Oil Plateau

The recession has taken the oil industry out of mind, so we are over due for a refresher course on the subject. The problem is very simple. We are technically unable to fully replace the oil resources we are consuming and this appears to be largely price insensitive.

We are discovering and perfecting ways to do a lot, but that will be not enough. We simply consume way too much because several mega fields empowered a global expansion of consumption over the past five decades. Their general decline must contract supply. The only mega field in existence with the ability to replace a part of the pending production decline is the Canadian Tarsands under THAI production provided it succeeds.

As Nelder comments, the change that has taken place is the silencing of the dream spinners. As I have posted several times, it is most probable that industry production will decline over several years by as much as forty percent, Over the past two years we have watched conditions deteriorate with a few discovery announcements fueled by the natural uptick in drilling.

The industry can sustain production levels at about half present rates for a long time, certainly decades. It is the pending loss of the mega fields that is the problem. I personally think that a great deal of expensive conventional oil exists but it is mostly behind political barriers and will as a result tend to trickle out. I am not so sure that is not a good thing.

As I have also posted, we are about ready to transition from oil to electric transportation. This alone will nicely offset the drop in supply.

The Next Oil Crisis Is Just Ahead

By Chris Nelder Friday, October 16th, 2009

I have just returned from the annual conference sponsored by the U.S. contingent of the Association for the Study of Peak Oil (ASPO-USA) with a wealth of new information and perspective to share, so this will be the first of a series of reports.

I look forward to the ASPO-USA conferences all year, because they consistently deliver good, solid data on the state of energy and afford an opportunity for vigorous and stimulating discussion with some of smartest and up-to-date experts in the world-particularly over dinner and drinks late into the night. This year was typically outstanding.

I begin with some high-level updates on the key aspects of the peak oil study.

Past the Peak?

Perhaps the thing that struck me most was how much the outlook on peak oil has changed since the first conference in 2005.

Those who thought conventional oil had probably peaked back then were considered extremely pessimistic, where the consensus view saw the peak another 5-10 years off, and the optimists put it 20 years away or more. Some thought the peak rate of "all liquids" would be around 100 million barrels per day (mbpd), up from 85 mbpd at the time. Most thought non-OPEC production would increase up through 2010. Biofuel boosters were sunny about their future.

Four years later, the view on oil and biofuel has grown considerably worse.

We now know that conventional crude did in fact hit its peak-plateau in 2005, having remained around the 74 mbpd level ever since. The expected growth from non-OPEC mostly failed to materialize, as depletion of mature fields took its toll and the cost of new projects soared—especially for deepwater and production from marginal sources. More pessimistic observers now think the 87 mbpd all liquids peak recorded at the height of the 2008 boom was the peak, and the more optimistic ones have cut their expectations to under 100 mbpd, with 90 mbpd looking more likely.

Biofuels now have a black eye from the corn ethanol frenzy of 2007-2008, which has all but collapsed. Ethanol from algae and cellulose still looks about as far in the distance as it did in 2005, as no one has figured out how to produce either one at commercial scale or with an acceptable net energy return. And biodiesel has remained a minor player, with little expectation for it to scale up any time soon.

But the most surprising change has been the outlook for North American natural gas. In 2005, the majority of observers seemed to think it had peaked for good, and saw gas prices remaining in a high range of $11-15/Mcf. I don't think any of them expected the recent boom in North American shale gas, and there was certainly no suggestion that gas prices would crash to nearly $2 this year.

In fact the main worry about gas now seems to be that the shale gas boom will prove to be short-lived, and sucker us into building more vehicles and infrastructure to use it just as it sputters out. We only have a couple of years of data to work with on shale gas wells, and the only good data is from the Barnett Shale.

Running down the depletion numbers on shale gas, analyst Arthur Berman found that in the first year of production decline rates have been in excess of 50% for Barnett wells, and 90-95% for Haynesville Shale wells. The average well in the Fayetteville Shale is "profoundly non-commercial" he said, and predicted that most shale gas wells will be abandoned in less than five years after their first production because the output will be so low.

There is also a fear, which I have articulated previously, that with an average production cost of $7-8/Mcf for shale gas and prices through most of 2009 staying around $4 or less, new wells simply haven't been getting drilled. The effects of that lapse should show up next year and cause our "glut" to disappear quickly, taking prices much higher.

Supply Decline Rates

With the end of growth in the rate of global oil production now either in the past or looming in the next few years, attention is progressively focused on the depletion rates of mature oil fields and the rate and date of overall decline.

Most observers believe the globally averaged depletion rate has risen from 4.5% per year in 2007 to about 5 - 5.5% now, which will accelerate to around 6.5% per year by 2014. This is more or less in line with the average rates from IEA's report last year. Petroleum geologist Chris Skrebowski pointed out that a 5% per year decline rate means a loss of 4 mbpd per year, equivalent to all the volume of biofuels, tar sands and heavy oil combined, or losing the entire North Sea in about 14 months, and that it would be a huge challenge to replace those lost volumes.

Analysts using the Megaprojects database (of large oil projects started up after 2005) generally agree that production will peak in the 2009 - 2010 time frame. Net new supply each year is expect to begin declining around 2014 - 2015 as depletion overwhelms new projects. Supply may reach as high as 92 mbpd in 2010, then plateau to around 89 mbpd in 2014, then decline to 84 mbpd in 2020 and 78 mbpd in 2030.

That view was generally in line with comments from oil consultant and former head of exploration and production for Saudi Aramco, Sadad al-Husseini, in a video interview clip. Seeing insufficient large new projects in the next 5 - 6 years to compensate for decline rates of 6.5% in non-OPEC and 3 - 4.5% for OPEC, he expects a shortage of capacity in the next 2 - 3 years.

The poster child for decline rates is, of course, Mexico with its crashing Cantarell field. Matthew Simmons projected that its decline would end Mexico's long era as an oil exporter in 18 - 36 months. David Shields, an author and expert on Mexican oil production, delivered a devastating indictment of the country's political leaders and its oil company Pemex, asserting that Pemex officials knew exactly what Cantarell was going to do as far back as 2002, but said exactly the opposite in public. A chart that Pemex shared with the Mexican Senate showed that production from its largest fields would fall to 1 mbpd by 2017, a full 1.8 mbpd lower than the official forecast of about 3 mbpd. If political manipulation is distorting the public impression of Mexico's near-term oil potential (and I believe Shields on this point) then it could be very bad news for the U.S., for which Mexico is the #3 source of oil imports.

Demand Growth Rates

On the whole, I would say there is now a strong consensus (at least among analysts who prefer data to faith) that global oil production will begin to decline in the 2012 - 2015 time frame. The later-dated estimate is based on the notion that the global recession of the last two years has probably given us that much longer before terminal decline sets in.

Peak oil deniers who have projected continued growth for many decades hence and ultimate peak rates of 120 mbpd or more have obliquely capitulated in the face of the recent evidence and switched to a "peak demand" argument: It's not that supply couldn't keep up for geological reasons, it's that demand wasn't strong enough to support high enough prices to raise supply further.

It's a classic tactic to try to change the game if you can't win it, but the peakers aren't buying it. As Skrebowski pointed out, the peak demand argument only really holds for the OECD, where demand is off a few percent from the peak.

The real demand story is shifting quickly to the developing world, particularly China. Analyst Steven Koptis projected that China would overtake the U.S. as the top consumer of oil by 2018, and if supply is available, would double U.S. consumption by 2025.

Indeed, as petroleum geologist Jeffrey Brown pointed out in his presentation of the Export Land Model, the U.S. has already been outbid by Kenya for oil. According to the model he developed with Dr. Samuel Foucher, the top five oil exporters in 2005 will in aggregate reach zero net exports by 2032, and most of that will be shipped early on. In just three years, they shipped 1/5 of their total expected net exports after 2005.

