Fossil Fuel Divestment - Saudis Want Out

[Robert.Boston]

I'm just saying there won't be anything pushing against you if you wanted to do massive infrastructure or renewable energy projects nationwide. Oil will be $25, copper costs half what it did 3 years ago, Treasury rates are super low, etc...

The environment for stimulative projects will be wonderful.

Unfortunately the ROI on renewable energy projects is getting crushed by the low prices of natgas -- it dipped to $1.70/MMBtu in December, with some modest recovery recently. The short-term outlook is a gentle rise into the $3.50/MMBtu range, but at current prices, the marginal cost of generating electricity from a modern combined-cycle gas turbine is under 2¢/kWh (not including any capital cost recovery). Add another 2¢/kWh or so for capital costs, and you've got 4¢/kWh fully dispatchable power. That's really hard to beat with any renewable project.

 

[TheTalkingMule]

Unfortunately the ROI on renewable energy projects is getting crushed by the low prices of natgas -- it dipped to $1.70/MMBtu in December, with some modest recovery recently. The short-term outlook is a gentle rise into the $3.50/MMBtu range, but at current prices, the marginal cost of generating electricity from a modern combined-cycle gas turbine is under 2¢/kWh (not including any capital cost recovery). Add another 2¢/kWh or so for capital costs, and you've got 4¢/kWh fully dispatchable power. That's really hard to beat with any renewable project.

It's all in the neighborhood at this point. I see people debating the costs of utility solar vs nat gas, etc all while forgetting what those equations looked like just 4 years ago. This whole conversation around grid parity should be ended, we have arrived at cheap wind and solar. All options are now on the table and will only get cheaper as we make bold moves. What should we do next? If the big problem with the energy transition is natural gas peaker plants becoming a stranded asset, sort something out. Legislate tax breaks for building massive scale manufacturing adjacent to them. Allow them to be written off comfortably/creatively where needed. Germany is already at this step 5 years ahead of us.

The idea that Nevada Energy is going to open a new $1B natural gas peaker plant in the middle of the dessert in 2016 is utterly moronic no matter how the pennies fall. Obviously you agree, I'm just getting very annoyed with the voting public. There are plenty of possibilities out there that are actually money savers and it doesn't appear that we're even discussing any of them. This legislation should not be all that difficult to sell to the people. Their fossil fuel puppet reps.....that's a more difficult sell.

It should be relatively easy(and cheap) for us to accelerate this global transition to renewables while ramping up domestic stimulus and global competitiveness dramatically. We get to move our solar/wind firms out in front to get all the huge global contracts and the Saudi royal family loses power. What's not to like?

 

[beeeerock]

The idea that Nevada Energy is going to open a new $1B natural gas peaker plant in the middle of the dessert in 2016 is utterly moronic no matter how the pennies fall. Obviously you agree, I'm just getting very annoyed with the voting public. There are plenty of possibilities out there that are actually money savers and it doesn't appear that we're even discussing any of them. This legislation should not be all that difficult to sell to the people. Their fossil fuel puppet reps.....that's a more difficult sell.

Granted, my knowledge of the investment costs and returns for different forms of electrical generation are limited... but what I don't see being explicitly included in decisions of this sort are the future costs and unknowns...

Will natural gas remain cheap?
Will natural gas remain plentiful?
Will carbon taxes come along and impact the economics of natural gas?
And god forbid we ask: will natural gas generation limit our ability to survive on the planet?

vs.:

Will the sun remain free?
Will the sun keep shining?
Will the sun be taxed?

Initial construction costs notwithstanding, what does it cost to keep the different forms of generation running? If the fuel is free, if the infrastructure is close to maintenance free, how does solar not win hands down? Is it really the carbon lobby that makes the final decision? The big unknown of gas costs going into the future would seem to make these decisions a leap of faith...

 

[TheTalkingMule]

None of that is a concern to NV energy, as a semi-regulated monopoly they may money on top of cost. If it doesn't cost they don't get paid, therefore they MUST keep building out unnecessary infrastructure to build profits.

Satisfying large chunks of demand with residential solar at peak hours is the absolute worst thing that can happen for the profits of NV Energy. That's the concern, cost and efficiency never enter into the conversation.

 

[Jaff]

I've heard Trudeau is working on this...:wink:

Granted, my knowledge of the investment costs and returns for different forms of electrical generation are limited... but what I don't see being explicitly included in decisions of this sort are the future costs and unknowns...

