OilVoice Magazine - Edition 54 - September 2016

Edition Fifty Four— September 2016

Threat to Oil Price Recovery Rises from the Seas?

An Updated Version of the 'Peak Oil' Story Fracking's Future

CAN SATELLITES MONITOR OUR ASSETS?

FROM FEASIBILITY TO DECOMISSIONING, OUR SATELLITES SUPPORT YOUR DAILY OPERATIONS. Using our extensive satellite imagery and in-house expertise, we can help to reduce costs and maximise efficiency at every stage of your oil and gas project.

From offshore seeps analysis to pipeline planning, from day-to-day monitoring of assets to 24/7 emergency response; a unique range of solutions that makes us an indispensable partner. Find out more at geo-airbusds.com

OIL_VOICE_GEO_OIL&GAS_EN_203x267+5.indd 1

11/7/16 10:45

The Saudis Did NOT See This Coming From US Oil Written by Keith Schaefer from Oil & Gas Investments Bulletin The hottest oil play in the western world is the Delaware sub-basin of the Permian in SW Texas. Producers are seeing huge increases in flow rates as they figure out proper fracking techniques. Rates are doubling from 1500-3,000 boepd! And payout times for wells are now as low as seven months-at $45 oil.

Nobody saw this coming-especially the Saudis.

Junior producers especially need fast payout times on their wells so they can recycle that money back into another well. If they have longer than 12-15 month payouts, they really can't grow within cash flow, and end up diluting shareholders through debt and continued equity raises.

In the heart of this Shale Revolution-Resolute Energy. I added it to the OGIB portfolio on July 12, and added 10,000 shares on Monday Aug. 8 at $7.32 and added another 1000 shares Monday Aug 16 at $16.27. Here is my original notice to subscribers:

The stock of Resolute Energy (REN-NYSE) has doubled in three trading days, going from $2.80 - $6.07 on the strength of huge flow rates from its Permian Basin play.

And it may double again as the market understands 1. How close to bankruptcy this stock was priced 2. How richly other junior Permian stocks are valued at

1

This is fortuitous, as I'm studying the juniors in the Permian right now. This is the low cost oil play in North America and Permian stocks are receiving the highest valuation.

Resolute has just 15,000 bopd of production, and a whopping $490 million of long term debt-a Zombie Stock, like I wrote about last week with Athabasca Oil, Birchcliff Energy and PennWest Energy.

Investors have forsaken these heavily indebted companies for good reason. But as Resolute Energy showed us this week, when a Zombie comes back to life it can be explosive for share prices.

Now, I'm writing about this stock because I did buy 2000 shares at $5.60 today. It took me that long to notice the stock rocketing up, do the research, figure out what this thing could be worth & decide if I wanted to play or not-because this stock could still double from $6/share-IF oil holds up.

2

Everything changed for Resolute with just one press release (July 8) proclaiming amazing drill results- but first let me give you some quick background on Resolute.

Since the oil crash in 2014 Resolute has been selling off assets to try and stay alive.

In 2015 the company sold three assets to bring down debt: 

March 2015 sold non-core Midland Basin assets for $42 million



September 2015 sold its Powder River Basin assets for $55 million



November 2015 sold the rest of its Midland Basin assets for $177 million

Besides good drilling results, Resolute's most recent press release said it had sold some midstream assets and would be getting $32.5 million in cash ASAP. That hardly moves the needle on the company's $520 million of total long term debt.

A Step Change In The Permian

These recent drill results were awesome (don't worry, details are coming...) and this will significantly increase the amount of cash flow that Resolute can generate-and improve its net asset value.

A company's total leverage is determined by how much debt it has relative to its cash flow. Just as shrinking debt reduces leverage, so does increasing cash flow.

Resolute did this by getting a whole lot better at drilling wells into the Permian.

Resolute's main remaining Permian acreage is located in Reeves County in the Delaware Basin. The primary formation that Resolute is chasing on this land is the Wolfcamp A.

3

Source: Resolute Corporate Presentation

The last time that Resolute had released details on its Reeves county Permian production was on May 9, 2016. The company was then able to give IP30s on two recent 7,500 foot lateral wells-which came in at 1,552 boe/day and 1,475 boe/day.

Friday's release on its most recent Permian wells blew the prior (good) wells completely out of the water.

Source: Resolute July 8, 2016 Operations Update

4

Resolute has now moved to 9,000 foot laterals and production rates are much higher. The initial production rates on these wells are hitting 3,000 boe/day with the IP30 rates expected to double those of the 7,000 foot laterals previously drilled.

With these new data points on its wells and with results from competitors with offsetting acreage, Resolute has significantly updated its Wolfcamp A type curves.

The 7,500 foot laterals are now expected to recovery 56% more oil and gas and the 10,000 foot laterals 51% more than previously believed. That is like night and day.

In addition to getting 51% more oil, Resolute said they were able to lower cost 1218%.

Lower capex and increased flows puts the PV10 value of $10 million per well at these low oil prices. Wells costs on the longer laterals are $9.4 million and the shorter ones they're targeting $8.2 million. Ideally I want to see a PV10 that's 130150% of the well cost, but that's...ok.

Resolute has 22,420 gross / 12,940 net acres under lease in Reeves County where it believes it has identified 255 gross Wolfcamp A and Wolfcamp B locations to drill.

The company has 80% of 2016 hedged at $80/b and 25% of 2017 production at $54/b.

What is the stock worth? The secret here is that Resolute has only 15.5 million shares out. Callon has 118 million. At $6/share the Resolute market cap is $93 million. Add $490 million debt to get Enterprise Value (EV) of $583 million. Divide that by 15,000 boepd to get a per flowing barrel valuation of $38,866.67.

5

Per flowing boe is the weakest valuation metric to use, but consider Callon paid $80,000 per flowing boe for its latest acquisition, you get a sense Resolute stock could still run up.

If all the increase in EV to get to $80K/per flowing boe came from the stock -well, here's the stockbroker monkey math-15K x $80K=$1.2 billion - $490 million debt = $710 million market cap / 15.5 million shares = $45.8/share.

That sounds ludicrous doesn't it? That math shows why per flowing boe is the weakest metric to use.

But this is the Permian and there is a comparative bubble in the Permian. If someone paid $10/share for Resolute today, that's only $43K per flowing boe.

That's hugely accretive to Callon or Diamondback (FANG-NYSE) or Matador (MTDR-NYSE)-why wouldn't they take it over now just as type curves and EURs are increased dramatically, reducing leverage-and before the Market really catches on.

RISKS 1. this is all happening as I'm getting very bearish on oil and oil is dropping 50 cents a day.

2. The wells are only 55-60% oil (though natgas is starting to be worth something!)

3. Resolute's average working interest is about 60% 4. Very good hedges are saving the Company this year-which has 6 months left.

The Bonds Are Also Responding

Stock market investors weren't the only ones cheering the news from Resolute. Bond investors also like what they see. Resolute bonds that were trading for not much more than twenty cents on the dollar just a couple of months ago are now over seventy cents.

