THE END OF SUPERGIANTS: And What It Means

16 05 2019

GUEST POST: By Dr. Louis Arnoux

The meaning of this news snippet takes a bit of explaining.  What the specialised media did not emphasise is what follows:

When giant oil fields go into decline, they usually decline abruptly. Ghawar’s decline is ominous. It was discovered in 1948 and until recently represented about 50% of the oil crude production of the Kingdom of Saudi Arabia (KSA). Ghawar is representative of some 100 to 200 giant oil fields. Most of them are old.  The most recently discovered giants are of a diminutive size compared with those old giants.[2]

Giants represent about 1% of the total number of oil fields and yet produce over 60% of conventional oil crude.[3]Very few real giants have been discovered in recent years. The geology of the planet is now known well enough and prospects for new significant giant oil discoveries are known to be low.  In recent decades, discoveries of smaller oil fields have not been able to compensate for the eventual loss of the giants. Figure 1 illustrates the matter. It shows the net flux of addition to reserves per year (additional volumes less volumes used). Since 2010 the steep declining trend has worsened. The level of new discoveries per year is now only about 5% of yearly reserves depletion. That is, since the late 1970s the oil industry has been steadily depleting its stock-in-trade at a rather fast rate.

The fact that Ghawar is in terminal decline means that we must consider that most of the old giants are in a similar situation.  Some were already known to be in a terminal status, e.g. Cantarell in Mexico or the main North Sea fields.[4]  However, there is a paucity of recent public data on giants.  The matter of their depletion status is commercially sensitive.  Still, a number of public databases and studies from about 10 years ago provide a robust backdrop to the Ghawar news.[5]  This needs to be unpacked a bit more.  Older giants have been developed more slowly and as a result, tend to have lower depletion rates once they pass their peak of production.  More recent ones have been developed more aggressively with more recent technology and as a result, tend to have a much steeper depletion rate once past their production peak.  In short, we now must expect a “bunching”of abrupt declines of oil giants, old and more recent, between now and about 2030.

So, in fact, this little snippet of news about Ghawar tells us a lot.  It corroborates the assessment developed since 2010 with a number of colleagues, based on a thermodynamics analysis of the PPS and summarised in Figure 2.  In short, our world runs on net energy from oil.  Due to resource depletion, it takes more and more net energy from oil to get more oil. We estimate that in consequence, since the early 1980s, the absolute amount of net energy delivered by the oil industry to the non-oil part of the industrial world has been in steep decline.  The data summarised in Figure 3 corroborates Figure 2.

Almost no one noticed how dire the situation has become because most analysts reason in terms of barrels of crude or in financial terms. GDP growth data aggregates the growth of the oil industry world (oil industry plus everything and everyone that are necessary for the oil industry to operate) with that of the non-oil world.  This aggregation masks what is actually taking place. To keep operating the oil world progressively starves the non-oil world of the net energy that is vital for its continued existence.

It is in our view significant that it is precisely in the early 1980s that total global debt took off to high heaven (source Bank of America Meryl Lynch). This steep debt growth, evaluated in fiat currencies, masks the decline in net energy from oil; net energy that is at the source of all, actual tangible, real economic growth. Due to this decline, it is most unlikely that this global debt will ever be repaid.

The terminal decline of Ghawar also corroborates the more indirect analyses of the PPS summarised in Figure 3.  This means that the part-floating of Aramco that KSA wants to achieve in the near future is most likely so as to pre-empt having to go into a “fire sale” at a later stage when the decline of Ghawar and of the other Saudi large fields become rather obvious to even the most ignorant traders.

More importantly, the corroboration of our earlier analyses by the Ghawar news and the data summarised in Figure 3 tell us that we must expect abrupt turmoil from 2020 onwards not only re oil, but also concerning all other forms of energy supply, as well as socially and financially (consider the tail end of the orange curve onFigure 2). The present turmoil in Venezuela will probably appear as a forerunner of a nasty situation becoming global.

To emerge, develop and flourish, every civilisation requires a self-powered energy supply chain – i.e. it takes energy to get energy, so any civilisation lives on the energy surplus delivered to it by its self-powered energy supply chain(s). In the globalised industrial world’s case and until recently this was the oil industry (including the whole of the support systems required for the oil industry to operate).  Since oil overtook coal and biomass during the earlier part of the 20th century, the oil industry has been the sole self-powered supply chain of the industrial world. All other forms of energy depend on it, coal, natural gas, nuclear, all so-called “renewables”, and all the way to feed and food production. In our estimates, the oil industry entered terminal decline about 7 years ago and this decline will be over by about 2030 or before.  In our view, the decline of Ghawar corroborates that this end is most likely than not going to be abrupt.

The big problem is that presently we do not have a substitute energy supply chain that could be deployed in time. As summarised in Figure 4, what one calls “renewables” is not quite so and by a wide margin. Not only current “renewable” equipment requires net energy from oil for its manufacture, transport, maintenance, and eventual decommissioning but also its production results in substantial greenhouse gases emissions (GHGs).  Even more importantly, the current “renewable”technology mix cannot form the basis for a new, sustainable, self-powered energy supply chain able to substitute for the oil-based one within the time frame defined by the decline of net energy from oil and the imperatives to combat catastrophic global warming (at least 45% greenhouse gases emissions reduction by 2030).

