Technical Director Issue 7 – October 2012 OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: press@oilvoice.com Skype: oilvoicetalk Editor James Allen Email: james@oilvoice.com Sales Gabby Kotosoba Email: gabby@oilvoice.com Manager, Technical Director Adam Marmaras Email: adam@oilvoice.com Social Network Facebook Twitter Google+ Linked In

Welcome to the 7th Edition of the OilVoice Magazine.

Having the magazine in a PDF only format is a great way to distribute the editions. No printing costs, no shipping costs - just click and read. But there are a number of people who prefer having a printed magazine in their hands. The beloved, late Ray Bradbury summed it up best: “A computer does not smell ... if a book is new, it smells great. If a book is old, it smells even better.” I'm not claiming that a printed version of the OilVoice magazine will have an enchanting bouquet, but I think you get the idea.

We're currently investigating the logistics of getting a few copies printed and shipped. If your business thinks it would like a few printed copies sent to it, please let us know. It will help us with our plans.

As always, we have advertising availability in the magazine. Get in touch with Gabby who will be happy to talk you through our reasonable rates.

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Adam Marmaras Manager, Technical Director OilVoice

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OilVoice Magazine | OCTOBER 2012

Contents Featured Authors Biographies of this months featured authors

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Russia's Gazprom tightens its stranglehold on Europe, France falls: The natural gas war gets dirty

by Wolf Richter

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Has OPEC misled us about the size of its oil reserves? Does it matter?

by Kurt Cobb

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The stakes get higher in the fracking debate

by Keith Schaefer

12

What does the Mars Lander tell us about our industry?

by David Bamford

17

Why the oil industry doesn't want you to remember the last 14 years

by Kurt Cobb

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Recent Company Profiles The most recent companies added to the OilVoice directory

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The close tie between energy consumption, employment, and recession

by Gail Tverberg

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Oil energy dependence and energy transition

by Andrew Mckillop

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Regulation of all of the above energy to cost 20x more on public lands?

by Gary Hunt

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American shale E&P growth is creating a global energy independence transformation

by Gary Hunt

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Featured Authors Andrew MacKillop OilVoice Contributor Andrew MacKillop is an energy and natural resource sector professional with over 30 years experience in more than 12 countries.

Keith Schaefer Oil & Gas Investments Bulletin Keith Schaefer, editor and publisher of the Oil & Gas Investments Bulletin.

David Bamford Finding Petroleum David Bamford is non-executive director of Tullow Oil, and a past head of exploration, West Africa and geophysics with BP.

Gail Tverberg Our Finite World Gail Tverber has an M. S. from the University of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries.

Kurt Cobb Resource Insights Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment.

Gary Hunt TCLabz Gary Hunt is President, Tech&Creative Labs, a disruptive innovation business collaboration of software, data and advanced analytics technology companies working together to integrate their products to meet the changing needs of the energy vertical.

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OilVoice Magazine | OCTOBER 2012

Wolf Richter Testosterone Pit Wolf Richter has over twenty years of C-level operations and finance experience, including turnaround situations and start-ups. He went to school and worked for two decades in Texas and Oklahoma, with an interlude in France, and then headed east to New York City, Brussels, Tokyo, and finally San Francisco, where he currently lives.

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OilVoice Magazine | OCTOBER 2012

Russia's Gazprom tightens its stranglehold on Europe, France falls: The natural gas war gets dirty Written by Wolf Richter from Testosterone Pit

Why would France suddenly prohibit shale gas exploration? Sure, there are environmental issues with horizontal drilling and hydraulic fracturing, the methods used to extract gas from porous shale deep underground: flammable drinking water, earth quakes, cows that die, radioactive sludge in sewage treatment plants.... But French governments have had, let’s say, an uneasy relationship with environmentalists. Its spy service DGSE, for example, sank Greenpeace’s flagship, the Rainbow Warrior, in the port of Auckland, New Zealand, killing one person.

No, there must have been another reason why the government of Nicholas Sarkozy prohibited shale gas exploration in 2011, after having already issued permits in 2010.

A mini hullabaloo had broken out, stirred up by the European Ecologists and The Greens (EELV), the fringe on the French left. And Sarkozy caved! Without a fight!

Enthusiastically. The government of François Hollande just confirmed the prohibition when Environment Minister Delphine Batho declared: “Hydraulic fracturing remains and will remain prohibited.”

The clue: Sarkozy suddenly visited Japan on March 31, 2011, a couple of weeks after the horrific earthquake and tsunami, and the subsequent nuclear accident at Fukushima, to declare in front of shell-shocked Japanese that there was “no alternative” to nuclear power.

He’d been dispatched by the almighty state-owned nuclear industry to tamp down on the growing anti-nuclear sentiment at home. Owned by the government, nuclear power plants produce 75% of France’s electricity and export some of it. No one who wants to be politically viable is allowed to hamper the industry. If someone strays off the reservation, he or she is dragged back soon. While Hollande campaigned on a vague promise to reduce dependency on nuclear power to 50%, it was understood

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as one of the bones he had to toss to environmentalists. Nothing would come of it.

So when Batho, who wants to add more renewables to the portfolio, toed the party line by saying, “Nuclear power is an industry with future,” then qualified it with a “but,” it caused an outcry even among the Socialists. That’s the power the nuclear industry has over the political machines.

But now another powerful entity turned up: Russia’s Gazprom. It’s the world’s largest gas producer, gas exporter, and gas distribution company with nearly 100,000 miles of gas trunk lines and branches. The Russian government owns 50.01% of it. At home, it has to sell gas under cost, one of the Soviet leftovers. It relies on high-profit sales from Europe to make up for it. But Europe is diversifying away from its single most important supplier.

Competitors include Russia’s number two, Novatek, and Norway—the second largest natural gas exporter in the world. So, in April, Gazprom had to lower its European sales guidance for 2012. Its market share in Europe was 27% last year, and it’s shooting for 30% by 2020, but if the US shale-gas boom ever infects Europe, those plans would become a pipedream—and if the high-profit sales from Europe tapered off further, it would have to raise prices at home, a political nightmare.

Hence its fight by hook or crook against shale gas in France.

Gazprom’s “underhanded tactics” and “scaremongering about a new technology” have Moscow’s nod of approval and are designed to dissuade governments from developing their own shale-gas reserves, according to a report by Platts, a global provider of information on energy, petrochemicals, and metals. Efforts include all manner of operations, online and through encouraging demonstrations, but also paying public relation firms to spread “myths and misconceptions,” said Aviezer Tucker, assistant director of the Energy Institute at the University of Texas. A “European Union-wide ban” on shale-gas production, he said, would be the “holy grail.”

With France already knocked off, Sergei Komlev of Gazprom Export has been bouncing around the world in his fight against European shale gas. At a meeting in Qatar, according to Platts’ report, he gave a presentation. “Multiple Handicaps Will Retard Shale Gas Development Outside US” was the title of one of his slides.

“Fortunately, it claimed, “European shale gas development faces numerous economic, regulatory, and political barriers before there are significant amounts of shale gas production, not sooner than in ten or more years.”

Breathing room for Gazprom in the natural gas wars.

In the US, natural gas may be the most mispriced commodity these days. Its price has been below the cost of production for so long that the industry is suffering billions in losses. But demand for natural gas by power producers has been booming—and it’s killing coal, one powerplant at a time. Read.... Natural Gas Is Pushing Coal Over The Cliff.

And here is a highly insightful interview of James Hamilton, energy economist,

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former visiting scholar at the Federal Reserve Board in Washington, DC and other Federal Reserve Banks. Read.... The Real Reason Behind Oil Price Rises, by James Stafford.

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Has OPEC misled us about the size of its oil reserves? Does it matter?

Written by Kurt Cobb from Resource Insights

Has OPEC misled us about the size of its oil reserves? The short answer is probably. The long answer is that currently, there is no way to know for sure.

The next question we should ask is: Does it matter? The answer is most definitely yes. OPEC, short for the Organization of Petroleum Exporting Countries, currently claims that its 12 members hold 81.3 percent of the world's oil reserves. And, with few exceptions the world believes them. Trouble is these reserves "are not verified by independent auditors," according to a study (PDF) done by the U.S. Government Accountability Office, the nonpartisan investigative arm of the U.S. Congress. OPEC reserves are simply self-reported by each country. Essentially, OPEC's members are asking us to take their word for it. But should we?

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It ought to give us pause that the reserve numbers OPEC countries release are used in major reports produced by the U.S. Energy Information Administration (EIA); the Paris-based International Energy Agency (IEA), a consortium of 28 of the world's oil importing nations; oil giant BP which annually publishes the widely cited BP Statistical Review of World Energy; and myriad other organizations. Reports from the two agencies cited above and BP are frequently consulted by governments, industry, banks and investors around the world for policy formulation, long-term planning, and lending and investment decisions. Yet these groups seem blissfully unaware of the caveats surrounding the numbers in those reports and by extension surrounding more than 80 percent of the world's oil reserves.

Keep in mind as we go along that the sometimes astronomical numbers thrown around for world oil reserves by the uninformed or by those who intend to mislead us either have no basis in fact or actually refer to "resources." Resources are only an estimate of oil thought to be in the ground based on rather sketchy evidence. And, most of that oil will never be recoverable. Reserves, however, are what can be produced at today's prices from known fields using existing technology. It turns out that reserves are only a tiny fraction of so-called resources.

