Decreasing oil supplies and increasing gas supplies are interdependent and interlinked, but this is not a case of “One goes up if the other goes down”. The reason is Peak Oil and a rapid shift away from ‘conventional oil’ to lighter fossil hydrocarbons in the oil-and-gas mix: around 15% to 20% of world oil is today, in fact, gas-based and gas-related, described by terms such as NGL and condensates, that is natural gas liquids that are condensed, with the gas usually reinjected to maintain reservoir pressure or thrown away by venting or flaring. The old-style or ‘traditional’ image of oil produced by a land-based wooden derrick is replaced today by massive metallic platform structures in the sea. These always include flare stacks burning off a greasy gas, with black billowing smoke – in fact laden with liquid hydrocarbons and dissolved minerals and metals, most of them highly toxic. The vented gas is of course invisible, but surely not in climate change impacts. Methane, relative to CO2 has a climate change impact about 20 times higher. Around 9% of today’s world gas production is lost in the production and transport process. The loss rate is increasing much faster than production (about 7.5% pa for losses and 5% pa for production).
Peak Oil precedes Peak Gas, but the time interval between the two is not ‘canonical’ or fixed, exactly like the division of ‘associated’ gas and ‘unassociated’ or ‘stranded’ gas – the first being associated with oil production, the second not. How fast we arrive at Peak Gas, or a permanent decline in net total gas production and supply will depend on how gas/oil tradeoffs are made, driven by relative prices and other factors, especially the cost and time needed to build gas gathering and recovery infrastructures for ‘associated’ gas, and new, almost exclusively LNG infrastructures for ‘stranded’ gas. Where it is not possible to build these infrastructures, gas will be lost in larger and larger quantities, shortening the time to Peak Gas through a combination of reduced reserves, and insufficient production installations and transport infrastructures. This is the exact dilemma now facing Russia’s Gazprom, a ‘microcosm’ of the world context in which too much delay in recovering the current vast quantities of ‘associated’ gas that are thrown away can only advance the date of Peak Gas
Greasy Gas and Precious Oil
World oil is increasingly produced from hot greasy gas, the condensates, with a temperature around 180°C, far above the maximum possible temperature for liquid oil This hot greasy gas is typically produced at 3000 or 4000 metres below the seabed, which itself can be at 3000 or 4000 metres below the water surface in ‘extreme depth offshore’ producer regions such as Angola and deep Gulf of Mexico. Depending on the percentage oil in the greasy gas, it is categorised different ways, but what is recovered is ‘reformed’ or cleaned and condensed, to give liquid oil, and the dissolved contaminants are usually dumped in the sea. Much of the lighter gas is flared: night sky satellite pictures of large offshore production areas, like the North Sea, show a blaze of light similar to any big city, or urban region. In the North Sea, the electric power equivalent of flared gas is likely above 1500 MW.
The old-style wooden derrick surely produced some gas in the oil-and-gas stream, but not much. Today’s ‘unconventional’ oil production, on a worldwide average base, is around 1 barrel oil equivalent of gas produced, and reinjected, vented or flared, for every 8 barrels of oil condensed out of the greasy gas and commercialised. In some ‘mature’ that is old producer regions, where ‘conventional’ liquid oil production has been in decline for a long time, the ratio is much higher, and more steps are taken to recover the gas, and extract more liquid hydrocarbons (that is “oil”) out of the oil-and-gas stream. This is the case of the USA, where ‘conventional’ oil production is only about 25% of total, or 1.5 Mbd on a total of about 6 Mbd.
