Unconventional wisdom: 5 possible energy surprises for 2013
Cobb lists potential surprises in the energy world that conventional wisdom has judged rather unlikely to happen in 2013.
Many people trot out their predictions for the coming year right about now. I'm generally allergic to predictions and think rather in terms of probabilities. Naturally, the world we live in is far too complicated to yield anything approaching certainty concerning such matters as the future price and supply of energy, future economic conditions, and future political developments. In the end, the future is simply unknowable. So, I've tried to think of some developments which conventional wisdom has judged rather unlikely and which would therefore significantly alter our lives and perceptions should they occur--precisely because we are not prepared for them.
I don't think any of the following is likely to happen in 2013. But, any one of them would certainly surprise most people and most experts and upset the plans and expectations of many governments, businesses, investors and consumers. Here are my five possible energy surprises for 2013:
U.S. natural gas production falls. There has been so much talk of the vast resource of natural gas now available to America in the form of shale deposits that it is practically unthinkable that U.S. natural gas production would actually fall. Of course, very low natural gas prices have led drillers to cut way back on drilling until the current glut is worked off and prices rise. What most people don't know is that U.S natural gas production has essentially been flat so far in 2012.
One person I know who is tracking natural gas production closely believes that drillers will wait too long to ramp up drilling again leading to a plunge in supply--and here's the real kicker--one from which we cannot recover. The annual production decline rate for U.S. natural gas wells taken as a whole has reached 32 percent. That means that if we were to forgo drilling any new natural gas wells in the coming year, production would fall by one-third. The production decline rate for shale gas wells is considerably higher than that of the average natural gas well--above 50 percent in the first year with many shale gas wells declining by more than 60 percent from initial flow rates. By the end of the second year, shale gas wells are often down 85 percent from initial flow rates. This means that by the end of the second year of operation, 85 percent of the production from any given set of shale gas wells must be replaced just to keep shale gas production level.
The logistical challenges of shale gas are daunting, i.e., getting enough rigs and workers quickly enough in the field along with the necessary millions of gallons of fracking fluid needed for each well. But perhaps even more important, investors who took a shellacking in the previous drilling boom may be reluctant to part with more capital to drill wells until they are absolutely certain that prices will stay high enough long enough to reward them. That will mean further delays in reviving drilling once it becomes apparent that supply is shrinking in earnest.
All this adds up to not enough rigs, not enough personnel, and not enough capital to keep up with the ferocious production declines in shale gas and even conventional fields. It will nevertheless be a surprise to most people if U.S. natural gas production actually falls in 2013. But, it'll be an even bigger surprise if production then fails to rise or recovers only marginally once prices get high.
- Oil production from the America's most prolific tight oil region, North Dakota, falls. Tight oil (often mistakenly referred to as shale oil) is typically extracted using the same method as shale gas. But, as a result, tight oil wells experience the same types of declines. Wells drilled into the Bakken formation in North Dakota show an annual production decline rate of around 40 percent. As the rate of production grows from this deposit, more and more effort will have to be devoted to simply replacing production from wells that are swiftly declining. Already production increases are slowing. But almost no one expects oil production in North Dakota to decline in 2013 which is why it will be a surprise if it does.
- Oil prices plunge to $30 a barrel and stay there. This is really a macroeconomic scenario based on plunging oil demand. And, the reason for plunging demand might be that Europe finally implodes under the pressure of its slow-motion financial crisis; the United States goes into a recession, perhaps because Congress fails to agree on reducing hefty tax hikes now scheduled to go into effect automatically; and China has a hard economic landing and stays economically moribund. All these events coming together imply essentially a deflationary depression. In such circumstances, commodity prices in general would decline because of both excess capacity and falling demand. Oil won't be the only commodity whose price plunges under this scenario.
- Oil prices go to $200. This scenario is based on the idea that the civil war in Syria spills out into other Middle Eastern countries and becomes a general conflagration that hampers oil exports throughout the Middle East. Of all the scenarios I'm mentioning here, this one seems the least likely. But, if it does happen, look for scenario 3 above to take hold within a few months as the world economy, shocked by extremely high oil prices, goes into a profound economic contraction. If the fighting continues to rage throughout the Middle East for the entire year, we may get the economic contraction, but prices won't come down nearly as far as in scenario 3.
The U.S. Congress forbids additional natural gas exports. Even though the United States remains a net importer of natural gas--imports constituted 12.7 percent of consumption in 2012--the country currently exports small amounts of natural gas to Canada and Mexico. This is because the North American gas pipeline system connecting all three countries makes it economically sensible to do so in a few instances. If it becomes clear that America's natural gas endowment is actually quite limited, Congress may be keen to keep natural gas produced in the United States at home in order to keep prices low.
If Congress doesn't act, the Federal Energy Regulatory Commission may simply continue to grant permits for more liquefied natural gas (LNG) export terminals from which special refrigerated tankers will carry natural gas overseas to importing nations. With LNG prices in Europe and Asia three to four times pipeline prices in the United States, there is no doubt that natural gas drillers will spend prodigious amounts of time and money trying to prevent any export restrictions. If such a measure is introduced in Congress, it will result in a battle of corporate titans as the natural gas producers come up against large, well-funded users of natural gas such as utilities, chemical companies and fertilizer manufacturers. And, if such a fight does arise, it's not at all certain who will win.
My money, however, would be on the users of natural gas including the 50 percent of those who heat their homes with natural gas. These consumers represent an enormous number of votes, perhaps enough to overcome the lobbying acumen of the country's powerful natural gas producers.
As I said, all these developments would be surprises because so few people believe they are even within the realm of possibility. I will, however, not be surprised if we get through all of 2013 without any one of them coming to pass.
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