We call the present situation the Energy Seneca (after the Roman philosopher who first identified patterns of progressive growth followed with a peak and then abrupt decline). Figure 5 explains why the industrial world is now in a very tight spot, just after it has passed through the Energy Seneca apex.  On the one hand, the oil industry world is trapped in the famous Red Queen effect (RQ).  It has to keep pumping at an ever-faster rate to keep delivering net energy while, per barrel extracted, this net energy is in steep decline.  Soon it will run out of breath…  On the other hand, alternatives face what I call the Inverse Red Queen effect (1/RQ).  If the alternatives grow too fast, their manufacture and deployment drain energy from the industrial world just when it desperately needs more. And if those alternatives do not grow fast enough, then the industrial world is bound to abruptly decline or even collapse.

The harsh reality that few have identified is that presently none of the solutions touted by “green”business interests, governmental bodies, and NGOs alike can extricate us in time from the combination of RQ and 1/RQ effects. Not only this combination precludes building a new self-powered energy supply chain in time but also it precludes augmenting the present oil industry with non-oil energy sources to extend its terminal operations.  In short, unbeknown to most, our world is in the process of losing access to all the energy forms it depends on.  This thermodynamic conundrum compounds global warming and all other ecological, social and financial global issues to form a lethal avalanche that has been in train since about 2008.  There is global cognitive failure on the part of world elites to recognise this situation and address it.

As shown in Figure 6, the abrupt end of the Oil Age converges with the surge in protests that have taken place in recent years and that keeps gathering momentum. While most do not understand the intricacies summarised here, thousands of scientists and millions of people now do realise that they no longer have a future.  There is a “demand-for-something-else” than what they presently have.  This now strident demand is for a way forward that breaks through prevailing cognitive failure and re-opens a future for the younger ones.

To conclude, in our view Ghawar’s decline heralds the abrupt end of the Oil Age, as we have known it so far, over the next ten years.  It does not mean that we are “running out of oil”; there is plenty left but most of it will stay underground.  If a resource cannot be used to generate economic activity it loses all value and ceases to be a resource.  Like it or not, we now have to face the harsh emerging reality on the downside of the Energy Seneca.





How Donald Trump saved Civilization (and lost the planet)

22 10 2018

Just found this….  wow…….

 
The controversy swirling around murdered Saudi journalist Jamal Khashoggi has been moving Congress towards sending to the White House an Act* imposing broad sanctions on Saudi Arabia, effectively scrapping billions in pending arms sales.

Representative Adam B. Schiff of California, the senior Democrat on the House Intelligence Committee, said, “The kingdom and all involved in this brutal murder must be held accountable, and if the Trump administration will not take the lead, Congress must.”

***

In internal discussions, Mr. Kushner has urged the president and his aides not to abandon Prince Mohammed. But as Turkish officials leaked details of the grisly killing of Mr. Khashoggi and of the dismemberment of his body, the White House has become increasingly isolated in its defense of Saudi Arabia.

Take a moment and picture this scenario.
Caving to his image-advisors and pollsters who fret about a Blue Tide surging into key states, POTUS inks the sanctions.
As its mercantile supply line begins to dry up, Saudi Arabia does not blink. It does precisely what it said it would do. It retaliates by hitting the world where it hurts most: the oil supply.
For decades Saudi Arabia has been OPEC’s swing vote, able to turn up or down the light sweet crude flowing to international markets. No other producers have either the reserves or production to control the volume and thereby the price of petroleum.
Suppose they tightened the spigot. It would not be enough to merely reduce the flow. If they have learned anything in their years of military alliance with the Great Satan, it is the tactic of Shock and Awe. They close the valves. All of them. Call it the Third Middle East Oil Shock.
In spite of a record production year for the cartel of 32.78 million b/d, US sanctions on Iranian oil and deteriorating output from Venezuela have already begun pushing prices towards $100/barrel. Demand might be marginally slowing in climate-minded Europe or in economically stressed Turkey, Brazil, and Argentina, but in North America and Asia, oil consumption is still on an exponential trajectory. Despite the US’s shale oil production having increased at a spectacular annualized rate of over 5 million b/d (estimated), the hole created by Saudi Arabia’s withdrawal, accompanied by withdrawal of like supplies from its Middle Eastern OPEC neighbors out of enforced loyalty, would dwarf anything POTUS might have thought he held as a hole card.
Economic ripples became waves. Waves became a tsunami. The price of oil shoots to $400/b virtually overnight. It would take some weeks for that price to pass through refineries and reach retailers but already gas stations around the US jack up the price at the pump.
Then the Seventh Fleet sails into the Straits of Hormuz, but it is too little too late. The supertankers are empty. Short of landing the Marines to take the giant oil fields and recruiting an army of production engineers to run them, military options are few, and costly. Saudi Arabia, after all, is armed with state-of-the-art US weaponry, and with its honor at stake, is entirely capable of self-inflicting scorched earth if push comes to shove.
Meanwhile, back at home, everything descends to chaos. Markets crash. The most-energy-dependent sectors scramble to come up with downscaling plans that could keep the doors open, but within weeks — a month at the most — giants like WalMart and Amazon are shuttering million-square-foot warehouses. Freighters turn back to Shenzhen with full cargoes. Bankers are unwilling to extend lines of credit.
Economic contraction would spread like a pandemic across the face of Europe. It would reach into Russia and China, who had imagined themselves immune, but were already weakened by US economic sanctions. China’s giant economy demands 9 million barrels of refined oil each and every day.
Russia, now importing only 30,000 b/d, is likely to be the least harmed by a global energy supply drop, but is helpless to fend off the knock-on effects of global economic downturn, especially when its Chinese trading partner goes belly up. It could extend credit for gas purchases both Eastward and Westward but any expectation that it would be repaid would eventually be dashed. The world economy would be as a boxer who has been struck a knockout blow, still standing, but bound for the canvas.
In Scandinavia and Germany, breadlines form. In Spain and Italy, fascist movements take to the streets and find broad support. We’ve seen all this before, but this is a different beast. The event will be enormous, and it will be fast.
Central Banks and the Fed can meet in emergency sessions but the tools they used in earlier crises are gone, spent in 2008 and the lingering QE programs. In any case, this situation is not something that can be remedied by rejiggering debt. Energy is not money.
The televised bobbleheads we see wringing their hands over the Khashoggi affair, urging POTUS to stick up for “American values” would be mute. Their communications channels would be shutting down in any event. They might busy themselves thinking how they can feed their families as grocery store shelves go empty.
Of course, the other possibility would be that Donald Trump simply refuses to sign the sanctions bill and thereby saves Civilization. That is, until rising temperatures and rising seas erase it from memory.
Donald Trump has a chance here to do the right thing. He can kill Civilization and save the Earth. He just has to stick it to Saudi Arabia.