Will natural gas remain cheap?
Will natural gas remain plentiful?
Will carbon taxes come along and impact the economics of natural gas?
And god forbid we ask: will natural gas generation limit our ability to survive on the planet?

vs.:

Will the sun remain free?
Will the sun keep shining?
Will the sun be taxed?

Initial construction costs notwithstanding, what does it cost to keep the different forms of generation running? If the fuel is free, if the infrastructure is close to maintenance free, how does solar not win hands down? Is it really the carbon lobby that makes the final decision? The big unknown of gas costs going into the future would seem to make these decisions a leap of faith...

 

[omgwtfbyobbq]

Unfortunately the ROI on renewable energy projects is getting crushed by the low prices of natgas -- it dipped to $1.70/MMBtu in December, with some modest recovery recently. The short-term outlook is a gentle rise into the $3.50/MMBtu range, but at current prices, the marginal cost of generating electricity from a modern combined-cycle gas turbine is under 2¢/kWh (not including any capital cost recovery). Add another 2¢/kWh or so for capital costs, and you've got 4¢/kWh fully dispatchable power. That's really hard to beat with any renewable project.

What's the capacity factor associated with 2¢/kWh?

 

[omgwtfbyobbq]

For capital costs I mean. I can't edit my post for some reason.

 

[wdolson]

Back to the original story. A friend who is now a retired Geophysicist from the oil biz was telling me a couple of years ago about a rumor that was going around the oil biz back then that there were signs Saudi Arabia's oil was declining fast. They were doing a lot of smoke and mirrors to hide it, but a lot of geo-professionals who know what signs to look for were observing signs that their production was in terminal decline. It may be the Saudis are going public with Aramco to cash in before the public realizes their oil reserves are headed for exhaustion. Because they started with so much they have enough capacity to cover up the decline for several years after it starts.

This may or may not be the reason for the IPO, but I find it an interesting coincidence.

 

[Robert.Boston]

What's the capacity factor associated with 2¢/kWh?

75%, which is typical of a modern gas CC (at least at today's gas prices). I'm using a capacity rate of $11/kW-month, which is ISO New England's FERC-filed Net Cost of New Entry.

 

[AudubonB]

Back to the original story. A friend who is now a retired Geophysicist from the oil biz was telling me a couple of years ago about a rumor that was going around the oil biz back then that there were signs Saudi Arabia's oil was declining fast. They were doing a lot of smoke and mirrors to hide it, but a lot of geo-professionals who know what signs to look for were observing signs that their production was in terminal decline. It may be the Saudis are going public with Aramco to cash in before the public realizes their oil reserves are headed for exhaustion. Because they started with so much they have enough capacity to cover up the decline for several years after it starts.

This may or may not be the reason for the IPO, but I find it an interesting coincidence.

Yes, that rumor was rampant a half-dozen or so years back. Take such rumors extremely carefully. Case in point: the United States's production, all my very keyed-in colleagues are telling me, is about to enter terminal decline; probably as soon as next year but certainly no later than 1997.

<Time Warp OFF>

 

[ohmman]

<Time Warp OFF>

You know.. I read and reread your first paragraph a few times, thinking "are there really keyed-in peakers still?"

This is like that handout we got in school that told us to read all of the directions first, and the last one was "don't do anything listed above."

 

[wdolson]

Yes, that rumor was rampant a half-dozen or so years back. Take such rumors extremely carefully. Case in point: the United States's production, all my very keyed-in colleagues are telling me, is about to enter terminal decline; probably as soon as next year but certainly no later than 1997.

<Time Warp OFF>

With the United States, the existing fields are largely played out, but secondary recovery methods like steam injection has enabled older fields to recover a bit more oil. The projected exhaustion of US oil reserves didn't anticipate the extension of offshore drilling into deeper waters than ever done before, nor did it anticipate fields like the Bakken being brought online. People seem to think fracking is a new technology, but it's at least 40-50 years old. It is being done on a larger scale than ever seen before and disposing of all the used fracking fluids in old wells in Oklahoma has turned Oklahoma into the earthquake capital of the US.