Now here's the caveat from the International Energy Agency in its World Energy Outlook 2010: Definitions of reserves and resources, and the methodologies for estimating them, vary considerably around the world, leading to confusion and inconsistencies. In addition, there is often a lack of transparency in the way reserves are reported: many national oil companies in both OPEC and non-OPEC countries do not use external auditors of reserves and do not publish detailed results. "National oil companies" refers to government-owned companies which typically control all oil development within a country.

The BP Statistical Review of World Energy for 2012 provides this explanatory note under a table listing oil reserves by country: The estimates in this table have been compiled using a combination of primary official sources, third-party data from the OPEC Secretariat, World Oil, Oil & Gas Journal and an independent estimate of Russian and Chinese reserves based on information in the public domain. Canadian oil sands 'under active development' are an official estimate. Venezuelan Orinoco Belt reserves are based on the OPEC

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Secretariat and government announcements. The key words are "OPEC Secretariat" which refers to the OPEC staff located in an office in Vienna. That office is where BP presumably gets its information about OPEC reserves. The EIA lists the OPEC Annual Statistical Bulletin put out by--you guessed it--the OPEC Secretariat. Alas, the Annual Statistical Bulletin tells us under the heading "Questions on data" that "[a]lthough comments are welcome, OPEC regrets that it is unable to answer all enquiries concerning the data in the ASB." In other words, trust us. So, information about OPEC reserves comes either from the OPEC offices in Vienna or from member countries. Some analysts may adjust those figures based on the few shreds of evidence that are available outside of official government pronouncements. But, in reality, there are almost no hard facts when it comes to OPEC reserves.

Strangely, many of these countries say that a detailed audit of their fields by independent observers is out of the question because oil reserves are a state secret.

And, yet those countries report their reserves to OPEC which publishes them for all to see. So, are oil reserves in many OPEC countries a state secret or not?

Apparently, what's secret is the field-by-field data that would tell us whether the reserves claimed by these countries are actually there. Are there reasons to believe that if we saw this data it would contradict the official overall number provided by some countries? In a word, yes.

First, OPEC allocates production levels among its members. It does this to control the flow of oil to world markets and thus to manipulate the price. OPEC bases production quotas for its members in part on the size of each member's reserves.

When this policy was first established in the 1980s, reported reserves for several OPEC members jumped between roughly 40 and 200 percent within one year--not always the same year--as each country jockeyed for a higher production quota.

Based on EIA data, here's what it looked like: Country

Reserves in Barrels (Year)

Reserves in Barrels (Year)

Percentage Increase

Iran

48.8 billion (1987)

92.9 billion (1988)

90.4%

Iraq

47.1 billion (1987)

100 billion (1988)

112.3%

Kuwait

66.7 billion (1984)

92.7 billion (1985)

39.0%

Saudi Arabia

172.6 billion (1989)

257.6 billion (1990)

49.3%

United Arab Emirates

33.1 billion (1987)

98.1 billion (1988)

196.4%

Venezuela

25.0 billion (1987)

56.3 billion (1988)

125.2%

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Not every country participated in the free-for-all. But the countries with the largest exports participated with a vengeance. There was no drilling program in any of these countries that could have explained such jumps in reserves.

The competition continues to this day. In October 2010 Iraq announced an increase in its oil reserves from 115 billion barrels to 143.1 billion barrels. No attempt was made to hide the reason for the increase: "Falah al-Amri, the head of the country’s State Oil Marketing Company, suggested that future quota calculations might have been a factor in the revision." A week later Iran raised its reserves number from 136.6 billion barrels to 150.3 billion barrels, presumably in order to maintain its position within the OPEC production quota system. These numbers have been dutifully included in the latest statistical compilations of both EIA and BP, as if the two hadn't gotten the memo that Iraq's and Iran's increases were reported merely for quota reasons and not because of any particular discoveries.

Perhaps even more astounding is that some OPEC members don't even take the oil reserves reporting game seriously any more. Logic dictates that there should be at least small adjustments up or down in reserves each year as new fields are developed and old ones decline. The world of geology simply cannot yield precisely the new reserves needed to replace exactly the amount of oil extracted from existing fields each year.

And yet, the United Arab Emirates has been reporting 97.8 billion barrels of oil reserves every year since 1997. Kuwait has been reporting 104 billion barrels each year since 2008. Iraqshows long periods from 1980 onward when reserves don't change, the latest running from 2004 to 2011 during which reserves supposedly held absolutely steady at 115 billion barrels.Algeria has reported 12.2 billion barrels from 2008 onward. At least Saudi Arabia has demonstrated a certain sensitivity to appearances and has adjusted its reserves number slightly from year to year. And yet, that number has remained within a narrow range of 260 to 267 billion barrels from 1991 to the present. All of these numbers suggest that depletion from existing fields is taking absolutely no toll on OPEC's reserves. Even if that's true, we have no way of verifying it.

The second reason to doubt OPEC's official oil reserve numbers is that two insiders have told us not to trust those numbers. The now deceased A. M. Samsam Bakhtiari, an executive for the National Iranian Oil Company, told the Oil & Gas Journal all the way back in 2003 the following: "I know from experience how 'reserves' are

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estimated in major Middle Eastern (and OPEC) countries...And the methods used are usually far from scientific, as the basic knowledge for such a complex exercise is not at hand." He estimated that Iranian reserves were about 37 billion barrels, not the 90 billion that were being cited at the time.

Back in 2007 Sadad al-Husseini, former executive vice president for exploration and production at Saudi Aramco, the state oil company that controls all oil development in Saudi Arabia, told a conference in London that world oil reserves had been inflated by 300 billion barrels. That number almost matches the increases in OPEC members' reserves for quota reasons in the 1980s, and it represented about a quarter of all reported reserves in 2007. As a result, to this day al-Husseini remains skeptical of claims that world oil production will rise much from here.

Another piece of evidence that casts doubt on OPEC members' reserve claims came to light in 2005. That year Petroleum Intelligence Weekly, an industry newsletter with worldwide reach, obtained internal documents from the state-owned Kuwait Oil Co. The documents revealed that Kuwaiti reserves were only half the official number, 48 billion barrels versus 99 billion. Since then policymakers and the public seemed to have ignored the entire incident. The BP Statistical Review lists Kuwait's reserves as 101.5 billion barrels as of 2011. The EIA shows them as 104 billion. Skepticism apparently is taking an extended holiday at BP and EIA. Measuring oil reserves remains something of an art. Even large publicly traded oil companies with armies of petroleum geologists and engineers who operate under strict U.S. Securities and Exchange Commission rules for estimating reserves--even these companies don't always get it right. In 2004 Royal Dutch Shell had to lower its reserves number by 20 percent, a huge and costly blunder for such a sophisticated company. If Shell can bungle its reserves estimate, then how much more likely are OPEC countries which are subject to virtually no public scrutiny to bungle or perhaps manipulate theirs.

I said in a previous piece that the rate of production is the key metric when evaluating the success of the world's oil production and delivery system. But sustained production of oil depends on the size and quality of reserves. If the world does indeed have 300 billion fewer barrels of reserves than it thinks it does, that has implications for how long the current rate of production can be maintained. (It has been stuck between 71 and 76 million barrels per day since 2005.) And, that is why the mystery surrounding OPEC's reserves, which supposedly constitute 80 percent

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of the world's reserves, is so disturbing. Even more disturbing is how much this mystery is ignored or perhaps not understood by policymakers, industry and the public.

We shouldn't be the least bit exultant over claims that we have more oil reserves than we've ever had before. First, we are using up that oil at a faster rate than ever before. Second, much of what is currently parading as reserves may not be. Third, the plateau in worldwide oil production since 2005 is actually consistent with a smaller reserve base.

Given all this I think we can safely say that when it comes to the official statistics on oil reserves, there is likely to be less than meets the eye. And that begs the question: Does it really make sense for the world to chart its energy future based on such dubious information?

View more quality content from Resource Insights

The stakes get higher in the fracking debate Written by Keith Schaefer from Oil & Gas Investments Bulletin

Is there any common ground in the debate over hydraulic fracturing? It's a divisive issue, especially in the U.S., where 90%-plus of all global fracking is done now, pitting neighbor against neighbor.

Two weeks ago I wrote about a success story - How a U.S. Oil Refinery Got Saved -

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in which different stakeholders were able to put aside differences and create a winwin scenario for everyone.

Can the groups on either side of the fracking debate do the same?

The stakes are higher, as the main concern of those against fracking is that it may contaminate drinking water. That may or may not be true, but it certainly validates the fierce emotion behind the issue.

Media reports surfaced in late August that New York State Governor Andrew Cuomo may end the ban on fracking the state has had since 2008. Trouble started immediately.

The Albany Times-Union reports that roughly 1,200 people attended a march through the state's capital on Monday, August 27, calling on Cuomo to uphold the fracking ban.

'Hydrofracking remains a divisive issue for New Yorkers and presents DEC (Department of Environmental Conservation) and the Governor with a political 'loselose,'' Steven Greenberg, a pollster at Siena, said. 'Whatever decision they make is going to upset as many people as it pleases.'

