Shell CEO Talks of peak "easily accessible supplies of oil and gas" by 2015

As posted on other blogs (The Oil Drum and The Energy Blog) Jeroen van der Veer, the Chief Executive of Royal Dutch Shell, has suggested that the "easy oil" will not keep up with demand by 2015, and that a "blueprint" future energy scenario is preferable to a haphazard strategy. Now one of the world's largest companies says peak oil is within 7 years. Anyone want to work on battery and capacitor technology!?!

Use the title link to go to the Shell website for the statement, or just read below:

Two Energy Futures

* By Jeroen van der Veer

By 2100, the world’s energy system will be radically different from today’s. Renewable energy like solar, wind, hydroelectricity, and biofuels will make up a large share of the energy mix, and nuclear energy, too, will have a place. Humans will have found ways of dealing with air pollution and greenhouse gas emissions. New technologies will have reduced the amount of energy needed to power buildings and vehicles.

Indeed, the distant future looks bright, but much depends on how we get there. There are two possible routes. Let’s call the first scenario Scramble. Like an off-road rally through a mountainous desert, it promises excitement and fierce competition. However, the unintended consequence of “more haste” will often be “less speed,” and many will crash along the way.

The alternative scenario can be called Blueprints, which resembles a cautious ride, with some false starts, on a road that is still under construction. Whether we arrive safely at our destination depends on the discipline of the drivers and the ingenuity of all those involved in the construction effort. Technological innovation provides the excitement.

Regardless of which route we choose, the world’s current predicament limits our room to maneuver. We are experiencing a step-change in the growth rate of energy demand due to rising population and economic development. After 2015, easily accessible supplies of oil and gas probably will no longer keep up with demand.

As a result, we will have no choice but to add other sources of energy – renewables, yes, but also more nuclear power and unconventional fossil fuels such as oil sands. Using more energy inevitably means emitting more CO2 at a time when climate change has become a critical global issue.

In the Scramble scenario, nations rush to secure energy resources for themselves, fearing that energy security is a zero-sum game, with clear winners and losers. The use of local coal and homegrown biofuels increases fast. Taking the path of least resistance, policymakers pay little attention to curbing energy consumption – until supplies run short. Likewise, despite much rhetoric, greenhouse gas emissions are not seriously addressed until major shocks trigger political reactions. Since these responses are overdue, they are severe and lead to energy price spikes and volatility.

The Blueprints scenario is less painful, even if the start is more disorderly. Numerous coalitions emerge to take on the challenges of economic development, energy security, and environmental pollution through cross-border cooperation. Much innovation occurs at the local level, as major cities develop links with industry to reduce local emissions. National governments introduce efficiency standards, taxes, and other policy instruments to improve the environmental performance of buildings, vehicles, and transport fuels.

Moreover, as calls for harmonization increase, policies converge across the globe. Cap-and-trade mechanisms that put a price on industrial CO2 emissions gain international acceptance. Rising CO2 prices in turn accelerate innovation, spawning breakthroughs. A growing number of cars are powered by electricity and hydrogen, while industrial facilities are fitted with technology to capture CO2 and store it underground.

Against the backdrop of these two equally plausible scenarios, we will know only in a few years whether December’s Bali declaration on climate change was just rhetoric or the start of a global effort to counter it. Much will depend on how attitudes evolve in China, the European Union, India, and the United States.

Shell traditionally uses its scenarios to prepare for the future without expressing a preference for one over another. But, faced with the need to manage climate risk for our investors and our descendants, we believe the Blueprints outcomes provide the best balance between economy, energy, and environment. For a second opinion, we appealed to climate change calculations made at the Massachusetts Institute of Technology. These calculations indicate that a Blueprints world with CO2 capture and storage results in the least amount of climate change, provided emissions of other major manmade greenhouse gases are similarly reduced.

But the Blueprints scenario will be realized only if policymakers agree on a global approach to emissions trading and actively promote energy efficiency and new technology in four sectors: heat and power generation, industry, transport, and buildings.

This will require hard work, and time is short. For example, Blueprints assumes CO2 is captured at 90% of all coal- and gas-fired power plants in developed countries by 2050, plus at least 50% of those in non-OECD countries. Today, none capture CO2. Because CO2 capture and storage adds costs and yields no revenues, government support is needed to make it happen quickly on a scale large enough to affect global emissions. At the least, companies should earn carbon credits for the CO2 they capture and store.