6

Another thing I have preached on and on about is...share counts matter. I LOVE finding low float companies with big revenues. I think it's incredible to find a 15000 boepd producer with only 15.5 million shares out. That is real leverage! That's why some monkey math takes this stock to $24-$42...of course commodity prices have to co-operate. But a low float stock in the highest value play in North America can be a lucrative and beautiful thing.

The other thing I really liked about the stock was how well it traded today-in a straight line, not all over the map. Steady and real accumulation, not a flood of profit taking from daytraders throughout the day.

The company should be able to use this news to almost get out of the woods and on the path to recovery. The value of its Permian acreage has permanently increased and will give the company several additional options to bring its balance sheet even more in line.

View more quality content from Oil & Gas Investments Bulletin

7

PICK A WINNER FOR THESE CHALLENGING TIMES With the industry’s current focus on cost control, it is remarkable that more and more forward-thinking oil & gas companies are stepping up to invest in Ikon Science’s revolutionary RokDoc Ji-Fi®, a new tool to build reliable seismically-driven geological models.

Ji-Fi breaks the mold of traditional workflows and opens up a whole new realm of possibilities. The cost/benefit of Ji-Fi is so compelling it redefines how customers leverage data and knowledge to drive success in their exploration, development and production activities.

Stay ahead of the game, and don’t wait for partners to show you the value in your assets! Find out more at

ikonscience.com/jifi

The Present And Future Of GeoPrediction

info@ikonscience.com

ikonscience.com

Xcite Energy: How the Debt Monster Ate Their Company Written by Steve Brown from The Steam Oil Production Company Ltd Or should I say, might eat their company. To say that the company has been eaten would involve making a prediction about the future and I steadfastly refuse to make predictions about what another company might do and what might happen to their share price. So this is all just analysis of what has already happened and what has already happened is that the debt monster has nearly eaten Xcite, or more precisely, Xcite's shareholders.

There is still time for something to happen which means that Xcite's shareholders are not wiped out, but the odds are lengthening all the time.

But that's all in the future and I promised I would analyse the past. The past is a matter of record not a matter of opinion and it is a matter of fact that Xcite's shareholders have been on a wild ride.

The Xcite share price soared from 37p in February 2010 to about ÂŁ4 at the end of 2010, only to fall to not much more than ÂŁ1 when a somewhat disappointing reserve report was published in the middle of 2011. The share price hovered around that pound until Xcite announced their plan to finance the development of Bentley with debt and funding from development partners. Like the dog that didn't bark in the night it was the lack of mention of a bid from a big oil company that was important.

The share price fell to about 60 pence. Since then the share price has ebbed away until it hit a low of about 5 pence per share at the end of July. There has been a rally just recently, perhaps a portent of redemption, or maybe just the proverbial dead cat bounce.

8

Xcite's shareholders bemoan the vagaries of the AIM market and the evil shorters.

But they aren't right to do so. Over the last four years the market has hardly altered its opinion of the relative worth of Xcite's main asset, the Bentley oilfield. There is (in the parlance of every trashy website across the world wide web) one weird valuation metric which has been almost constant throughout that time.

The metric is this, the enterprise value divided by the oil price.

The enterprise value is the market capitalisation (share price x the number of shares in issue) plus the net debt (that's debt and short term liabilities less cash).

For more than 90% of the time since Xcite's successful EWT at the end of 2012 this metric has ranged between 3.5 and 5.5. It has averaged 4.4 over that period of time.

Even today this metric is about 3.8.

So how come a shareholder who bought the dip back at the end of 2011 could have lost over 90% of their investment. Well, it's that aforementioned debt monster. Rather than financing the company with equity the Xcite board issued a series of different debt instruments and the trouble with debt when you don't have cash flow is that the interest rolls up and the debt gets bigger and bigger as time passes.

The red on the chart below shows the net debt which Xcite owed and owes, and it is that debt monster which is on the verge of eating Xcite's shareholders investment in their company. The evil shorters are exonerated.

9

Chart updated 14th August to show enterprise value in dollars rather than sterling and to show cumulative finance raised by the company. Finance raised is gross equity issues (incl exercise of options and warrants) plus debt plus interest paid in kind.

View more quality content from The Steam Oil Production Company Ltd

10

Cartographic Drafting & Design Services

We’ve got it covered‌ Serving the E&P industry for over 25 years

At blue asterisk, we specialise in providing on-demand cartography and graphic design services at highly competitive rates.

We work within your deadlines to provide accurate, high quality end products, from maps and montages to presentations and reports.

Find out how we can make your business stand out from the rest...

Contact us for more details or visit our website

blueasterisk.co.uk | info@blueasterisk.co.uk | +44 (0)1883 340341

OPEC is Playing The Emotion Game Again to Support Oil Prices Written by Alahdal A. Hussein from Oil Industry Insight

One of the key factors which supported oil prices recovery last week was the news about some of OPEC's members who are calling once again for an output freeze deal. Positive comments were given by both, Saudi Arabia energy minister Khalid AlFalih and Venezuelan President Nicolas Maduro, which lay the groundwork for a possible talk next month to discuss the possibility of oil producers freezing their oil output to support oil prices.

This is not the first time OPEC's oil producers give the oil market a hope that an output freeze deal could be reached. In fact, we still remember Doha's meeting and its disappointing outcomes. When we look at the situation now and then, we realize that there is no much difference.

Back then, oil prices fell below $30/bbl. The oil market sentiments were bearish, and many oil analysts were expecting oil prices to fall as low as $20/bbl. The direction in which the oil market was heading scared oil producers. And consequently, some of OPEC's members as well as other oil producers threw the idea of an output freeze deal. The duration since announcing the news of a possible output freeze deal until its actual meeting helped oil prices recover at that time.

But the result of Doha's meeting ended up with a failure to reach an output freeze deal, mainly because of Saudi Arabia's refusal to freeze oil output unless Iran does too. At that time oil prices were already well above $30/bbl, and the news didn't have much impact on oil prices. The oil prices rally continued on support from different factors.

11

In a similar way now, the news of a possible output freeze talk by OPEC's members came after oil prices fell below $40/bbl. Oil market sentiments were bearish during the last few weeks. U.S. crude inventories were not falling as expected and gasoline inventories were increasing. The increase in U.S. rig count was accelerating, and U.S. oil production recorded few increases during early to mid-July. Hedge fund managers increased their short positions and oil market analysts expected oil prices to fall sharply again.

These negative news scared OPEC's members again, and they decided to play the same old game. Announce a possible oil output freeze talk. Oil prices will stop falling, and reverse a course. Then, let the talk takes a month or more. The news of 'output freeze talk' throughout this period will help change the state of the oil market from negative to positive, just like it did few months ago.

When the output freeze meeting date comes, some producers will come up with an excuse not to agree on freezing their oil output. And the meeting will end up as a failure in a similar way like its previous version.

When that time comes, oil prices will be at a higher level. The oil market will be in a better state than it was a week ago. Other parameters will come in to support oil prices like what happened few months ago. And these oil producers talking about freezing their oil output right now will be producing more oil at that time.

OPEC's members are not freezing any oil output, they are simply playing the emotion game to help the oil market get through this difficult time.