A recent survey from Siena Research Institute found more New Yorkers supported restarting fracking than opposed it‌ by a razor-thin margin of 39 percent to 38 percent.

Still, the DEC's research notes that the industry could bring more than 17,600 jobs to the state, and potentially as much as $125 million each year in tax revenue, making a strong counter-argument all on its own.

For many, the issue is jobs and royalties vs. the environment. I don't see it that way, though. This multi-billion dollar industry-horizontal drilling and multi-stage frackinghas been around for 15 years, but really only seen major growth since 2007-five short years ago.

And as companies test new fracking technology-plug & perf vs. open hole, slickwater vs. oil vs. propane-new things get developed that keep lowering costs and increasing the amount of oil and gas that can get produced. What I mean to say is that

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technology is changing so fast, the industry can hardly keep up-much less the general public. And the industry is obviously fixated on keeping up with the competition; not explaining things to the public-which, in all likelihood, will all be out of date shortly.

The industry is even developing more environmental ways of fracking. I believe, for example, that in five years all fracking fluid will be food-grade. You (ok, maybe not you, but the oil and gas company reps) will be able to drink the stuff. The public is demanding it. I think it will happen-but not right away.

The industry and the public are going to continue to dance around this issue for the next couple years trying to find consensus. The Shale Revolution is SO important economically to the United States there is no way fracking is EVER going to get banned in the near-to-mid-term. But both sides need to work harder to find consensus.

The two sides don't talk the same language yet. When regulators produce 450-page studies which have scientific backing that say fracking can be done safely, I don't hear respect from the people opposed to fracking.

And the industry‌ well, a lot of them are like deer caught in the headlights. They've been fracking for 50 years, and they just can't get over what all this new fuss is about.

Get over it, guys. And hurry.

There is a very bright light of mainstream attention that will forever change the way oil and gas does its business in the developed world, and how it gets permitted.

Sadly, the industry hasn't been pro-active or successful in getting ahead of public opinion on fracking, and they remain re-active in responding to issues-most of which they clearly never thought were issues in the first place.

And some very aggressive operators who have little bedside manner haven't helped at local levels-especially in areas that are new to oil and gas, like the northeast US. Carol French and Carolyn Knapp, two Pennsylvania dairy farmers, are outspoken critics of fracking. They not only point to stories of contaminated wells but to the

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problems that come with the infrastructure brought in by operators. According to The Associated Press, the pair say that pipelines can cut off access to crops and drilling equipment can cause serious damage to roads.

'I never in my wildest dreams envisioned the industrialization that comes along with this process,' Knapp told a group in North Carolina.

Siobhan Griffin, a New York cattle farmer, told the news source that she fears for her animals if fracking comes to town.

Two incidents stick out in her mind: the quarantine of 28 cows in Pennsylvania after they drank fracking wastewater and the death of 17 Louisiana cows that died after drinking water that was contaminated. (Fracking involves millions of gallons of water mixed with sand and about 1% chemicals pumped into the earth to fracture shale rock, releasing gas. The wastewater created by this has caused many fears of drinking water contamination.)

Not all farmers have the same view of fracking, however. Some see the wealth it has brought their neighbors, and are anxious to get in on the action.

New York dairy farmer Jennifer Huntington took her town to court after it stopped a well plan on her land. She says that the money brought in by the operation would have paid for a number of updates to her farm.

'We would have used the royalties to update the anaerobic digester that we installed in 1984,' she told the AP. 'We would have purchased a better oil seed press to more efficiently press soybeans for biodiesel. We would have invested in our farm, our land and our employees.'

Dan Fitzsimmons, the chief of the 70,000-member Joint Landowners Coalition of New York, has worked to have the Empire State lift its moratorium on fracking so he and others could profit from it like their neighbors in Pennsylvania.

'I go over the border and see people planting orchards, buying tractors, putting money back in their land,' he said. 'We'd like to do that, too, but instead we struggle to pay the taxes and to hang onto our farms.'

The picture is not always clear even once fracking starts up, however. While some of

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OilVoice Magazine | OCTOBER 2012

the environmental impacts of fracking may often get overstated, and are often misunderstood, some incidents have highlighted the potential for problems just in bringing the gas industry into populated areas.

The Philadelphia Inquirer notes that the town of Dimock, Pennsylvania-made famous by a shot of flaming tap water from the slightly histrionic documentary Gaslandremains deeply divided by the presence of the gas industry.

The town was at one point the epicenter of the hydraulic fracturing debate after initial reports suggested that fracking had tainted nearby wells. The story really kicked off when methane that had collected in one well exploded, ignited by the well's electric pump.

Investigation from the U.S. Environmental Protection Agency eventually found that the problem was actually with the cement used to seal off the wells, which let gas migrate into the local aquifers. Still, even with extensive efforts to fix the wells and clean the water, many residents remain opposed to further drilling and distrustful of the companies doing the work.

'You sort of have to give them the opportunity to fix your water. It's all about the water; it's not about the money,' Bill Ely, a 61-year-old resident of Dimock, told the Inquirer. However, he added, 'Once your water is bad, it's hard to get back to drinking it.'

Even in areas where the environmental impacts have been less dramatic, there has been notable disagreement. The Star-Gazette notes the example of Montana's Blackfeet Indian Reservation, which leased about two-thirds of its land for oil and gas exploration in 2008.

The reservation has already brought in around $30 million; enough to pay off debts incurred building a casino, upgrade some of the area's infrastructure and offer some regular income for residents, without any dramatic environmental problems.

However, the land has started to fill up with all the trappings of the oil and gas industry, from drilling rigs to water and chemical containers, leading many to question the decision.

So the debate rages. The emotional side needs to look at the science, and the

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engineers need to understand the emotion, which doesn't get papered over with a study. I would suggest it's up to industry to make the big first move-whatever that is.

But for it to be effective, it needs to be a Big Leap Forward.

View more quality content from Oil & Gas Investments Bulletin

What does the Mars Lander tell us about our industry?

Written by David Bamford from Finding Petroleum

Against the background of the Mars Lander, I examine the charge that the oil & gas industry is extremely conservative, compared to almost any other, in its approach to new technologies and ideas has some justification.

Why is this? What's the evidence?

At the recent British Business Embassy day on the Upstream – start here if you must – somebody, an optimist perhaps, asked the august panel "Perhaps the oil and gas industry is very innovative in terms of technology but conservative in the way we run the business. How can we learn from other industries? Can we do things in a way that could be more efficient?"

Hmm, no, this is very innovative: the 3D panoramic view of the surface of Mars taken by the Lander!

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OilVoice Magazine | OCTOBER 2012

In contrast, the facts indicate that our industry is conservative in the extreme!

Some time ago, I noticed an interesting article on RigZone talking about companies that are consistently innovative, the outcome of a study by three business school professors who studied the world's most innovative companies for the last 8 years.

Really interesting I thought and similar in a way to some of the ideas of Niall Ferguson on why 'the West' rose to pre-eminence in the 19th and 20th Centuries and George Magnus's on why China (and other community rather than individually oriented countries) will struggle to outpace the West in the long run.

But then, IMHO, the whole article was undone by referring to a study by HOLT, a subsidiary of Credit Suisse, to identify the leading 100 innovative companies, based on how much revenue companies claimed new offerings would yield out into the future.

In this top 100, from the oil & gas sector, they put forward: 

FMC-Technologies



Schlumberger China Oilfield Services Cameron International

   

Tenaris SA Halliburton

I wonder if you asked managers in the oil & gas sector to name their top 5 innovative companies – the ‘disruptive innovators’ - whether any of these 6 would figure!!

I was struck by reading the commentary on the late Steve Jobs’ stepping down as CEO of Apple that he invented new things – the iPod, the iPhone, the iPad – before any of us realised we needed them. This seems to me to be a really good definition of innovation, of leadership in innovation, and it set me wondering where this exists in our industry?

Why do I assert that our industry is ultra-conservative?

As a piece of data, I offer the following graphic which summarises rather neatly the insight that the oil & gas industry is one of the most conservative industries around:

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OilVoice Magazine | OCTOBER 2012

Two of our ‘most important technologies’ – horizontal drilling and 3D/4D seismic – that are consistently identified in surveys - of what the ‘great & good’ in our industry think - are great examples of the decades it takes for new ideas to achieve market dominance in our industry, having been first used in the 1940’s and 1960’s respectively!

Time-to-market in years for various industries (Courtesy of Shell: original work by McKinsey)

View more quality content from Finding Petroleum

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OilVoice Magazine | OCTOBER 2012

Why the oil industry doesn't want you to remember the last 14 years Written by Kurt Cobb from Resource Insights

What were the prices of oil and gasoline in 1998? Do you remember? Without looking them up (or looking below this line), make your best guess.

I've been taking an informal poll to find out what people remember about oil and gasoline prices in that year. So far, only one person has correctly characterized prices back then. Most guesses have clustered around $2.50 to $3 a gallon for gasoline (in the United States). Only one person could come up with a crude oil price which she guessed was around $55 a barrel. The answers show a vague recollection that oil and gasoline were cheaper than they are today. But just how much cheaper has been lost down the memory hole.