Blueprints will not be easy. But it offers the world the best chance of reaching a sustainable energy future unscathed, so we should explore this route with the same ingenuity and persistence that put humans on the moon and created the digital age.

The world faces a long voyage before it reaches a low-carbon energy system. Companies can suggest possible routes to get there, but governments are in the driver’s seat. And governments will determine whether we should prepare for bitter competition or a true team effort.

Jeroen van der Veer, Chief Executive of Royal Dutch Shell plc, is Energy Community leader of the World Economic Forum energy industry partnership in 2007-2008 and chaired this year’s Energy Summit in Davos. He also chairs the Energy and Climate Change working group of the European Round Table of Industrialists.

Peak Energy, Coal Reserves, and Climate Change

The blog The Oil Drum has posted a writing by Dave Rutledge, the Chair for the Division of Engineering and Applied Science at Caltech. In this post and in a YouTube video Rutledge makes a few basic claims or revelations, that if correct, should profoundly affect how we (the United States and the World) treat the issues of energy supply and climate change. Also see a webpage posted by Dave Rutledge where you can download his power point presentation and Excel files.

The three basic points he makes are:

1. Coal reserve estimates are inaccurate, outdated (derived and unchanged significantly since 1974), and in need of revision quite a bit downward. He references a National Academies report that discusses the need for new and accurate accounts of coal reserves and resources.

2. Hydrocarbon (oil and natural gas) and coal resources are well below those that are use by the IPCC climate models to estimate future global warming. The end result is that there is not enough mineable fossil fuels to cause the warming and sea level rises that are being predicted. For example, in some IPCC models, oil production is assumed larger in 2100 than today. Is this possible? Does this mean the use of tar sands and oil shale, or is using those resources even not enough? Rutledge's discussion of this concept makes it seem unlikely that new sources will take up the slack.

3. For climate change reasons, or fossil fuel depletion reasons, work on implementation and research and development into renewable energy systems is an imperative. I'll add not energy efficiency per se, but energy reductions that still enable us, as humans, to continue to be healthy and interact culturally as needed to have good lifestyles.

I will not further discuss this topic as one should refer to the links within this post for further information from the Dave Rutledge himself.

New Energy Bill

The US Congress passed an energy bill yesterday and Bush signed it into law. It is both a step backward and forward for energy policy. See this CS Monitor article for a synopsis.

Creating a higher CAFE standard to get to 35 mpg by 2020 is certainly a good step forward, and it has been a long time coming. The biofuels mandate is a marginally good idea. The emphasis on corn ethanol is not the greatest due to the environmentally unfriendly aspects of using a tremendous amount of irrigated water (200-2,500 gallons of water for every gallon of ethanol) consumed and fertilizer runoff into the Gulf of Mexico. To most engineers who study the problem, I would say they believe biofuels must be non-irrigated and farmed in a way that sustains the nitrogen cycle, and not only the carbon cycle we hear so much about.

The removal of the renewable energy production tax credits for wind, solar, etc. is disappointing, but it has lapsed and been restarted three times already in its brief history. What we really need is a PTC scheme that sets it at a medium to high level (note: it was 1.9 cents/kWh) and has it steadily decrease in a set manner which cannot be changed. This gives businesses the ability to know the future of this kind of incentive such that they can invest in infrastructure that must be amortized over several decades.

The CS monitor article mentioned above does point out one thing that I think is good: energy policy might now be, as it should, a perennial subject. That doesn't mean that energy policies should change every year, it just means they should be evaluated every year.

Deregulated vs. Regulated Energy Prices

In Texas in 1999, Senate Bill 7 created a deregulated electricity market within the Electric Reliability Council of Texas (ERCOT). Some areas opted not to join into the fun of a deregulated market, where consumers could choose their retail electricity provider of choice. Examples of these ares are the city of Austin (Austin Energy) and the city of San Antonio (CPS).

So since 1999, I wondered: if the economic 'free' market is supposed to be optimal and drive prices lower for the consumer, why aren't prices in the deregulated market lower than those at Austin Energy and CPS Energy?