Petrobras' Promise

As a counterpoint to the generally gloomy data on global oil supply and demand, a razzle-dazzle keynote was given by Dr. Marcio Rocha Mello, president of HRT Petroleum and a 24-year veteran of Brazil's oil company Petrobras (NYSE: PBR). He asserted that the recent pre-salt finds in very deep formations off the shore of Brazil, like the much-hyped Tupi field, indicated that there was a great deal more oil in the pre-salt layers—we just need to drill deeper.

In an extremely animated presentation that at times seemed more like a carnival sideshow than a serious analysis, Dr. Mello served up combination of stratigraphic charts and contrarian theory to make the case that between the pre-salt of Brazil, West Africa, the Congo basin and the Gulf of Mexico, there are another 500 billion barrels yet to find.

While entertaining and humorous, I don't think Dr. Mello made too many converts in the room. As former BP oil exploration chief Jeremy Gilbert pointed out the following morning, none of the alleged pre-salt oil is yet proved, and in fact he'd be surprised if there were 5 billion barrels of proved oil there. "Don't confuse passion with precision" he warned, and noted that it would take 20 - 30 years to prove the resource. In short, it doesn't change the peak oil story at all. By the time pre-salt barrels come online, we'll be well down the back side of the production curve. Rising resource nationalism in Brazil also bodes poorly for very many of those new barrels to make it to foreign markets.

I'll conclude this report with a brief comment on oil prices. As I mentioned in my update three weeks ago, the outlook for oil prices has been murky for months as they traded in a $60 to $75 range. I was long oil but cautiously bearish, and watching for signs of a new signal. This week, that signal came as oil breached the $75 level and touched $78 this morning. It's a decidedly bullish move and I think it portends higher prices to come, at least in the near term.

I took the opportunity to beef up my oil exposure with positions in EOG Resources (NYSE: EOG) and, naturally, Petrobras. Even if Dr. Mello is wrong about the pre-salt, Petrobras is one of the most sophisticated and aggressive oil companies in the developing world, and they are positioned better than most to mint money for years to come. And if he's right...well, it will be a great position to hold long term.

Stay tuned to this space for much, much more from the cutting edge of peak oil analysis in the coming weeks.

Until next time,

Chris Nelder

Energy and Capital

Shifting Sands in the Alberta Oil Sands

The enthusiasm for THAI oil production is now beginning to widen outside of oil industry insiders. Besides this item, I was startled to find it as a lead in a list of world changers in Feedblitz, which is a technology tracker rather than a resource industry watcher. I go there to help track fusion research. A little like getting a review on chip technology in an oil industry journal.

THAI is certainly a game changer and its present state of development is well advanced. They ran their first test wells successfully and encountered sand problems as must be expected when you are minimizing the cost of a test well. Since then sand problems are well corrected and they are now running the operation while also testing the catalytic well liner. I am not as optimistic about that, but it is a bonus anyway.

Today, they can develop a production field with a good understanding of the variables and a good plan for avoiding problems without the CAPRI part of the program.

They have not shared any technical data on production, and that is actually premature anyway. However, a best guess model seems appropriate today as an update of the original modeling work to see how close things are, or how far of for that matter.

It does appear to be working and this company is not permitting a 100,000 barrel per day facility because they need to bet the company.


Shifting Sands: New technology on the way
Posted by Brett Harris on May 29, 2009

http://www.bnn.ca/blog/9741.html

In 1959, Manley Natland, an American paleontologist working for the California-based Richfield Oil company, came up with a unique (and scary) plan for tapping the vast energy reserves in Alberta’s oil sands. Natland suggested burying a nine-kiloton nuclear device deep within the oil sands and detonating it. The idea was that the "bomb" would literally cook the oil out of the sands, making it easy to recover. That may sound crazy, but not only did Richfield win approval from Ottawa for the plan, it actually bought the nuclear device. Fortunately "Project Oil Sands" never came to fruition. But it makes for an interesting read. The story is chronicled in William Marsden’s book "Stupid to the Last Drop."

Well, the oil sands have come a long way since 1959. Today, even the traditional method of mining using giant shovels and trucks seems outdated, primarily because of the excessive costs associated with strip-mining and the increasingly unacceptable environmental impacts. The newest method for mining the oil sands entails injecting steam into the ground to loosen the tarry bitumen from the sand and then pumping it to the surface using horizontal drilling technology. The process is called Steam Assisted Gravity Drainage or SAGD. But because of the vast amounts of natural gas and water needed to create the steam, even SAGD has become a target for environmental groups.

There are literally dozens of other new technologies on the drawing board right now that aim to make oil sands not only greener, but cheaper to tap. Most are either in the high-concept or early development stage, but one new technology stands out as a potential game changer. At its Whitesands project near Conklin, Alta., Petrobank Energy is in the final stages of testing a new technology called THAI (Toe to Heel Air Injection). Although not as draconian as Natland’s nuclear idea, THAI sounds a bit like something out of a science fiction novel. It involves drilling a hole into the oil sands, injecting oxygen and igniting a continuous underground burn or "fireflood." Over the course of several months, that fireflood slowly works its way through the oil sands reservoir, heating up the bitumen so it drains into a horizontal collector well. No digging. No huge mining equipment. Just a few pipes, some wellheads and a modest processing facility.

THAI is still considered experimental by the oil sands industry, but Petrobank is so confident that it works, it’s forging ahead with two commercial-scale projects using THAI.

Petrobank Charging

For those who do not know why this is important, Petrobank is the company that is launching THAI/CAPRI technology in the Alberta Tarsands and in heavy oil resources worldwide. The technology has been completely successful to date and we now have an economic method of production that will ultimately be able to supply at least a third of global oil demand without the massive problems associated with mining and other present methods.

Think US demand at 15,000,000 barrels per day and then consider that this technology can replace all that demand out of Alberta just as quickly as we can drill 1000 barrel per day shallow horizontal production wells. That is exactly 15,000 wells in the Tarsands. It can also include a few hundred wells in some of the heavy oil reserves in the US, although simple economics are likely to favor the Tarsands for decades.

Whatever happens to the oil industry and whatever happens to all other energy solutions, we can be certain that this company will be a major player in the oil industry for decades to come.

We have burned a trillion barrels, and we have a trillion barrels of the easy stuff left, and these guys are on the way to be the key player in the recovery of the three trillion plus worth of heavy oil. If it takes a century or a millennium, this is the technology that enables it.

Petrobank boasts record year

By Shaun Polczer, Calgary HeraldMarch 13, 2009

Despite a 30 per cent drop in fourth-quarter profits, Calgary-based Petrobank Energy and Resources Ltd. had its best full-year result ever on the strength of higher production from its unconventional oil and gas plays.

The Calgary-based company said net income tripled in 2008 to $244.5 million, or$2.76 per share, even as fourth-quarter profits fell to $28.08 million, or 34 cents a share, from $40.15 million, or 45 cents a share, a year earlier.

Cash flow jumped 281 per cent in 2008 to $665.9 million, or $7.28 per diluted common share, as production soared 181 per cent to 28,742 barrels per day (bpd) from 10,243 bpd in 2007. Petrobank said higher production enabled it to offset the effects of lower commodity prices in the second half.

"Petrobank's production growth coupled with high world oil prices during the first three quarters of the year combined to generate record levels of cash flow and net income," the company said in a statement.

Petrobank said its Canadian results were underpinned by the performance of the Bakken unconventional oil play in southeast Saskatchewan where it produced almost 20,000 barrels a day. In addition, the company has interests in the Montney and Horn River natural gas plays.

The company said it continues to progress with its toe-to-heel air injection, or THAI, fire flood technology that employs in-situ combustion to loosen thick heavy oil deposits and upgrade it underground. Work on a variation of the THAI technique using chemical catalysts--dubbed CAPRI--also continues.

Petrobank's wholly owned subsidiary, Archon Technologies Ltd.,was granted two new U.S. patents for improvements that add features to the existing THAI and CAPRI technologies and extend the life of the existing intellectual property to 2026.

Three other patent applications are pending, Petrobank said, covering a "heel-to-toe" combustion design, catalyst placement for CAPRI and downhole solvent injection.