This concerns ‘associated’ gas, associated to oil production, and obviously this is a tail-out phenomenon. Declining oil content in the oil-and-gas stream gives way to essentially gas-only production. When the gas-to-oil ratio gets very high, it is more rational to throw away the oil, or recover only a small part of it, and to concentrate on the gas. This is theory: while oil remains expensive and gas remains relatively cheap (on a unit energy base), gas will be reinjected or flared or dumped, unburnt, in the atmosphere, and the precious oil recovered. Gas gathering from both ‘associated’ and ‘unassociated’ or gas-only reserves (the so-called ‘stranded’ gas reserves) is expensive, as is gas transportation relative to oil. This particularly concerns LNG or liquefied natural gas, putting a heavy brake on LNG production from ‘stranded’ or ‘associated’ gas. Reassuring images of the ‘Gas Bridge’ away from oil to gas, and based on LNG, suffer from the normal defect of technology hype, that is the cost and time constraints for building this ‘LNG Gas Bridge’. Taking only the time constraint, increasing world LNG to say 10% of current world oil production in energy terms (producing about 8.6 Mbd oil equivalent of LNG) is likely impossible in less than 15 or 20 years even if unlimited capital spending was given to this quest. Neither the time nor the capital is available for this, making the ‘Gas Bridge’ a bridge to nowhere, just like the miraculous but nonexistent ‘Hydrogen Economy’.
Blurring Divisions and Diminishing Prospects
Worldwide, the division between associated and unassociated is in fact blurred, because virtually all (at least 90%) of major ‘stranded’ gas reserves are in oil producing areas. The pressing problem for world gas supplies is to increase recovery of currently flared or vented ‘associated’ gas, rather than develop LNG-based production from ‘stranded’ gas. The reasons are triple: quantities of ‘associated’ gas currently thrown away, and time and cost constraints. In addition, oil production needs to be maintained, and this is more and more difficult. Gas is still underpriced but gas production, especially in ‘mature’ gas producing regions – notably Russia and USA – is increasingly expensive. In a pricing context where gas prices remain volatile and low, unlike oil prices which are volatile and high, the ‘smart’ money does not spontaneously roll towards expanding gas production or developing new supply through costly gas gathering installations. The same applies, but more so, to much more expensive LNG capacity growth.
Along with the increased costs for expanding gas supplies to meet world demand, which is growing at well above 5% pa (compared to about 2.25% pa for oil), new developments take more time to add net supply capacity. The total of ‘associated’ natural gas currently flared worldwide, estimated by the World Bank at about 150 Billion cubic metres/year (around 30% of Europe’s total gas consumption or more than enough to supply all electric power production in Black Africa) is an attractive target for recovery, and a reassuringly large quantity. This again is in theory: the gas is there, or rather thrown away and ‘used’ to change world climate, but gathering it, and using it for energy supply poses immense problems of cost and time to develop infrastructures. At a smaller scale, but not so much because Russia currently produces about 22% of world gas supply, and is claimed to hold 30% of the world’s remaining gas reserves (‘associated’ plus ‘stranded’), this cost-and-time problem is now acute for the ‘clay-footed giant’ of world gas, the Russian Federation. Immediately in turn, this will soon pose major gas supply and cost problems for dependent European Union gas consumer countries – most of which are planning, and building new gas-fired electric power capacity at ‘Belle Epoque’ rates, in part to comply with Kyoto Treaty obligations, and on the fond belief that Russia’s gas, like Saudi Arabian oil of the 1980-2000 period, is “limitless”.
There are increasingly sure signs that Russia’s Gazprom will not be able to meet its self-assigned, and massive gas production targets. The increasing vindictiveness of relations between Russian oil and gas corporations, all closely controlled by Putin’s Kremlin, and foreign ‘partners’ such as BP, Total and Shell, are in large part due to new gas reserves not being as big as hoped, and cost plus time constraints for bringing these reserves into the Gazprom gas gathering and transport network, serving Europe, that are always increasing. Deliberately underestimating costs before project starts, then raising them almost by the week as development grinds slowly along, is a sure way to brew conflict between project partners. As Ali Samsam Bakhtiari has put it:
Put in a nutshell, Gazprom’s present predicament is untenable. With dwindling production based on declining major gas fields (and no fresh giant field on tap), the Russian gas monopolist will inevitably have to curtail its exports as it cannot (or rather dares not) cut domestic supplies delivered at extreme-low prices….. Thus, it will have to boost export prices in order to compensate for internal ‘manque a gagner’ and also hope to somehow lower external demand.