They come in when the oil market is full of pessimism and negative sentiments, and they give it what it needs; a hope. That hope prevents oil prices from falling further and supports its recovery. The good news is, everyone wins in this type of games.

And when the game is over, oil prices are higher.

12

The Positive Side of Low Oil Prices Written by Alahdal A. Hussein from Oil Industry Insight

Is there really a positive side for low oil prices? Yes there is, it is just that not many people can read between the lines and look at the big picture in the long term. While low oil prices could be bad for oil companies and their profits in the short term, it is good for the oil industry itself in the long term. How is that so?

When a market downturn happens and oil prices start to fall, companies' profits decline and eventually they start losing money. However, as times goes, oil companies start to adapt to the new oil price reality and they manage to make profits at the new low oil price, whatever it is.

This happens due to the fact that many oil companies are not operating efficiently in high oil prices environment. They get used to high oil prices to the point where they are no longer able to realize that they can do more with less. But when they are hit with harsh reality, and the fact that they either improve, or leave, they become able to realize that many things can be improved and done more efficiently. Eventually, they become able to survive and make profits at whatever the oil price is, it just takes time.

Unlike oil companies, when a market downturn happens, the oil industry is usually not in a good state. Higher oil prices discourage consumers and make them look for cheaper alternatives instead. When that happens, the global oil market share decreases and the future of the oil industry becomes under threat, even though it is still the supplier of the world's leading fuel.

13

The opposite is absolutely true. When oil prices fall and remain at a level that is suitable both for producers and consumers, its global market share increases. When oil becomes cheap, at an affordable price, its consumption increases. In fact, this is exactly what happened during the current oil market downturn.

According to the 65th edition of BP Statistical Review of World Energy, in 2015 crude oil gained market share for the first time since 1999. The gain in crude oil market share in 2015 is a direct result of low oil prices. It is obvious that low oil prices prompted adjustments in the energy markets where oil demand was lifted in some markets.

14

In 2015, global oil consumption grew by 1.9 million b/d, ( 1.9% ). Such growth in the global oil demand is significantly stronger than the increase of 1.1 million b/d seen in 2014, and nearly double the historical average of 1%. Generally, crude oil remained the world's leading fuel, accounting for 32.9% of global energy consumption.

The above figures reported by BP Statistical Review of World Energy prove that low oil prices environment benefits the oil industry more than high oil prices' does. The oil industry is in a good state as long as the global oil market share is growing. The ones who benefit from high oil prices are cash-thirsty producers not the industry itself.

With the raising threat to the oil industry from other industries especially electric vehicles industry, the best option for oil prices is to remain low at a level that benefits both producers and consumers. After all, our goal is to fuel the world not to purely make money. If we stick with the first goal, we can still make money, but once we focus on the second, we may just lose all.

View more quality content from Oil Industry Insight

15

Saudi Permian: A Race To The Bottom For Tight Oil Written by Art Berman from The Petroleum Truth Report Remember the shale gale and Saudi America? The scale of those outlandish delusions has now dwindled to plays in a few counties in West Texas and southeastern New Mexico. Saudi Permian.

It's a race to the bottom as investors double down on the tight oil companies that can still tell a growth story. Permian-weighted E&P companies are the temporary darlings of Wall Street as other tight oil plays have lost their luster.

A Silly Price Rally: Catch-22

We are in the middle of a truly silly price rally. Other rallies of 2015 and 2016 took place despite substantial production surpluses and too much inventory. Then, there was some hope that higher prices might result if over-production could be brought under control. Now, the world's production and consumption are near balance but oil prices remain mired in the $40 to $50 per barrel range.

This current rally will end badly because there is something more fundamental keeping prices low. Despite repeated assurances from IEA and EIA that demand growth is strong, it is not strong enough to draw down outsized global inventories.

Hope for an OPEC production freeze at next month's meeting in Algiers is the main factor driving this rally. The problem is that the world liquids market is as close to balance as it ever gets—over-supply has been less than 0.5 million barrels per day for the last two months (Figure 1). Oil prices were more than $100 per barrel at similar or greater production surpluses in 2013 and 2014.

16

Figure 1. World liquids production minus consumption shows that the present market is as close to balance as it ever gets. Source: EIA and Labyrinth Consulting Services, Inc.

In 2015, when the average production surplus was 2 million barrels per day, it was a different story. Over-production is not the problem now as it was then. If OPEC freezes production, it won't make any difference.

Inventories exceed all historical levels. The world remains over-supplied because there is too much oil in inventory.

As long as oil prices are are range-bound between about $40 and $50 per barrel, it makes more sense to store oil than to sell it. The carrying cost of storage is less than what can be made by rolling futures contracts over each month. Inventories will stay high until prices break out of their current range but outsized inventories make that impossible. Catch-22.

17

Four Oil-Price Cycles in 2015 and 2016

There have been four oil-price cycles in 2015 and 2016-the first three each lasted approximately 6 months (Figure 2). Each new cycle began with high price volatility that fell as price peaked. We are currently in the upward arc of Cycle 4.

Figure 2. Oil-price and oil-price volatility cycles since 2014. Source: EIA, CBOE, Bloomberg and Labyrinth Consulting Services, Inc.

The oil-price volatility index has fallen to levels similar to when prices peaked during the last cycle suggesting that current WTI futures prices just above $48 per barrel may already be near the peak for this cycle. Prices may increase into the low-$50 per barrel range as they did in June before falling again.

18

The latest cycle began when NYMEX futures prices fell below $40 per barrel in early August. In the succeeding two weeks, they have climbed to more than $48 (Figure 3). A factor beyond a possible OPEC freeze is the weakened U.S. dollar because of expectations that the Federal Reserve Bank will not raise interest rates at least until December. The value of the dollar against other major currencies has fallen 3% over the last month (36% annualized). WTI futures prices have increased 22% since August 1.

Figure 3. 2016 U.S. dollar index and WTI NYMEX futures prices. Source: EIA, Wall Street Journal and Labyrinth Consulting Services, Inc.

A third factor driving the current price rally is long-term concern about supply because of under-investment in oil development projects and exploration since the oil-price collapse. Recent statements by the International Energy Agency that demand may outpace supply in the next few years underscored that anxiety.

19

Figure 3 shows that oil prices appear to be range-bound between about $40 support and $51 per barrel resistance levels. The upper boundary is largely controlled by record-breaking volumes of U.S. and world crude oil inventories and the fact that producers add rigs and production with each upward swing in oil prices.

The 200-day moving average of NYMEX futures prices suggests similar range boundaries of about $38 and $52 per barrel (Figure 4).

Figure 4. Two-hundred day moving average of WTI NYMEX futures prices. Source: EIA, Bloomberg and Labyrinth Consulting Services, Inc.

Staggering Inventories

This market looks for any excuse to raise prices. Every price upswing is seen by some as the beginning of a return to oil prices above $70 per barrel. We seem to selectively forget that the staggering inventory levels of crude oil make this impossible until those volumes are drawn down substantially. Oops.

20

U.S. crude oil inventories fell 2.5 million barrels this week but have increased a net 1.6 million barrels over the last month during what is supposed to be de-stocking season (Figure 5).