Petrobank is continuing to license the technology to third-party opera-tors and late in the fourth quarter entered into royalty, technology licence and a joint venture agreements with True Energy Trust to apply the technology on portions of its Kerrobert heavy oil property in west central Saskatchewan.

Despite the downturn, Petrobank said it continues to negotiate joint ventures around the globe and expects to announce another joint project in the near future.

"We continue to receive worldwide interest in our technology."

Andrew Potter, an analyst with UBS in Calgary, said Petrobank finished the fourth quarter "on a strong note" despite softer commodity prices and maintained a "buy" rating with a 12-month target of $42 on the stock.

Petrobank shares surged more than eight per cent on the Toronto Stock Exchange on Thursday, up $1.61 to $21.67.

SPOLCZER@THEHERALD.CANWEST.COM

Gasoline Ration Cards

I have posted often on the pending oil supply crisis, now been briefly masked by the decline in demand caused by the global credit collapse. As credit begins to flow again as it is now, demand will quickly recover.

This returns us fairly swiftly to the inelastic supply conditions that permitted this past summer’s price rise to $145. I do not get any sense of supply buildup taking place while the price is so low, but surely every refiner is restocking the pipeline while demand is lower. We will have a small cushion.

In the meantime OPEC is tamping back supply by a couple of million barrels. I would like to believe that this could last but it will be gone with the snow. In the event, the price of oil will soon back to a $60 to $100 trading range, assuring everyone that it is just too expensive. If inventories do build properly, we may get a year’s pause in volatility in oil pricing, but this is only a respite.

The fundamental problem remains. We have no method of turning on an additional two million barrels of production per day. We could not do it properly when oil was $145 per barrel. All we could do was standby and watch the train wreck. The first casualty was the excessive credit balloon aided and abetted by the two year long commodity bull and the massive exposure to soft mortgage lending.

Oil drained the cash flow needed to support that balloon.

We also now know that the economy cannot be operated on expensive oil. This means that we are headed for demand regulation in order to preserve the economy. We have already discussed this extensively and have concluded that switching the trucking industry over to liquid natural gas (LNG) as proposed in California is the best available quick fix. Done in the USA, some millions of barrels of oil per day will be released back into the global market. Done globally, a real percentage of global demand will be released. I have not recently checked the numbers, but I believe that this will be close to 15 million barrels out of 87 million barrels.

Therefore, before we even think of the solar build out, we can ride through a major portion of the pending decline.

That still leaves us with the most economically wasteful use of oil. Personal transportation will have to be rationed. We cannot permit the demand for private convenience to price public good. Up to now we have had both. We are now entering a world were the use of available stocks will need to prioritize in terms of the common good. The best way to do this will be the ration card.

A ration card for gasoline will do more than any thing else we could ever do to drive the adoption of the electrical autocart. And yes folks, EEStor is looking more real every day.

An alternative to a ration card is a non commercial use tax. This is unfair to those who must have a car just to operate from their suburban home, or is it? We have a century of persuading folks to move out into distant acreages all supported indirectly by cheap gas. In reality, a ration card issued against known available supply is about as good as it will get. Some will benefit by having a surplus while those who must will buy those surpluses.

The good news is that we do not have a problem for 2009. In the meantime, maybe someone will hit the panic button and cause a crash THAI program in Alberta to give us that real two million barrel cushion and regulate the rapid adoption of LNG as in California.

Recall one single fact today. We are now consuming four barrels for every barrel we now find of conventional oil, excluding the Tarsands and their ilk. Those have only begun to yield oil in appreciable amounts. How much more stark can I make this?

1.7 Trillin Barrels of Oil

This is an excellent article on the Alberta Tar Sands that is also complete in describing the state of the art and includes THAI.

This also states a reserve picture of 1.7 trillion barrels which is likely accurate, particularly with the advent of THAI. That it represents two thirds of the global reserve is daunting and we can expect that to stand up even with fresh discoveries in the deep sea and elsewhere.

THAI appears to produce crude at around $35 per barrel. How that will stand up as experience is gained is today anyone’s guess. I note that SAGD comes in at $60 per barrel in costs and that is naturally more expensive by far since it must produce steam with natural gas at some serious expense. At least the initial running costs are based on supplying compressed air to the toe. I expect to see THAI to swiftly replace SAGD particularly if the ultimate recovery hugely surpasses that of SAGD which is much lower than originally anticipated.

I believe that the method lends itself to significant optimization and that cost of $35 is likely to get a lot lower but not in the initial stage while the fire front is been fully established.

http://www.theengineer.co.uk/Articles/309275/Black+gold+mine.htm

Black gold mine

Published: 08 December 2008 12:20 PM
Source: The Engineer

To its champions it represents a plentiful, secure source of fuel that could wean the West off its addiction to Middle East oil. To its detractors it is an environmental catastrophe in the making.

Despite the strong feelings on both sides, most agree that the oil-sand beneath the soil of Alberta, Canada represents the largest petroleum resource on the planet.

Canada's oil-sand reserve covers an area about twice the size of Wales and already hosts most of the world's oil majors plus a smattering of home-grown specialists. Between them they produce about 1.3 million barrels of crude oil a day from this unpleasant mixture of clay, sand, water and bitumen.

But there is much, much more — an estimated 1.7 trillion barrels more, or two thirds of the world's remaining petroleum reserves. Despite a recent slowdown triggered by the falling price of crude, there are plans to scale up production to 3.5 million barrels a day over the next decade.

Now for the bad news. To get the oil-sand out of the ground and turn it into useful fuel, huge amounts of energy are required and the process pumps vast quantities of CO2 into the air, creating giant lakes of toxic sludge. In comparison, conventional oil production looks like an environmental blessing.

While campaigners would like to see the industry shut down overnight many others, including Geoffrey Maitland, professor of energy at Imperial College London, believe the size and location of the resource makes exploitation inevitable. 'There's three or four times more of this stuff than there is conventional oil,' Maitland told The Engineer. 'If you could extract it today economically then it would transform overnight the balance of power in terms of where the hydrocarbon is.'

Against a backdrop of growing political pressure and falling crude prices (oil-sand is considered uneconomical when crude drops below $70 a barrel) the industry has no choice but to clean up its act. The question is, what can technology do to improve the economic and environmental profile of the dirtiest end of the oil business?

About three quarters of oil-sand activity is concentrated on the reserves that lie closest to the surface, which can be extracted using traditional open-pit mining techniques.The biggest producer, Syncrude Canada (a joint venture between firms including Imperial Oil and ConocoPhillips), generates about 350,000 barrels of oil a day.

At Syncrude's colossal facilities, dubbed Mordor by local activists, the biggest trucks and shovels in the world dig out the oil-sand and place it in enormous crushers before it is sent on huge conveyer belts to gargantuan separation vessels.

As the oil-sand at these facilities is so close to the surface, the mining costs are not high. It is at the separation and refining stage that the big inefficiencies begin to emerge.

To separate the bitumen from the ore huge amounts of water — about three barrels for every barrel of oil produced — are used to float the oil from the tar sand within the separation vessels. Unfortunately, this water also dissolves the clay that forms about 20 per cent of the oil-sand.

The resulting noxious sludge, or tailings, ends up in giant reservoirs where the water and clay can take up to 30 years to separate.

The size of these ponds — Syncrude's 540 million m3 Fort McMurray pond is the second largest dam in the world — is regarded by some as the industry's greatest problem.

A number of groups, including French fuel giant Total, are developing and testing expensive filtration systems that speed up the de-watering process.

However Dr Murray Gray, scientific director of Alberta University's Centre for Oil Sands Innovation, is carrying out fundamental scientific research into extraction methods that dispense with the need for water. The group's work is being funded by Imperial Oil.

'We would like to keep the clay with the sand. Current technology beautifully disperses this material in the water and that creates the tailing problem,' he said.

'We have a project looking at clay minerals in the oil sand and how they are distributed within the ore. We have made progress here and started to visualise ways of getting oil out without moving clays about.
'Another project, which should be ready for pilot testing in a year, involves adding special catalyst materials to crack the bitumen in order to avoid having to use water.'

