Peak Oil Matters

A while back I ran a post exploring Venezuela’s significance in the Peak Oil discussion, with some follow-up information here.

The always-informative Tom Whipple has now provided us all with some additional—and troubling—details about Venezuela’s energy woes, with a potentially significant impact on United States oil supply in the months ahead. Read his latest post here.

As I and others continue to point out, there are many factors that affect oil supply considerations, and Whipple’s post is a great example of how issues most of us never even think to consider can nonetheless have far-ranging influence on our economy and societal well-being.

And it’s just one example among many….The news won’t be getting any sunnier as time passes.

A brief “interruption” to the flow of planned posts in the upcoming days:

I came across 3 separate articles (here, here, and here) in the past 24 hours that are worth reading in their entirety. Not much commentary is needed … the articles speak for themselves.

It is noteworthy that Richard Branson, Chairman of the Virgin Group—and an international business leader with a decidedly vested interest in oil supply and pricing—is now warning that we are soon going to find ourselves on the business end of oil supply shortages. He joins an increasing chorus of prominent international business leaders in oil-related industries making the same claims.

Chris Nelder’s article echoes themes I’ve raised previously (here and here): we will soon be facing an import shortage due to production declines in both Mexico and Venezuela. The facts he recites are worth paying attention to. Those who scoff at the notion of Peak Oil rarely get around to providing the level of detail Nelder offers us. Funny how that works….

The Frederick Banks piece offers information on an area I have not yet discussed: Russian oil production. The information he shares about Russia and production elsewhere dovetails nicely with these other two articles, giving added authority and weight to the fact that we continue to ignore the imminent consequences of declining production and supply at our peril.

Unlike the fact-free declarations of those who deny the impending onset of Peak Oil, these prominent voices provide us with more solid evidence indicating that we are indeed on the cusp of dramatic changes, and more arguments in support of meeting the challenges head-on … now.

Facts: what a concept!

This morning, I came across an interesting online article from The Wall Street Journal.

The paper is reporting that Venezuela’s energy and oil minister is meeting in China with government and oil industry official there. The main topics of discussion will be a joint-venture refinery project and more Chinese government investment in the Venezuelan oil reserves. I discussed the heavy oil resources of Venezuela in yesterday’s post. (here)

In that post, I also noted that one of many geopolitical issues we need to be mindful of is that foreign oil producers are no longer falling all over themselves to seek relations with the United States, nor are they always anxious to make us their primary customer. Venezuela’s President, Hugo Chavez, is a notorious anti-American.

China and Venezuela have already entered into a number of oil and energy-related agreements, and other countries are also working out oil agreements with Chavez’s government (Italy being only the most recent one.)

Another recent article notes that Russia and Venezuela are likewise engaging in trade talks and oil cooperation.

Tellingly, after referencing several recent China-Venezuela oil deals, the Journal’s article notes that:

“These moves stem from Venezuelan efforts to fund development of its huge oil reserves and diversify sales away from its traditional main market, the U.S., including by boosting sales to China to 1 million barrels per day.”

Our blind dependence on foreign oil and a naïve assumption that going forward we will continue to import all the oil we need may crash head-first into political realities where those assumptions are by no means a given. Those realities carry with them real consequences, too.

Sources:

http://online.wsj.com/article/SB10001424052748704022804575040431689856008.html?mod=googlenews_wsj – Venezuela, China in Oil Talks By SIMON HALL

http://news.xinhuanet.com/english2010/world/2010-02/01/c_13158157.htm – Russia, Venezuela step up oil cooperation

Once more I’d like to detour away from my next planned post and discuss a news item that received a fair amount of media attention last week: the United States Geological Survey’s (USGS) assessment that Venezuela’s Orinoco Oil Belt now contains a bit more than 500 billion barrels of “technically recoverable” oil.

There’s certainly no question that if this report is true, the opinion enhances Venezuela’s status as a major player in the international oil market. (According to the Energy Information Agency—citing the Oil and Gas Journal—Venezuela had 99.0 billion barrels of proven oil reserves in 2009. That’s the largest amount in South America.)

The EIA reported that as recently as two years ago, the United States received more of Venezuela’s petroleum exports than any other nation. That amount continues to decline annually. (According to the EIA, we import more than a million barrels of crude oil and petroleum products from Venezuela per day.)

As is almost always the case, however, things are not as simple as they appear.

Unlike the light sweet crude oil produced by the U.S. and the light oil which has made Saudi Arabia such a force, the Orinoco oil is “heavy oil” found in oil sands—similar in characteristics to the tar sands bitumen found in Alberta, Canada. (See my prior post here.) The Venezuela oil is thus much harder to extract and refine, making it more costly. Significant investments of time and money are required to provide adequate refinery capabilities. Needless to say, extracting this heavy oil is a much more energy-and time-intensive effort than is the process for extracting the more familiar light crude. It is not anyone’s answer in the next few years.