Okay, I know the suspense is killing you. Here's how gasoline and oil fared in 1998.

The nationwide average price of a gallon of gasoline in the United States in December of that year was 95 cents. The closing price for a barrel of crude oil sold on the New York Mercantile Exchange on December 31 was $12.05. Just three weeks earlier the price of oil had hit its nadir for the year at $10.72. Oil had started the year above $17 and steadily slid as the Asian financial crisis slowed the world economy and reduced oil demand. Gasoline prices dropped only a little during the year starting from the January average of $1.09 a gallon.

Why does the oil industry want you to forget this? Because after a 10-fold increase in the price of crude oil and a fourfold increase in the price of gasoline, the industry is once again trying to sell the same story of continued abundance that they were selling back in the late 1990s. But the manyfold increase in oil prices ought to make everyone doubt an industry which has repeatedly told us that huge supplies are just

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around the corner, and prices are headed for a crash.

Perhaps the best example of the oil industry's "Wrong Way Corrigans" is industry mouthpiece Daniel Yergin, head of Cambridge Energy Research Associates (CERA), a prominent energy consulting firm. For a long time Yergin has been a frequent guest on prominent television news programs and a source for many print journalists. He is a darling of the media on energy issues, a media which is too polite to confront him with his abysmal record of predictions in the oil market. He was wrong in his public pronouncements every step of the way from the 1998 low in oil prices right up to the all-time highs of 2008, frequently predicting a large buildup of new supply and crashing prices. (One wonders why clients of CERA continue to buy the company's research when it has been so wrong for so long. But that's a story for another time.) Only at the end of 2008 did oil prices finally crash and then only because the world economy was headed into the worst economic decline since the Great Depression. But as soon as the economy revived even tepidly, prices rose back to $80 a barrel and then above $100 which is about where they are today.

The reason for high prices is actually quite obvious. Crude oil production worldwide has been stuck between 71 and 76 million barrels per day since 2005 (calculated on a monthly basis). Oil volumes have been tracing out a troubling bumpy plateau that many fear will mark the all-time peak in world production. These numbers are reported by the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, and are widely considered to be the most reliable available. They reflect total production of "crude oil including lease condensate" (which is the definition of crude oil) from all sources worldwide.

Oil production has stalled despite the huge incentive that record high prices are providing for oil exploration and development. And, despite enormous spending by oil companies on exploration and drilling worldwide, we have only just kept production on a plateau for the last seven years. These high prices and enormous capital spending were the reasons given by Daniel Yergin for the expected buildup of production volumes. So what went wrong?

The simple answer is that we've exhausted the easy-to-get oil and are now left with mostly the hard-to-get oil. It only makes sense that the early oil pioneers harvested the easy oil first. Why go after the hard stuff at that point? We've since learned how to extract oil that is much harder to develop. This includes deposits far offshore and deep below the seabed as well as those locked in the Canadian Tar Sands, deposits

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that must undergo expensive and energy-intensive processing to convert what is really bitumen, a goopy, thick hydrocarbon, into what we call oil.

And, this leads me to a crucial concept which I find myself repeating over and over again in response to all the foolish Daniel Yergins of the world: The critical factor in the oil markets and a global economy dependent on large, continuous supplies of oil is the rate of production. The rate is the key, not the size of the world's reserves. It is the size of the tap, not the size of the tank that matters.

Let me offer another analogy to help explain. If you inherit a million dollars with the stipulation that you can only withdraw $500 a month, you may be a millionaire, but you will never live like one. That is increasingly the situation we face with oil. There may be huge resources of tight oil (often mistakenly referred to as shale oil) and of oil-like substances such as tar sands. But the expense, the necessary energy and increasingly, the amount of water required to extract and process them is so great that we have been unable to lift the worldwide rate of production significantly above its current plateau for a sustained period during the last seven years. Even with all our vaunted new technology, we have only just barely been able to replace the capacity lost each year to the inexorable decline in the rate of production from existing oil fields.

Recently, the head of a company well placed to judge trends in the worldwide rate of oil production said he believes that the all-time peak is in. Core Laboratories CEO Dave Demshur told attendees at the Denver Oil & Gas Conference last month that "[t]he maximum yearly oil production of the planet is taking place now." Core provides well analysis and reservoir management to oil and gas companies in practically every major oil region of the world. Demshur's statement is an unusual admission from an industry insider with access to information that spans the entire industry.

The truth is we won't know for sure that we've passed the peak in world oil production until long after it occurs. It may be a decade after the event before oil production turns down definitively and the peak becomes obvious for all to see.

Just to clarify, here's what peak oil does NOT mean: 

Peak oil does not mean we are running out of oil. This is a canard used by the oil industry to confuse the public. Nobody who understands world peak oil

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production ever says that it means we are running out. In fact, we won't run





out of oil for a very, very long time. At the peak the rate of production will cease to rise, probably trace a plateau for a time, and finally begin a possibly slow and bumpy decline. That means we'll have less and less oil available each year. As oil becomes more and more expensive, we will use less, and we will ultimately reserve it for critical purposes for which we cannot find good oil substitutes.

Peak oil does not mean that we won't find any more oil. We are finding oil every day. We're just not finding enough and putting it into production fast enough to grow production in the face of declining flows from existing fields.

Peak oil does not mean the immediate collapse of modern civilization.

However, if we stand still and do little to address oil depletion, peak oil will likely result in immense difficulties.

The industry and its paid spokespersons try to dazzle the public with talking points that include the notion that we have more oil reserves than we've ever had. That is questionable, and I'll explore that claim in a later piece. But again, I emphasize that reserves are not the salient point. It is and always will be the rate of production that matters more. If oil production stopped for a sufficiently long period--enough to drain all aboveground supplies--modern civilization as we know it would collapse. The amount of reserves would not matter since the rate of production would have dropped to zero.

What matters is how much we can produce for continuous input into the world economy. As you might intuit, we've built a financial system and physical infrastructure premised on continuous and rising levels of oil consumption. That's why peak oil matters so much, and why flat oil production has been a large contributing factor to the unstable world economy in recent years.

To further illustrate the importance of rate, consider the following: Half of all oil consumed since the beginning of the oil age has been consumed since 1985. We consumed exponentially larger amounts nearly every year until 2005 when a number of factors conspired to constrain supplies. We frequently hear about multi-billion barrel discoveries and think (wrongly) that oil must surely be plentiful as a result. So, here's another question to ponder: How long does one billion barrels of oil last the world at current rates of consumption? If you guessed something close to 12 days, you have a sense of the enormous challenges humans face in extracting finite resources at ever higher rates. Just multiply those multi-billion barrel discoveries by

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12 to find out how many days the oil age might be extended by each discovery.

You'll find the answer is, "not many."

Perhaps it will seem puzzling that experts inside the industry--with a few notable exceptions--cannot grasp that the rate of production is the central issue. The best explanation I can offer is to quote author Upton Sinclair: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

And, here is where we get to the motivations behind the sunny optimism of the oil industry. If the public understood that oil supplies might be nearing an irreversible decline, it would demand the deployment of alternative fuels and efficiency measures to soften the blow in order to give us time for a transition to a society based on something other than oil. That would ultimately reduce demand for oil products and eventually end our dependence on oil. Oil companies might get stuck with significant inventories in the ground that they cannot sell, at least not at the prices or in the quantities they would like.

The more immediate problem for oil company executives is that their companies may soon find it impossible to replace all their oil reserves. Oil companies strive to replace at least 100 percent of what they produce so that their reserves don't fall. If investors come to believe that a failure to replace reserves will be ongoing year after year, they will mark down oil company share prices significantly. In fact, it's already happened, and it's likely to happen with more frequency as more companies struggle to reach 100 percent replacement. Such share price declines would, of course, make a lot of oil executives significantly poorer as the value of their stock and stock options plummet. Essentially, oil companies would be recognized as self-liquidating businesses.

All of this the oil industry wants you to ignore as it undertakes yet another public relations campaign to convince the world that supplies will only grow from here.

Naturally, with prices near $100 a barrel, the public needs reassurance. The campaign is designed to lull both the public and policymakers into a somnolent surrender to a business-as-usual future that will leave us unprepared for the momentous challenges ahead.

Oil is the central commodity of the modern age. As of 2011 it provided one-third of the world's energy and the basis for countless petrochemicals necessary to the functioning of modern society. Oil's role in transportation remains critical; 80 percent

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of the world's road, rail, air and sea transportation fuel is derived from petroleum, and in the United States the number is 93 percent. Good substitutes for oil in transportation are still hard to come by.

No one can know exactly when world oil production will peak--not me, not the world's oil companies, not any government agency. The dangers we face if we are unprepared are potentially quite severe. With worldwide oil production essentially flat for the last seven years, the sensible thing to do would be to get ready now as quickly as we can.

Given what's at stake for oil company managements, it should be obvious why they are telling us not to worry. Given the publicly available production data, the persistently high price of oil, and the failure of oil companies to expand worldwide production even after enormous expenditures and effort, it should also be obvious why we shouldn't fall for the industry's beguiling but wildly misleading tale.

