Oil Shortages Look Certain by 2007
- LNG to the Rescue?

Gas Shortages Are Most Pressing, But Economics Shows No Easy Answers

Why The Oil Markets May See Price Dips Before The Collapse and Why This Will Make the Outcomes Worse

by

Dale Allen Pfeiffer -- FTW Energy Editor

© Copyright 2004, From The Wilderness Publications, www.fromthewilderness.com. All Rights Reserved. May be reprinted, distributed or posted on an Internet web site for non-profit purposes only.

[Suddenly, Peak Oil and Gas issues are everywhere. It's as if the light bulb is going on a day late and a tank or two short. ABC News, The Petroleum Review, BBC, Wall Street and many other “establishment” voices are beginning to sound the alarm. For North A merica, natural gas shortages are here now and can only worsen. The oil production numbers are bearing out that by 2007 demand will have permanently exceeded supply and production capacity. In both cases the outlook is not good. For natural gas the only solution is the importation of liquefied natural gas or LNG. The costs, dangers, political opposition and international competition for dwindling supplies create a complex calculus that will be exceptionally difficult to solve.

The picture for oil is worsened by the way the oil markets operate. Oil prices are driven only by very short-term criteria, essentially how much oil is in the pipeline for the next few months. The last so-called mega fields – really only a few months supply in the global picture -- are scheduled to come on line in 2005 creating a short term glut even as the industry acknowledges that the cheap oil is gone forever. The result will be that the capital needed to build infrastructure or switch to alternatives will not be available as the last crucial window of opportunity for its use begins to close. Without that timely capital, there will be no brakes when petroleum civilization hits the wall.

Dale Allen Pfeiffer deconstructs the market forces as mankind stands on the brink of a new dark age. – MCR]

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February 19, 2004, 1800 PST (FTW ) -- In previous articles, we drew a picture of North American natural gas (NG) poised to fall off the cliff of declining production. In order to maintain a healthy economy, our natural gas consumption – primarily for the generation of electricity – must grow by 35 to 50% before the end of the decade. The North American NG supply is in decline and has already fallen behind demand. Homes must have heat in the winter. In the US, 60% of all homes are heated by NG, and that ratio is increasing, as over 70% of new homes require NG for heating.1 Natural gas is the intended fuel of virtually all new power generation projects within the US. By 2002, 90% of all new power plants were gas-fired.2 All of the industrial users with the ability to move production or shift to other fuel sources have done so. There is little room left for fuel switching. How then to make up the shortfall?

Opening up pipelines from Alaska (ANWR) and Northern Canada will take several years and will not make up for the deficit between traditional production and demand. It is more than likely that any production carried along a Canadian pipeline would be diverted to Canadian tar sands refining, which involves the use of high-pressure steam (heated by gas) to wash heavy oil from sand. Opening sanctioned areas of the Rockies and the Outer Continental Shelf would help, though NG reserves in both areas are likely to deplete quickly. Geologist Walter Youngquist and electrical engineer Richard Duncan pointed out in a recent study that new NG wells are showing decline rates as high as 80% in the first year. Over the past decade, the amount of gas found per foot drilled has declined by 50%.3

In examining the situation and looking over the optional sources of NG to make up the shortfall, it becomes clear that the US must go overseas for its NG needs. Now it is time to look at Liquefied Natural Gas (LNG) and determine if LNG imports can make up the difference between US NG demand and diminishing US NG production.

Current Situation

US LNG imports are growing. They have doubled in the last year alone. At present, LNG only accounts for 2% of our natural gas consumption.4 Current US consumption exceeds 80 trillion cubic feet (Tcf). In 2003 we imported 540 billion cubic feet (Bcf) of LNG, just a drop in the bucket compared to our total NG consumption. By the end of this year (2004), the US is hoping to add another 1 Bcf/day of LNG imports, and another 2 Bcf/day by the end of 2006.

