Minnesotans For Sustainability©
Sustainable Society: A society that balances the environment, other life forms, and human interactions over an indefinite time period.
How is Natural Gas Different from Oil & is it a Substitute?
As we’ve seen, oil started in the middle of the 19th century and its discovery peaked around 1964. In the early days when discovery peaked and production was about to follow in the next few years. But in the early years, this gas that was produced in conjunction with the oil was almost worthless; in fact, it was flared, they simply lit it and flared it away and it still continues in some parts of the world where there are no ready markets to use it. But over the last twenty, thirty years gas itself, especially in the United States as its own oil declined, was seen to have a great value itself and so gas was tapped and used and been progressively used for electricity generation, in particular because it is cheap and because it’s environmentally much better than oil –has fewer emissions, and so forth.
And so gas has become a very important fuel and many people believe that when oil declines, we simply switch to gas.
But gas carries its own problems because by virtue of being a gas, it has a much greater mobility than oil. I describe the difficulty that oil has flowing through the reservoirs to reach the well bowl, but gas can do that much more easily because it’s simply a gas and it moves much more easily. If you fully open a gas well you could drain an accumulation very quickly, just puff it away.
In practice, gas production is generally capped by the pipelines and people build the pipelines for a certain capacity and most fluctuation is just seasonal to meet the fluctuating demand between winter and summer and the ideal way to produce gas is to have a long, long plateau. This plateau, of course, has an in-built spare capacity and as you go along the plateau you’re progressively drawing down this in-built spare capacity.
In the open market, if there was just one gas company doing this, it could have a view of the future and it could plan in some sensible fashion and in places that have had state-run utilities they indeed have done that. But in the open market where you have different producers of gas and different consumers of gas, they trade on an almost hourly basis, and they go along the plateau, drawing down the in-built spare capacity and we aren’t really being conscious of it, the producers are vying with each other at exactly the rate at which they balance between how much money they want to make it and how quickly they want to make it, and how quickly they want to draw down their assets.
What happens is that a certain height as is now happening in the United States, you come to the end of this plateau and there’s no real market signal that you’re doing so because the cost of producing the last cubic feet of gas is much less than the first because you’ve written off all the exploration costs and early costs and you’re just simply drawing down the spare capacity.
And when suddenly you wake up one day and say, “Gosh, there just isn’t any spare capacity left,” and you say, “Oh, dear me, I must get compressors.” So they get compressors and they try to suck more out from the field and they can do that for a little while, add compressors, try to keep the pressure, try to produce, but tragically, they’ve got to run faster to stand still. And then suddenly, the end comes and it comes fast, and it falls like a stone. Whereas oil protects us from ourselves in a way, by depleting slowly towards the end because it moves through all these constraints and gas ends fast and without much sign that it’s going to do so in the open market.
Any engineer or geologist could foresee this quite easily but in the open market which drives the oil business, this is something that just isn’t realized. I think we face the situation now. The United States is the most mature place of all so all of these phenomena that we face eventually in the world as a whole are already being felt in the United States.
They, in response to this end of the plateau, have stepped up the rate of gas drilling far above the average of the past. They’re drilling just as fast as they know how, but what is left to drill now is either deeper or smaller or more difficult. But this time they don’t have the luxury of producing at less than capacity so the wells are flat out and are depleted in a matter of months. So they’re running and running faster and faster and faster, simply to try to meet the demand that is there.
I think they seem to be realizing this and so they’re building more and more electricity generating plants to use the gas and so they have to import from Canada. Under the NAFTA arrangements, Canada is apparently obliged to sell it. There’s no shortage of oil companies in Canada now being increasingly owned by American companies who follow normal market principles and sell as fast as they can to wherever they can.
And so, in a strange way, Canada is now being drained in the same way that the United States is. And then they’ve got to move to Alaska. There’s a lot of gas up in the Arctic regions but that means building more pipelines and it eventually follows the same eternal pattern imposed by nature over which nobody has anything to do about it.
And another thing, the way that gas is different from oil. Whereas oil can be easily and cheaply transported around the world, so you can tap multiple sources and try to meet your security needs in that way. Gas is sent by pipeline and so you can’t contemplate a pipeline across the Atlantic very easily. Gas is more regional. The North American market for gas has basically to live within its own capacity. Of course, you can liquefy gas and transport it but that’s expensive and really isn’t going to contribute enough to make any significant difference. It can be profitable, and it’s done and increase in the future, but it’s not really a panacea.
So North America has to live within its needs and so does Europe.
Europe very soon will be... Here we live in Ireland and here electricity in Ireland is generated from gas imported from England. Now England has had extreme hyperactivity under the most open of markets and as a consequence, production has now reached a peak, a very high peak, and is set to fall very rapidly now, such that the country will be importing 50% of its needs by 2010 – this is not far off, you know - and more after that. Its own fields are declining, falling like a stone. And so Britain will be relying on imports from Norway, which has a lot of gas, and later, increasing so, from Russia, and eventually Central Asia, North Africa, and even the Middle East, which in turn, is a huge geopolitical change that has happened. We no longer rely on our own supply but rely on something from far away.
What has happened already in North America which is reaching the end of the line, and they clearly are experiencing it, is also happening to the rest of the world too. Asia, Southeast Asia, Japan, and China are also very concerned about this issue. What we see already in North America is a world phenomenon, coming sooner or later in different places, but inevitably it follows the same overall pattern.
The idea of substituting gas for oil - we hear this expression: “the dash for gas is”- is a short term solution by all means, and you can flood this supply by this easy cheap gas that is currently available. But due to the nature of gas depletion, once it begins to decline, it declines fast so we’re buying a little time but building a greater problem for ourselves – and not that far away. As I said, Britain will be importing more than 50% in less than 10 years and North America is in an even more critical situation.
political consequences of this, as this begins to dawn, the governments
themselves probably won’t appreciate it until it really hits them in the face
and then they will wake up one day and say, “My goodness, where is the gas?
I switched the light on and nothing happened.” This is a sort of doomsday
cataclysmic kind of image that one paints, but really, what alternative is
there? This is imposed by Nature, is given a finite amount of hydrocarbon
resources and secondly, by the physics of the reservoir which is immutable and
nobody can change them. And so we really ought to pay more attention to
exactly what these trends are.
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