______

* Before Congress can take action of this kind, it is required to first invoke the Global Magnitsky Human Rights Accountability Act and give the President 120 days to investigate and recommend sanctions. Lawmakers did that on October 18.





What’s happened to Peak Oil since Peak Oil….

2 10 2018

The latest news that Mexico has this month switched from being a net oil exporter to a net oil importer prompted me to do some more research on what stage we all are with Peak Oil…….  and as expected, the news are not good. Since the peak of conventional oil in 2005, ALL the major producing nations except for Iraq and the US have been producing less and less in real terms, and let’s face it, half the US’ production is unviable shale oil which since the GFC has lost the oil industry $280 billion and counting…..

Meanwhile, pundits on TV are expressing disbelief at how the price of fuel is skyrocketing in Australia (with our dollar struggling to remain above $US0.70) while oil is simultaneously surging under all sorts of pressures.

Crude_prod_changes_2005-May_2018Fig 2: Crude production changes between 2005 and 2018 by country

Group A
Countries where average oil production Jan-May 2018 was lower than the average in 2005. At the bottom is Mexico with the highest rate of decline. This group started to peak in 1997, entering a long bumpy production plateau at around 25 mb/d, ending – you guessed it – in 2005. This is down now to 16 mb/d, a decline of 700 kb/d pa (-2.8% pa).

Decline-group_1994-May2018Fig 3: Group A countries

Group B

Countries where average oil production Jan-May 2018 was higher than the average in 2005. At the top of the stack are Iraq and the US, where growth was highest. Group B compensated for the decline in group A and provided for growth above the red dashed line in Fig 1.
The 2018 data have not been seasonally adjusted.
In group B we have a subgroup of countries which peaked after 2005

Crude_post-2005-peaking_1994-May2018Fig 4: Countries peaking after 2005

A production plateau above 7 mb/d lasted for 6 years between 2010 and 2016. The average was 7.1 mb/d, around +1.8 mb/d higher than in 2005. Another country in this subgroup is China, here shown separately because of its importance and consequences.

Cumulative_crude_prod_changes_2005-May_2018Fig 13: Cumulative crude production changes since 2005

This is a cumulative curve of Fig 2 with changes in ascending order (from negative to positive). On the left, declining production from group A adds up to -9 mb/d (column at Ecuador). Then moving to the right, countries with growing production reduce the cumulative (still negative) until the system is in balance (column at Canada). Only Iraq and the US provide for growth.

According to Crude Oil Peak, where all the above charts came from, the only viable conclusion is…..:

Assuming that the balancing act between declining and growing countries continues (from Mexico through to Canada) the whole system will peak when the US shale oil peaks (in the Permian) as a result of geology or other factors and/or lack of finance in the next credit crunch and when Iraq peaks due to social unrest or other military confrontation in the oil producing Basra region. There are added risks from continuing disruptions in Nigeria and Libya, steeper declines in Venezuela and the impact of sanctions on Iran.

Assuming that the balancing act between declining and growing countries continues (from Mexico through to Canada) the whole system will peak when the US shale oil peaks (in the Permian) as a result of geology or other factors and/or lack of finance in the next credit crunch and when Iraq peaks due to social unrest or other military confrontation in the oil producing Basra region. There are added risks from continuing disruptions in Nigeria and Libya, steeper declines in Venezuela and the impact of sanctions on Iran.