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The close tie between energy consumption, employment, and recession Written by Gail Tverberg from Our Finite World

The number of jobs available to job-seekers has been a problem for quite a long tine now—since 2000 in the United States, and longer than that in Europe. If we look at the percentage of the US population who are employed, it is now back to 1984 or 1985 levels.

Figure 1. Total number of individuals employed in non-farm labor, and reported by the US Bureau of Labor Statistics, divided by US resident population, as reported by the US Census Bureau.

I have run into a number of clues about what is happening. In this post, I’d like to discuss what I am seeing. Part of the problem is that high oil costs squeeze the economy, reducing employment. Part of the problem is growing trade with Asia. It is even possible that the Kyoto protocol (which the US did not sign) has something to do with what we are seeing. Let me start by explaining a fairly strange relationship.

A Strange Relationship – A Close Tie Between the Amount of Energy Consumed and the Number of People Employed

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Since 1982, the number of people employed in the United States has tended to move in a similar pattern to the amount of energy consumed. When one increases (or decreases), the other tends to increase (or decrease). In numerical terms, R2 = .98.

Figure 2. Employment is the total number employed at non-farm labor as reported by the US Census Bureau. Energy consumption is the total amount of energy of all types consumed (oil, coal, natural gas, nuclear, wind, etc.), in British Thermal Units (Btus), as reported by the US Energy Information Administration.

I have written recently about the close long-term relationship between energy consumption and economic growth. We know that economic growth is tied to job creation, so it stands to reason that energy consumption would be tied to job growth1. But I will have to admit that I was surprised by the closeness of the relationship for the period shown.

This close relationship is concerning, because if it holds in the future, it suggests that it will be very difficult to reduce energy consumption without a lot of unemployment. It also would seem to suggest that a shortage of energy supplies (as reflected by high prices) can lead to unemployment.

Why Rising Energy Cost (Particularly Oil) Leads to Lower Employment and Less Energy Consumption Suppose oil prices rise2. The critical issue is that consumers’ incomes do not rise at the same time. Consumers’ budgets get squeezed, and they cut back on discretionary spending. For example, they may go out to restaurants less, make fewer long-distance vacation trips, put off buying a new car, or contribute less to their favorite charities. Workers in discretionary sectors of the economy tend to get laid off, as a result. We have come to know this as part of recession.

(The impact of an oil price rise will be worse if other fuel prices, such as natural gas,

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rise as well. It will be mitigated, if natural gas prices are low, as they are in 2012 in the United States. Europe has much higher natural gas prices than the United States. This is big part of the reason why recessionary impacts are now worse in Europe than the United States.)

In the case of high oil prices and lay-offs, less energy of all types–not just oil–is used. Laid-off workers may move in with relatives, and thus reduce their living expenses. Each laid-off worker would have used oil to get to their job, and this will no longer be required. The jobs experiencing layoffs themselves may have required fuel use of various types, such as heat for buildings, fuel for airplanes, or electricity used in making new cars, and this is reduced as well.

There is also likely to be a link to housing prices. Moving up to a more expensive home is a discretionary expenditure. If people’s incomes are squeezed by high oil prices, and some are being laid off, there will be less demand for homes as well.

This lower demand can be expected to reduce housing prices, especially in areas where commuting distances are longest (and thus, oil use for commuting greatest).

There are also likely to be layoffs in the construction industry, as there is less demand for new homes and new buildings of all sorts.

As I have mentioned previously, James Hamilton (2011) has shown that 10 out of 11 recessions in the United States since World War II were associated with oil price spikes.

High Energy Costs in One Area Tend to Lead to Substitution to Places Where Energy Costs Are Lower If there is a possibility of international trade, manufacturing and some types of services will tend to move to areas where costs are lowest. Part of these costs are energy costs. A manufacturer with cheap electricity costs will have an advantage over one with higher electricity costs. As energy costs rise (as they have in recent years), they get to be more important in determining where manufacturing will be done.

Besides direct energy costs, wages are another part of the difference in costs from one part of the world to another. Wages tend to be lower in the warmer areas of the world. In part, this is because energy from the sun provides much of the needed energy for heating homes, so there is less need for supplemental energy. This

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means that wages do not need to be as high for a comparable standard of living.

If we look at recent world energy consumption, we see rapid growth in energy consumption. This pattern is quite different from the US pattern we saw in Figure 2, which was much flatter.

Figure 3. World Energy Consumption based on BP’s 2012 Statistical Review of World Energy

Figure 4 below shows that there has been a striking difference in how energy consumption has grown in various parts of the world.

Figure 4. Energy Consumption divided among three parts of the world: (1) The combination of the European Union-27, USA, and Japan, (2) The Former Soviet Union, and (3) The Rest of the World, based on data from BP’s 2012 Statistical Review of World Energy Figure 4. Energy Consumption divided among three parts of the world: (1) The combination of the European Union-27, USA, and Japan, (2) The Former Soviet Union, and (3) The Rest of the World, based on data from BP’s 2012 Statistical Review of World Energy.

Energy consumption has been quite flat in the grouping of industrialized countries I show first (European Union-27, USA, and Japan). The Former Soviet Union (FSU) collapsed in 1991, and the consumption for those countries has never recovered.

Energy consumption for the “Rest of the World” has been increasing amazingly rapidly since 2002. The rest of the world includes China, India, Bangladesh, and many small countries, plus oil exporters, such as Saudi Arabia and Mexico. Although

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I don’t break it out separately on Figure 4, the increase in energy consumption since 2002 has been especially marked in Asia.

The “bend” in the line for “Rest of the World” energy consumption took place immediately after China joined the World Trade Organization in December 2001. If we look at China’s fuel consumption by itself, we see that its huge rise in energy consumption (Figure 5, below) came mostly from increased coal consumption starting at that time. Oil consumption also increased. Nuclear and renewables are too small to be visible on the chart.

Figure 5. China’s energy consumption by source, based on BP’s Statistical Review of World Energy data.

Other countries, especially Asian countries like India, also ramped up their energy consumption at a similar time. India also uses coal as its primary fuel, with 53% of its energy consumption in 2011 coming from coal (based on BP 2012 data).

While I don’t have employment data for Figure 4 groupings, I do have economic growth data (Real GDP is Gross Domestic Product, adjusted to remove effects of inflation), shown in Figure 6, below.

Figure 6. Three-year average real GDP growth for (1) EU-27, USA, and Japan, (2) Former Soviet Union, and (3) Rest of the World, based on data by Angus Maddison through 2008, and USDA since then.

Figure 6 indicates that the economy of the “Rest of World” has been growing much faster than the EU, USA, and Japan grouping since 2001. In fact the Rest of the World’s growth has been much faster for nearly the entire period shown on the

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graph. Based on the steeper rise in energy consumption of the “Rest of World,” in Figure 4 compared to the old industrialized countries grouping, this might be the predicted result.

One point that many people miss is that the Great Recession of 2007-2009 was to a significant extent a phenomenon of the older industrialized countries. EU, USA, and Japan all were hit very hard, while the “Rest of the World” almost sailed along. This can be seen in the energy consumption data on Figure 4, and the economic growth data on Figure 6. The Rest of the World slowed down a bit, but even during that period, its growth rate exceeded the best growth rate of the EU, USA, and Japan grouping during the 1984-2011 period (based on Figure 6).

Is it Possible to Change the Relationship between Energy Consumption and Number Employed?

The answer is pretty clearly, yes, but lower wages may be part of the mix.

Let’s look at how the United States changed its energy consumption, per number of people employed, over time. If we go back to the 1949 to 1972 time period, we also see a close relationship ( R2 = 99%) between US energy consumption and employment, but it is a different close relationship than since 1982, (shown in Figure 2, near the top of this post).

Figure 7. Graph of amounts similar to Figure 2, but for the period 1949 to 1972.

During the 1949 to 1972 period, energy consumption was consistently rising faster than the number of people employed. Oil was cheap, as were other energy sources, so not too much thought was given to how efficiently it was used. Also, as we will see in Figure 9, wages for workers were rising much more quickly (in inflationadjusted terms) than they have been in more recent times.

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About 1972, we discovered we had a big problem: Figure 8. US crude oil production based on data of the US Energy Information Administration.

Oil had been our largest source of energy, and our own domestic production was dropping quite rapidly. By 1973, the Arabs had discovered our vulnerability, and the 1973 Oil Embargo began, leading to a sharp rise in gasoline prices. The US Federal Government regulated oil prices from 1973 to 1981. At the same time, a major effort was made to switch oil use to another fuel whenever possible. Electricity generation was switched to include more coal and nuclear (based on EIA data), and to remove production using oil. There was great demand for more fuel-efficient cars, leading to the import of cars from Japan (a country that had been making smaller cars for years), and the down-sizing of US cars.

Figure 9. Employment and Energy Consumption using data similar to that used in Figure 2 and 7, but for the 1972-1982 time period.

As a result, the period 1972-1982 was a time when energy consumption was relatively flat, but employment rose. A big part of this rise reflected the addition of women who had not previously worked outside of the home to the work force. With the higher price of oil, salaries did not go as far, so having another family member working was helpful. According to Toosi, the percentage of women who were part of

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the workforce rose from 43.3% in 1970 to 51.1% 1980. Wages of women were lower than those of men (Figure 10, below), helping to hold down the average wage.