In the case of Saudi Arabia, they have quietly started secondary recovery in some fields and they have also started drilling fields that were not as economically viable. Signs their cash cow fields have smaller reserves left than they claim. In any case, producing from smaller fields and secondary recovery both have higher costs of production than the salt dome production they have had from their primary fields. The cheapest oil to produce are salt dome formations. There the oil is trapped under a dome of salt with something causing pressure from below. Many Texas and Louisiana fields were salt dome fields and there are salt dome plays being drilled in deep water in the Gulf of Mexico today. Saudi Arabia has some of the largest salt domes in the world and have enjoyed oil for practically nothing but turning on the tap for 90 years. In Texas some of the played out salt domes have been used for the strategic oil reserve. The US bought oil when it was really cheap and pumped it into these old fields with the goal of pumping it back out again in an emergency. Primarily the plan is to restrict it to use by the military if there is some kind of war emergency, though it has been used for economic reasons on a couple of occasions when oil prices spiked.

The US Navy had a big chunk of the Midway Sunset field shut in for a long time. It was oil that had never been produced. They finally sold the oil rights to oil companies in the 90s and that oil has mostly been produced now. I think they are into secondary production now like most California oil fields.

 

[TheTalkingMule]

BofA: The Oil Crash Is Kicking Off One of the Largest Wealth Transfers In Human History

Economists are still hotly debating whether the oil crash has been a net positive for advanced economies. Optimists argue that cheap oil is a good thing for consumers and commodity-sensitive businesses, while pessimists point to the hit to energy-related investment and possible spillover into the financial system.

A new note from Francisco Blanch at Bank of America Merrill Lynch, however, puts the oil move into a much bigger perspective, arguing that a sustained price plunge "will push back $3 trillion a year from oil producers to global consumers, setting the stage for one of the largest transfers of wealth in human history."

Blanch and his team already see evidence that the fall in the price of crude is having a positive impact on demand, and say that it could accelerate even further if prices don't pick up.

Interesting times. I guess the Saudis have run the numbers and feel that $20-30 oil for a year will prime the global economy in a manner that blasts global demand through the roof. Seems logical I guess. Good time to make a 20 year infrastructure and renewable energy transition plan.

These guys are toast in 3 years.

 

[GoTslaGo]

This is like that handout we got in school that told us to read all of the directions first, and the last one was "don't do anything listed above."

Yes I got toasted by that test.

- - - Updated - - -

With the United States, the existing fields are largely played out, but secondary recovery methods like steam injection has enabled older fields to recover a bit more oil. The projected exhaustion of US oil reserves didn't anticipate the extension of offshore drilling into deeper waters than ever done before, nor did it anticipate fields like the Bakken being brought online. People seem to think fracking is a new technology, but it's at least 40-50 years old. It is being done on a larger scale than ever seen before and disposing of all the used fracking fluids in old wells in Oklahoma has turned Oklahoma into the earthquake capital of the US.

I do remember reading about it in Popular Mechanics in the early-mid 80s (after oil crisis). I remembered the article indicating it was too expensive and would need oil to be >100 per barrel. Something about shale.

 

[wdolson]

Re: how old fracking is:
I do remember reading about it in Popular Mechanics in the early-mid 80s (after oil crisis). I remembered the article indicating it was too expensive and would need oil to be >100 per barrel. Something about shale.

Getty Oil was fracking in California in the late 70s, mostly older wells with declining production. The Kern County oil fields were well into advanced secondary recovery by the mid-1980s.

 

[TheTalkingMule]

TBoone on the TV today saying prices have bottomed and "history shows" that oil "should double" over the next 12 months. Obviously that is not the case, but what should be done as we drift down toward $20 over the next few months?

I don't like to reward irrational behavior or support the combustion of oil products for energy, but I think we should consider a loan fascility through the DoE to keep fracking afloat while oil is below $35.

For one thing, these huge looming defaults(like AIG in 08) are going to cause major negative economic ripples domestically. More importantly, we could take this opportunity to rachet up the regulation and oversight as part of this loan legislation. Drastically limit what areas can be fracked and how the fracking can be done. Put robust transparency rules in place.

What would this do? Clearly the Saudis are trying to "cycle" their way to some extra decades of oil relevance, this would take them out within about three years. This grand bargain legislation could also include major DoE support for wind/solar to beat back the utilities' sabotage of progress.

Why sit back and let the Saudi's dictate the cycle? The minute oil hits bottom in March/Apr, you put something in place to keep it there for an extra year or two. That solves a lot of our issues, costs no American lives, and ironically would accelerate renewables considerably.

 

[ohmman]

TBoone on the TV today saying prices have bottomed and "history shows" that oil "should double" over the next 12 months. Obviously that is not the case, but what should be done as we drift down toward $20 over the next few months?