To top it off, here’s a video clip of this guy I’ve never heard of before but which, whilst not peak oil specific, seems on the money to me…….





Areas Of The World More Vulnerable To Collapse

16 06 2018

ANOTHER great post from SRSrocco…..  this one should be of particular interest to Australians though, because we are in a more vulnerable region…. and while Australia may look not too bad on those charts, it’s only because our relatively small population means we consume way less than most of the other nations of the Asia Pacific region…

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Certain areas of the world are more vulnerable to economic and societal collapse.  While most analysts gauge the strength or weakness of an economy based on its outstanding debt or debt to GDP ratio, there is another factor that is a much better indicator.  To understand which areas and regions of the world that will suffer a larger degree of collapse than others, we need to look at their energy dynamics.

For example, while the United States is still the largest oil consumer on the planet, it is no longer the number one oil importer.  China surpassed the United States by importing a record 8.9 million barrels per day (mbd) in 2017.  This data came from the recently released BP 2018 Statistical Review.  Each year, BP publishes a report that lists each countries’ energy production and consumption figures.

BP also lists the total oil production and consumption for each area (regions and continents).  I took BP’s figures and calculated the Net Oil Exports for each area.  As we can see, the Middle East has the highest amount of net oil exports with 22.3 million barrels per day in 2017:

The figures in the chart above are shown in “thousand barrels per day.”  Russia and CIS (Commonwealth Independent States) came in second with 10 mbd of net oil exports followed by Africa with 4 mbd and Central and South America with 388,000 barrels per day.  The areas with the negative figures are net oil importers.

The area in the world with the largest net oil imports was the Asia-Pacific region at 26.6 mbd followed by Europe with 11.4 mbd and North America (Canada, USA & Mexico) at 4.1 mbd.

Now, that we understand the energy dynamics shown in the chart above, the basic rule of thumb is that the areas in the world that are more vulnerable to collapse are those with the highest amount of net oil imports.  Of course, it is true that the Middle Eastern or African countries with significant oil exports can suffer a collapse due to geopolitics and civil wars (example, Iraq, and Libya), but this was not a result of domestic oil supply and demand forces.  Rather the collapse of Iraq and Libya can be blamed on certain superpowers’ desire to control the oil market as they are strategic net oil importers.

The areas with the largest net oil imports, Asia-Pacific and Europe, have designed complex economies that are highly dependent on significant oil supplies to function.  Thus, the areas and countries with the largest net oil imports will experience a higher degree of collapse. Yes, there’s more to it than the amount of net oil imports, but that is an easy gauge to use.   I will explain the other factors shortly.  If we look at the Asia-Pacific countries with the largest net oil imports, China, India, and Japan lead the pack:

China is a net importer of nearly 9 mbd of oil, followed by India at 4 mbd and Japan with 3.9 mbd.  Thus, as these net oil imports decline, so will the degree of economic activity.  However, when net oil imports fall to a certain level, then a more sudden collapse of the economy will result… resembling the Seneca Cliff.

We must remember, a great deal of the economic infrastructure (Skyscrapers, commercial buildings, retail stores, roads, equipment, buses, trucks, automobiles, etc etc.) only function if a lot of oil continually runs throughout the system.  Once the oil supply falls to a certain level, then the economic system disintegrates.

While China is the largest net oil importer, the United States is still the largest consumer of oil in the world.  Being the largest oil consumer is another very troubling sign.  The next chart shows the countries with the highest oil consumption in the world and their percentage of net oil imports:

Due to the rapid increase in domestic shale oil production, the United States net oil imports have fallen drastically over the past decade.  At one point, the U.S. was importing nearly three-quarters (75%) of its oil but is now only importing 34%.  Unfortunately, this current situation will not last for long.  As quickly as shale oil production surged, it will decline in the same fashion… or even quicker.

You will notice that Saudi Arabia is the sixth largest oil consumer in the world followed by Russia.  Both Saudi Arabia and Russia export a much higher percentage of oil than they consume.  However, Russia will likely survive a much longer than Saudi Arabia because Russia can provide a great deal more than just oil.  Russia and the Commonwealth Independent States can produce a lot of food, goods, commodities, and metals domestically, whereas Saudi Arabia must import most of these items.

Of the largest consumers of oil in the chart above, Japan and South Korea import 100% (or nearly 100%) of their oil needs.  According to the data put out by BP 2018 Statistical Review, they did not list any individual oil production figures for Japan or South Korea.  However, the U.S. Energy Information Agency reported in 2015 that Japan produced 139,000 bd of total petroleum liquids while S. Korea supplied 97,000 bd.  Production of petroleum liquids from Japan and South Korea only account for roughly 3% of their total consumption…. peanuts.