Lead researcher and USGS geologist Chris Schenk admitted that their report is not asserting that the “technically recoverable” oil is in fact “economically recoverable.” That’s a significant distinction, and one that needs to be emphasized. All the presumed underground reserves in the world won’t mean much if it makes no sense to invest the time, effort, and money to try and extract them.

The USGS nonetheless estimates that a stunning 40 – 45% of that resource will be ultimately recoverable. One prominent geologist (and a former board member of Petroleos de Venezuela SA—Venezuela’s state oil company) is already on record as doubting anywhere near that amount can be recovered, and stated that much of what might actually be recoverable would in fact be too expensive to produce.

Merely stating that 40% or 45% is recoverable is not the answer. Those who dispute Peak Oil may fervently wish that merely uttering that remote possibility is enough to curtail discussions on the topic, but the optimism of “possibility” is insufficient in and of itself. The reality is that like with most other oil reserves, final production levels will be nowhere near that high a percentage. If experts already on record are correct, Venezuela simply does not have production capabilities or financial resources needed to meet that projection.

Aside from the political turmoil normally associated with President Hugo Chavez’s regime, Venezuela is suffering the effects of a poor investment environment. Rolling blackouts, drought, a high murder and crime rate and the social upheavals those factors spawn are all contributing to serious oil production challenges—among other political and economic difficulties.

Thousands of highly qualified oil company employees were fired by Chavez several years ago and many have left the country, so the state oil company is suffering a severe shortage of qualified personnel. Any outside oil company successfully bidding on these reserves will be called up to expend tens of billions of dollars to create infrastructure in the drilling/mining regions while simultaneously being obliged to deal with the political, industrial, and social problems unfolding in that nation. There is no easy or quick solution on the horizon.

Oil production has declined by about one-third in the last five years in that country, and exports continue their drop month after month. In the midst of its ongoing power crisis, Venezuela is being called upon to produce more energy in an economic climate that is hardly conducive to producing more of anything. (Many stores, malls, and businesses have been resorting to generators in order to stay in business, and the country’s infrastructure is in seemingly perpetual decline.)

And let’s not forget one key political factor about Venezuela and its oil production: it is no fan of the United States. By most accounts Chavez is pursuing agreements with other nations in no small part because it means less Venezuelan oil for America. The million or so barrels of Venezuelan oil we receive daily are amounts Chavez is no doubt hoping soon find their way elsewhere. That’s not an insignificant shortfall to make up. With Mexican production also crashing, we need to recognize the likelihood that past supplies of foreign oil are not guaranteed for the future. We receive an average of a couple of million barrels of oil every day from those two nations. If they are unavailable to us in just a few years, that’s an enormous energy hit for us to take.

Does all this mean we’re facing a catastrophe tomorrow? Of course not. But the problems within Venezuela and its precarious relationship with our nation are factors we must consider in any long-range energy planning or expectations about supply. Peak Oil is indeed about much more than just geologically-premised declining rates of production.

The sooner we pay attention to these vital issues and plan accordingly, the less disruption to our ways of life we’ll be obliged to endure.

Sources:

http://scitizen.com/future-energies/venezuela-may-yield-twice-as-much-oil-as-was-thought-_a-14-3350.html – Venezuela May Yield Twice as Much Oil as was Thought. 25 Jan, 2010

http://www.frumforum.com/chavez-strike-out – January 2010

http://www.frumforum.com/lights-out-in-chavez-land – January 2010

http://www.energybulletin.net/node/51298 – January 2010

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=332210&t=01003417101430356940 – Revisiting the 4 Horsemen of the Oil Boom – January 2010

http://english.eluniversal.com/2010/01/25/en_eco_esp_energy-crisis-threat_25A3336133.shtml – Energy crisis threatens Venezuelan exports of fuel oil and diesel. Energy

http://www.ogj.com/index/article-display/4235916720/articles/oil-gas-journal/exploration-development-2/reserves/2010/01/usgs-pegs_orinoco.html – USGS pegs Orinoco’s recoverable figure at 513 billion bbl. Jan 22, 2010. Alan Petzet. OGJ Chief Editor-Exploration

http://ca.news.finance.yahoo.com/s/22012010/2/biz-finance-venezuela-s-orinoco-area-holds-vast-supply-crude.html – Venezuela’s Orinoco area holds vast supply of crude, US Geological Survey says. Fri Jan 22 By Ian James, The Associated Press

http://www.aspousa.org/index.php/2010/01/top-ten-peak-oil-stories-of-2009/ – Top Ten Peak Oil Stories of 2009 By Tom Whipple • January 4, 2010