¹ Video Tip
For our brief video introduction to the Energy industry, see plunkettresearch.com/video/energy.
There is a broad, global focus today on energy as an economic, geopolitical and strategic resource. Some of the world’s leading nations, such as Canada and Brazil, are intent on fully developing their oil and gas production. Others, such as China, are focused on purchasing interests in foreign reserves and expertise. Advanced technologies, including 3D seismic, ultra-deep ocean rigs, hydraulic fracturing and directional drilling, have opened up exceptional new levels of oil and gas discovery and production around the world. In fact, the application of new technologies has dramatically upset the former balance of power in the energy industry, making North American production much more important while lessening the influence of OPEC.
In addition, there is a greater focus than ever before on the impact of energy production and consumption on the environment. Certain nations, particularly those in the EU, have very ambitious goals to reduce consumption of fossil fuels. Worldwide, investment in the development and implementation of clean or renewable energy technologies, as well as energy conservation, is a major priority for many governments and industries. This emphasis varies widely from nation to nation, ranging from cleaner ways to burn the world’s immense stores of coal; to the construction of advanced-technology nuclear generating plants that are exponentially safer than older models; to the use of more cost-effective renewable technologies based on solar, wind and wave power.
With the exception of hydroelectric power, renewable energy sources were initially much more expensive as an electricity resource than fossil fuel-based generation (primarily coal and natural gas). This meant that they required significant government subsidies, loan guarantees or incentives in order to encourage investment. By the beginning of 2015, however, onshore wind power as well as solar power had become dramatically more efficient, and in some instances very competitive on price. It remains to be seen whether or not governments will cut back significantly on their subsidies and incentives for renewables.
The most important emerging nations are investing heavily in alternative energy sources, while continuing to use growing quantities of fossil fuels. China leads the world in investment in new nuclear plants, while it is installing vast numbers of wind turbines and solar facilities. (Meanwhile, it continues to face a serious environmental challenge due to the amount of coal it burns.) India is likewise planning multiple new nuclear plants, but remains dependent on generation from coal. Brazil continues to be a leader in the low cost production and use of ethanol as a transportation fuel, while it is slowly developing some of the world’s most important new offshore oil and gas fields.
The price of a barrel of West Texas Intermediate oil (WTI) was as high as $107.95 in June 2014. By mid-November 2015, it was in the $40.00 to $50.00 range. We’ve seen even greater fluctuations in the past. For example, oil soared to nearly $150 per barrel in the summer of 2008, only to crash to about $40 a few months later in early months of 2009. While drilling activity plummeted as a result, American oil production barely fell at all in 2009, and soon started a rapid climb through 2014.
The rapid market crash to relatively low prices near $50 per barrel of oil may not significantly reduce production from existing wells, but it will undoubtedly delay investment in many new drilling projects, especially those designed to operate at a breakeven point of $70+ per barrel. To begin with, lenders and investors will be much less interested in providing financing for new wells. Next, the cost to produce a barrel of oil varies dramatically from one region to another and from one type of well to another. Today’s market trends will cause exploration and production companies to strive for lower costs and accelerate the adoption of efficient new techniques and technologies, but this will take time.
The world’s energy supply will remain abundant for the foreseeable future. Better science, technology and engineering are being applied to exploration, production, conservation and distribution alike, with stunning success. The world is benefitting greatly from the rapidly-growing production of crude oil and natural gas. At the same time, total energy usage in mature economies is on a path of decline or slow growth. For example, analysts at BP estimate that American consumption of primary energy sources (such as coal, natural gas and crude oil) declined by a bit more than 2% from 2004 to 2014. In China, however, the same measure increased by 89%, while the increase was 85% in India, over the same time period.
Emerging economies will continue to burn huge amounts of coal and other fossil fuels while total energy usage continues to soar. This is where the growth in consumption and related emissions and pollution is essentially unavoidable for the near future: in rapidly rising economies that are adopting modern industrialization, transportation (including millions of new automobiles yearly), business services and housing, with all of the energy consumption that such development demands.
Dramatic shifts in the global energy supply are occurring. Iraq, still suffering from political unrest but home to some of the world’s largest oil reserves, has begun significant increases in production thanks to increased foreign investment. Iran is also likely to ramp up production and exports when sanctions are lifted.
The International Energy Agency (IEA) forecast in late 2012 that the United States will become almost self-sufficient in energy by 2035, on a net basis accounting for imports and exports. This is due largely to growing oil and gas output, but also to increasing efficiency and conservation, as well as renewables.
