Guest post by David Middleton
Some people look forward to the Oscars, others look forward to the Super Bowl… I look forward to the U.S. Energy Information Administration’s Annual Energy Outlook (AEO)… Kind of like Navin Johnson looked forward to the new phone books…
Well… AEO 2018 was no disappointment!
Full Release Date: February 6, 2018 | Next Release Date: February 2019 | full report
EIA’s Annual Energy Outlook provides modeled projections of domestic energy markets through 2050, and it includes cases with different assumptions regarding macroeconomic growth, world oil prices, technological progress, and energy policies. Strong domestic production coupled with relatively flat energy demand allow the United States to become a net energy exporter over the projection period in most cases. In the Reference case, natural gas consumption grows the most on an absolute basis, and nonhydroelectric renewables grow the most on a percentage basis.
Even though Obama is out and energy dominance is in, they still feel the need to throw a bone to wind & solar:
In the Reference case, natural gas consumption grows the most on an absolute basis, and nonhydroelectric renewables grow the most on a percentage basis.
After downloading the PowerPoint and some of the Excel workbooks, I put together a summary of some key points.
Primary Energy Consumption: Fossil Fuels Dominate the Future!
While it may be true that “nonhydroelectric renewables (renewables in the table below) grow the most on a percentage basis,” growing from 7% to 12% ain’t much to brag about. Units are in quadrillion Btu (quad) and percent of total consumption:
|2017 (quad)||2017 (%)||2050 (quad)||2050 (%)|
Note that coal consumption barely declines, petroleum stays about the same and natural gas skyrockets (86’ing the Clean Power Plan was a most excellent move by President Trump). When I lump fossil fuels together, things really get cool:
|2017 (%)||2050 (%)|
In other good news, the U.S. will continue to “green the planet” at a decent pace:
|2017 Gt CO2||2050 Gt CO2|
Electricity Generation: Natural Gas Baby!
I used the data browser to break wind, offshore wind, solar PV and solar thermal out of the renewables category and found the following:
With virtually no installations of offshore wind power over the next 33 years, it looks like most Atlantic and Pacific coast governors will be disappointed.
Special Feature: Milton Friedman on Energy in 1978
Same as it ever was…
Same as it ever was…
Just as true today as it was 40 years ago. Milton Friedman…Truly… Once in a lifetime (H/T to The Talking Heads).
Addendum: Comparison of past AEO forecasts with actual oil & gas production
The Energy Information Administration (EIA) of the U.S. Department of Energy is about to release its Annual Energy Outlook (AEO) 2018, with forecasts for American oil, gas, and other forms of energy production through mid-century. As usual, energy journalists and policy makers will probably take the document as gospel.
That’s despite the fact that past AEO reports have regularly delivered forecasts that were seriously flawed, as the EIA itself has acknowledged. Further, there are analysts inside and outside the oil and gas industry who crunch the same data the EIA does, but arrive at very different conclusions.
The last few EIA reports have displayed stunning optimism regarding future U.S. shale gas and tight oil production, helping stoke the notion of U.S. “energy dominance.” No one doubts that fracking has unleashed a gusher of North American oil and gas on world markets in the past decade. But where we go from here is both crucial and controversial.
The most comprehensive critiques of past AEO forecasts have come from earth scientist David Hughes, a Fellow of Post Carbon Institute (note: I, too, am a Post Carbon Institute Fellow). Since 2013, Hughes and PCI have produced annual studies questioning EIA forecasts, based on an analysis of comprehensive play-level well production data. Their latest report, a critical look at AEO2017, is just out…
Past AEO forecasts were not “seriously flawed” because reality diverged from the forecasts. The explosion of oil & gas production was simply not predicted by the EIA.
The EIA conducts “post mortem” analyses of their forecasts and makes the results available to the public. I downloaded two Excel files for AEO crude oil and natural gas production. The most striking thing is that the “shale boom” came out of nowhere in the eyes of the EIA.
These forecasts only work from conditions that are known at the time they are generated.
Back to the Post Carbon Institute discussion:
“Shale Reality Check: Drilling Into the U.S. Government’s Rosy Projections for Shale Gas & Tight Oil Production Through 2050” explores four big questions crucial to the realization of the EIA’s forecasts:
How much of the industry’s recent per-well drilling productivity improvement is a result of better technology, and how much is due to high-grading the best-quality parts of individual plays? Over the past few years, industry has shown the ability to extract increased amounts of oil and/or gas from each well. This has been achieved in part by drilling longer horizontal laterals, tripling the amount of water and proppant (usually sand) used per unit of well length, and increasing the number of fracking stages. It is also in part a result of “high-grading,” or focusing drilling on the best-quality parts of each play (termed “sweet spots” or “core areas”). The decline in average well productivity observed in parts of some plays, despite the application of enhanced technology, suggests that sweet spots there are becoming saturated with wells. When this happens, drillers must either move to lower-quality rock outside of sweet spots, or drill wells too close together, which results in well interference or “frac hits” and reduced well production.
Can technological advancement in the industry continue to raise productivity indefinitely? If, as the EIA suggests, improved technology will continue to increase well production, then perhaps per-well productivity can continue to grow for some time. However, based on the analysis of recent data, Hughes questions this (as does a team of MIT researchers). Well productivity is already declining in some plays, despite the application of enhanced technology, indicating that technology and high-grading have reached limits. Given uniform reservoir quality, improved technology allows the resource to be extracted more quickly with fewer wells, but it does not necessarily increase the overall amount of resource that can be recovered.
What will be the ultimate cumulative production from all U.S. tight oil and shale gas wells? Taking the above points into account, Hughes concludes from a detailed analysis of production data that the EIA is making extremely optimistic assumptions about ultimate production and long-term production rates in most shale plays. Production over the long term is likely to be fraction of what the EIA is forecasting.
What about profitability? So far, overall, the industry has lost money on tight oil production, and shale gas has done little better. That’s even with most recent drilling being focused in core areas. The industry and its investors assume that if productivity continues to increase, and oil prices rise, profitability will eventually materialize. But what levels of oil and gas prices would be required to profitably extract fuels in the large non-core areas that the EIA assumes will eventually be tapped after “sweet spots” are drilled and exhausted? The AEO offers little in the way of realistic analysis on this point.
Most of the productivity improvement has been through cost reduction, much of it falling on oilfield service companies.
Natural gas prices have ranged from $2.60 to $3.40/mmbtu over the past year. If natural gas prices fall, less wells get drilled, supply declines, prices rise, more wells get drilled. If demand for natural gas drives the price up too high, coal becomes more competitive with gas and coal-fired power plants operate at a higher utilization rate.
If natural gas prices evolve in a totally different manner than the EIA forecast, the mix of natural gas and coal will evolve differently. No one can predict how quickly technology will improve and reduce costs.
EIA’s reference case for natural gas prices brings most gas plays above breakeven. Even in their “high oil & gas resource & technology” case, the Marcellus generally stays above breakeven.
In the event that the Marcellus craps out or that technological advances stall, natural gas prices would likely rise to the point that 3 BCF blips in the Gulf of Mexico would become economic. The “price mechanism” works, just ask Milton Friedman.