Analysts or individuals who continue to believe the United States will become energy independent are ignorant of the impacts of Falling EROI – Energy Returned On Investment or the Thermodynamics of oil depletion.  Many analysts believe that if the price of oil gets high enough, say $100 or $150; then shale oil would be hugely profitable.  The error in their thinking is the complete failure to comprehend this simple relationship… that as oil prices rise, SO DO the COSTS… 

Do you honestly believe a trucking company that transports fracking sand, water or oil for the shale oil industry is going to provide the very same costs when the oil price doubles????  We must remember, the diesel price per gallon increases significantly as the oil price moves higher.  Does the energy analyst believe the trucking companies are just going to eat that higher cost for the benefit of the shale oil industry??  This is only one example, but as the oil price increases, inflationary costs will thunder throughout the shale oil industry.

If the oil price shoots up to $100 or higher and stays there (which I highly doubt), then costs will start to surge once again for the shale oil industry.  As costs increase, we can kiss goodbye the notion of higher shale oil profits.  But as I mentioned in the brackets, I don’t see the oil price jumping to $100 and staying there.  Yes, we could see an oil price spike, but not a long-term sustained price as the current economic cycle is getting ready to roll over.  And with it, we are going to experience one hell of a deflationary collapse.  This will take the oil price closer to $30 than $100.

Regardless, the areas and countries with the highest oil consumption and net oil imports will be more vulnerable to collapse and will fall the hardest.  Just imagine the U.S. economy consuming 5 million barrels of oil per day, rather than the current 20 mbd.  The United States just has more stuff that will become worthless and dysfunctional than other countries.

Lastly, the end game suggests that the majority of countries will experience an economic collapse due to the upcoming rapid decline in global oil production.  However, some countries will likely be able to transition better than others, as the leverage and complexity of the economies aren’t as dependent on oil as the highly advanced Western and Eastern countries.





2030

11 06 2018

I’m well aware of the fact that making predictions with actual dates on them is really taking a chance, but at least this one is a round number, so I’d say +/- two or three years… So what has prompted me to post this prediction?

Several sources in the know have published articles about Saudi arabia becoming a net importer of oil from 2030….. no it’s not a joke – well it is a joke I guess, who will KSA be buying oil from? Regardless, a report by Citigroup has warned that Saudi Arabia could run out of oil to export by 2030, raising fears that oil prices may rise significantly in coming years. Never mind the price of oil, the price of petrol is currently the highest it’s ever been in Australia, (I recently paid almost $1.80/L on my way to Hobart Airport to pick up my better half…) even though the price of oil was more than double today’s in 2008 when the oil price of $147 triggered the financial crisis…….

KSA consumes some 25% of its oil output domestically and oil accounts for about 50% of its electricity production…..Saudi Arabia already has a higher per capita consumption of oil than most other industrialised nations, and that consumption is growing at a rate of 8% a year and is aiming to almost triple its power capacity by 2032 through new nuclear and solar instalations. But doubt has been cast on the nuclear plans, given problems of underinvestment (read growing debt bubble), safety fears over “keeping reactors cool in the desert” and the risk of cost overruns which have occurred on every single recent projects elsewhere…. and besides KSA has no Uranium. This is turning out to be one of the best examples of the EXPORT LAND MODEL….
On top of its geological problems, KSA is deep in political turmoil, and may be on the verge of collapse, if not now, then some time between now and that fateful appointment with 2030.
I haven’t been posting much here lately, because there’s a building boom happening on the farm, and a full report will go up soon, I hope…….




The Collapse of Saudi Arabia is Inevitable

23 04 2018

I’ve been saying this for years now…….  but here’s one of the world’s best journalists explaining it way better than I can….. and you better believe it, when Saudi Arabia goes the way of Syria, it will be the trigger for global collapse to start in earnest.
By Nafeez Ahmed

nafeezSeptember 28, 2015 “Information Clearing House” – “MEE”- On Tuesday 22 September, Middle East Eye broke the story of a senior member of the Saudi royal family calling for a “change” in leadership to fend off the kingdom’s collapse.

In a letter circulated among Saudi princes, its author, a grandson of the late King Abdulaziz Ibn Saud, blamed incumbent King Salman for creating unprecedented problems that endangered the monarchy’s continued survival.

“We will not be able to stop the draining of money, the political adolescence, and the military risks unless we change the methods of decision making, even if that implied changing the king himself,” warned the letter.

Whether or not an internal royal coup is round the corner – and informed observers think such a prospect “fanciful” – the letter’s analysis of Saudi Arabia’s dire predicament is startlingly accurate.

Like many countries in the region before it, Saudi Arabia is on the brink of a perfect storm of interconnected challenges that, if history is anything to judge by, will be the monarchy’s undoing well within the next decade.

Black gold hemorrhage
The biggest elephant in the room is oil. Saudi Arabia’s primary source of revenues, of course, is oil exports. For the last few years, the kingdom has pumped at record levels to sustain production, keeping oil prices low, undermining competing oil producers around the world who cannot afford to stay in business at such tiny profit margins, and paving the way for Saudi petro-dominance.

But Saudi Arabia’s spare capacity to pump like crazy can only last so long. A new peer-reviewed study in the Journal of Petroleum Science and Engineering anticipates that Saudi Arabia will experience a peak in its oil production, followed by inexorable decline, in 2028 – that’s just 13 years away.