Figure 5. U.S. crude oil inventories and comparison with 2015 levels and the four years preceding. Source: EIA and Labyrinth Consulting Services, Inc.

Storage volumes are 57 million barrels more than at this time in 2015 and are 143 million barrels higher than the 5-year average. This is definitely not a basis for a sustainable oil-price rally. Until inventories are drawn down by at least another 125 million barrels, a recovery to somewhere approaching mid-cycle 2014 levels of about $80 per barrel is technically impossible.

21

The Permian Basin Dominates Rig Count Increases

Five new horizontal rigs were added last week to drill tight oil objectives in the Permian basin and 12 rigs were added the previous week. Only 1 rig was added in the Bakken play after losing 2 rigs a week ago. No rigs were added in the Eagle Ford after losing 1 rig the previous week. More capital is being spent in the Permian basin than in all the other plays put together.

Overall, 67 tight oil rigs have been added since early June. Forty eight of those are in the Permian basin, 5 in the Bakken and 6 in the Eagle Ford play (Figure 6). Four rigs were added in the Niobrara, 3 in the Granite Wash and 1 in Other. Rig count increases began as oil prices peaked above $50 per barrel in early June and continued through the slump toward $40 prices before the latest upward swing to $48 per barrel.

Figure 6. Permian basin, Bakken and Eagle Ford tight oil horizontal rig count, NYMEX WTI prices and oil-price volatility index. Source: Baker Hughes, EIA, Bloomberg and Labyrinth Consulting Services, Inc.

22

Weekly changes in the Permian basin rig count are the leading indicator of capital flows and expenditures. Permian rig count is more responsive to capital flows than the other tight oil plays because there is more money available for Permian-weighted companies.

In late July, I wrote, 'When prices fall and oil-price volatility increases, the floodgates of capital open. Every genius-investor wants to buy low and sell high. Rig count rises with fresh capital, production increases and oil prices fall.'

In fact, the Permian basin accounts for 64% of the total U.S. horizontal tight oil rig count (Figure 7).

Figure 7. The Permian basin rig count represents more than 60 percent of the U.S. horizontal tight oil rig count. Source: Baker Hughes and Labyrinth Consulting Services, Inc.

23

This is curious because Permian production from the Bone Spring, Wolfcamp and Trend-Spraberry horizontal plays represents only 21% of total tight oil production (Figure 8).

Figure 8. Permian basin daily production from the Bone Spring, Wolfcamp and Trend Area-Spraberry plays is only 21% of total U.S. horizontal oil production. Source: EIA, Drilling Info, North Dakota Department of Natural Resources and Labyrinth Consulting Services, Inc.

It is even more curious because Permian basin tight oil proven reserves rank 42nd in the world just behind Denmark and Trinidad and Tobago based on the latest EIA data (Figure 9).

24

Figure 9. Permian basin tight oil proven reserves compared with world crude oil reserves. Source: EIA and Labyrinth Consulting Services, Inc.

Some will argue about potential and possible Permian resources and reserves preferring Pioneer CEO Scott Sheffield's view of things to reality. I won't debate them but the point is that Saudi Permian is a stretch based on any reality-based interpretation of existing data.

READ MORE ON FORBES

View more quality content from The Petroleum Truth Report

25

#RGUTOPDOG OIL & GAS MANAGEMENT, LAW AND ACCOUNTING courses designed to take your career to the next level – Full time, Part time and online.

Apply now for September 2016!

ABERDEEN BUSINESS SCHOOL www.RGU.ac.uk/TOPDOG

Eiffel Towers in the North Sea - Shell's decommissioning plans another Brent Spar PR disaster?

Written by Alex Russell and Peter Strachan from Peter Strachan and Alex Russell Shell is preparing to start the decommissioning of its four gigantic oil platforms in the famous Brent field in the Scottish part of the North Sea - a huge undertaking.

Unfortunately, write Professor Alex Russell of the Oil Industry Finance Association and Professor Peter Strachan of Robert Gordon University, the company plans to dismantle only the topsides of the platforms. It wants to leave the Eiffel-tower sized legs, including 64 giant storage cells at the base of these structures, in place. They will take hundreds of years to disintegrate. Russell and Strachan call on the UK government and other North Sea governments to call a halt to these plans. They also demand that the Scottish government will have a say in the project.

Fancy a night or two in a police cell? If so, change your car oil, mix it up with mud, add some carcinogenic radioactive sludge and a menu of other waste products, wrap it in concrete, and then dump it in the North Sea. And when you are undergoing questioning by Mi5 to ensure you are not a terrorist, tell them the concrete is thick enough to last 1000 years and there's nothing to worry about!

Sounds bizarre enough to form a story line for a new series for David Brent, star of the BBC's iconic comedy the Office? Alas, fact can be stranger than fiction. For this is essentially what Shell is planning to do in the North Sea - but they might be able to get away with it.

26

'Brent' of course is also the North Sea oil industry's iconic field and the price of Brent crude is a recognised international benchmark for oil. Shell has started on the decommissioning of the Brent Delta platform, one of four Brent Field platforms.

Alpha, Bravo and Charlie will be decommissioned later. Delta has seen preparatory work, although the real decommissioning process has been delayed to 2017, according toReuters.

The decommissioning is a gigantic project. Across the Brent field 154 wells will have to be securely plugged with cement after removing the well control equipment. This process has been completed for Delta, which ceased production on 31 December 2011.

On its website Shell has explained in some detail, and justified to its own satisfaction, how it intends to handle the multibillion dollar decommissioning of the Brent installations and pipelines. In essence, the topsides of the platforms will be removed and transported down and past the east coast of Scotland to Able UK in Teesside where they will be brought ashore for dismantling, scrapping and recycling.

It is reassuring to see this work is staying in the UK yet irksome it is not being done closer to Shetland where the vast profits from exploiting the UK's resources in the Brent field were earned.

If the Scottish parliament truly had devolved power then logically control over all economic activity in Scotland's borders would be the prerogative of Holyrood. Should decisions taken by global companies which affect Scotland's economy and social fabric and which carry mind-boggling tax relief handouts, whereby the UK pays 50% of the decommissioning cost, not be subject to scrutiny by Holyrood? The promised unfettered devolution of control to Scotland by successive UK Prime Ministers (Cameron, Brown and Blair) is a myth without such transfer of power.

Moreover, as demonstrated by the recent grounding of the Malta bound drilling rig Transocean Winner on Dalmore in Lewis and the consequent spillage of thousands of gallons of diesel fuel, the less distances rigs and topsides have to travel the better from a safety and environmental perspective.

27

Future sets for alien films

More irksome still is the proposal by Shell that the huge gravity-based structures (GBSs) which pin the platforms to the seabed will be left in situ not only because it is clearly the cheapest option but because, according to Shell, this is also the most environmentally friendly option. Really? The GBSs consist of 3 or 4 concrete legs each the height of the Eiffel Tower (Shell's analogy), around 165 metres tall and 18 metres diameter, and up to 25 metres above sea level. They have at their base some 64 concrete storage cells which are 20 metres in diameter and 60 metres high - taller than Nelson's column (another Shell analogy). According to the Shell website, 'over the years, 42 of the cells have been used for oil storage and separation. They are made of almost 1m thick concrete and reinforced with steel. Inside, they contain a mixture of attic oil, water, and a layer of sediment which has settled at the base.'