He goes on:
[Gazprom’s] present pipe network spanning over some 150,000 kilometers is in daily danger and will require in the future ever-increasing maintenance linked to spiraling costs. (Bakhtiari, March 2006).
As Bakhtiari and plenty of other observers surmise, Gazprom boasts of ‘almost unlimited’ gas reserves, are no more than boasts, and identical to oil reserve bragging by OPEC countries – designed to suck in capital and bolster investor confidence. In the real world, the diminishing but critical gas reserves of the three-biggest west Siberian gasfields (all of them ‘associated’) are unable to meet even short-term gas demand of Russia’s domestic, CIS, and EU consumers. Only massive capital spending, and immense luck would make it possible for Russia to meet projected gas export demand in the 2009-2015 period. Put another way, Peak Gas, for Gazprom and its down-the-gasline consumer customers, is likely to arrive quite early, about 2009. Rather like the erudite calculations of Marx and Engels (based on 19th C thermodynamics principles related to the inverse square law) advanced to support their idea that imperial powers would expand ever outward but meet vastly increasing logistics problems, due to distance from the Mother Country, the logistics of gas gathering spirals up in cost and time as more, smaller and further gasfields need to be tapped, to maintain production. The key word is: maintain. Increasing total production will soon be a forgotten promise, and lure for incoming partners, a hangover from the 1995-2000 period, certainly for Russian gas.
Knock-on and Downstream Effects
It is important to understand that average members of the consumer masses, or decision making masses have no conception of Peak Gas being imminent. While Peak Oil is grudgingly accepted, at least to the extent that ‘After Oil’ is a buzzword in corporate planning and political policymaking circles – where it can turn a profit or deliver votes – Peak Gas is an entirely unheard of and unwelcome spectre. Almost by definition, for consumers of cheap energy, gas is the “replacement fuel”, with many advantages: these include the belief that gas, because of its ‘near limitless abundance’ can only be cheap, is an ‘environment friendly’ energy source, and is available from non-OPEC and non-Arab or non-Muslim countries. This latter belief is immediately contradicted by reality. Apart from Russia – already at the edge of Peak Gas – the world’s biggest remaining gas reserves are in Iraq, Iran, UAE, Qatar, Turkmenistan, Nigeria and Venezuela. The claimed ‘environment friendly’ nature of natural gas, especially in relation to climate change, is contradicted by the huge loss rate relative to delivered and burned gas: at least 9% of world gas goes straight into the sky, unburned, where it acts as a very powerful GHG. This loss rate will very surely increase faster than production, notably because of increasing transport distances, smaller gasfields exploited, and increased attempts at gas storage, to cover sharply increasing seasonal variation of gas demand.
This last point brings us onto yet another tell-tale sign of approaching Peak Oil and Peak Gas: increasing seasonality of demand. Major reasons for this include price – as price increases, so do just-in-time buying habits – but there are also long-term factors driving this trend. These notably climate change, resulting in increased summer peaks of electric power demand (needing more gas, and sometimes oil, for generation), and summer peaks of car fuel and airplane fuel demand in the largely de-industrialised ‘postindustrial’ consumer societies, wallowing in a riot of industrial goods consumption. Consuming now, not investing for a future they dont believe in, is a real world habit of the consumer society, which translates to ‘new techniques’ for oil and gas storage: that is trading gas and oil in transit, that may or may not arrive, or even be there in first instance. This game began with electricity and was typified by the Enron debacle; it is now in full flood with oil and gas, and will produce the same end results.