This could well underestimate the extent of the problem. According to the Export Land Model (ELM) created by Texas petroleum geologist Jeffrey J Brown and Dr Sam Foucher, the key issue is not oil production alone, but the capacity to translate production into exports against rising rates of domestic consumption.

Brown and Foucher showed that the inflection point to watch out for is when an oil producer can no longer increase the quantity of oil sales abroad because of the need to meet rising domestic energy demand.

In 2008, they found that Saudi net oil exports had already begun declining as of 2006. They forecast that this trend would continue.

They were right. From 2005 to 2015, Saudi net exports have experienced an annual decline rate of 1.4 percent, within the range predicted by Brown and Foucher. A report by Citigroup recently predicted that net exports would plummet to zero in the next 15 years.

From riches to rags
This means that Saudi state revenues, 80 percent of which come from oil sales, are heading downwards, terminally.

Saudi Arabia is the region’s biggest energy consumer, domestic demand having increased by 7.5 percent over the last five years – driven largely by population growth.

The total Saudi population is estimated to grow from 29 million people today to 37 million by 2030. As demographic expansion absorbs Saudi Arabia’s energy production, the next decade is therefore likely to see the country’s oil exporting capacity ever more constrained.

Renewable energy is one avenue which Saudi Arabia has tried to invest in to wean domestic demand off oil dependence, hoping to free up capacity for oil sales abroad, thus maintaining revenues.

But earlier this year, the strain on the kingdom’s finances began to show when it announced an eight-year delay to its $109 billion solar programme, which was supposed to produce a third of the nation’s electricity by 2032.

State revenues also have been hit through blowback from the kingdom’s own short-sighted strategy to undermine competing oil producers. As I previously reported, Saudi Arabia has maintained high production levels precisely to keep global oil prices low, making new ventures unprofitable for rivals such as the US shale gas industry and other OPEC producers.

The Saudi treasury has not escaped the fall-out from the resulting oil profit squeeze – but the idea was that the kingdom’s significant financial reserves would allow it to weather the storm until its rivals are forced out of the market, unable to cope with the chronic lack of profitability.

That hasn’t quite happened yet. In the meantime, Saudi Arabia’s considerable reserves are being depleted at unprecedented levels, dropping from their August 2014 peak of $737 billion to $672bn in May – falling by about $12bn a month.

At this rate, by late 2018, the kingdom’s reserves could deplete as low as $200bn, an eventuality that would likely be anticipated by markets much earlier, triggering capital flight.

To make up for this prospect, King Salman’s approach has been to accelerate borrowing. What happens when over the next few years reserves deplete, debt increases, while oil revenues remain strained?

As with autocratic regimes like Egypt, Syria and Yemen – all of which are facing various degrees of domestic unrest – one of the first expenditures to slash in hard times will be lavish domestic subsidies. In the former countries, successive subsidy reductions responding to the impacts of rocketing food and oil prices fed directly into the grievances that generated the “Arab Spring” uprisings.

Saudi Arabia’s oil wealth, and its unique ability to maintain generous subsidies for oil, housing, food and other consumer items, plays a major role in fending off that risk of civil unrest. Energy subsidies alone make up about a fifth of Saudi’s gross domestic product.

Pressure points
As revenues are increasingly strained, the kingdom’s capacity to keep a lid on rising domestic dissent will falter, as has already happened in countries across the region.

About a quarter of the Saudi population lives in poverty. Unemployment is at about 12 percent, and affects mostly young people – 30 percent of whom are unemployed.

Climate change is pitched to heighten the country’s economic problems, especially in relation to food and water.

Like many countries in the region, Saudi Arabia is already experiencing the effects of climate change in the form of stronger warming temperatures in the interior, and vast areas of rainfall deficits in the north. By 2040, average temperatures are expected to be higher than the global average, and could increase by as much as 4 degrees Celsius, while rain reductions could worsen.

This would be accompanied by more extreme weather events, like the 2010 Jeddah flooding caused by a year’s worth of rain occurring within the course of just four hours. The combination could dramatically impact agricultural productivity, which is already facing challenges from overgrazing and unsustainable industrial agricultural practices leading to accelerated desertification.

In any case, 80 percent of Saudi Arabia’s food requirements are purchased through heavily subsidised imports, meaning that without the protection of those subsidies, the country would be heavily impacted by fluctuations in global food prices.

“Saudi Arabia is particularly vulnerable to climate change as most of its ecosystems are sensitive, its renewable water resources are limited and its economy remains highly dependent on fossil fuel exports, while significant demographic pressures continue to affect the government’s ability to provide for the needs of its population,” concluded a UN Food & Agricultural Organisation (FAO) report in 2010.

The kingdom is one of the most water scarce in the world, at 98 cubic metres per inhabitant per year. Most water withdrawal is from groundwater, 57 percent of which is non-renewable, and 88 percent of which goes to agriculture. In addition, desalination plants meet about 70 percent of the kingdom’s domestic water supplies.

But desalination is very energy intensive, accounting for more than half of domestic oil consumption. As oil exports run down, along with state revenues, while domestic consumption increases, the kingdom’s ability to use desalination to meet its water needs will decrease.