There are even greater reserves to be found underground. About 80 per cent of Alberta's oil-sand is buried too deep for open mining and to get at these a different process is required.

Current approaches tend to mirror conventional oil extraction techniques by displacing the bitumen to the surface. However, bitumen does not flow like conventional oil. It is up to 10 million times more viscous and to reduce the viscosity to the point where it begins to flow requires the application of a lot of heat.

One method that appears to be gaining in popularity is a so-called in-situ technique known as steam assisted gravity drainage (SAGD). This technique, used by Shell, BP and others, pumps steam down a line at high pressure into the reservoir. After a number of weeks of continuous heating, the bitumen begins to separate from the oil-sand and drips down into a drainage line from where it can be extracted.

It is a novel process and, because some upgrading occurs in-situ, it is a more economical way of getting at oil-sand than surface extraction. But Imperial's Maitland says it is still relatively energy-inefficient and only recovers 10 per cent to 15 per cent of the resource.

'You need to generate a lot of steam at the surface and in generating this steam you generate a lot of C02,' he said. Also, the fraction of heat that goes into heating the oil as opposed to heating the rock is a relatively small percentage (20 per cent) so there's a tremendous loss in efficiency. The overall energy and C02 carbon footprint sums are very poor.'

An alternative to steam is the use of hydrocarbon solvents that require far lower injection volumes than steam and are therefore more energy efficient. One such process, vapour assisted petroleum extraction, is being used at Imperial Oil's Cold Lake oil-sand facility in Alberta.

Another alternative is electrical heating. Dr Bruce McGee, chief executive of E-T Energy, is a pioneer in this area and has developed an electro-thermal heating technique that he claims is the only one that can make oil-sand economical at current crude oil prices.

E-T Energy's electro-thermal dynamic stripping process is deployed by drilling a number of well bores next to the oil reservoir.

Electrodes of varying voltages are put down the bores and the voltage difference causes electricity to flow through the oil-sand and melt the bitumen. The firm is using the technology on its own reserves to produce 1,000 barrels a day and plans to increase production to 10,000 barrels a day by 2010.

McGee claims a number of advantages for his technology. It boasts big thermal efficiencies over SAGD, he said, and claimed that while SAGD only becomes economical when crude oil is $60 or above, his process remains competitive at $22 a barrel.

He added that while a steam plant can take months to set up, his technology takes just two weeks to install and will be producing oil within the year.

Another technical advantage, he claimed, is that the electrodes can be configured to provide feedback on the geometry and suitability of the reservoirs in which they are positioned. While SAGD plants can sometimes work for months before operators discover they are poorly positioned, this technique can respond far more rapidly.

In a similar initiative at an earlier stage of development, a group at Siemens is working on an electromagnetic induction-based system that it believes could be used to complement and, ultimately, replace steam.

Dr Bernd Wacker, the engineer behind the concept, said the idea is to embed a copper cable in the ground then pass a current through it, creating an alternating magnetic field that generates eddy currents, heats the surrounding sand and rapidly reduces the viscosity of the bitumen.

Wacker's team has tested the concept in a sand box at its lab in Erlangen, Germany, and is preparing for a second set of trials in a larger experimental facility. He hopes to begin field trials in Alberta by 2010.
Wacker's vision is that initially the system will be used to complement steam extraction methods, with the inductor running parallel to the steam pipe to provide an additional heating effect.

According to early calculations the process could, he claimed, lead to a 20 per cent improvement in the efficiency of extraction. In the longer term, if the coils were used to replace steam, he believes a 50 per cent improvement could be achieved.

While such techniques could go a long way to achieving the desired economic and environmental goals, Imperial's Maitland believes the oil-sand industry may be barking up the wrong tree.

'It strikes me that there's a greater analogy between tar sands and coal than there is with conventional oil,' he said.

The research carried out into the underground gasification or in-situ processing of coal may be more pertinent to the oil-sand industry.

One promising technique is the toe to heel air injection (THAI) process pioneered by Prof Malcolm Greaves at Bath University.

The key idea of the technique that has already undergone commercial trials with both Orion Oil and Petrobank is that rather than having to use additional energy at the surface to create vapour or steam, some of the in-situ heavy oil is used as a sacrificial fuel.

Air is injected into the reservoir, an underground combustion front is created and the high temperatures, of up to 400ºC, reduce the viscosity of the bitumen.

Because the temperatures are so much higher than those achieved using SAGD, the process also leads to some in-situ cracking and pyrolysis of the bitumen, creating other usable products including methane, CO and, if there is some steam, hydrogen.

A process such as THAI, claimed Maitland, begins to address some of the problems of oil-sand production. 'You use some of the in-situ material as your energy source. You're starting to produce some CO2 in-site, so you could capture some of it and use it to enhance recovery and sequester it within this heavy oil reservoir,' he said.

'It's also doing some in-situ processing so that you're starting to produce at the surface more of what you want.

'We're a million miles away from being very selective and optimised in all of this but I do believe that the road ahead with these heavier hydrocarbon materials is not to produce them the way we've produced conventional oil.'

But in-situ combustion raises big problems of its own. Maitland said there is a pressing need for simulation technology able to accurately predict the effect of lighting huge underground fires.

'You need really good models — you're not just modelling fluid flow but heat and mass transfer over a kilometre-length scale in geological environments that aren't well characterised.'

For instance, because the bitumen is effectively the glue that binds the tar sand together, its removal from deep underground could have serious consequences.

'If you combust this material and flow it, what are you doing to the mechanical properties of a formation?' asked Maitland.

'Can you maintain stable wells? Are you going to get subsidence or major changes to the subsurface?'
With crude prices hovering around $50 a barrel, these are questions to which the industry is going to have to find answers fast.

According to the Canadian Association of Petroleum Producers, investment in oil-sand expected for 2009 had fallen by 20 per cent. Recent decisions by both Shell and Petro-Canada to put planned expansion on hold are just recent examples of how investment is dropping off.

But despite the jitters Maitland, in common with many others, believes the oil-sand industry is here to stay.

'The fact that oil's gone down now is only a temporary thing,' he said. 'I think we will continue to see high oil and gas costs in the future and that the long-term investment in these things will be high.'

'There's been a lot of immediate reaction to the current economic situation and we will see some pulling back but I think in terms of long-term strategy the majors like Shell and BP are committed to seeing the heavier hydrocarbons as strategically very important.

'However, they realise that they've got to produce them in a much cleaner way in the future.'

Maitland added that with Barack Obama due to be sworn in as US president in January, there is also now an added political imperative.

'In order to use these reserves — which are absolutely crucial to the future of the provision of the amount of energy the world needs and security of supply — it must inevitably be done in a cleaner way because it's a matter of when, not if, legislation gets put in place.

'There will not be a window of opportunity to operate in a way where you can be profligate with energy consumption.'

Oil Reserve Calculations

It struck me, after posting my recent note on the problem with the unchallenged reserves quoted by the Saudi’s and the members of OPEC in general, that few people outside of the oil industry have a clear understanding of how these reserves are calculated.

Unlike the mining industry, who quite rightly minimize reserve calculation because it is very expensive and needs to be sufficient only to remain several years ahead of production, oil operates against a very different model because the reserves can be calculated early and accurately.

To book a reserve creditably in the oil business, it is necessary to make a discovery well first. That puts you in a field. At that point it is possible to map the confines of the field’s closure with relatively inexpensive seismic. A judicious placement of the next well usually toward the farthest closure boundary confirms continuity. At that point, provided the well is successful, you can do a preliminary reserve calculation that will probably stand up.

In fact it will stand up. That is why a deep discovery with only the discovery well in the pocket can be proclaimed so confidently as a multi billion barrel reserve. A second production well quickly refines the numbers to a level of confidence that permits production planning.