The US is currently lacking in LNG infrastructure. There are currently only 4 LNG offloading facilities in the country, located in Georgia, Louisiana, Maryland and Massachusetts . There has been a flood of new proposals for receiving and regasification terminals, but it will be several years before (if) they are all built, and it is likely that a significant portion of the projects will fail somewhere along the way due to local opposition. US demand is expected to grow about 10 Bcf/day to a total of 77 Bcf/day through the course of this decade.5

The world's largest importers of LNG are, in descending order, Japan, Korea, Spain and Taiwan, with the US holding fifth place.6 China is expected to shoulder its way to the top of this list in the next few years. Top suppliers of LNG are, at present, Egypt, Algeria, Norway, Trinidad and Nigeria. Indonesia and Australia are of growing importance as suppliers, as is Russia. And the Middle East holds a great deal of natural gas along with all of its oil. Venezuela hopes to become an LNG producer as well, though the US government is at odds with Venezuelan President Hugo Chavez and the state owned oil company, Petroleos de Venezuela S. A. (PdVSA ).

At the turn of the century, there were only 114 LNG tankers in the world, and only 8 of those were available for spot market trade.7 Today, the current global fleet of LNG tankers numbers 140, with a capacity of 14.5 Bcf/day,8 but it is doubtful that there has been much change in the percentage of tankers which are not locked into long term trade agreements. One credible researcher has put the cost of an LNG tanker at around $150 million and estimated that more than a hundred would be needed to meet US needs. Construction of one LNG tanker takes three years.9

“By the year 2010, the gap between what is needed
and conventional sources
will be 6 Tcf/year, or 16 Bcf/day.”


Meeting Future Demand

In a December 17th speech delivered at a summit of energy ministers from producing countries and private sector representatives, US Energy Czar Spencer Abraham stated that from 2000 to 2020, NG consumption is projected to double, from 84 Trillion cubic feet per year (Tcf/year) to 162 TCF/year. He noted that demand for natural gas is growing by nearly 5.5 % per year.10 By reporting world demand only, Secretary Abraham skirted around the North American NG situation and the entire reason for his speech. In the US, demand is expected to grow rapidly over the next few years while production declines. By the year 2010, the gap between what is needed and conventional sources will be 6 Tcf/year, or 16 Bcf/day. It will require 30 to 40 new LNG offloading and regasification facilities by 2010 to fill this gap.11 According to a report from analysts at Raymond James, the current tanker fleet will have to double within the next five years.12

That means the US will require a fleet equal to the current world fleet, 114 tankers just to service our needs. LNG tankers are three times as expensive as a large crude oil carrier, averaging $155 million per ship.13 So the tanker fleet alone will require an investment of $13 billion and take decades. Add to this the expense of building over 30 new LNG projects and the associated pipelines, and the necessary investment quickly climbs over $100 billion.

Shell, Exxon, BP and Sempra Energy are among the corporations proposing new LNG facilities. New LNG Terminals have been proposed for the states of California, Texas, Alabama and Florida.14 The proposed terminals have many hurdles to jump before they will become reality. First the proposed terminals have to meet all the standards and rules of the U.S. Federal Energy Regulatory Agency, a sprawling and formidable bureaucracy. And they must overcome siting challenges from residents and environmental groups. It is likely that many of the proposed terminals will have to be moved to unobjectionable locations either off the coast or in neighboring countries (as in the case of the terminal proposed for Baja, California which will provide NG to that state).

Throughout the siting and application process, as well as during construction, companies must make considerable capital outlays, providing the necessary ongoing financing for several years before there is any hope of seeing a return on their investment. The NG market fluctuates a great deal with the seasons, causing prices to rise and drop. For these LNG projects to proceed, gas prices must stay well above $4 per thousand cubic feet. Prices are currently far above that mark, but will they stay that high consistently for the next several years?

LNG Supply – IS THERE ENOUGH?

Supposing that 30 new terminals are built, along with a fleet of 114 tankers just to meet US demand, where will we purchase the LNG to be transported and processed by this new infrastructure? Where will we obtain the 16 Bcf/day of LNG to fill the gap between domestic supply and demand by 2010? LNG exporting countries would have to make major investments in additional production in order to meet growing US demand. The LNG market is bound up in long term agreements, just as most of the tankers being built today are already locked into long term contracts.

LNG trade is supposed to increase by 35% from 2000 to 2005, yet all of that increased production is already spoken for by Asia. Even if that entire increase were shipping to the US, it wouldn't come close to meeting US demand. The struggle for LNG market share will bring the US into direct competition with China. In fact, it already has.