Figure 10. US Median Wages, separately for males and females, in 2010$. Based on Census Historical Income Tables: People, Table P5 – Regions by Median Income and Sex.

Also, the wages of lower-paid men stopped rising in real (inflation-adjusted) terms.

(The wages shown are Figure 5 are median wages–50% of wage-earners earn more than that amount and 50% year earn less.) Wages of high-paid workers, such as business executives and physicians (not shown on the chart), were still rising.

It is hard to tell what the relative impacts were of the many changes that took place in the 1972 to 1982 time period. Clearly, lower average wages (with more women in the work force) and flatter wages were a big part of the change. But there were other changes as well, including more imported manufactured goods, changes to fuels other than oil, and more efficient use of oil, all contributing to the differences we see between Figure 2 and Figure 7. The US became a net importer during this period as well, and thus began running up external debt (based on US Bureau of Economic Analysis data).

Comparing energy-employment patterns in Figure 2 and Figure 7 may be confusing for some. I show the change in the relationship in another way in Figure 11. Here I show (energy consumption/number of people employed). It shows that energy consumption per employed person was rising prior to 1972, came down for a variety of reasons in the 1972-1982 period, and is now pretty close to flat (decreasing slightly).

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Figure 11. Total US energy consumption divided by number employed. Energy consumption from US EIA, number of non-farm workers from US Bureau of Labor Statistics.

On a positive note, one factor that has helped keep quality of life up is increased efficiency in using energy. Homes are better insulated now. Home heating and cooling units are more efficient. Businesses have worked hard to keep energy use down, because energy is a major factor in their cost structure. For example, we read about airlines retiring their less fuel-efficient jets. Thus, even though energy consumption divided by number of workers is flat or trending slightly downward, our standard of living has risen considerably since 1970 or 1980.

Another thing that has helped improve living standards is the amount of manufactured goods we are now importing from China and other countries around the world, especially Asian countries. The amount of debt we need to keep amassing to buy all of the goods we buy abroad is a problem, however, because we are not earning enough to pay the full amount of these goods. If we could count on economic growth forever, perhaps we could simply “grow� out of this debt, but this seems increasingly unlikely, for reasons I will discuss in later posts.

The United States Hit Peak Percentage Employed in 2000 If we look at the percentage of the US population who have jobs outside the home (or self-employed farm workers), the trend is quite alarming (Figure 12): Figure 12. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. (This includes children and others not usually in the labor force.)

2012 is a partial year estimate.

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While the percentage of people with jobs was rising between 1960 and 2000, in recent years it has dropped. The recent drop seems to be at least in part related to the shift in energy consumption growth (and jobs) to the “Rest of the World,� which includes China, India, and many other developing countries and oil exporting countries. Jobs that the United States would have had, seem to have been shifted elsewhere.

The percentage of US population employed outside the home or farm has grown for a very long time. The increase started in the 1800s, as the use of coal allowed a reduction to the number of workers needed in farming, because it allowed more use of metals, enabled the use of electricity, and helped make farmers more efficient.

See my post The Long-Term Tie Between Energy Supply, Population, and the Economy. See also Smil, (1994) and Lebergott (1966). Later, women increasingly joined the work force, especially after World War II. The combination of rising energy costs (especially oil) and increased international trade gave China and other Far Eastern countries an opportunity to ramp up their manufacturing and service industries (call centers in India, for example). Jobs migrated to China and to other countries with low energy costs (thanks to lots of coal in the mix) and low costs of living, thanks in part to better solar heating.

There had always been some foreign trade, but the amount of trade increased in the late 1970s, when we started importing smaller cars from Japan, as well as more oil.

It increased again later, especially after China entered the World Trade Organization in late 2001. US imports of goods and services increased from $54 billion in 1970, to $291 billion in 1980, to $616 billion in 1990, to $1.4 trillion in 2000, and to $2.7 trillion in 2011 (US Bureau of Economic Analysis).

Other Observations Role of World Trade. Figure 4 suggests that world trade makes a huge difference in the amount of energy consumed. If we truly wanted to reduce our energy consumption (which I doubt world leaders are really interested in), we could reduce world trade through taxes on imports, or some other mechanism. The number of people employed would likely drop as well, although perhaps part of the difference could be made up by greater efficiency and by lower wages for individual workers.

The important role of world trade also brings up another issue. If world trade were,

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for some reason, interrupted or seriously scaled back, this would likely significantly reduce energy consumption (and employment) around the world.

Energy Consumption vs Number of Jobs Patterns by Country will Vary. I have shown US data. Patterns in other countries are likely to vary, in part because of the different specializations (amount of services compared to manufacturing, for example) of different countries, and different wage levels in different countries.

Good Intentions Aren’t Always Helpful. The Kyoto Protocol with respect to Climate Change was adopted in 1997. Figure 4 and Figure 5 suggest that adding China to the World Trade Organization had far more impact, and in the opposite direction. In fact, additional carbon taxes on goods that require high energy input may have encouraged competition in countries without such controls. Furthermore, reduced oil consumption through, say, higher taxes on gasoline, left more oil on the world market, to be used by developing countries. (This is related to “inelastic supply” of oil. Reducing demand in one area leaves more supply for other areas.)

Figure 13. Actual world carbon dioxide emissions from fossil fuels, as shown in BP’s 2012 Statistical Review of World Energy. Fitted line is expected trend in emissions, based on actual trend in emissions from 1987-1997, equal to about 1.0% per year.

Figure 13 shows that while Kyoto Protocol may have helped reduce emissions in some countries, world carbon dioxide emissions have grown more than what would have been expected, based on the 1987-1997 trend in emissions. If the Kyoto Protocol influenced China’s and the rest of Asia’s decision to ramp up exports, this decision would have indirectly affected job availability in the United States, even if the US was not a signer of the Protocol.

The “Smaller Batch” Issue. If there is not enough energy to go around at prices people can afford to pay, recession seems to be nature’s way of fixing the situation. I compare the situation to a chemical formula, or to a cake recipe. If one necessary ingredient is in short supply, the economy behaves as if it is making a “smaller batch”. It contracts in a way that leaves out those who were most marginal to begin

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with–such as employees of discretionary industries, and borrowers who could only barely make payments on loans (subprime borrowers), and countries with the highest energy costs. Employment is reduced, and unemployed people tend to move in with friends or their family, to cut expenses. This reduces energy consumption.

Increased Wage Dispersion May Reflect Another of Nature’s Coping Mechanisms. In the animal kingdom, any “K-selected species,” such as a dog or cats or primates, (probably including humans), has an inborn instinct toward hierarchical behavior.

The manifestation of this instinct tends to be greater as there is greater crowding, and greater competition for resources (Dilworth, 2009). The intent in the animal kingdom is survival of the fittest, with those at the bottom of the hierarchy being starved out, if there is not enough to go around.

It is striking to me that since the mid-1970s, we have seen what could perhaps be interpreted as increased hierarchical behavior in humans and corporations. Wage dispersion has tended to become greater since the mid-1970s, when we started encountering energy supply problems. We have also seen the growth of international businesses. These large businesses have been increasingly favorably taxed, because they can choose tax havens around the world to incorporate. All of these changes tend to concentrate wealth at the top, in large companies and in the wealth of high paid workers. Perhaps all of this is a coincidence, but the timing is striking.

Increased use of part-time and contract jobs might be considered a trend in this direction as well. Job sharing has been proposed as a way of dealing with having an inadequate number of jobs in the older industrialized countries, but this tends to act in the same way (pushes the wages of lower-paid workers down, while leaving the top wages untouched).

Economic Models. Economic models seem not to take into account the very substantial shift in percentage of the population employed. Part of economic growth on the “way up” was growth in the percentage of people employed. If economists miss this change, as well as the fact that the percentage now seems to be headed down, their models will be wrong. Expected economic growth may disappear.

The World War II baby boom generation is now reaching retirement age. This change will tend to push the percentage of population employed down further, all other things being equal.

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Impact on Governments. If fewer people are employed, this is a problem for governments around the world. Governments in Europe are particularly affected now, partly because of the generous benefits they offer. The US budget deficit is very much related to this issue as well. I will write more about debt and government funding in another post.

Notes: [1] The idea of looking at employment in relationship to the economy after reading Mario Giampietro and Kozo Mayumi’s book, The Biofuel Delusion: The Fallacy of Large-Scale Agro-Biofuel Production, Earthscan, 2009.

[2] While total energy costs are important, individual energy costs, such as gasoline cost, are important as well, because there is little short-term substitutability across sectors. For example, coal is not an option for running today’s gasoline-powered cars, and public transport is not an option in most of the US. If there is a long enough lead-time and citizens can afford the transition, substitutions might be made, but it is not something we can count very much in the short term.

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Oil energy dependence and energy transition Written by Andrew Mckillop from OilVoice

Energy analysts and commentators are steadily shifting towards a common understanding that global energy since 2008 is very different from pre-2008, and will continue diverging. To be sure, declining energy intensity of the economy, falling oil demand, rapid growth of renewable energy and other facets of energy transition are often dismissed as "only driven by crisis and recession". Using less energy, developing new forms and types of energy, changing consumer perceptions of energy - all of these can be brushed aside as only crisis phenomena. Following that "logic", energy demand led by oil demand will bounce back when or if the economy bounces back - at some unspecified future date.