As a matter of fact, the contents of these storage cells have been so difficult to determine that Shell enlisted the help of NASA to scan and assess their contents.

The first results from NASA for Brent Bravo were produced in May 2016. To be fair to Shell they have made strenuous efforts to clean out the storage cells but they acknowledge that the safest option based on scientific evidence is to leave the possible radioactive sludge entombed in the thick walled concrete pyramids. This argument forms the basis for Shell's plans to leave the contaminated cells in situ at the base of the GBSs.

To exacerbate the situation, Shell's decommissioning plans also involve leaving an unnamed number of pipelines and steel jacket footings in place plus other debris including drill cuttings that have accumulated on top of the GBSs. A director of future aliens films would be thrilled by the opportunities presented by this prospect but it is hard to see who else would applaud.

A sad legacy for 40 generations of Scots

Why is this a problem given that Shell has consulted experts who have supported the plans as being the most cost effective and indeed environmentally safest mode of dealing with the eye-sore structures?

28

It would be possible to write several PhD dissertations on why these plans should not be accepted. There are obvious flaws in the proposals. According to Shell, the concrete legs above sea level will take between 150 to 300 years to disintegrate.The legs below sea level will take up to an additional 500 years to fall apart. And the 64 storage cells? They can take up to 1000 years to disintegrate! In other words if the Shell proposals are given the green light by the UK Conservative Party Government and by OSPAR, a body set up to safeguard the North-Atlantic environment (named after the Oslo/Paris Conventions), then they have the potential to affect the next 40 generations of Scots whose offshore environment can be polluted for 1000 years!

Thus, Shell did not design them, apparently, to enable them to be re-floated and taken back to shore. Even if that were the case, surely, as the profits rolled in over the years and a common acceptance was established across the industry that there would be complete removal of redundant infrastructures at the end of an oil field's life, plans and financial resources should have been established by Shell to deal with that situation.

Innovative advances in oil and gas technology?

The exportable technological inventions and innovations achieved by the UK oil industry in finding solutions to previously intractable oil extraction problems is constantly trumpeted by Oil and Gas UK and by the Oil and Gas Authority as a defining feature of the industry. If true, this technology should be deployed, regardless of cost, to deal with decommissioning of GBSs.

Will it occur to Theresa May to be proactive here and tell Shell to rethink their plans for creating a scrap yard in the North Sea? Does she realise that failure to do so may create another Brent Spar situation for Shell that will galvanise resistance not only in Scotland but across Europe? Or has Brexit excised her sensitivities to our European partners' views? It was Germany's reaction to the 1995 plans to topple the storage vessel Brent Spar into the depths of the North Sea that thwarted the plans of Shell and the UK government at that time.

29

Time for reflection by OSPAR

Shell aims to submit a detailed commission plan to the British energy ministry by the end of the year. After a consultation period, the minister will forward the plan to the OSPAR commission. OSPAR, which has 15 member countries plus the EU, will have a number of questions to consider.

OSPAR (decision 98/3) have a clear policy of requiring operators to restore the seabed to its original debris-free state once oil production has ceased. Shell point to concessions granted by OSPAR to other operators of GBS platforms to leave the GBSs in place with appropriate warnings to shipping and fishing interests.

Oil companies have resources and influence that more than match the might of most sovereign states. In the current low oil price environment cost-cutting by all means appears to drive decision-making by oil companies and is actively encouraged by the UK regulator, the Oil and Gas Authority. Is it acceptable for exceptions to OSPAR policy as stated above to be determined on a case-by-case basis?

Once one concession is granted that becomes the precedent for similar concessions and in the blink of an eye OSPAR policy has been shredded and the exception to a policy can easily become the norm. OSPAR needs urgently to look at the possible implications of granting exceptions for GBSs to their preferred policy. Just how littered do we want our oceans to become? Will developing nations shrug and say well if that's good enough for Scotland yes topple whatever you like onto our seabeds? Is there an overarching moral imperative for multinational companies and powerful countries such as the UK to see the wider picture and take actions that protect less powerful countries?

Arguably, agreement with the Shell proposals by the UK government should not be granted without the Scottish government, or better, the Scottish people being happy with them. The plum economic contracts for topside recycling should be an issue Holyrood has an influence over, so that ways and means are found for decommissioning to be done as close as possible to where the oil platforms are situated. Given the prospect of Scotland's fishing and shipping lanes - who knows

30

where Trident submarines meander around - being threatened by the presence of ghostly concrete towers for 1000 years, the future decommissioning of topsides being undertaken outside Scotland smacks of rubbing salt into the wound.

Would anyone doubt that if a referendum were held in Scotland on the issue, then Scots would be unequivocal in requiring oil companies to restore the seabed to its original state? Does Theresa May and the Department of Energy and Industrial Strategy share that point of view or will they argue it's only Scotland being littered so what's the problem? The next independence referendum may be closer than Westminster cares to imagine!

View more quality content from Peter Strachan and Alex Russell

Threat to Oil Price Recovery Rises from the Seas?

Written by Matt Cook from DW Monday There is a general consensus amongst industry analysts that the oil oversupply creating the current market downturn will narrow by the end of 2016. DouglasWestwood (DW) data support this view, with our World Drilling & Production Market Forecast showing the first oil production decline in 2016 since 2009 - when OPEC strategically cut output in order to support prices. This is largely due to considerable reductions in oil production from the US shale plays as well as widespread outages in Nigeria as a result of militant attacks in the Niger Delta. Therefore, the oversupply

31

will be eroded from the supply side with the demand side stuttering as a result of slowing Chinese economic growth and uncertainty surrounding the future of European markets.

DW's 2017 view is less positive for the oversupply. The implementation of a host of offshore developments sanctioned before the oil price crash will lead to a 1.8 million barrels per day (mmbbl/d) increase in offshore oil output and a 2.1 mmbbl/d increase overall. Such projects include the ill-fated Kashagan project in the Kazakh Caspian.

Kashagan alone is expected to contribute nearly 300 thousand barrels per day (kbbl/d) in 2017. Significant additions are also expected from the Middle East in the form of condensate output from the 24-phase South Pars development and around 300 kbbl/d Khafji field - previously shut-in due to environmental infringements and disagreements between joint operators Kuwait and Saudi Arabia. This pattern is expected to be seen globally, even mature plays in the North Sea and south-east Asia seeing increased output in 2017 as a result of the lag effect of offshore developments (the time between project sanctioning and first oil can be many years).

Demand outlooks from BP, EIA and IEA suggest 2017 demand growth around 1.2 mmbbl/d to 1.5 mmbbl/d, therefore it is highly likely the oversupply will increase once again next year. Whilst this is not certain to push oil prices down once more, it is likely to dampen the recovery until later this decade when a lack of project sanctioning in the last two years leads to a significant drop in offshore oil output additions towards to the end of the decade. This will cause offshore oil production to peak at 29.1 mmbbl/d in 2019 before declining slowly into the 2020s. Onshore oil production is unlikely to sufficiently offset this trend to keep pace with demand growth later this decade, therefore, this may be the point the market reaches equilibrium.