End of the road
In Iraq, Syria, Yemen and Egypt, civil unrest and all-out war can be traced back to the devastating impact of declining state power in the context of climate-induced droughts, agricultural decline, and rapid oil depletion.

Yet the Saudi government has decided that rather than learning lessons from the hubris of its neighbours, it won’t wait for war to come home – but will readily export war in the region in a madcap bid to extend its geopolitical hegemony and prolong its petro-dominance.

Unfortunately, these actions are symptomatic of the fundamental delusion that has prevented all these regimes from responding rationally to the Crisis of Civilization that is unravelling the ground from beneath their feet. That delusion consists of an unwavering, fundamentalist faith: that more business-as-usual will solve the problems created by business-as-usual.

Like many of its neighbours, such deep-rooted structural realities mean that Saudi Arabia is indeed on the brink of protracted state failure, a process likely to take-off in the next few years, becoming truly obvious well within a decade.

Sadly, those few members of the royal family who think they can save their kingdom from its inevitable demise by a bit of experimental regime-rotation are no less deluded than those they seek to remove.

Nafeez Ahmed PhD is an investigative journalist, international security scholar and bestselling author who tracks what he calls the ‘crisis of civilization.’ He is a winner of the Project Censored Award for Outstanding Investigative Journalism for his Guardian reporting on the intersection of global ecological, energy and economic crises with regional geopolitics and conflicts. He has also written for The Independent, Sydney Morning Herald, The Age, The Scotsman, Foreign Policy, The Atlantic, Quartz, Prospect, New Statesman, Le Monde diplomatique, New Internationalist. His work on the root causes and covert operations linked to international terrorism officially contributed to the 9/11 Commission and the 7/7 Coroner’s Inquest.





More Peak Oil bad news…..

15 06 2017

There have been no end of new articles on the demise of the oil industry lately. I’ve been so busy building that it’s only now I can catch up with some blogging, so here’s your lot for the time being.

From the srsroccoreport.com website comes this unbelievable analysis…:

While the Mainstream media continues to put out hype that technology will bring on abundant energy supplies for the foreseeable future, the global oil and gas industry is actually cannibalizing itself just to stay alive.   Increased finance costs, falling capital expenditures and the downgrade of oil reserves are the factors, like flesh-eating bacteria, that are decimating the once great oil and gas industry.

This is all due to the falling EROI – Energy Returned On Investment in oil and gas industry.  Unfortunately, most of the public and energy analysts still don’t understand how the Falling EROI is gutting the entire system.  They don’t see it because the world has become so complex, they are unable to connect-the-dots.  However, if we look past all the over-specialized data and analysis, we can see how bad things are getting in the global oil and gas industry.

Let me start by republishing this chart from my article, Future World Economic Growth In Big Trouble As Oil Discoveries Fall To Historic Lows:

The global oil industry only found 2.4 billion barrels of conventional oil in 2016, less than 10% of what it consumed (25.1 billion barrels).  Conventional oil is the highly profitable, high EROI oil that should not be confused with low quality “unconventional” oil sources such as OIL SANDS or SHALE OIL.  There is a good reason why we have just recently tapped in to oil sands and shale oil…. it wasn’t profitable for the past 100 years to extract it.  Basically, it’s all we have left…. the bottom of the barrel, so to speak.

Now, to put the above chart into perspective, here are the annual global conventional oil discoveries since 1947:

You will notice the amount of new oil discoveries (2.4 billion barrels) for 2016 is just a mere smudge when we compare it to the precious years.  Furthermore, the world has been consuming about an average of 70 million barrels per day of conventional oil production since 2000 (the total liquid production is higher, but includes oil sands, deep water, shale oil, natural gas liquids, biofuels and etc).  Conventional oil production has averaged about 25 billion barrels per year.

As we can see in the chart above… we haven’t been replacing what we have been consuming for quite a long time.  Except for the large orange bar in 2000 of approximately 35 billion barrels, all the years after were lower than 25 billion barrels.  Thus, the global oil industry has been surviving on its past discoveries.

That being said, if we include ALL liquid oil reserves, the situation is even more alarming.

Global Oil Liquid Reserves Fall In 2015 & 2016

According to the newest data put out by the U.S. EIA, Energy Information Agency, total global oil liquid reserves fell for the past two years.  The majority of negative oil reserve revisions came from the Canadian oil sands sector:

Of the 68 public traded energy companies used in this graph, total liquid oil reserves fell from 116 billion barrels in 2014 to 100 billion barrels in 2016.  That’s a 14% decline in liquid oil reserves in just two years.  So, not only are conventional oil discoveries falling the lowest since 1947, companies are now forced to downgrade their total liquid oil reserves due to lower oil prices.

This can be seen more clearly in the EIA chart below:

The “net proved reserves change” is shown as the black line in the chart.  It takes the difference between the additions-revisions, (BLUE) and the production (BROWN).  These 68 public companies have been producing between 8-9 billion barrels of oil per year.

Because of the downward revisions in 2015 and 2016, net oil reserves have fallen approximately 16 billion barrels, or nearly two years worth of these 68 companies total liquid oil production.  If these oil companies don’t suffer anymore reserve downgrades, they have approximately 12 years worth of oil reserves remaining.