Thus, once such a reserve calculation is made, it is very unlikely that it will ever be upgraded significantly by additional in field drilling. Technology changes will upgrade resources, such as happened with the Alberta Tarsands. Expect additional upgrades driven by the development of THAI. Just remember though that no new oil is been found or even needs to be found in Alberta and Saskatchewan. The resource itself already exceeds a trillion barrels and apparently hugely exceeds that.

Therefore the addition of 150 billion barrels of Saudi reserves, not previously quoted by the pre Aramco discoverers is very suspect. Folks who find fields do brag about them at appropriate industry seminars. And the nature of reserve calculation as I have just described makes it very unlikely those reserves are coming from prior discoveries.

And it is not just the Saudis who are playing bullshit poker, so is the entirety of OPEC. As a result, the world has been gulled into sitting back and behaving like very good customers. The World has not invested aggressively in other resources with the exceptions of Canada in the Tarsands and Europe in the wind business and in nuclear. The US political system chose to sleep as this unfolded and is only now waking up to the dire necessity of action, although business has not been sleeping and has been pushing everywhere for position in the coming race to provide fresh energy.

By the by, if those reserves had a drop of credence, Saudi production would not be sitting at 5,000,000 barrels per day and teetering on the edge of sharp decline. You would have brought those reserves on line and lowered the take on existing fields. Instead they applied water injection to their best field as a method to maintain production volume. In the event, the shoe is overdue to drop. The way they squirmed last summer before they promised to release more oil, surely tells us that their above ground reserve is drawn down and is leaving them with no flexibility to massage the market.

The truth is that the dominos are falling slowly as field after field is in clear decline already, and the last to hit the wall will be the Saudis if it has not happened already.

IEA admits Developing Oil Collapse

This has just been released a few hours ago and has been expected. This is the IEA’s biennial report and it is now acknowledging that production declines are been felt everywhere and it will take an incredible investment to just maintain current production. My readers already know that.

The hope that massive investment will solve this looming shortfall is whistling in the dark. Outside of the coming THAI /CAPRI revolution, only now slowly developing, there are no alternatives.

The industry is spending full out but they simply have run out of targets and options sufficient to make up the looming production decline (collapse?). After all, you drill in the seas off Kamchatka because you cannot drill one thousand new wells in much better places.

My readers know that Alberta’s tar sands are positioned to fill the demand gap. In fact I saw a newsletter quote a real reserve figure of 2.7 trillion barrels. Half or more of that will be recoverable with THAI/CAPRI. That gives us ample supplies for at least a century.

The point is though that a major industry authority has finally admitted what they knew all along, that replacing cheap oil with expensive oil is incredibly expensive and this makes expensive alternative fuel sources competitive now.

And since alternative energy sources are at least carbon neutral, they will quickly replace the entire oil industry over the next twenty years and leave most of that expensive oil in the ground.

The report continues to use weasel words but they are clearly now into covering their backsides since the supply failure is becoming visible. Their reference to forty years of supply almost lets you believe it is sitting in a tank somewhere. They fail to mention it will take eighty years to extract it all at increasingly higher cost. And it is forty years since all that oil was found and put on stream.

I think my headline makes it a little clearer.

Whenever I get access to this report in whole or in part, I will post useful data.

Energy body warns on oil prices

By Sarah Mukherjee

BBC News

One of the world's leading authorities on energy supply says the era of cheap oil is over and prices could soon be back up to $100 a barrel.

The International Energy Agency (IEA), in its World Energy Outlook for 2008, says prices could soar as high as $200 a barrel by 2030.

The immediate risk to supply, it says, is not one of a lack of global resources.

Instead, it points to a lack of investment where it is needed.

Rising costs

The world, the report's authors conclude, is not running out of oil just yet - indeed, there is enough of it to supply the world for more than 40 years at current rates of consumption.

But, they point out, field by field, declines in oil production are accelerating and more money will be needed in research and development to extract the oil there is.

While world oil supply will rise, the report's authors predict that massive investments in energy infrastructure will be needed - an eye-watering $26 trillion dollars up to 2030.

A significant amount of this money - $8.4 trillion - will need to be spent on oil and gas exploration and development.

In one scenario considered by the IEA, China and India will account for just over half of the increase in world primary energy demand between 2006 and 2030, and much of the increase in world oil demand.

But despite the agency's assessment of oil and gas reserves, the report contains a stark warning of the consequences of continuing to rely on fossil fuels.

The consequences for the global climate of policy inaction when it comes to decarbonising the world economy are "shocking", according to the report.

"Strong, co-ordinated action is needed urgently to curb the growth in greenhouse gas emissions and the resulting rise in global temperatures," it said.

Petrobank commences THAI/CAPRI Pilot

I share this recent release from Petrobank who is pioneering the THAI protocol for producing the tarsands. They have successfully implemented THAI and are now testing CAPRI which is a catalytic sleeve in the production well. They are also installing a slotted liner system which should eliminate the sand inflow problem.

Remember this pilot system is only two years old. They are now also ramping up the air input in order to maximize production. Remember that in the early going, the burn front would be small preventing full air flow.

Now with plenty of oil removed it should be easy to expand air flow. It is projected that each well will achieve production rates of around 1000 barrels per day and sustain this for at least three years if not a great deal longer. No one is that courageous yet.

Read my post of a year ago to get a quick description:

http://globalwarming-arclein.blogspot.com/2007/08/thai-proclaimed-success.html

I cannot over exaggerate how important THAI technology is. Without CAPRI a THAI well is converting 8 degrees API oil to 12 degrees API while also producing some lights. It is doing this without mining the tarsand or putting any fuel into the formation. The environmental footprint is little different that that of a conventional oil well with perhaps a little more CO2 allowed to escape that is surplus to what is dissolved into the formation itself which is beneficial in releasing the oil from the sand.

With CAPRI, it seems possible to bring the gravity up to perhaps 17 degrees API and that will make it directly shippable into the pipelines, or so close as to be easily upgraded.

The available resource in the tarsands has always been estimated at well over a trillion barrels. They gave up trying to actually measure it a long time ago because it was not obviously producible. This technology will make all of it producible at recoveries that will approach a mind boggling seventy percent. This translates into a reserve picture exceeding one trillion barrels of oil very soon. This matches all the oil ever consumed and can be expected to exceed that of Saudi Arabia by one hundred percent at least.

All this while eliminating the environmental problems and costs related to mining this stuff.

I fully expect that the developed world will now move heaven and earth to lower our dependence on oil as a fuel. Having this reserve coming on stream gives us the energy security to do so without out of control pricing and rationing. It also puts all the other producers on notice that we no longer need their oil.

This technology will also access billions of barrels of oil that was bypassed over the past century. Many other small heavy oil fields were found, although most were quite large by conventional standards, and this technology will open them up. Depleted field may also respond to this method provide that they can be dehydrated.

A speculation can be made asserting that global reserves will reach ten trillion barrels. I have no inventory list to support that number and suspect that it will be conservative. I think we could find half of that in North America.

The point is that we actually could stay on an oil diet while the whole globe properly modernized. What we cannot do is continue to convert fossil fuels into CO2. And this blog has discovered many excellent sustainable strategies to exploit that are far more beneficial, including the conversion of all that CO2 into biochar.

Petrobank Announces First THAI(TM)/CAPRI(TM) Production

Mon Sep 22, 12:01 AM

CALGARY, ALBERTA--(Marketwire - Sept. 22, 2008) - Petrobank Energy and Resources Ltd. ("Petrobank" or the "Company") (TSX: PBG.TO) is pleased to announce results from the world's first CAPRI(TM) in-situ catalytic production well (P-3B) at our Whitesands project near Conklin, Alberta.

Whitesands P-3B Update

Petrobank drilled P-3B late in the second quarter of 2008 and completion operations commenced on the well in late July. This well has been designed to demonstrate the additional upgrading potential of our patented CAPRI(TM) process which places an active catalyst bed between two concentric slotted liners.

In laboratory tests, CAPRI(TM) has achieved an upgrading effect of seven degrees API in addition to the upgrading effect resulting from the THAI(TM) process. The P-3B well also incorporates our narrower slot design, intended to significantly reduce sand production from the McMurray sandstone reservoir typically encountered at Whitesands.