In fact experience since 2008, both in OECD countries and Emerging economies shows one mega trend: energy demand and especially oil demand is slowing even faster than the economy slows down. Another major change is the range and types of "new energy", and energy saving options are growing very fast.

These simple facts are however a complex reality, with a large number of counterintuitive spinoffs, one of them being the plight of the renewable energy industry in Europe and elsewhere. Another is the little remarked or analyzed but rapid slide in the fortunes of "Big Energy" corporations led by the historic oil majors, from Exxon Mobil and Shell to BP and Total or ENI. Yet another is the increasingly uncertain and financially unsustainable situation of many large power production and supply utility companies, especially in Europe, but again also elsewhere.

DEINDUSTRIALISATION AND ENERGY A recent piece on 'The Demise of European Refineries' by Maxime Lambert covers one aspect of these themes: http://www.energypolicyblog.com/2012/05/06/thedemise-of-european-refineries/ Underlying the demise of Europe's refining industries, where today "all the signals

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are red" and the industry is out of synch with all main parameters (crude supply and types, product demand by type, volumes needed, environmental costs, financial performance, etc), is European de-industrialisation. A less industrial society needs less energy - especially petroleum, even if the imported industrial goods used and consumed in that "postindustrial society" are energy intense and oil intense.

Staying with the example of European oil refining, we have to ask why the industry has suffered from blatant overcapacity not for "a few years", but decades? One reason is that each economic recession crisis or apparent crisis is imagined to be transient, with no change of underlying infrastructures or social and economic superstructures, that is financial, economic and social expectations, investment (and divestment) intentions, or major changes in energy policy, science and technology.

The static world of "technocratic" planning and political mamagement is in fact a flat world hypothesis where nothing changes. What we can call "pre-Copernican" planning and management.

Change can and does occur across the spectrum. At certain times, especially during recessions, the pace of change often accelerates, even if the economy and society shrink or retreat into inertia and anomie. The "hidden recession" of the long period since at least 2005, measured by state and corporate debt growth on an almost worldwide scale, has only become fully acknowledged and recognized - at least by mass media and politicians - as happening from 2008, signalled by events like the Lehman Bros collapse, the US subprime rout and the Eurozone crisis. Global and regional energy demand, as an energy-economic indicator, however shows that even by 2006, EU27 oil demand was starting to fall. In 2012, European oil demand is in its sixth consecutive year of decline. To be sure, the hardest hit countries by the financial and economic crisis, the PIIGS, show the most dramatic declines of oil consumption, often in double digit percentage numbers since 2006.

What we also find is that industrial output and industrial capacity, especially heavier engineering and virgin metals, all show consistent and long term decline of activity and output in nearly all European countries - and in many other OECD countries.

The de-industrialisation trend was not "waiting to happen" in 2008 but was already well entrenched: the process was accelerated by recession and crisis, only. The supporting energy evidence for this argument is massive: electricity demand growth, for example, has stagnated in nearly all OECD countries, not for "a few years" but for a decade or longer. Several countries, again in Europe, show an ncreasingly consistent trend of annual declines in total electricity demand. Outside Europe this

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trend is active in other OECD countries, but the real surprise is that recent Chinese national data shows that in July 2011-July 2012 China's electricity demand growth was zero, this event producing a flurry of comments by economic analysts worldwide, as to whether this was a "bellwether trend" or not.

See for example: http://www.energypolicyblog.com/2012/09/23/energy-demandgrowth-is-passe/.

Under any hypothesis it shows firstly that China's economy is slowing rapidly, and that secondly the policy of reducing the energy and electricity-intensity of the economy is moving ahead very fast.

WHERE WILL ENERGY DEMAND GROWTH COME FROM? Until recent years, even 2008, the received wisdom was that "Asian locomotive" economic growth would continue driving the global economy, entraining constant energy demand growth, including oil. This theory has already been disproved by economic reality, especially since 2008. Chinese and Indian economic growth are declining, and their economies are becoming more energy efficient or less energyintense, and the decline of their economic growth is being accelerated by the recession in the OECD countries. Put another way, Asian economic growth has not prevented recession in the US, Europe and Japan, but recession in OECD countries is slowing down the "Asian locomotive" which itself is using less coal and oil (if not gas) and becoming less energy-intensive per unit of GDP. For Europe this sets new and unexpected challenges for the "climate-energy package" and member state REAPs (renewable energy action plans). Taking simply offshore windpower development, the EU27 + Norway are set on a course of developing 140 000 MW of offshore wind capacity by about 2030. This is about 15% of Europe's entire installed electric power generating capacity as of Dec 2011: in the event of continuing falls in European power demand, will it be necessary to develop this new power capacity? If it is developed, what will be its financial and economic performance?

The fallback or default argument is that non-OECD and non-Asian countries, accounting for roughly one-half the world's population of 7 billion at present, will show Asian-type rapid industrial growth and urbanization, driving up their energy demand, including oil demand. Against this argument, however, there are a large

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number of counter-arguments. In particular, this concerns Africa, with a present total population of around 1.05 billion, almost exactly the same as the OECD's population but growing relatively rapidly although demographic transition to smaller families and slower population growth is operating in Africa, as in all other regions. One unexpected energy transition, especially powerful since 2008, is the pace of energy discovery in Africa, including large oil finds in many countries, and vast stranded gas finds in east Africa. Already a large oil exporter relative to its small oil consumption dictated by poverty, Africa has the fossil energy resources to pursue a completely conventional energy-intense economic development trajectory, if it wants to.

Learning curve effects, and technology changes in the energy domain, shown by the impressive pace of renewable energy development and constant reduction in unit energy costs from renewable energy sources and systems may heavily modify the current received wisdom that even if Asian economies decrease their energy intensity and increase their use of renewable and alternate energy, Africa will take up the slack and compensate this decline in energy demand growth. Opposing this fallback argument that energy shortage, penury and high prices are "sure and certain", African economic development goals most surely include agriculture and food production growth, rather than industrialisation, made more rational or unavoidable by increasing food supply problems and the world's large - and increasing - industrial overcapacity in an increasing number of sectors. The car industry and shipbuilding industry, consumer electronics, cellphones and even the aviation industry are all examples. The woefully neglected food sector will almost certainly become at least as important as the oil industry has been until very recently, for the developed countries including the OECD group.

This region-by-region analysis is itself underlain by key assumptions, some of which are now openly questionable: in particular this concerns the materials intensity of the economy, its transport intensity, and the energy intensity of materials and transport, as well as related components of economic activity such as urbanization rates and types of urban development. All of these components are subject to technology change, as well as demand change driven by social, cultural and demographic change. Taking a simple example, of national car fleets, many OECD countries are at saturation levels of 500 - 700 cars per 1000 inhabitants in countries with sometimes rapid ageing of the population: the supply of mobility services is already replacing the growth of physical car numbers, with a downward impact on per capita energy needs for transport and transport services.

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THE "POST CRISIS" PERIOD TO 2015 Given the massive changes in world energy that were compressed into the 20082012 period, we can expect or accept the potential for similar large changes through 2012-2015.

These will almost certainly include a large fall in oil prices, driven by the most basic energy-economic factors that are possible: oil is extremely overpriced relative to all other energy sources. Long treated as being "impossible to substitute", but using IEA data, the OECD group obtained 52.6% of its energy from oil in 1973, and 36% of its energy from oil in 2009. Outside the OECD group, oil dependence is even lower, in almost all countries and regions, for example supplying about 21% of China's primary energy. Relative to the approximate 4.75 million barrels a day demand for the world petrochemicals industry, where oil really is difficult to substitute, world proven oil reserves are sufficient to cover about 725 years of current petrochemical industry demand.

Now declining interest in mitigating the claimed warming effects of the supposed "killer gas" CO2 will almost certainly not prevent renewable energy development from powering ahead because in many cases, notably windpower and solar power, the "fuel" source is completely zero cost. The certain growth of global gas supplies will enable this cleaner and abundant fuel to replace oil and even coal: current US natural gas prices (about $2.50 per million BTU on average in Q2 2012) price gas at about $17 per barrel equivalent, and through 2011-2012 to date, US coal consumption for power production has declined by about 25%. Present gas prices in Europe and Asia can only decline, if not to present US price levels, underscoring the policy choices and goals in Europe, of developing or not developing shale gas resources: cheap gas can and does substiute coal, as well as oil.

By 2015, many national policies and programmes for energy saving and development of non-fossil energy sources and systems will be attaining maturity, even if oil prices have declined, probably to the oil industry E&P (exploration and production) investment spending threshold price of around $75 per barrel. Removing high priced oil from the global energy equation, apart from its beneficial effects on global geopolitical relations and consumer confidence, will also help rationalize national and regional energy policies and programmes.

In the past decade, these policies and programmes have often been dominated and

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dictated by the "fear of $150 oil", as well as irrational fears of global warming "apocalypse", leading to unrealistic and uneconomic energy project choices. With generally lower energy and the removal of depeltion and scarcity fear, energy policy making and programme choices can become more rational.