View more quality content from DW Monday

32

An Updated Version of the 'Peak Oil' Story Written by Gail Tverberg from Our Finite World The Peak Oil story got some things right. Back in 1998, Colin Campbell and Jean Laherrère wrote an article published in Scientific American called, 'The End of Cheap Oil.' In it they said:

Our analysis of the discovery and production of oil fields around the world suggests that within the next decade, the supply of conventional oil will be unable to keep up with demand.

There is no single definition for conventional oil. According to one view, conventional oil is oil that can be extracted by conventional methods. Another holds it to be oil that can be extracted inexpensively. Other authors list specific types of oil that require specialized techniques, such as very heavy oil and oil from shale formations, that are considered unconventional.

Figure 1 shows the growth in unconventional oil supply for three parts of the world: 1. Oil from shale formations in the US. 2. Oil from the Oil Sands in Canada.

3. Oil characterized as unconventional in China, in a recent academic paper of which I was a co-author. (Temporarily available for free here.)

33

Figure 1. Approximate unconventional oil production in the United States, Canada, and China. US amounts estimated from EIA data; Canadian amounts from CAPP. Oil prices are yearly average Brent oil prices in $2015, from BP 2016 Statistical Review of World Energy.

Oil prices in 1998, which is when the above quote was written, were very low, averaging $12.72 per barrel in money of the day-equivalent to $18.49 per barrel in 2015 dollars. From the view of the authors, even today's oil prices in the low $40s per barrel would be quite high. Since the above chart shows only yearly average prices, it doesn't really show how high prices rose in 2008, or how low they fell that same year. But even when oil prices fell very low in December 2008, they remained well above $18.49 per barrel.

Clearly, if oil prices briefly exceeded six times 1998 prices in 2008, and remained in the range of six times 1998 prices in the 2011 to 2013 period, companies had an incentive to use techniques that were much higher-cost than those used in the 1998 time-period. If we subtract from total crude oil production only the production of the three types of unconventional oil shown in Figure 1, we find that a bumpy plateau of conventional oil started in 2005. In fact, conventional oil production in 2005 is slightly higher than the later values.

34

Figure 2. World conventional crude oil production, if our definition of unconventional is defined as in Figure 1.

I would argue that far more crude oil production was enabled by high oil prices than I subtracted out in Figure 2. For example, Daqing Oil Field in China is a conventional oil field, but greater extraction has been enabled in recent years by polymer flooding and other advanced (and thus, high-cost) techniques. In the academic paper referenced earlier, we found that the amount of unconventional oil extracted in China in 2014 would be increased by about 55%, if we broadened the definition of unconventional oil to include oil made available by polymer flooding in Daqing, plus some other types of Chinese oil extraction that became more feasible because of higher prices.

Clearly, this same kind of shift to more expensive extraction methods has occurred around the world. For example, Brazil has been attempting to extract oil from below the salt layer of the ocean using advanced techniques. According to this article, Brazil's 'pre-salt' oil production was expected to exceed 600,000 barrels per day by the end of 2014. This oil should count, in some sense, as unconventional oil.

35

Massive investments in the Kashagan Oil Field in Kazakhstan were enabled by high oil prices. Some initial production began, but was discontinued, in September 2013.

Production is expected to resume in October 2016.

There are clearly many smaller fields where higher extraction was made possible by high oil prices that allowed oil companies to utilize more advanced techniques.

Deepwater drilling also became more feasible because of higher prices. Another example is Russia, which is reported to have heavy oil extraction that would not be commercially feasible if oil prices were below $40 to $45 per barrel. If we were to add up all of the extra oil production in many areas of the world that was enabled by higher prices, the total amount would no doubt be substantial. Subtracting this higher estimate of unconventional oil in Figure 2 (instead of the three-country total) would likely result in more of a 'peak' in conventional oil production, starting about 2005.

Thus, if we think of conventional oil production as that which is possible at low oil prices, the forecast by Colin Campbell and Jean Laherrère was pretty much correct.

Production of conventional oil did seem to peak about 2005 or shortly thereafter. We simply don't have the data to estimate how much we could have extracted, if oil prices had remained low. Furthermore, oil prices did rise substantially, relative to 1998 prices, making Campbell's and Laherrère's forecast of higher prices correct.

I suppose that we could even say that if conventional oil were all that we had in 2005 and subsequent years, supply would have fallen far short of demand, based on Figure 2. This last statement is somewhat debatable, however, because there would have been other feedbacks, as well. It is possible that if total supply were very short, oil prices would have spiked to an even higher level than they really did. The resulting recession would likely have brought prices down, and temporarily brought demand back in line with supply. If prices had stayed low, there might have been a second round of shortages, with an even greater supply problem. This, too, might have been resolved by another price spike, quickly followed by another recession that brought world demand back down to the level of supply.

36

Of course, conventional crude oil isn't the only type of liquid fuel that we use. When we add all of the pieces together, including substitutes, what we find is that since 1998, broadly defined oil production ('liquids') has been rising quite rapidly.

Figure 3. World Liquids by Type. Unconventional oil is from Exhibit 1. Conventional oil is total crude oil from EIA, and other amounts are estimated from EIA International Petroleum Monthly amounts through October 2015. (EIA's category 'Other Liquids' is referred to as Biofuels in Figure 3, since this is its primary component. Other liquids also include coal and gas to liquids and other small categories.)

In fact, since 2005, Figure 4 shows that the single highest year of growth in oil production (broadly defined) was 2014, with 2.47 million barrels per day. (This is based on crude oil data from EIA Beta Report Table 11.b, plus values for other liquids from EIA's International Energy Statistics. Annual amounts for 2015 were estimated based on data through October.)

37

Figure 4 shows that the increase in oil supply in 2015 is almost as high as in 2014.

The 2005 to 2015 period shown indicates a lot of 'ups and downs.' The only two high years in a row are 2014 and 2015. This would seem to be at least part of our 'oil glut' problem.

Exactly by how much oil production needs to increase to stay even with demand depends upon price-the higher the price, the smaller the quantity that buyers can afford. At a price of $100 per barrel, a reasonable guess might be that about 1 million barrels per day in consumption might be added. If categories other than crude oil are increasing by an average of 440,000 barrels per day, per year (based on data underlying Figure 4), then crude oil production only needs to increase by 560,000 barrels per day to provide an adequate supply of fuel on a total liquids basis.

If production of crude oil is actually increasing by more than 2.0 million barrels per day when only 560,000 barrels per day are needed at a price level of $100 per barrel, clearly something is badly out of balance. According to EIA data, the countries with the five largest increases in crude oil production in 2015 were (1) US 723,000 bpd, (2) Iraq 686,000 bpd, (3) Saudi Arabia 310,000 bpd, (4) Russia 146,000 bpd, and (5) UK 106,000 bpd. Thus, US and Iraq were the biggest contributors to the global glut in 2015.

38

What Is Going Wrong?

Not only did a lot of people hear the Peak Oil story, a great many responded at once.