Not addressing your broader point, but I want to say it's not quite so "obvious" that oil will not increase significantly over the next 12 months. I'm bullish on the price of oil (just not the product). I think short term recoveries are very likely for a couple of reasons - first, speculators will continue to favor it as it's one of the most necessary commodities in our system at this time. Second, traders will continue to follow the technical data that tells them to buy, which will prop it up. And third, because it's still inextricably linked to worldwide transportation, agriculture, etc, it has inherent value as we work through the surplus.

Prices cannot stay below or at cost for a commodity that has this kind of utility. Backing up, the trend is going to certainly be downward. In the short (6-24 months, even longer) term, I wouldn't be surprised if it doubles.

 

[TheTalkingMule]

Aren't frackers simply going to ramp back up the minute it touches $40 again? I don't see how anything other than say 2 years at $27 causes enough debt damage to US companies that they can't just flip the switch again. Aren't we in a perma-glut for 2 years until global growth can really ramp back up? As far as I can tell the glut is still getting worse every day and we don't even have Iran online yet.

A major war is all it would take, but I don't see any appetite for that at the moment.

 

[ohmman]

Aren't frackers simply going to ramp back up the minute it touches $40 again?

They will anticipate and do so to some degree. Again, I think if you look macro-scale, things do stabilize around a true market price. However, zooming in, the market hasn't shown that it reflects true supply and demand. Oil over $100/barrel made little sense in this context, but it persisted well beyond what was sensible.

I suppose we'll see as the year progresses.

 

[wdolson]

Aren't frackers simply going to ramp back up the minute it touches $40 again? I don't see how anything other than say 2 years at $27 causes enough debt damage to US companies that they can't just flip the switch again. Aren't we in a perma-glut for 2 years until global growth can really ramp back up? As far as I can tell the glut is still getting worse every day and we don't even have Iran online yet.

A major war is all it would take, but I don't see any appetite for that at the moment.

As to your earlier comments about regulation, California, even Texas, and other states that produced a fair amount of oil in the past put in a fair bit of regulation to limit messes. The feds too put in some regulations, but GW Bush's administration stripped the agency that does the regulating so there are far fewer people to regulate the oil industry now. The oil boom states are ones that had little or no oil production in the past and there are few limits on what they can do, which is leading to a lot of problems. For example all the train fires can be easily fixed if the Dakotas simply copied a Texas law. The Bakkan oil has some highly flammable components produced (that are actually quite valuable). Texas requires any Texas oil put in a railcar to have some minimal refining to remove those highly flammable components. If the Dakotas required the same thing, we wouldn't see tanker cars burning every few months.

As for fracking, if done right there is no threat to the water table or anything else. California has been doing it, with regulation, for a long time and you never hear about fracking problems there. Oil wells have casing that seal the well from the formations you pump the oil up through. It's in the best interest of the operator as well as the environment to have good casing. They want to get the oil out of the ground, not lose it into the ground surrounding the well. However, casing sometimes cracks, but a good well driller will pull the casing and replace it if that happens. In the new oil boom, there are some shady drillers who don't bother and they try to fake it.

With a cracked casing, the fracking fluids leak out to places where nobody wants them to go. It's estimated that less than 1% of fracking is done with cracked casing, but when there are thousands of wells being drilled, it amounts to a problem.

Another problem that exists in new oil fields that doesn't exist in states with more oil experience is that those states with experience have very strict laws on what operators have to do with stuff once it comes out of the ground. In the past operators would just dump produced water in giant open air ponds that would stink up the environment as well as leach nasty stuff back into the water table. There are strong laws in states like California and Texas that prevent that today, but not so much in a lot of other states. On the federal level there should be EPA inspectors who enforce federal laws like the Clean Water Act, but they have been so stripped they don't have the people to do the job anymore.

As for the price of oil, I think it will remain low until Putin topples from power. There is former reporter who I heard several years ago who has found evidence that one of the weapons used to bring down the USSR was the price of oil. The last Soviet finance minister told this reporter that the low price of oil through the 80s killed them financially. He also speculates that oil remained high regardless of demand from the mid-90s until recently to hurt China which has to import oil. Oil demand dropped like a rock after the 2008 economic crash, but the price remained high until just after Putin took the Crimea, then it shot down and Russia is in economic trouble today. Iran is also very dependent on high oil prices and this price crash is killing them too.