The major unknown and a cause of realistic fear is the state of the global, regional and national economies. Continuing decline of economic activity is not impossible. If this decline continues, it may attain threshold tipping points for major long-term structural change of the economy, towards the "degrowth economy". In regions such as Europe this is a decreasingly irrational or increasingly likely hypothesis, with energy implications which will certainly be massive.

Article by Andrew Mckillop

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Doing more with data Kuala Lumpur, October 24-25, 2012

Finding Petroleum / Digital Energy Journal is running 2 one day conferences in Kuala Lumpur, Malaysia, on October 24 and 25 on doing more with drilling and subsurface data.

These 2 events will present the most exciting new technology to help manage and work with all aspects of data in the upstream all and gas industry.

The conferences are for people who want to learn about new ideas and new technologies to make their data work harder, to improve efficiency and safety of drilling, ability to find new reservoirs and extend existing ones, and maximise production.

The event is scheduled to co-incide with the Energistics National Data Repositories conference in KL on October 21-24.

Attendance is free - register now to secure your place.

October 24 - Doing more with with drilling data October 25 am - Doing more with subsurface data October 25 pm - Getting data tools implemented faster The aim is (i) to make it easier for people working in KL oil and gas companies and service companies to find out more about the latest new technology to help manage data, and (ii) to provide technology companies attending the National Data Repositories event with a chance to meet a local audience during the same trip.

The events will be free to attend.

For days 1 and 2, we will look for financial contributions from speakers - in the range 14600 MYR / USD 4760 / GBP 3000 for a morning slot and MYR 9750 / USD 3200 / GBP 2000 for an afternoon slot.

Sponsorship opportunities are also available.

For enquiries about sponsorship and speaking please contact our sales manager John Finder on +44 208 150 5292, e-mail jfinder@onlymedia.co.uk

Reserve your place now at FindingPetroleum.com

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Regulation of all of the above energy to cost 20x more on public lands?

Written by Gary Hunt from TCLabz

More than 96% of the domestic energy production growth from shales has taken place on private lands safely out of the reach of the Federal government bureaucrats and regulators. That energy production growth is transforming America’s energy future by increasing supply reliability and driving down the price of natural gas from more than $13 per MMBTU to less than $3 per MMBTU in a period of less than five years.

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Meanwhile, on public lands, production has actually slowed as the Department of Interior and its Bureau of Land Management (BLM) press on with extensive environment studies and new regulations even as the President professes support for an "all of the above" energy strategy.

The Federal government announced proposed rules on fracking on public lands in May 2012 (43 CFR 3160.0-3) and has received more than 2,000 comments on those rules by the September 10, 2012 deadline. Interior Secretary Ken Salazar said in May he hoped to issue a final rule by the end of 2012 likely after the Presidential election.

According to a study by John Dunham and Associates the total cost of the proposed Federal rules will be about $1.5 billion to $1.62 billion a year or about $235,839 per well to satisfy the requirements on chemicals disclosure and certification that the well is properly isolated to prevent leaks that might contaminate groundwater.

This figure compares to a BLM estimate of $11,833 per well—a difference of more than 20 times. All that cost for rules that the oil and gas industry and the states of Colorado and Wyoming claim are unnecessary, unreasonable and required E&P firms to take actions that no state currently regulating fracking for oil and natural gas production has required.

The Dunham Study disputes the BLM claim that the proposed regulations are not major changes from existing rules citing the following examples of how the new rules add substantial and costly new requirements for E&P activities on federal and Indian lands: 1. Mandates additional information and meet new requirements than currently required for all well stimulation (completion) activity when applying for a permit to drill (APD).

2. Requires a similar separate application must be filed prior to additional drilling on an existing well.

3. Requires BLM review and verification the additional drilling requirements at each permit stage slowing down the process and driving up the cost of idle equipment and crews.

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4. Requires additional cement bond logs be submitted to BLM for review and approval prior to completing the well again idling equipment and crews and driving up costs.

5. Requires reporting specific source of water used in well completion operations.

6. Requires submittal of a detailed engineering design and other information related to well stimulation operations to the BLM for approval. These detailed studies end up becoming the basis for environmental litigation designed to challenge the review process and thus slow to stop E&P activities.

7. Requires detailed information about how all recovered fluids from well drilling will be captured and disposed consistent with the rules.

8. Requires a successful mechanical integrity test before beginning any well drilling.

9. Requires receipts be supplied to BLM to validate that recovered fluids are disposed of in a proper manner.

Dunham also says that by adding additional requirements for new drilling activities at existing wells many of the current 90,452 wells on Federal leases will find greatly increased costs over time. Dunham calculated its estimates of the cost of these new fracking rules on public lands by examining data from the thirteen state regulatory authorities in the Western states covered by the study. Dunham found about 12,300 oil wells, and 14,100 gas wells currently in the process of receiving a permit, or permitted but not yet drilled.

As you can imagine, private energy developers are wondering if the shale drilling opportunities on public lands—substantial as they are on the 38 million acres leased by the U.S. Government for energy development —are worth the aggravation. Now a private study of the implications and costs of the proposed Federal regulations and environmental requirements to gain access to public lands has added up the costs. It is not a good news story.

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American shale E&P growth is creating a global energy independence transformation Written by Gary Hunt from TCLabz

The growth of oil and gas exploration in shales begun in North America is setting off a global race for shale E&P development and threatens to turn the old conventional energy order on its head.

Based primarily on the phenomenal growth of domestic energy production from shale E&P in the United States, the world is waking up to realize that we are not running out of oil or natural gas.

As in every revolution there are both opportunities and risks. Here in America our politicians are promising energy independence from development of domestic resources. This, more accurately, should be interpreted as an end to energy dependence upon OPEC for oil imports by substituting a more broadly competitive global marketplace with many suppliers. Energy independence is more accurately energy inter-dependence as the world adapts to the concept of truly competitive energy markets.

SOURCE: US EIA

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The shale revolution is underway and every nation wants part of the action but success threatens to diminish the market power of OPEC making global energy markets truly interdependent and highly competitive. The growth potential and wide geographic distribution of technically recoverable oil and gas resources from unconventional shale deposits around the world is setting the stage for an E&P rush to develop those resources. 

For China, the potential from a shale gas revolution is profound. US EIA estimates that China has more than 1,275 trillion cubic feet (tcf) of technically recoverable natural gas compared to an estimate for the US of 862 tcf.

Developing this domestically available shale potential can assure that China has the secure energy resources to sustain its economic growth and better yet more widely distribute the benefits of the growth into the rural areas of the country.



For Israel and other nations in the Eastern Mediterranean, a 2010 USGS study of the discovered oil potential off the coast of Israel, Syria, Lebanon and Gaza suggest that there may be as much as 1.7 billion barrels of recoverable oil and 122 trillion cubic feet of natural gas and 5 billion barrels of natural gas liquids. If developed that is enough resource to make each of these nations or prospective nations energy independent and likely net exporters. This, of course, also adds to the ongoing regional tension with new opportunities for energy development disputes.



For nations like those who comprise OPEC, plus Russia, Iran and Venezuela the shale revolution potential is terrifying because it undermines the cartels they have developed and erodes their pricing power with profoundly adverse effects on their economies. Russia is particularly threatened by US-backed unconventional gas technology, as evidenced by their support for ‘fearmongering’ concerns on environmental and health problems related to hydraulic fracturing-related practices. Russia also is unfamiliar with US fracking technology, and is keen on trying to understand more regarding it and its potential for expanding Russian energy resources.

North America is the center of the shale revolution leveraging American technology in perfecting 3D seismic technologies for E&P discovery and assessment, horizontal drilling to gain access to the resource, and hydraulic fracturing to release the tight oil and gas and allow economic recovery. A debate about how America should take advantage of this shale E&P opportunity is both timely and prudent in this

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presidential election

America has Always Had plenty of Oil, but Not the Will to Produce It. This shale oil and gas production growth in North America is in addition to the already substantial conventional oil and gas resources in place and being tapped to meet American energy needs. We have never lacked for energy resources. What we lack, so far, is the political will to put them to full productive use. Today, our desperate need to get the Us economy growing again creating jobs is changing that for the better.

The USGS estimates the technically recoverable conventional petroleum resources from 70 locations not counting Federal offshore locations total more than 32 billion barrels of crude oil, 291 trillion cubic feet of conventional natural gas deposits and more than 10 billion barrels of natural gas liquids.

Gaining access to American technology, skills equipment and expertise is making the United States and Canada a magnet for foreign direct investment in the energy sector and the vendors that serve it. Developing abundant, reliable, low cost access to energy resources in the US will revitalize American’s industrial base and bring strategic industries, manufacturing and jobs home after a decade of outsourcing. We can accelerate that growth and the repatriation of jobs by making changes in our tax

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laws, regulatory environment, and business-friendly attitudes to welcome the foreign direct investment and more importantly get American companies to bring their production back home.

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Health, Safety, Environment and Risk Management RPS Energy is a global multi-disciplinary consultancy, providing integrated technical, commercial and project management support services in the fields of geoscience, engineering and HS&E.

Contact James Blanchard T +44 (0) 20 7280 3200 E BlanchardJ@rpsgroup.com

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