Meanwhile, very exciting technologies continue to bolster nearly all facets of the energy sector, from green technologies applied to electricity conservation, to tremendous advances in oil and gas exploration technologies, to highly evolved safer nuclear plants. At the same time, many renewable energy technologies, such as thin-film solar, concentrated solar and wave power (to name but a few), are also making significant advances in cost per watt of output, thanks to substantial improvements in engineering and design. Nanotechnology, an exciting materials science, is about to find broad applications in energy production and consumption with tremendous results.
Global Energy Numbers:
Oil: According to the latest data available from analysts at energy giant BP, the world produced 88.7 million barrels of oil daily in 2014, up 2.3% from the previous year (these are the latest available numbers). This includes unconventional petroleum output from such sources as oil sands, as well as natural gas liquids. However, it does not include alternative sources such as oil from biomass and coal derivatives. Proven reserves worldwide totaled 1,700.1 trillion barrels at the end of 2014, down slightly from the previous year.
Natural Gas: According to BP, global production of natural gas was 3,460.6 billion cubic meters in 2014, up 1.5% from the previous year. Proven reserves totaled 187.1 trillion cubic meters, enough to last several decades at today’s consumption rates. Massive discoveries of natural gas in shale formations in the U.S. and elsewhere are rapidly altering the gas industry. Likewise, vast investments in LNG infrastructure are enabling international shipment of gas from production areas such as Qatar and offshore Australia to major markets in China, Europe and elsewhere. Contracts for LNG from U.S. gas fields to be shipped to Europe have recently been signed.
Coal: Analysts at BP estimate that global production of coal was 3,933.5 million tons of oil equivalents in 2014, down 0.7% from the previous year. The largest emerging nations are hooked on coal, with China accounting for about 46.9% of global consumption. As of 2014, global coal reserves were massive at 891,531 million tons, or enough to last about 250 years at today’s consumption rates.
America’s Energy Numbers:
According to the U.S. Energy Information Administration, natural gas production in the U.S. increased by 6.3%, to 31,895 billion cubic feet in 2014, the latest year available. This is more than double the production of 1960. (U.S. proven reserves of natural gas soared by 108% in the twenty years from 1993 to 2013, as both shale gas and deep-water offshore discoveries have been very significant.)
The Department of Energy estimates oil production was 8,713 thousand barrels per day during 2014, up dramatically from 7,441 thousand barrels per day in 2013. (These numbers do not include natural gas liquids.) This soaring domestic production has led to dramatic cuts in America's oil imports.
As the nation’s natural gas industry has been growing very quickly, and new production has ensued, thanks largely to wells in shale, the total production picture of both oil and gas has improved dramatically, especially when natural gas liquids, or oil that is stripped from natural gas during processing, are included. (These gas liquids amounted to 3,015 thousand barrels per day of oil equivalent during 2014.)
Historically, America’s use of petroleum led to an increase in net petroleum imports from 641,111 thousand barrels per year in 1960 to 5,005,541 thousand barrels per year in 2005 (nearly an eight-fold increase). Since 2005, the number dropped steadily through 2014, to 3,372,904 thousand barrels in that year. New American oil production, both onshore and offshore, has been a driver of this dramatic decline in imports. Meanwhile, the source of those imports has changed as well. Thanks to booming output in areas outside of the Persian Gulf, including Canada and the West Coast of Africa, America’s reliance on OPEC and Middle Eastern nations for oil has plummeted. As of 2014, America received less than 36% of its oil imports from all OPEC members (when measured in dollar value), down from 73.1% in 1980. America’s imports from Persian Gulf nations such as Saudi Arabia are now significantly less important than they were 30 years ago, while Canada has become the number one exporter to the U.S.
Only 140 refineries existed in America as of 2015, down by more than 50% from 1980. However, these remaining refineries have invested heavily in additional capacity to the extent that their total refining output has grown, despite the fall in the total number of refineries. America’s substantial new oil and gas production, combined with the expansion of existing refiners, made the U.S. a net exporter of refined petroleum products in 2011, the first time since 1949.
Total American consumption of energy of all types was 98,454,830 billion BTUs in 2014, having grown about 50% since 1970. In terms of BTUs consumed per year per capita, American energy use is in a long-term decline. That is, while the number of automobiles and aircraft per capita has grown dramatically; along with vast growth in the percentage of homes and buildings that are air conditioned; combined with tremendous increases in the number of appliances, computers and entertainment devices per person; efficiency has grown to the extent that the energy consumption of an average American declined from a peak in 2000 of 351 million BTUs yearly, to only 309 million in 2014.