Governments added requirements for more efficient vehicles. This tended to lower the quantity of additional oil supply needed. At the same time, governments added mandates for the use of biofuels, also reducing the need for crude oil. Arguably, the US-led Iraq war, which began in 2003, was also about getting more crude oil.

Oil companies also rushed in and developed oil resources that might be profitable at a higher price. These new developments often take more than ten years to produce oil. Once companies have started the long path to development, they are unlikely to stop, no matter how low oil prices drop.

It is becoming apparent that if oil prices can be raised to a high enough level, a lot more oil is available. Figure 5 shows how I see this as happening. We start at the top of the triangle, where there is a relatively small quantity of inexpensive oil, and we gradually work toward the expensive oil at the bottom.

Figure 5. Resource triangle, with dotted line indicating uncertain financial cut-off.

39

The amount of oil (or for that matter, any other resource) isn't a fixed amount. If the price can be made to rise to a very high level, the quantity that can be extracted will also tend to rise-in fact, by a rather large amount. The 'catch' is that wages for the vast majority of workers don't rise at the same time. As a result, goods made with high-priced oil soon become too expensive for workers to afford, and the economy falls into recession. The result is prices that fall below the cost of production. Thus, the limit on oil supply is not the amount of oil in the ground; instead, it is how high oil prices can rise, without causing serious recession.

While wages don't rise with spiking oil prices, increasing debt can be used to hide the problem, at least temporarily. For example, cars and homes become less affordable with higher oil prices, since oil is used in making them. If governments can lower interest rates, monthly payments for new homes and cars can be lowered sufficiently that new car and home sales don't fall too far. Eventually, this cover-up reaches limits. This happens when interest rates start turning negative, as they now are in some parts of the world.

Thus, by ramping up buying power with low interest rates and more debt, governments were able to get oil prices to stay above $100 per barrel for long enough for producers to start adding production that might be profitable at that price.

Unfortunately, the amount of additional oil demand isn't really very high at that price.

So, instead of running out of oil, we ran into the reverse problem-too much oil relative to the amount that the world economy can afford when oil prices are $100+ per barrel.

The attempt by governments to fix the oil shortage problem didn't really work.

Instead, it led to the opposite mismatch from the one we were expecting. We got an oversupply problem-a problem of finding enough space for all our extra supply (Figure 6). Unless we have infinite storage, this pattern clearly cannot continue forever.

40

Figure 6. Weekly ending stocks of crude oil and petroleum products through July 29.

Chart by EIA.

Eventually, this oversupply problem is likely to result in 'mother nature' cutting off oil production in whatever way it sees fit-oil prices dropping to close to zero, bankruptcies of oil companies, or collapses of oil exporters. With lower oil supply, we can expect recession.

Misunderstanding the Real Problem

In the early 2000s, the story that Peak Oilers came up with (or perhaps the way it was interpreted in the press) was that the world was 'running out' of conventional oil, and that this would lead to all kinds of problems. Oil prices would rise very high, and oil depletion would take place over a long period, as shown in a symmetric Hubbert Curve. As a result, at least small quantities of additional energy products with high 'Energy Returned on Energy Invested' (EROI) were needed to supplement the energy products that would be produced based on the slowly depleting Hubbert Curve. Our oil supply problems were viewed as a unique situation, calling for new and unique solutions.

In my view, this story came about through over-reliance on models that likely were accurate for some purposes, but not for the purpose that they later were being used.

One of these over-extended models was the supply and demand curve of economists.

41

Figure 7. From Wikipedia: The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

This model 'works' when the goods being modeled are widgets, or some other type of goods that does not have a material impact on the economy as a whole.

Substituting high-priced oil for low-priced oil tends to make the economies of oil importing countries contract. This effect indirectly reduces demand (and thus prices) for many products (not just oil), an impact not considered in the simplified Supply and Demand model shown in Figure 7. Also, the very long lead times of the oil industry are not reflected in Figure 7.

42

Two other models that were used beyond the limits for which they were originally designed were the Hubbert Curve and the 1972 Limits to Growth model. Both of these models are suitable for determining approximately when limits might be hit.

Even though Peak Oilers have believed that these models can accurately determine the shape of the decline in oil supply and in other variables after reaching limits, there is no reason why this should be the case. I talk about this problem in my recent post, Overly Simple Energy-Economy Models Give Misleading Answers. Thus, for example, there is no reason to believe that 50% of oil will be extracted post-peak.

This is only an artifact of an overly simple model. The actual down slope may be much steeper.

The Real Story of Resource Limits that We Are Reaching

Instead of the scenario envisioned by Peak Oilers, I think that it is likely that we will in the very near future hit a limit similar to the collapse scenarios that many early civilizations encountered when they hit resource limits. We don't think about our situation as being similar to early economies, but we too are reaching a situation of decreasing resources per capita (especially energy resources). The resource we are most concerned about is oil, but there are other resources in short supply, including fresh water and some minerals.

Research by Joseph Tainter and by Peter Turchin indicates that some of the issues involved in previous resource-based collapses are the following:

Growing Complexity. Citizens who discovered they were reaching resource limits typically tried to work around this problem. For example, hunter-gatherers turned to agriculture when their population grew too large. Later, civilizations facing limits added irrigation to raise food output, or raised large armies so that they could attack neighboring countries. Making these changes required greater job specialization and more of a hierarchical system-two aspects of growing complexity.

This increased complexity used part of the resources that were in short supply, since people at the top of the hierarchy were paid more, and since building new capital goods (today's example might be wind turbines and solar panels) takes resources

43

that might be used elsewhere in the economy. Eventually, growing complexity reaches limits because costs rise faster than the benefits of growing complexity.

Growing Wage Disparity. With growing complexity, wage disparity became more of a problem.

Figure 8. People at the bottom of a hierarchy are most vulnerable.

I have described this problem as 'Falling Return on Human Labor Invested.'

Ultimately, this seems to be a major cause of collapse. Workers use machines and other tools, so this return on human labor has been leveraged by fossil fuels and other energy resources used by the system.

Spiking Resource Prices. Initially, when there is a shortage of food or fuel, prices are likely to spike. A major impediment to long-term high prices is the large number of people at the bottom of the hierarchy (Figure 8) who cannot afford high-priced

44

goods. Thus, the belief that prices can permanently rise to high levels is probably false. Also, Revelation 18: 11-13 indicates that when ancient Babylon collapsed, the problem was a lack of demand and low prices. Merchants found no one to sell their cargos to; no one would even buy human slaves-an energy product.

Rising Debt. Debt was used to enable complexity and to hide the problems that people at the bottom of the resource triangle were having in purchasing goods.

Ultimately, increased debt was not successful in solving the many problems the economies faced.

Ultimately, Failing Governments. Governments need resources for their purposes, whether hiring armies or making transfer payments to the elderly. The way governments get their share of resources is through the use of tax revenue. When people at the bottom of the hierarchy were cut out of receiving adequate resources (through low wages), the amounts they could afford to pay in taxes fell. Governments would sometimes collapse directly from lack of tax revenue; other times collapses occurred because governments could no longer afford large enough armies to defend their borders.