Last October, after negotiations which included visits from President Bush and Chinese President Hu Jintao, Australia awarded a new $30 billion, 25 year LNG contract to China. This on top of a $25 billion LNG deal struck a year ago between Australia and China.15 The US, with its weak dollar and anemic economy, must compete with a yuan backed by gold, and a growing economy which is powerful simply because of its size.

The LNG market is very tight, with little spare capacity. The high cost of LNG liquefaction and transport prevents the industry from developing capacity beyond what is contracted. And so, in order to expand imports, the US must either urge LNG exporters to increase production, develop new production elsewhere, or take LNG which was formerly promised elsewhere.

The US is working on a project with Russia to bring a 2 year supply of LNG from Russia's Far East to California . But most of Russia's production is already promised to Europe and Asia.

We've got Our LNG Sites Trained on You

Look for the US to help build an LNG industry in Africa , particularly Nigeria. The west coast of Africa would be much more attractive to the US than would Middle Eastern sources because the shipping route is shorter and more direct. Around 124 Tcf of natural gas have been discovered in Nigeria, making it the 9 th largest reserve in the world.16 Currently, however, Nigeria flares off 75% of its natural gas due to lack of local market and infrastructure. Nigeria alone is said to account for 12.5% of the world's gas flare.17 Nigeria is supposed to put an official end to the practice of gas flaring this year (2004), but the deadline has already been moved back once.

Nigerian production is controlled by NNCP (a state oil firm), working mostly with Shell, TotalFinaElf and Agip. Current Nigerian processing capacity is 383 Bcf/year, much of that being shipped to Europe. By 2005, new projects should increase that capacity by an additional 363.5 Bcf/year.18 Bitter civil unrest has closed down production in Nigeria several times in the past year. Given the growing importance of a stable supply of LNG imports to the US, it would not be surprising to see the US take an interest in pacifying the Nigerian population. US military presence in the region has been increasing with the gift of six US warships to the Nigerian Navy,19 while NATO has announced an increased focus on West Africa.20

CORRUPTION AS USUAL

Right now, in fact, the Nigerian LNG industry is the source of a scandal involving Halliburton's conduct during the period of Dick Cheney's presidency of that company. It seems Halliburton subsidiary Kellogg, Brown & Root is accused of paying Nigerian government officials $180 million in bribes for construction contracts to LNG projects. Investigations are ongoing in Nigeria and France, and the US Justice Department has begun to probe into the allegations. It is possible that embezzlement charges could be filed against Cheney in Paris.21

Currently Trinidad and Tobago in the Caribbean are the largest suppliers of LNG to the US. This area of the Caribbean, off the coast of Venezuela, holds about 30 Tcf of NG reserves. Production has doubled over the past 10 years, to 520 Thousand cubic feet per year (Gcf/year). There are plans to increase production to 1.3 Tcf/year, but this will take time.22 Alot of ammonia and other chemical production has moved to Trinidad, which exports these products back to the US. And so diverting too much of their NG production into LNG will harm the chemical industry there.

Geologically speaking, Trinidad lies on a northern extension of the fossil fuel rich East Venezuelan basin. The islands lie within close proximity to Venezuela and have been associated with that country since explorers used the islands as a base from which to venture into the continent. It seems that whenever you focus upon the islands, you must ultimately turn your attention to the mainland.

Venezuela has 148 Tcf of proven reserves. Currently 60% of its NG production is either re-injected or flared off.23 The Venezuelan state oil company, PdVSA, wants to develop LNG production for export to the US. However, the current regime in the US is vehemently opposed to Venezuelan President Chavez. President Chavez has asked for more royalties from fossil fuel sales so that he can use the money to fight the chronic poverty of Venezuela. The oil majors are averse to sharing more of the oil profits.

There has been one overt coup attempt and at least two more subtle attempts to depose the Chavez government. So far President Chavez and the people of Venezuela have maneuvered around each threat with alacrity. It is very plain that the CIA is aiding these destabilization efforts and that the effort has the full approval of the White House. A nd it is certain that LNG concerns are now adding to the US desire to topple Chavez.

More such efforts can be expected, possibly as soon as this spring. Venezuela, according to US political thinking, is simply too close and too important for the US to leave it in the hands of Chavez—or the hands of the Venezuelan people, for that matter.