Since air injection and oil production commenced in August from P-3B, the well has been on continuous production, with no appreciable produced sand. Initial produced fluids consisted of oil and water emulsions from the steam preheat as well as residual drilling mud, which diminished as the well cleaned up. Recently we have achieved oil production volumes of up to 300 barrels per day on low air injection rates, with oil cuts of 40 to 50%. While it is still too early to determine the effectiveness of the catalyst, the produced oil has been upgraded to 11.5 degrees API due to the thermal cracking effects of the THAI(TM) process. Currently P-3B is operating at a well bore temperature below the optimum range for the catalyst to be effective. We are presently increasing well bore temperatures up to 300 degrees Celsius for optimum catalyst efficiency and we will continue to analyze produced oil quality to assess the catalyst effectiveness. Produced gas analysis from P-3B is consistent with the P-1 and P-2 wells and indicates high temperature combustion with free hydrogen.

During the early startup phase of the P-3B well we have continued to operate the P-1 and P-2 wells at lower air injection rates. These wells have recently achieved high on-stream factors with oil production rates of up to 400 barrels per day for each well at a quality of approximately 12 degrees API, compared to the native 8 degree API bitumen in-situ. Now that P-3B production is stabilizing, we are gradually increasing air injection on all three wells, which is expected to result in further increases in fluid and oil production.

During August we also installed facilities to recover lighter oil that is currently being carried by the overhead gas stream as a vapor which is then condensing in the secondary separators. This lighter oil is over 30 degrees API and is not included in the production rates noted above. This lighter oil component further demonstrates significant in-situ thermal cracking and the potential for co-production of other high-value by-products.

Our revised facilities design utilizing primary gas separation followed by tank separation of oil, water and sand (rather than using a single pressure vessel) is being installed on P-3B and, when combined with the narrower liner slot size, is expected to eliminate most operational challenges caused by sand production in this well and future wells.

Petrobank Energy and Resources Ltd.

Petrobank Energy and Resources Ltd. is a Calgary-based oil and natural gas exploration and production company with operations in western Canada and Colombia. The Company operates high-impact projects through three business units and a technology subsidiary. The Canadian Business Unit is developing a solid production platform from low risk gas opportunities in central Alberta and an extensive inventory of Bakken light oil locations in southeast Saskatchewan, complemented by new exploration projects and a large undeveloped land base. The Latin American Business Unit, operated by Petrobank's 76.2% owned TSX-listed subsidiary, Petrominerales Ltd. (trading symbol: PMG), is a Latin American-based exploration and production company producing oil from three blocks in Colombia and has contracts on 15 exploration blocks covering a total of 1.6 million acres in the Llanos and Putumayo Basins. Whitesands Insitu Partnership, a partnership between Petrobank and its wholly-owned subsidiary Whitesands Insitu Inc., owns 75 net sections of oil sands leases in Alberta, 36 sections of oil sands licenses in Saskatchewan and operates the Whitesands project which is field-demonstrating Petrobank's patented THAI(TM) heavy oil recovery process. THAI(TM) is an evolutionary in-situ combustion technology for the recovery of bitumen and heavy oil that integrates existing proven technologies and provides the opportunity to create a step change in the development of heavy oil resources globally. THAI(TM) and CAPRI(TM) are registered trademarks of Archon Technologies Ltd., a wholly-owned subsidiary of Petrobank.

Commodity Decline

While we have been regaled with the ongoing unraveling and reconsolidation of the massive US mortgage market, the rise and fall of the oil market is delivering another casualty. As my readers know, I called both the price run up past $100 per barrel and the turn at $145 per barrel. This price move was necessary to force the public to pay attention to our serious exposure to the presently inelastic condition of the supply side of the oil equation. We now have a global consensus for shifting out of the fossil fuel business and demand has been visibly throttled. I now expect a return to $65 per barrel.

Prior to the oil price run up we had a huge price lift in commodity prices. This created a huge amount of credit and has thoroughly funded the metals industry in a way not possible for generations. The ongoing oil price decline appears to be collapsing that long lasting bubble.

To give my readers a meaningful standard to work with, I will share one fundamental idea. All commodities are normally sold at a price very close to the real cost of production. The rationale is obvious. Higher prices allow all producers to ramp up production and to invest in technologies and new operations that will bring costs down. The only real constraint to this behavior is the time needed to make this happen. Well, guess what? We have had the necessary two to three years to dust off every mothballed project from the past two generations and blast them through permitting.

And now the credit in the commodity markets is evaporating.

Up to about three years ago, all copper mines worked against a copper price of around $0.70 per pound. This had been the average since the sixties! This had actually driven new mine development out of North America. But all mines worked against an operational break even of around that seventy cent mark.

I address copper in particular because it continues to be the leader in terms of mining innovation and cost cutting. When I first got into the business in 1972, it was still possible to contemplate mining a several million ton deposit carrying twenty pounds of copper to the ton over several years. Today that represents a month’s supply in most major mines. Such scale has permitted mining grades to hang around eight pounds to the ton.

What I learned early on was that this technology ultimately came to every other minable commodity. I know of deposits in certain commodities that would idle every other mine in operation if brought on stream.

Returning to copper, we have a commodity that requires three or four years to ramp up but then can be produced for well under $1.00 per pound. Yet we have been forced to pay $4.00 per pound and now are back at $3.00 per pound. This I see returning to around $1.50 to put everything back in balance.

Of course there are an army of analysts who will argue vehemently that this is not so. Oh well!

We have just been through an old fashioned commodity boom and bust carried out over three years. All the producers are flush with cash and are bringing fresh production on stream. This is also happening throughout the global agricultural business. This next year we will be awash with huge surpluses and a rapid global business recovery driven be suddenly lower costs across the board.

Importantly, the market has decisively signaled the need to vacate the carbon business and governments are getting mandates to do just that. This is giving us the time to do it right.

As I have posted, the simple shift now from diesel to LNG in the USA alone will release half of our demand for oil. The advent of THAI will let North America become the globe’s strategic oil reserve with perhaps two trillion barrels of producible reserves booked before we are finished. That is twice all the oil produced to date.

This all means that the economic rebound will be very strong for the next three years.

Oil headlines

The 2008 oil fright is continuing and we are seeing signs of volatility in the oil market itself and this likely presages a sell off in the price of oil which is rather welcome. We needed this price to get everyone’s attention. That accomplished, we now need a long period of price stability while demand is lowered and a vast redeployment of capital resources is put in motion. A price retrenchment to below a $100 is now in the works and is much more likely than any further advance. Much more importantly, the consumer is spending on ways to reduce the pain and this will cause a sharp lowering of USA oil consumption possibly beyond what anyone ever imagined possible.

I now expect that the conversion by the trucking industry to LNG engines will be precipitous in spite of the current distribution difficulties and the need to accelerate access to supply. Now that all minds are focused, it is possible to shed two to four million barrels of daily oil demand over the next four years. Yes this is optimistic, but the need is seen as dire and the effort will be there.

Recall that this price advance has not been driven by a shock of some sort. It has been driven by tightening supplies and the revealed inability of suppliers to crank up volume anywhere. That meant that the price had to go to a level were it became everyone’s business to cut down usage. At some point, the hole in your wallet sparks reaction. We have now clearly reached it and a full blown effort to reduce demand is now underway.

A shock may still arrive to run the price up to much higher levels, but I do not see many opportunities there. Besides, the retreat of the US dollar can only go so far as a way to balance the pressure and only hastens the day that other currencies take on reserve currency status.

What we cannot evade is that the current level of oil production at 87,000,000 bpd is likely as good as it gets and that this is terribly vulnerable to declines that are not easily replaced, although THAI promises to handle all that if we have enough time. Nothing else will do it.

This means that increased demand and some historic demand must be covered by other energy sources. The simplest but more inconvenient LNG can bridge this demand for a long time. It will certainly be having its heyday. On the other hand it is necessary. We simply cannot convert to anything else at sufficient speed.