By another measure, energy use per unit of economic output has fallen dramatically. On an inflation-adjusted basis, energy consumption per dollar of GDP (gross domestic product) dropped from 17.99 thousand BTUs in 1970 to only 7.28 thousand BTUs in 2009.
According to the U.S. Department of Energy, electric generation in America as of 2014 used the following ratio of fuels: coal 38.7%; nuclear 19.5%; natural gas 27.4%; hydroelectric 6.3%; and non-hydro renewables such wind and solar, 6.9%.
Consumers and businesses alike are increasingly willing to invest more in the initial cost of green buildings, high-efficiency appliances and energy-saving transportation equipment, with the promise of lower energy costs for daily operation. The automobile industry has responded with lighter, much more fuel-efficient vehicles. Even pickup trucks use much less fuel than they did in the recent past.
Thanks to the development of advanced technologies for producing gas from America’s immense shale formations, available gas reserves have soared. This trend is revolutionizing the electricity and petrochemicals industry, while keeping natural gas prices at very modest levels.
A Brief History of Oil Prices and Reserves:
Ever since William Hart dug America’s first successful gas well in Fredonia, New York in 1821, and “Colonel” Edwin Drake drilled the first true U.S. oil well in the state of Pennsylvania in 1859, the ability of oil and natural gas to power electric generation plants, transportation, homes and industry has created both immense economic advances and significant controversy. Many times it has been assumed that the world would quickly run out of oil. In 1939, the U.S. Department of the Interior warned that America’s oil reserves totaled only enough to fuel the nation for about 13 years. Similar misjudgments were announced on a regular basis in the mid to late 1900s by the federal government and by a continuing stream of respected reports and books by various authors. In fact, rather than becoming scarcer over time, energy, including oil and gas, became much more plentiful. Energy prices can fluctuate wildly. Nonetheless, over much of history the trend has often been lower prices on an inflation-adjusted basis, when a combination of advancing technologies, determined entrepreneurs and alternative sources exponentially expanded the total amount of energy and reserves available for consumption. The breakthrough in shale gas in recent years is a perfect example.
An estimate of crude oil resources on a global basis, published by Cambridge Energy Research Associates in 2006, was 4.82 trillion barrels—enough to take care of the world’s needs for more than 100 years. (A similar study would no doubt find much higher reserves today.) This number included oil shale and other sources that are relatively difficult to tap. Technologies will continue to be enhanced, enabling the recovery of significant portions of these resources, as long as the market price of energy is high enough to justify necessary investments in technology, exploration, development, production and distribution.
There have long been periods of major fluctuations in price for oil, coal and natural gas. Energy consumers of all types, from residential consumers to transportation firms to industrial plants, have seen oil and gas prices swing wildly, and they have often suffered the economic effects of greatly increased energy costs. Strong global demand for energy combined with political strife in many oil exporting nations could easily lead to a long-term period of relatively high market prices for crude oil. The price of Arabian light crude oil rose from about $1.85 per barrel in 1972 to about $40 in 1981 during an “energy crisis,” the peak price for many years to come. Adjusted for inflation, that $40 barrel of oil would have been $100 or so in 2012 dollars.
More recently, during 1986 and again in 1998, the price of a barrel of oil plummeted to about $10 in a short period of time. However, prices generally rose from 2003 through early 2008. In the fall of 2005, the post-Hurricane Katrina price of a barrel of light U.S. crude oil peaked just shy of $70 as the extent of the damage to Gulf Coast production became apparent. The price of natural gas more than doubled from June through October 2005, rising from about $6 to nearly $16 per million BTUs for spot market prices, compared to only about $3.50 during much of 2012-13.
In mid-2006, the price of light U.S. crude peaked at about $80. By late 2007, it had neared $100. By mid-2008 it was over $145, but plummeted quickly when the global financial crisis of 2008-09 slowed economies worldwide.
In order to increase reserves and production, major oil companies have placed a recent emphasis on production from alternative (or “unconventional”) sources such as tar sands in Canada. These fields are significantly more expensive to produce than conventional fields.
When oil prices rebound, offshore exploration and production will continue to be emphasized in many parts of the world, with sophisticated rigs drilling ever deeper to tap massive reservoirs, using technologies that enable the rigs to go to depths undreamed of 20 years ago.