Today, the winter charge for electricity within the Austin Energy domain is near 8.5 cents/kWh if using 1000 kWh per month. The summer rate this year was near 9.4 cents/kWh. If I look on the Texas Public Utility Commission's website for finding a retail electric provider (Power To Choose) in Round Rock, Texas (just north of Austin) in the Oncor region, I notice for the fixed rates (I will not consider variable rate electricity) the price varies between 10.2 - 14.1 cents/kWh. This is approximately 1.5 cents/kWh more than Austin Energy averaged over the year. Note that the price a consumer pays is due to costs for (1) electricity generation, (2) transmission, and (3) retail electric providers (REP) who administer the service. The ERCOT deregulated market makes it such that no one company can perform more than one of those functions.

One major reason for this discrepancy is how electricity is priced in the deregulated market.

Assume the following:
1. Company A is in the deregulated market in ERCOT, and Company B is a city municipality within ERCOT but not engaged in the deregulated market (like Austin Energy).

2. Both Company A and B have identical power generation capacity and mix at: 33% natural gas combined cycle, 33% pulverized coal, and 33% nuclear.

The deregulated market prices electricity at the 'marginal price' (i.e. the cost to generate the last bit of electricity). Also, all coal and nuclear power runs almost continuously with the natural gas units cranking up and down to follow the rise and fall of electric demand. Assume the case now with high natural gas prices, it is the most expensive.

Say nuclear power costs 1.7 cents/kWh, coal costs 3.5 cents/kWh, and natural gas generation costs 5.0 cents/kWh.

For 1000 kWh of generation the deregulated cost of energy is:

= (nuclear electricity)*price + (coal electricity)*price + (natural gas electricity)*price
= 333 kWh*5.0 cents/kWh +333 kWh*5.0 cents/kWh + 333 kWh*5.0 cents/kWh
= $50.00

For 1000 kWh of generation the municipality cost of energy is:

= (nuclear electricity)*price + (coal electricity)*price + (natural gas electricity)*price
= 333 kWh*1.7 cents/kWh +333 kWh*3.5 cents/kWh + 333 kWh*5.0 cents/kWh
= $34.00

So using THE EXACT SAME GENERATION units, the municipality is inherently cheaper. Of course, municipalities can be less efficient running their organization than competitive companies and end up charging more. But, competitive REPs also need to pay for marketing their product, which incurs costs. Thus, municipalities can afford to be less efficient in their general operation and organization up to the point that they make up for marginal price differences and marketing costs from REPs. There are also other factors, but the basic price structure for charging for generated electricity is perhaps the most influential.

Of course, since the deregulated market was created after lots of infrastructure existed already, it is not truly a 'free' market system since some companies started with a tremendous amount of assets. But that is a discussion for another day ...

An oil scare story from the past ...

“It is the Summer [two years from now]. Violent uprisings have shaken Saudi Arabia, and the House of Saud has fallen. For months, the nation has been kept in turmoil by dissidents with strong religious and anti-Western feelings: ultraconservative Muslims of the Wahhabi sect, angered by corruption among some of the ruling princes and embittered by the erosion of family and tribal values; and disaffected foreign workers, many of them Palestinians, stirred up by radical forces in other lands.

Oil no longer flows from rich Saudi fields. Critical elements of the oil distribution system, systematically wrecked, lie in ruins. The giant terminal at Ras Tanura, which once sent half a dozen tankers a day down the Persian Gulf and out to the global oil routes, rusts silently under a scorching sun.

The free world has lost a fifth of its oil supply – some ten million barrels a day.

For a brief time, the United States seemed not to feel the loss; its daily share from Saudi Arabia was less than a million and a half barrels, and there were stockpiles and a small strategic reserve to draw on.”

Does this projection sound believable? It did in 1981, because that is when it was written in National Geographic magazine along with comments about projections that oil could be at $80 per barrel in 1985. It turned out that the cost of a barrel of oil in 1985 was about $27, and only $14 in 1986 (which is roughly $52 and $27 in early 2007 dollars). How wrong was that oil price projection?

See http://www.wtrg.com/prices.htm and http://www.inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Chart.asp for discussion and charts of oil prices.

What this look into the recent past indicates, is that projecting energy prices and uses into the future is pretty much as good as looking into a crystal ball. The reason that oil prices dropped is due to efficiency improvements and adjustments in the world economy that reduced demand. These adjustments were caused by people, just as the price increase and embargo was also caused by people.

And a large part of the reason it has taken approximately 25 years for us to have the same conversation again about the future of oil supplies and Wahabbi sects in the Middle East, is because people had the ability to act and change the future. Thus, in the 1970s and 1980s, people were the major influence in energy consumption and energy prices. Today, people are still the major influence as we still have room to become more energy efficient to choose the goal for oil consumption for the next few decades.