I have already pointed out that cattail culture is capable of producing a cornucopia of ethanol as compared to any other biological pathway we have investigated. The sheer logistics are daunting. It would be better to properly encourage it and then allow it to roll out naturally, until all transportation fuel is ethanol. If every farmer took up the challenge today, it would still take at least a decade to make the easy stuff happen and a century to do the rest.

The fact is that we have options that sound policy can unleash.

What we do not have is a way to substantially stave of pending large field declines except by replacing such declines by fresh production using THAI on heavy oil reservoirs. This technology seems to be working in Alberta and will open up a major new class of field. It will still take a lot of time and as I have posted earlier, I think that we are confronting a production swing approaching 20,000,000 bpd over the next decade. And I am trying to downplay the scale of change hitting us, and hoping that is not really true.

That means energy will be in the headlines continuously from now on. Get used to it.

Developing Oil Fright

The past few weeks have made the developing supply crisis in oil crystal clear to everyone. The fact that I was able to predict this scenario a few months past did not require any prescience on my part. I only had to overcome everyone else’s state of denial. And now, the consumers are beginning to change their consumption habits.

The $130 price for a barrel of oil is quite sufficient to encourage a maximum effort to expand production and to expand replacement sources. A jump to $300 per barrel is unnecessary or that but will likely happen briefly if we have a surprise. By that I mean an unexpected drop of two million barrels per day. Such an event may not happen this year or even next year, and if we can get past that, other patches can kick in.

Right now a lot of folks are actually sitting down and doing the supply analysis and all you see are glum faces. The fact is that this crisis will not be magically fixed by turning on a well somewhere. That option has evaporated and with pending declines everywhere, supply has to be found by emergency replacement from non oil sources.

Even with the advent of THAI oil production and a number of important new fields, the industry can only hope to keep pace with the developing decline. To put it more succinctly, we are on the verge of losing roughly around 10,000,000 barrels per day of production over the next several years and I am likely still sugar coating the story. I think that we can bring on around this much new production with the aforementioned resources, after which the THAI technology could well be able to keep pace with further declines for some time.

The good news for us is that most of this will be focused in North America, permitting us the luxury of sort of controlling our destiny. So although we are going through an uncomfortable readjustment, the transition will be long and drawn out

The new emergency reserve supply is coming from the conversion of the transportation fleet over to LNG engines. This will easily release 15,000,000 barrels of oil per day globally and can be done almost overnight. In fact California is well on way to doing this and has begun to force the infrastructure. It is good to see that at least one group of politicians are not in denial. The point that I am making is that the USA can release millions of barrels of daily oil back into the market in probably less than two years by the simple expedient of a slight engine modification and a few tanks and tankers. The recent rise of diesel prices will force the truckers to make the switch as fast as they can.

I should mention that globally there are massive supplies of LNG for the asking. This is a direct result of a market that has been limited to pipeline distribution to meet the low end market of home heating. Transportation fuel readily can justify the economics of hauling it around in cryogenic tanks. I observe that LNG produces a steady supply of boil-off gas that needs to be shoved into a local pipeline if it is not immediately burned. We can live with all that with a lot of common sense applied.

The other big fix that is been suggested is the simple expedient of making all new automobile engines able to switch on demand to ethanol. That industry is still shy of a few solutions, but establishing capability is the first step to driving demand and supply. I have little doubt that ethanol supplies will begin to climb. I will be posting tomorrow on a discovery that I have recently made for a huge new ethanol feedstock that is likely capable of replacing all our gasoline.

Lester Thurow on Sub Prime Credit

It is always nice to propose a bold solution to an economic crisis and to see it mirrored by a leading economist a couple of weeks later. See my post march 17 on credit stabilization

Lester Thurow makes three recommendations. His first on marking the mortgages to market, eating the loss and saving the borrowers differs from my proposal only in not going the extra mile whereby a fifty percent stake over strike price is retained in the property until sold years later. This is a disaster internal to the USA that has been partially passed on to the global financial system. The USA oversight mechanism has been caught napping and must accept guilt and pay the piper. This is the best possible fix. Right now, our failure is toying with putting the global economy into a massive tailspin and global economic contraction that will take a decade to recover from.

The alternative is to allow the destruction of wealth to continue its natural course over the next several years. The real losers will still be the same lenders, and most of that money likely came from pension funds whose net worth will contract. The individuals will walk away and spend years putting it all back together slowly. The proposed solution will hugely shorten this recovery period.

Imagine the damage if the savings and loan debacle of the mid eighties had been solved by stiffing all the depositors.

The sooner we get started on this emergency legislation the better.

Lester’s other two recommendations are not nearly as compelling or even wise.

$100 oil exists for a very good reason and that is to encourage a crash program of energy expansion. This is happening now. The only glitch is that it takes a few years for the influx of fresh capital to be organized and deployed. The most critical investment in THAI started last year with a mere $40,000,000. Next year that will be $500,000,000 and then it will be five billion and then perhaps between 2010 and 2015 it will be fifty billion. Thereafter, this technology will be generating many millions of barrels of oil per day and prices will slowly subside to levels that balance demand. While this is all happening, the global economy will pass through a massive readjustment with necessary new energy strategies and economies.

Outsourcing is another false economy. The global economy is driven by consumption. The consumer has a finite supply of cash in his jeans. Perhaps fifteen percent of that cash ends up going to the primary manufacturer’s labor force. The rest goes to the fine art of delivering those goods into our hands. All that money gets spent domestically.

Yes our manufacturing job sector is expanding very slowly, but the rest of the economy has boomed getting those imported goods into our hands. Quit chasing those lost milling jobs that paid sweat shop wages to poor immigrants (now illegal) and support high end skilled jobs in the industries we are good at. It worked for the Europeans and it will surely work for us. There is a lot to be said for dynamic destruction.

Do you really think that we would have had the wide screen TV screen anytime soon if the manufacturers were relying on production runs aimed solely at the USA market? The market is now a global middle class of one billion on the way to two billion. Our ultimate share of that market is going to be fifteen percent and declining.

The market is inevitably taking care of the latter two issues and the USA is not necessarily a leader there for much longer. This has the benefit of producing an army of natural economic allies that share our interests and will carry a lot of the heavy lifting. I would much rather see Europe and Japan negotiate beneficial terms of trade than to be dragged into it as lead and getting blamed for every misstep.

The sub prime issue is made at home and we must do our own housecleaning. It cannot and must not be exported as the great depression was exported in the thirties. If we do this fix, the housing market will rebound quickly and within five years it will be largely a bad memory just as was the savings and loan debacle.

It's got to hurt before it gets better

There are solutions to high oil prices, the housing crisis and outsourcing, but they require some sacrifice.

By Lester C. Thurow

April 11, 2008

The financial crisis in the United States is not a crisis if you do not want to sell your home, do not have a house with a sub-prime mortgage and have a good job that you are not about to lose.

Very few Americans have to sell their homes right now. Those who bought a house on speculation get what they get. After all, they "speculated" and lost. Very few Americans have a sub-prime mortgage. Those with bad credit have bad credit. Most have a job they are not about to lose.

So what is all the fuss about? The meltdown of the financial markets.

Shouldn't we just let the big guys lose? After all, they are big guys. The answer is no. The credit markets, like those before the 1929 crash and during the Depression, affect us all.

What should be done?

The answer starts with the heart of the problem: the sub-prime mortgages. These mortgages have to be written down to less than the current value of the house so that if the borrower walks away, he or she has something to lose. The government (taxpayer) is going to have to pay to write down these mortgages. This is the subsidy -- and the only subsidy -- that should be given to the lenders.

If the borrowers don't walk away from their sub-prime mortgages, there is no crisis in the financial markets.

In the future, we can regulate the markets to prevent sub-prime mortgages. But that is the future. Let's get to the real crisis: the rising cost of oil and the outsourcing of American jobs.

