EIA Annual Energy Outlook 2010: Peak what?

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Peak What? Eamon Keane

The Energy Information Administration (EIA) released its Annual Energy Outlook 2010 (AEO 2010) last week, with projections out to 2035. It makes for interesting reading. Most notable was its take on peak oil, natural gas vehicles and on converting natural gas to liquids (GTL).

An otherwise reasonable report was marred by the presumption of oil plenty. Figure 1 shows a graph presented (.pdf) by Glen Sweetnam, director of the EIA’s International, Economic and Greenhouse Gas division, in April 2009. Although it mentions the source as being the AEO 2009, this data does not appear in the AEO 2009. It presumably is data from the modeling system which isn’t publicly released.

Glen Sweetnam Oil Supply

The large gap of some 52 million barrels per day (mb/d) is quite stark. Fortunately we can all breath a sigh of relief, because the AEO 2010 has found this phantom oil, and then some. Figure 2 shows data from Table C6 (page 180) for the sources of oil supply the EIA forsees in its reference scenario. I added in the yellow line to illustrate oil that will have to be brought online.

AEO 2010 Oil Supply

I used the reference scenario showing 2035 oil supply of 112mb/d to save you spitting your coffee at the low oil price scenario. The low oil price scenario has 2035 oil at $50/bbl and supply at 127mb/d. Seriously. The reference scenario assumes an average price of about $120/bbl and the high oil price scenario has average oil at about $180/bbl, with 2035 supply at 91mb/d.

These numbers are artifacts of the National Energy Modeling System (NEMS) used by the EIA. It has cost curves for all the oil producers in the world, and the three oil scenarios make different assumptions about ‘economic access’ to these oil supplies. For instance the low oil price scenario assumes that “greater competition and international cooperation will guide the development of political and fiscal regimes in both consuming and producing nations, facilitating coordination and cooperation among them”. Whatever that means. The EIA also accept the fantastic notion that OPEC has 940Gb of reserves, and that the world has 1,340Gb. You will notice that the area under the total conventional crude curve is some 900Gb, with no peak in sight. This is either geological illiteracy or assumes we’ll suddenly find a few Ghawars under the couch.

The AEO goes on to spend several pages discussing the Pickens Plan. Overall, their analysis is quite cool to the potential for Heavy Duty Natural Gas Vehicles (HDNGVs). They say:

“The Department of Transportation’s Vehicle Inventory and Use Survey (VIUS), last completed in 2002, suggests a wide range for the intensity of heavy truck use. Notably, in the 2002 VIUS, trucks reporting a primary range of operation that extended more than 500 miles from their base averaged 91,000 vehicle-miles traveled (VMT), or more than 5 times the average of 17,000 VMT for trucks reporting a primary range of operation range within 100 miles of their base.

Although long-distance trucking offers a potentially faster payback of the incremental capital costs for HDNGVs, their penetration and acceptance in the long-distance freight market faces two significant barriers: limited driving range without refueling and a lack of available fueling infrastructure. A diesel truck with one 150-gallon diesel tank and a fuel economy of 6 to 7 mpg can drive approximately 1,000 miles without refueling, which can be extended readily with an auxiliary fuel tank. In contrast, a CNG-fueled truck with a frame-rail-mounted storage tank can drive only about 150 miles without refueling, while one with a back-of-cab frame-mounted storage tank can drive about 400 miles without refueling, similar to an LNG-fueled truck with frame-rail-mounted tanks. In addition, regardless of fuel type, long-distance trucks are less likely to be fueled at central bases, which makes them more dependent on fueling infrastructure that is open to the public.

In addition to concerns about driving range and refueling, the residual value of HDNGVs in the secondary market is likely to be an important consideration for buyers. Also, purchase decisions can be influenced by other factors, such as weight limits on highways and bridges, which can make the considerable additional weight of CNG or LNG tanks a significant drawback in some market segments.”

Even assuming that long haul trucks adopt natgas, and assuming that incremental HDNGV purchase costs over diesel costs are neutralized with tax credits and $100k subsidy per new NGV station (Pickens Plan), they arrive at about a 40% freight market share in 2035, with approximately 0.67mb/d of oil being abated. That’s about 4% of current annual US oil consumption. Figure 3 shows the cost of tax credits versus the cost of fuel saved. By the AEO’s estimates, the tax subsidy is larger than the reduction in fuel costs. This does not account for the benefit in balance of payments or energy security, however. Figure 3 assumes 0.67mb/d is achieved and with subsidies until 2027, per Pickens Plan.

Pickens Plan Costs

The AEO also discusses the potential for converting natural gas to liquids. They produced break even curves based on high and low estimates for GTL plants. Figure 4 shows an adapted version of Figure 28 (page 49). Below the line is the feasible region. The AEO assumptions are a 10% hurdle rate and a 10 year operating period.

GTL Break Even

This is interesting, and based on your projections of future oil prices, you can see what natural gas price is tolerable. For instance at $150/bbl, if GTL plants turn out to be very expensive (only a couple are in operation so costs aren’t really known), only $2/MMBtu would be tolerable. On the other hand at the low end of the range $11/MMbtu would still allow for a 10% return. It should be noted that 43% of the energy in natural gas is lost in the conversion process, not the best idea in an energy constrained world.

Regarding Coal to Liquids (CTL), the EIA says “although advances in coal liquefaction technology have made it commercially available in other countries, including South Africa, China, and Germany, the technical and financial risks of building what would be essentially a first-of-a-kind facility in the United States have discouraged significant investment thus far. In addition, the possibility of new legislation aimed at reducing U.S. GHG emissions creates further uncertainty for future investment in CTL.” CTL involves a loss of 55% of the energy in coal (page 137 of the AEO’s assumptions document).

The EIA gives a big shout out to shale gas also. In the High Shale Gas scenario, the EIA sees shale output increasing to 8 tcf by 2025 and 10tcf by 2035. This assumes a Henry Hub price of about $7/MMbtu, although the full-cycle profitability of shale gas at such levels is disputed. In all the EIA’s natural gas scenarios, natural gas production never goes above 27tcf, which is 3tcf higher than 2008’s 24tcf.

The AEO 2010 is a very useful document but its highly improbable forecast of oil supply means if you’re looking for peak oil leadership
from the EIA, you’ll have to dream on.

Eamon Keane is an Energy Systems Engineering masters student at University College Dublin with an interest in electric cars, rare earth metals and energy.  He is looking for a job in the energy sector anytime after August 2010.

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