The question is: how long can people’s choices and adjustments remain the most influential factor in energy consumption and prices? Because, if people are not the most influential factor, then that means nature’s limitations in resources is the most influential factor. At no point yet in history has per capita energy consumption declined. Human choices can possible maintain high standards of living even if and when energy per capita begins to decline, sometime in the future. Our goal should be to maintain the world and society such that humans always have the most control over energy consumption, because otherwise, it means, by definition, we are not in control.

Google's Energy Ventures - Can Computer/Programming Companies Tackle the Commanding Heights?

The "Commanding Heights" of the economy were what Vladimir Lenin referred to as the segments and industries in an economy that effectively control and support the others: energy, banking, and transportation/shipping. Google and other so-called 'tech' companies (note: it is a misnomer to call technology only concepts that involved computers and programming) are aiming at solving both their own and others' energy cost problems.

In all likelihood, companies venturing in this space see their future growth limited if energy does not stay cheap and abundant. Venture capitalists see the large amount of dollars possible for finding the next major contributor to the energy mix. But tackling the Commanding Heights takes a lot of physical capital - the steel, silicon, wires, etc. that actually exist on the ground somewhere - and the paybacks times are historically slower than what Google and others are used to.

In the case of Google, their servers have grown at such a rate that they likely see limitations in their ability to continually increase their offers for free hosting services. Since providing the energy to power servers is critical to many of Google's business aspects, they Google executives have decided it is worth their while to try to solve the problem for themselves. They likely can do that, but making a new renewable energy technology (besides wind power) go mainstream will be tough, but I'm glad they are taking this challenge.

The fact is, that for almost any building in the United States, putting photovoltaic panels (for example) at the facility to offset electricity purchases will provide a payback on the investment within the lifetime of the building, and likely in less than 15 years, and possibly in less than 10 years depending upon location and incentives. The reason why this is typically not done (except on government buildings) is that there are other investments to be made with the same money that have higher paybacks in shorter time frames: this is the crux of the issue.

As long as the paybacks in energy investments take longer than other investments, companies will fulfill their fiduciary duty to make the non-energy investments. Energy simply does not cost enough to change the economics. Making renewable energy generation cost less than coal can be done by two ways: (1) cheaper renewable energy and/or (2) more expensive coal energy. The latter is not likely to happen anytime soon, even with a possible future carbon, or carbon dioxide, price. One way for the former to occur is to allocate semiconductor factories toward building solar cells instead of microchips. But then this means more expensive servers (because of less supply of chips and processors) for Google ... a catch 22.

Pros and Cons of Wind Energy

Here is a link to another article in an ever increasing list of discussions about wind power and its pros and cons. More and more negative or problematic points about wind energy are surfacing, and it is mostly because wind energy is starting to have a measurable impact instead of just being 'in the noise' of the electricity generation mix.

Essentially, because utility and grid operators don't know exactly when wind power will be getting generated due to the unpredictability in wind speed, there are additional actions that need to be taken in operating a reliable electric grid. As the amount of installed wind capacity (the MegaWatts installed if all wind generators were operating at maximum power) gets to over 10% of the entire grid capacity (wind, nuclear, coal, natural gas, hydroelectric, etc.), the other electrical generators are required to operate to account for the increased wind capacity. This assumes, of course, that you are going to allow the full available wind power onto the grid at any given time.

A study by GE (see http://www.ercot.com/meetings/ros/keydocs/2007/1022/Variablity_and_Predictability_draft_dlvd_2a.zip, or link on page http://www.ercot.com/calendar/2007/10/20071022-ROSWIND.html), done for the Electric Reliability Council of Texas (ERCOT)
shows that the dispatchable generators (those that can be turned on at any time) have to be able to ramp up and down faster the more that wind is integrated into the grid. Interestingly, the predictability of the total load that needs to be served by the dispatchable generators stayed about the same as without wind. This is because there is already enough uncertainty in the electricity demand throughout the day such that the added uncertainty of wind generation was not incredibly influential.

Basically, with more wind, we are deciding how many other additional aspects (higher generation ramp rates, more transmission lines, etc.) we are willing to deal with to have a clean source of electricity. The fact that wind energy is getting questioned for its newly-perceived (though not new at all) drawbacks is a testament to the wind industry already solving many problems to become a mainstream source of electricity.