The Outlook

Significant LNG production will not begin to come online before 2007 at the earliest. Until then, we hope for mild winters and rely on our own declining NG production. But the big question is: will enough LNG production be available by 2010 to fill the projected gap between North American demand and North American production? It is doubtful that production will grow enough to meet the demands of both the US and China, much less the rest of the world.

As witnessed by the summit at which US Energy Secretary Spence A braham spoke, the US is trying to organize global LNG trade under its watchful eye. However, the magnitude of Chinese demand will speak with its own voice and producing countries will have to listen. It is doubtful that LNG capacity will be able to meet US demand by 2010, much less global demand. Somebody will have to go lacking.

Mild weather in North America over the next few years might be a blessing in the short term for NG supply and prices. But if prices relax below $4/Gcf for any length of time, many of these LNG projects would be put on hold or canceled altogether. So the best case scenario for the short term will make things worse in the long run.

PART II -- Oil Shortages After 2007

It appears that the year 2007 will be important for oil as well as natural gas. A new study published in Petroleum Review suggests that production might not be able to keep up with demand by 2007.24 The study is a survey of mega projects (those with reserves of over 500 million barrels (Mb)) and the potential to produce over 100,000 barrels per day (Gbpd) of oil). Mega projects are important not only because they provide the bulk of world oil production, but also because they have a better net energy profile than smaller projects, and they provide a more substantial profit than smaller projects. Bear in mind that the planet consumes a billion barrels of oil (or two mega fields) every eleven and one half days.

The discovery rate for mega projects has dwindled to almost nothing. This can be seen in the data for the last few years. In 2000, there were 16 discoveries of over 500 Mb; in 2001 there were only 8 new discoveries, and in 2002 there were only 3 such discoveries.25 From first discovery to first production generally takes about 6 years. If the new project can make use of existing infrastructure, then the start up time might be cut to 4 years.

This past year (2003), 7 new mega projects were brought on stream. 2004 expects to see another 11 projects start producing. 2005 will be the peak year for bringing new projects on stream, with 18 new projects expected to be brought on stream in that year. In 2006, the pace drops back to 11 new projects. But in 2007 there are only 3 new projects scheduled to begin production, followed by 3 more in 2008. There are no new projects on track for 2009 or 2010.26 And any new mega project sanctioned now could not possibly come on stream any sooner than 2008.

The study points out that currently about a third of the world's oil production comes from declining fields, with a likely overall decline rate of about 4%. As a result, global production capacity is contracting by over 1 million barrels per day (Mbpd) each year.27 New production is the only thing offsetting this decline.

By 2007, production capacity will have declined by 3-4mn b/d. Yet this decline will be offset by 8mn b/d of new capacity drawn from the many new projects expected to come on stream over the next few years.28 This leaves a surplus of 4mn b/d in spare capacity. Yet global demand is growing by over 1 Mbpd each year.29 So 3 years of demand growth will reduce our spare capacity to 1mn b/d by the start of 2007. As very little new capacity is set to come on stream in 2007, that remaining 1 Mbpd spare capacity will likely disappear before 2008.

The upshot of all this is that the oil supply appears robust until 2007. With so much new production coming on stream, there may even be periods of price weakness. However, it is likely that we will begin suffering oil shortages after 2007, especially if anything happens to disrupt a portion of the production. If new projects are not sanctioned to start up by 2008, then by the end of that year we are likely to see shortages without any cause other than rising demand.

FINDING 10 NEW NORTH SEA FIELDS… SOMEWHERE

By 2015, global oil demand is expected to increase by over two-thirds, that is 60 Mbpd beyond current global consumption of 75 Mbpd. To meet that demand we will have to find the equivalent of 10 new North Sea oil fields within a decade.30 Yet we are hard pressed to discover even another mega-sized field, let alone one reserve equaling the size of the North Sea deposits which are now in serious decline.

We cannot go on ignoring these problems for much longer. By 2007, all of us will be affected by the North American NG shortage. And not very long after 2007, we will begin experiencing the first global energy shortages. To quote former British environmental minister Michael Meacher, we are facing… "the sharpest and perhaps the most violent dislocation (of society) in recent history."31