A significant portion of oil consumption is used as fuel for transportation, including cars, aircraft and trucks. Although the world has made an immense investment in electric supply infrastructure, as much as one-third of the world’s population either has no access to, or cannot afford, a steady supply of electricity.
In 1892, Thomas Alva Edison established the Pearl Street Station in New York City—the world’s first central electric power station. By the 1920s, electricity was in common use in American buildings and homes. Fuels for electric generation vary widely around the globe, but coal and natural gas are common sources. In Europe, a large portion of electricity is generated by nuclear plants, especially in France, and massive investments are being made in European solar and wind generation. A looming question is whether America and major nations in Europe will resume significant construction of nuclear generation plants. The fact that several nuclear plants were destroyed by a tsunami at Fukushima, Japan in early 2011 makes significant new development of nuclear sites even more controversial. Meanwhile, advanced generation nuclear technologies have the potential to provide much greater operating efficiencies with vastly increased safety over the plants constructed in earlier years, and the nations of China, India, Saudi Arabia and the UAE are likely to move ahead with massive nuclear plant construction plans that are already in place. China may construct as many as 90 new nuclear plants over the long term.
Gen4 Energy, formerly Hyperion Power Generation, hopes to be able to sell a small reactor, suitable to power about 20,000 American homes, for only $50 million. Gen4 Energy is utilizing technology that originated more than 50 years ago at the nearby Los Alamos Labs. Competitor Toshiba has its own small unit, the “4S” (super safe, small and simple). Elsewhere, NuScale Power received $226 million in 2014 in funding from the U.S. Department of Energy for the development of tiny reactors that could be installed underwater.
Yet another alternative to traditional nuclear reactors is thorium liquid fuel reactors, which are fueled by molten fluoride salt containing thorium. Thorium is far more abundant than uranium and it creates uranium 223 continuously, resulting in approximately 90 times as much energy from the same quantity of uranium. In addition, it generates less waste, which itself has a much shorter half-life than uranium. India has significant reserves of thorium (about 319,999 tons or 13% of the world’s total), and has been working on the technology since the 1950s. Since then, about one ton of thorium oxide fuel has been irradiated experimentally in pressurized heavy water reactors and has been reprocessed, according to the Bhabha Atomic Research Centre (BARC). A reprocessing center for thorium fuels is being built at Kalpakkam. In November 2011, India announced plans to build a prototype thorium-fueled advanced heavy water reactor that will generate 300 megawatts of electricity.
SPOTLIGHT: Fusion Power
As opposed to nuclear fission, nuclear fusion is the reaction when two light atomic nuclei fuse together, forming a heavier nucleus. That nucleus releases energy. So far, fusion power generators burn more energy than they create. However, that may change with the construction of the International Thermonuclear Experimental Reactor (ITER) in Southern France (www.iter.org). To be operational as early as 2027, at a cost of about $11.7 billion, the reactor is a pilot project to demonstrate the feasibility of full-scale fusion power. Initial testing could begin as early as 2020.
In early 2014, experiments at the U.S. Department of Energy fired 192 laser beams at a pea-sized target which unleashed a vast amount of energy for a millisecond. It resulted in a reaction that released more energy from the pea-sized fuel than it initially contained.
The Middle East, where industrial and residential need for electricity is set to soar, is a ripe area for nuclear power plant development. Saudi Arabia plans to build 16 new nuclear plants by 2030, at a cost of more than $100 billion. Nearby in the UAE, the government has awarded a South Korean consortium with a contract for the construction of four new nuclear plants at a cost of $20.4 billion.
SPOTLIGHT: Gen4 Energy
Startup Gen4 Energy, formerly Hyperion Power Generation (www.gen4energy.com) is working on utilizing technology from Los Alamos National Laboratory for a nuclear battery. The unit, which is a little less than five feet wide and called the Gen4 Module, can produce more than 25 megawatts for five years, or enough to power about 25,000 homes. The battery runs on uranium hydride which, in addition to providing fuel, regulates power output so the possibility of a meltdown is almost nil. There are no moving parts, and the unit can be buried underground for additional safety. The company claims that the cost of each unit will be far less than the price for building and operating a natural gas plant with the same capacity.
While many truly revolutionary technologies for nuclear power are under consideration, research or development, actual commercialization of a concept would take many years, and many will not succeed. The challenges of finding investors and government subsidies, developing and testing prototypes or demonstration units, and getting through the regulatory and licensing maze are enormous.
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