But… what happens if the oil price continues to decline as the global economy starts to really contract from the massive amount of debt over-hanging the system?  Thus, the oil industry could likely cut more reserves, which means… the 12 years worth of reserves will fall below 10, or even lower.  My intuition tells me that global liquid oil reserves will fall even lower due to the next two charts in the following section.

The Coming Energy Debt Wall & Surging Finance Cost In The Energy Industry

Over the next several years, the amount of debt that comes due in the U.S. oil industry literally skyrockets higher.  In my article, THE GREAT U.S. ENERGY DEBT WALL: It’s Going To Get Very Ugly…., I posted the following chart:

The amount of debt (as outstanding bonds) that comes due in the U.S. energy industry jumps from $27 billion in 2016 to $110 billion in 2018.  Furthermore, this continues higher to $260 billion in 2022.  The reason the amount of debt has increased so much in the U.S. oil and gas industry is due to the HIGH COST of producing Shale oil and gas.  While many companies are bragging that they can produce oil in the new Permian Region for $30-$40 a barrel, they forget to include the massive amount of debt they now have on their balance sheets.

This is quite hilarious because a lot of this debt was added when the price of oil was over $100 from 2011 to mid 2014.  So, these companies actually believe they can be sustainable at $30 or $40 a barrel?  This is pure nonsense.  Again… most energy analysts are just looking at how a company could producing a barrel of oil that year, without regard of all other external costs and debts.

Moreover, to give the ILLUSION that shale oil and gas production is a commercially viable enterprise, these energy companies have to pay its bond (debt) holders dearly.  How much?  I will show you all that in a minute, however, this is called their DEBT FINANCING.  Some of us may be familiar with this concept when we have maxed out our credit cards and are paying a minimum interest payment just to keep the bankers happy.  And happy they are as they are making a monthly income on money that we created out of thin air… LOL.

According to the EIA, these 68 public energy companies are now spending 75% of their operating cash flow to service their debt compared to 25% just a few years ago:

We must remember, debt financing does not mean PAYING DOWN DEBT, it just means the companies are now spending 75% of their operating cash flow (as of Q3 2016) just to pay the interest on the debt.  I would imagine as the oil price increased in the fourth quarter of 2016 and first quarter of 2017, this 75% debt servicing ratio has declined a bit.  However, people who believe the Fed will raise interest rates, do not realize that this would totally destroy the economic and financial system that NEEDS SUPER-LOW INTEREST RATES just to service the massive amount of debt they have on the balance sheets.

As an example of rising debt service, here is a table showing Continental Resources Interest expense:

Continental Resources is one of the larger energy players in the Bakken oil shale field in North Dakota.  Before tapping into that supposed “high-quality” Bakken shale oil, Continental Resources was only paying $13 million a year to finance its debt, which was only $165 million.  However, we can plainly see that producing this shale oil came at a big cost.  As of December 2016, Continental Resources paid $321 million that year to finance its debt…. which ballooned to $6.5 billion.  In relative terms, that is one hell of a huge credit card interest payment.

The folks that are receiving a nice 4.8% interest payment (again… just a simple average) for providing Continental Resources with funds to produce this oil at a very small profit or loss… would like to receive their initial investment back at some point.  However….. THERE LIES THE RUB.

With that ENERGY DEBT WALL to reach $260 billion by 2022, I highly doubt many of these energy companies will be able to repay that majority of that debt.  Thus, interest rates CANNOT RISE, and will likely continue to fall or the entire financial system would collapse.

Lastly…. the global oil and gas industry is now cannibalizing itself just to stay alive.  It has added a massive amount of debt to produce very low-quality Shale Oil-Gas and Oil Sands just to keep the world economies from collapsing.  The falling oil price, due to a consumer unable to afford higher energy costs, is gutting the liquid oil reserves of many of the publicly trading energy companies.

At some point… the massive amount of debt will take down this system, and with it, the global oil industry.  This will have an extremely negative impact on the values of most STOCKS, BONDS & REAL ESTATE.  If you have well balanced portfolio in these three asset classes, then you are in serious financial trouble in the future.

Then…….  on ABC TV’s lateline (I’m rarely up late enough to watch it, so this was an omen…) this interview came up. I have to say, I found the whole Qatar thing rather bizarre, but this commentator thinks that Saudi Arabia is already in trouble

http://www.abc.net.au/lateline/content/2016/s4682983.htm

And now Zero Hedge has this to say as well….

Oil Prices Suffer First ‘Death Cross’ Since 2014 Collapse

For the first time since September 2014, after which oil prices collapsed almost 75%, Brent and WTI Crude futures both just flashed a ‘death cross’ signal as the 50-day moving-average crossed below the 200-day moving-average.

The crossover is typically seen a loss of short-term momentum and last occurred in the second half of 2014, when prices collapsed due to oversupply amid surging U.S. shale oil production.

 

As Bloomberg notes, OPEC and its partners will be hoping their efforts to curb output will be enough to support prices and counteract any fears of growing downside risk.

 

However, this morning’s news of “real” OPEC production may raise more doubts about the cartel’s commitment (and going forward, the Qatar debacle won’t help).