There is a solution to the rising cost of oil, but it is a painful one. Let's say there is a lot of $20-a-barrel oil in the world -- deep-sea oil, Canadian tar sands. But who would look for $20-a-barrel oil if someone else (Saudi Arabia) has lots of $5-a-barrel oil? The answer is: no one.

Basically, American taxpayers have to guarantee potential producers that the price in the future will not fall below $20 a barrel and that they will not lose their investments.

This is easy to do. The U.S. needs to guarantee that it will buy all of its oil at $20 a barrel before buying anything from OPEC. This forces the price of oil down to $20 a barrel, but it eliminates the possibility that it will ever go back to $5 a barrel.

Painful!

Outsourcing has an equally simple solution. Let us encourage the dollar to fall. At some value of the dollar, it will pay producers to bring jobs back to the United States.

Suppose the dollar has to fall a lot -- let us assume 50%. Who cares? Only those Americans who plan to take foreign trips or buy something abroad. It costs them more. For those who want to go to the tropics, there are the U.S. Virgin Islands. If the solutions are so simple, why don't we do them? Because all of them are painful.

Write-downs for sub-prime mortgages cost money. Oil at $20 a barrel guarantees there will be no $5-a-barrel oil. A lower dollar guarantees foreign trips and purchases will cost more.

We have Herbert Hoover when we need Franklin Roosevelt. Luckily, we will have a new president and a new Congress come January, but January is a long time away.

Basically, we require changes from President Bush now. He needs to propose a write-down in the sub-prime mortgages, propose a guarantee in the price of oil and let the dollar fall. Unfortunately, the first two are not likely. Only the third will happen with or without his approval. As long as we have a large current account deficit, the dollar will fall. It has to for some very simple reasons.

To get foreign currencies to pay for the deficit, we must borrow from abroad. Eventually, foreigners get tired of lending because they will lose money on their holdings of dollars if the dollar falls further.

At the same time, the big American guys move money into foreign currencies to take advantage of the falling dollar. When they move money back into dollars, they have more dollars. Essentially, they have an infinite amount of money to move.

As they move money, the current account deficit gets bigger and bigger, and the pressure on the dollar to fall only grows.

We need to do something! Take painful actions! Gridlock is the worst of all worlds.

Lester C. Thurow is a professor of management and economics and dean emeritus at the MIT Sloan School of Management. His latest book is "Fortune Favors the Bold: What We Must Do to Build a New and Lasting Global Prosperity."

NAFTA oil independence

As I have posted before, we will be hearing a lot about the Bakken Formation, just as now we are all hearing about the Alberta tar sands. Both are expensive and difficult resources to tap, though clearly not as problematic as the Green River Formation in Colorado and Utah. I have posted the excellent Wikipedia article for a comprehensive description.

The tar sands do not have any porosity or permeability issues whatsoever. In fact, if you can cause separation, the recovery reaches nearly eighty percent. This means that the trillion barrel reserve is almost fully recoverable, provided you are prepared to go after it using mining methods.

The THAI in-situ process promises to deliver seventy percent recovery of areas treated at a very low cost and from considerable depth without nearly the environmental cost of mining. The process also partially upgrades the oil which is a major break. THAI process relies on the creation of an air fed burn front started at the toe of a horizontal well. The heat and pressure and process CO2 and process steam and nitrogen gas all assist in attacking the bitumen. This technique will eventually be used on many older partially depleted fields that have lost their gas drive or simply are too thick.

In other words, the current results are already amazing on formerly unrecoverable resources, and it is well worth a try on almost every other reservoir to see if it can help. I can even see folks pumping out an old water flood to try this on and cursing the idiots who authorized it in the first place. Not only does THAI bring at least one trillion barrels of bitumen in Alberta into full exploitation mode, it also likely brings another trillion barrels on stream from the Amazon that I know of. Add another trillion from known conventional fields and we now have three times all the oil that has ever been burned.

And remember folks, we are going to burn it all, regardless of all the conservation efforts, simply because it will always be a cheap feedstock for either energy production or synthetic materials. It will just take us a lot longer. Or let us rephrase it another way. How much oil do you think will be in the ground for use in ten thousand years?
This takes me now to the Bakken Formation. This is a great oil resource that likely represents half a trillion barrels of oil in place at a depth of two miles. Unfortunately, the recovery runs at an abysmal 4% or so though it appears that ten percent has been achieved. That means that the recoverable resource may be no more than fifty billion barrels. I will take it, but it is hard to imagine a more difficult technical challenge in the oil patch, but apparently secret breakthroughs have been made.

Without doubt this entails horizontal wells at the end of a ten thousand foot vertical string which alone is pushing the technology and some pretty nifty hydraulic fracing along the foot across the natural fracture planes of the oil bearing structure. Since it is in dolomite I suspect that this is an acid frac to boot. I am not sure if we should buy shares in the producers or Halliburton, Dick Cheney’s favorite company. Each well must cost at least ten to fifteen million.

In any event, this is not cheap oil and it still looks like you have to find the sweet spot at least for now. Welcome to the brave new world of folks with billion dollar balls. In any case one hundred dollar a barrel oil is on the march and North America, also known as NAFTA, is clearly on the road to total oil independence.

*-Bakken Formation

From Wikipedia, the free encyclopedia

The Bakken Formation, initially described by geologist J.W. Nordquist in 1953,[1] is an immense blanket of rock from the Late Devonian to Early Mississippian age occupying a substantial part of the subsurface of the Williston Basin, Montana, North Dakota, and Saskatchewan. Covering about 200,000 square miles (520,000 km²), Bakken serves as a significant oil reservoir, and until recently has long frustrated efforts to extract its oil, initially discovered in 1951.

The formation consists of three members: lower shale, middle dolomite, and upper shale. The shales were deposited in relatively deep marine conditions, and the dolomite was deposited as a coastal carbonate bank during a time of shallower water. The middle dolomite member is the principal oil reservoir, roughly two miles below the surface.

Porosities in the Bakken average about 5%, and permeabilities are very low, averaging 0.04 millidarcies—much lower than typical oil reservoirs.[2] However, the presence of horizontal fractures makes the Bakken an excellent candidate for horizontal drilling techniques in which a well drills along the extent of the rock layer, rather than punching a hole vertically through it. In this way, many thousands of feet of oil reservoir rock can be penetrated in a unit that reaches a maximum thickness of only about 140 feet (40 m).[3] Production is also enhanced by artificially fracturing the rock.[4]

The greatest Bakken oil production comes from Elm Coulee Oil Field, Richland County, Montana, where production began in 2000 and is expected to ultimately total 270 million barrels (43 million m³). In 2007, production from Elm Coulee averaged 53,000 barrels per day (84 m³/d) — more than the entire state of Montana a few years ago.[5]

New curiosity developed in 2007 when EOG Resources out of Houston, Texas reported that a single well it had drilled into an oil-rich layer of shale below Parshall, North Dakota is anticipated to produce 700,000 barrels (111,000 m³) of oil. Estimates for ultimate oil contained in the entire Bakken play range from 271 billion to 503 billion barrels (40–80 km³), with a mean of 413 billion barrels (65 km³) of technically recoverable and irrecoverable oil.[6]

This massive estimate appears to dwarf the estimated 50–70 billion barrels (8–11 km³) of technically recoverable and irrecoverable oil in Alaska's North Slope. A conservative estimate of Bakken's technically recoverable oil would be 1% to 3%, or between 4.1 and 12.4 billion barrels (0.6–2 km³) of oil, due to the fact that Bakken's shale is so tight. However, other estimates range from 10% to as high as 50% technically recoverable reserves.[7] By comparison, recoverable oil estimates in the Alaska formation are 30% to 50%, or a mean of 26 billion barrels (4 km³).

Not counting the Bakken Formation, there are about 175 billion barrels (28 km³) of technically recoverable oil in the United States,[8] so the formation represents a substantial increase in U.S. reserves, which can be produced at an estimated cost of $20–40 a barrel.[9]

Starting in March, 2008, the U.S. Geological Survey will re-survey the Williston Basin which includes the Bakken Formation.[10]