Ultimately, Falling Population. With low wages and governments requiring higher tax levels to fund their programs, people at the bottom of the hierarchy found it difficult to afford adequate nutrition. They became more susceptible to plagues. Loss of battles to neighboring countries could at times play a role as well.

Lessons We Should Be Learning

Even if we made it past peak conventional oil, there is likely a different, very real collapse ahead. This collapse will occur because the economy cannot really afford high-priced energy products. There are too many adverse feedbacks, including increasing wealth disparity and the likelihood of not enough revenue for governments.

45

We can't count on long-term high prices. The idea that fossil-fuel prices will gradually rise, and because of this, we will be able to substitute high-priced renewables, seems very unlikely. In the United States, our infrastructure was mostly built on oil that cost less than $20 per barrel (in 2015 dollars). We know that with added debt and greater complexity, we were temporarily able to get oil to a high-price level, but now we are having a hard time getting the price level back up again. We really don't know how high a price the economy can afford for oil for the long term. The top price may not be more than $50 per barrel; in fact, it may not be more than $20 per barrel.

We need to look for inexpensive replacements for both oil and electricity. Many substitutes are being made to produce electricity, since indirectly, electricity might act to replace some oil usage. There is considerable confusion as to how low these prices need to be. In my opinion, we can't really raise electricity prices without pushing economies toward recession. Thus, we need to be comparing the cost of proposed replacements, including long distance transport costs and the cost of adjustments needed to match electric grid requirements, to wholesale electricity prices. In both the US and Europe (Figure 9), this is typically less than 5 cents per kWh. (In Figure 9, 'Germany spot' is the wholesale electricity price in Germany-the single largest market.) At this price level, producers need to be profitable and to pay taxes to help support governments.

46

Figure 9. Residential Electricity Prices in Europe, together with Germany spot wholesale price, from http://pfbach.dk/firma_pfb/references/pfb_towards_50_pct_wind_in_denmark_2016_ 03_30.pdf

Replacements for oil need to be profitable and be able to pay taxes, at currently available price levels-low $40s per barrel, or less.

We need to be careful in aiming for high-tech solutions, because of the complexity they add to the system. High-tech solutions look wonderful, but they are very difficult to evaluate. How much do they really add in costs, when everything is included?

How much do they add in debt? How much do they add (or subtract) in tax revenue?

What are their indirect effects, such as the need for more education for workers?

47

We need to be alert to the possibility that solar PV and most wind energy may be energy sinks, rather than true energy sources. The two hallmarks of providing true net energy to society are (1) being able to provide energy cheaply, and (2) being able to provide tax revenue to support the government. When actually integrated into the electric grid, electricity generated by wind or by solar generally requires subsidies-the opposite of providing tax revenue. Total costs tend to be high because of many unforeseen issues, including improper siting, long-distance transport costs, and costs associated with mitigating intermittency.

Unless EROI studies are specially tailored (such as this one and this one), they are likely to overstate the benefit of intermittent renewables to the system. This problem is related to the issues discussed in my recent post, Overly Simple Energy-Economy Models Give Misleading Answers. My experience is that researchers tend to overlook the special studies that point out problems. Instead, they rely on the results of meta-analyses of estimates using very narrow boundaries, thus perpetuating the myth that solar PV and wind can somehow save our current economy.

Too much debt, and too low a return on debt, are likely to be part of the limit we will be reaching. Investment in complexity requires debt, because complexity requires capital goods such as wind turbines, solar panels, computers and the internet. The return on this additional debt is likely to drop lower and lower, as complex solutions are added that have less and less true value to society.

We need to remember that as far as the economy is concerned, it is total consumption of energy resources that is important, not just oil. Wages reflect the leveraging impact of all energy sources, not just oil. If energy consumption per capita is rising, more and better machines can help raise output per capita, making workers more productive. If energy consumption per capita is falling, the world economy is likely moving in the direction of contraction. In fact, we may be headed in the direction of early economies that eventually collapsed.

When we look at the data, we see that world energy consumption per capita appears to have peaked about 2013. In fact, the big drop in oil and other commodity prices began in 2014, not long after energy consumption per capita hit a peak.

48

Figure 10. World energy consumption per capita, based on BP Statistical Review of World Energy 2105 data. Year 2015 estimate and notes by G. Tverberg.

The world seems to have hit peak coal, because of low coal prices. In fact, falling coal consumption seems to be the cause of falling world energy consumption per capita. Whether or not most people regard coal highly, coal is pretty much essential to the world economy. A recent decrease in coal consumption is what is pulling world energy consumption per capita down. We do not have any other cheap fuel to make up the shortfall, suggesting that our current downturn in energy consumption (shown in Figure 10) may be permanent.

49

Figure 11. World and China appear to be reaching peak coal.

We should not be surprised if the financial problems that the world is now encountering will eventually resolve badly. This seems to be how the Peak Oil story will finally play out. Without rising energy per capita, the world economy tends to shrink. Without economic growth, it becomes very difficult to repay debt with interest.

Wealth disparity becomes more and more of a problem, and it becomes increasingly difficult for governments to collect enough revenue to support their needs. Our problems begin to look more and more like those of earlier economies that hit resource limits, and eventually collapsed.

View more quality content from Our Finite World

50

Fracking's Future Written by Jacob Halevy from DW Monday

Hydraulic fracturing has been a hugely controversial subject in many countries and has increasingly become the focus of legislation in the US. The state of Colorado has seen the most recent push for new restrictions - activists have obtained over 200,000 signatures to introduce two new initiatives on Colorado's November 8th ballot. If passed, these initiatives would impose the toughest regulations on the hydraulic fracturing industry to date - increasing local control and dramatically limiting where fracking can take place. Initiative 75 would provide local governments with the authority to regulate oil and gas development in a manner that supersedes statewide regulations, whilst initiative 78 would prohibit fracking within 2,500 feet of houses, parks, schools, playgrounds, and clean water sources.

Colorado accounts for a significant proportion of U.S. hydrocarbon reserves - more than ten percent of the nation's largest natural gas fields. Amongst US states, Colorado ranks 7th in both natural gas and crude oil production. Upstream activity in the state relies heavily upon fracking, the proposed legislation, coupled with the slow oil price recovery would likely severely hinder hydrocarbon extraction in Colorado.

Strict limitations on fracking activity will also have severe consequences for the state budget. Pro-fracking groups argue that passing these initiatives in Colorado may cost the state 140,000 jobs and up to $217 billion in economic activity over the next 15 years. The implications of passing such a bill would likely reach much further than just the state of Colorado. With precedent set, increased regulation may be seen in other states. Greater regulation, combined with reduced activity as a result of the oil price downturn, could severely impact the future of the drilling sector in the US.

51

Both presidential candidates may also play a significant role in the future of fracking.

Trump has stated that while he is in favour of fracking, he supports Colorado's right to ban the activity as an issue of states' rights. Clinton broadly supported fracking as Secretary of State - however, she has pledged support for increased investment in renewable energy and outlined a series of fracking 'conditions'. With volatility shaking the industry, the United States presidential election could be decisive in deciding the industry's direction.

View more quality content from DW Monday

52