For the analysts and policymakers there is the comfortable (to them) and brutal solution of ‘demand destruction’. When prices get high enough, or supplies are not there, demand will surely drop, to the floor or further. Yet this has not happened in the real world and with oil, or gas, or electricity. As supply tightens, and prices become more volatile, then higher, world energy demand goes on growing because energy consumption shifts to consumers who can use it, and do need it – as any economist, even of the New Economics variety, will accept. In the case of world traded oil and gas, this signals a shift from the old world and de-industrialising OECD North, to the emerging industrial South, led by the two supergiant economies of China and India. Here, potential demand is simply ‘unlimited’, much like demand potential in Europe and Japan during the ‘postwar economic miracle’ of the 1950-1975 period.
Nice Theories and the Real World
Coming to grips with, even accepting the idea of Peak Oil has taken at least 10 years, like the acceptance of climate change and the need to do something about it – which has taken about 15 years. How long will it take for Peak Gas to be accepted as fundamentally linked and related to Peak Oil? The jury is out for deliberation on this one, and nobody knows when it will be ‘politically credible’ to advance the idea that world gas supplies are even today unassured, and sure to decline, tomorrow. What is important is the triad oil-gas-electricity which unlike coal are all highly interdependent. If one part of this three-leg stool falls away, the stool falls. Demand projections for world electricity – growth is running at 9% pa – all assume, either explicitly or implicitly, that ‘abundant and cheap’, as well as ‘environment friendly’ natural gas will take the strain. This is for the real world, outside the cosy images of windfarms, and nuclear power stations that will not be built. Removing cheap gas from the picture will very surely trouble the reassuring but impossible concept that after Peak Oil we will have a ‘Gas Bridge’ for decades, even for 50 years as some die-hard dreamers like to proclaim.
Gas prices will soon firmly link to oil prices, that is expensive oil will drag up gas prices rather than underpriced gas dragging down oil prices – this being what most consumer country deciders like to believe, surely hope, and inscribe into white papers and green books as a surrogate for reality. This oil-gas price linkage will start soon, at latest by 2007-2008. The excesses of downward price speculation in 2006 (gas prices falling to an equivalent of about 17 USD/barrel), so attractive to consumers and political leaders of the consumer countries, will soon be a thing of the past, no doubt mirrored by upward price speculation of the same ‘imaginative’ virility and excess. The main problem – exactly as for oil – will be that fast-rising gas prices will do little or nothing for increased supply and supply capacity. This is yet another tell-tale sign of the fundamental linkage between Peak Oil and Peak Gas.
On the positive side, high and firm energy prices will finally allow and enable energy transition. This has been described many times by myself, and will need to feature organised, planned and automatically funded effort, worldwide, to rationalise oil and gas utilisation, sharply reduce oil and gas intensity (average per capita demand) in the OECD countries, and rapidly develop renewable energy on a coherent international base. Time is ticking away, the countdown to Peak Gas is now as easy to guesstimate as the Peak Oil countdown, but as ever the absence of coordinated and international response is a tribute to, or proof of the incoherence of so-called New Economics and its defenders. In the effective real world, as we know, the Gazprom crisis – and likely future debacle – has translated to grotesque cold war atavism, with sharp rising tension between Putin’s Russia and its European clients and customers, encouraged and intensified by the USA. Conflict and rivalry for Turkmenistan’s gas reserves is linked to the Afghan war. Iran’s ‘immense and unlimited’ gas reserves – exaggerated in the same way as Russian reserves – are treated by some as a raison de guerre, that is booty for the victors in the case of ‘Iran regime change’. Gas rivalry and conflict also now affects relations between Argentina, Brazil and their new supplier, Bolivia. Little or nothing, conversely, is being done to raise gas recovery in Nigeria, with the highest ratio worldwide of flared gas to produced oil, despite World Bank hand wringing on the subject. The list is long, and time and money are short. Peak Gas will surely arrive while the jury is still out, debating whether Peak Gas exists.
Copyright Andrew McKillop 2006