Home » October 31st, 2011 Entries posted on “October, 2011”

Hunting Acquires Specialty Supply for US$31.0m

Hunting PLC, the international energy services company today announces completion of the acquisition of Specialty Supply L.P.(“Specialty”), for an initial cash consideration of US$31.0m (c.£19.5m).

The consideration paid is on a cash-free-debt-free basis and is subject to adjustment for working capital and will be funded from Hunting’s existing borrowing facilities. An additional cash consideration of up to US$5.0m (c.£3.2m) is also payable on the achievement of certain performance conditions measured over a two year period. Specialty is the last of the three acquisitions, whose aggregate consideration amounted to around £90.0m, referred to in the announcement of the acquisition of the Titan Group on 5 August 2011.

Located in Houston, Texas Specialty manufactures precision machined MWD parts used in directional drilling markets worldwide. These include a comprehensive line of running gear and associated products for MWD, LWD, steering tool and gyro systems. Additionally, Specialty’s product offering includes drill pipe screens for all drilling applications as well as a complete line of downhole filter sub rentals.

Specialty was established in 2003 and operates from two production facilities totalling 32,000 square feet.

For the year ended 31 December 2010, under US GAAP Specialty generated revenue of US$17.7m (£11.4m), EBITDA of US$6.2m (£4.0m) and a profit before taxation of US$5.5m (£3.5m). Specialty’s net assets and gross assets as at 31 December 2010 were US$6.8m (£4.3m) and US$9.4m (£6.0m) respectively.

Specialty has continued to perform well for the eight months ended 31 August 2011 with the unaudited US GAAP management accounts reporting revenue and EBITDA of US$17.6m (£10.9m) and US$6.9m (£4.3m) respectively..

The acquisition of Specialty is expected to be earnings enhancing in the first full financial year before acquisition costs and normal acquisition adjustments such as fair value adjustments and the amortisation of intangible assets.

Hunting is acquiring Specialty from the current management who will remain with the business following completion.

Commenting on the acquisition, Dennis Proctor, Chief Executive of Hunting said:

“Specialty has a broad customer base in the growing MWD market and provides Hunting with additional products and services in this area of oil and gas drilling. The business complements Hunting’s Drilling Tools activities and will benefit from Hunting’s operational footprint in key shale drilling regions.

“With the completion of the acquisition of Specialty and other recent transactions, Hunting provides many key products for MWD and LWD applications. Our strengthening portfolio in specialist manufacturing for complex conventional and unconventional oil and gas wells, positions the Group to provide products and services that enable companies to drill in demanding environments.”

Article source: http://feeds.oilvoice.com/~r/OilvoiceHeadlines/~3/VqAFvhbKKf4/2205088fcb62.aspx

October 31st, 2011 | Posted in Headlines | Read More »

Tower Resources and Wessex Exploration Sign Assurance Agreement for Imlili Block PSC

Tower Resources plc (“Tower”) is pleased to announce that together with Wessex Exploration PLC (“Wessex”), the “Joint Venture Partners”, it has signed with the Saharawi Arab Democratic Republic (“SADR”) an Assurance Agreement (“AA”) for a Production Sharing Contract (“PSC”) for the Imlili Block which is located offshore the territory known as the Western Sahara.

Tower and Wessex each have a 50% equity and working interest in the AA and PSC and Wessex is the operator.

The Imlili Block covers an area of approximately 16,965 square kilometres and lies offshore from the very large onshore Bojador Block (44,298 square kilometres) and east of the offshore Guelta Block (15,760 square kilometres), in each of which Tower and Wessex each have a 50% equity interest. Tower acquired its interests in Bojador and Guelta when it acquired Comet Petroleum Limited in June 2008. Water depths on the Imlili Block range from 0 to 150 metres.

The award of the block gives Tower and Wessex joint control over a swathe of prospective acreage more than 500 kilometres long in a dip direction, extending from the outcrop in the east to the deep water in the west.

The Imlili Block was poorly explored more than five decades ago but is known to be underlain by a stratigraphic section of Mesozoic and Tertiary clastic deltaic facies rocks in excess of 4,000 metres thick. The block is also underlain by a small salt basin. A few exploratory wells drilled in the block and surrounds in the early sixties had oil shows in good quality sandstones, and the geologic data available suggests the presence of all of the ingredients necessary for a working petroleum system.

The SADR is the democratically-elected government of the territory known as the Western Sahara, and is recognized by the United Nations as a non-self governing territory. Tower will be required to pay only a small annual administrative fee to the SADR to retain the block until the sovereignty of the territory has been settled. In the meantime, the prospectivity of this acreage will be evaluated using legacy seismic and exploratory well data currently available to the Joint Venture Partners.

Peter Kingston, Tower’s Executive Chairman, commented: “Tower now has potential access to adjacent exploration licences extending from onshore to deep water prospectivity. There will be limited activity until a political solution has been reached on SADR sovereignty. Once that occurs, Tower should have access to exploration acreage of the highest quality. I wish the West Saharan people good fortune in their quest for an independent future.”

Article source: http://feeds.oilvoice.com/~r/OilvoiceHeadlines/~3/-auisOOiT3w/04603bdeeb35.aspx

October 31st, 2011 | Posted in Headlines | Read More »

Gould to Replace Wilson as BG Group Chairman

Sir Robert Wilson announced Monday his intention to stand down as Chairman of BG Group at the conclusion of the Company’s Annual General Meeting in May 2012. He will be succeeded by Andrew Gould, currently Chairman of Schlumberger Limited.

Gould joined Schlumberger, the world’s largest oil and gas industry service provider with operations in 80 countries, in 1975. He held a variety of roles in finance and management in Asia, Europe and the United States, including positions as President and Chief Operating Officer.

Gould was appointed Schlumberger Chairman and Chief Executive Officer in 2003, leading a restructuring of the company aimed at increasing return on capital, reducing debt, increasing earnings faster than revenue and refocusing on its core business. He held those joint posts until 2011, when he retired as CEO. Mr Gould is due to stand down in April 2012 as Chairman of Schlumberger.

In June 2011, Gould was appointed a Non-Executive Director of BG Group.

Sir Robert Wilson joined the BG Group board as a Non-Executive Director in September 2002. He was appointed BG Group Chairman in January 2004. During his tenure as Chairman the Company grew from a market capitalisation of 10 billion to a leading global oil and gas business valued today at approximately 45 billion.

“I am delighted that Andrew has accepted the board’s invitation to succeed me as Chairman of BG Group,” Sir Robert said. “He has had a highly distinguished career during which he has acquired a quite exceptional knowledge of the oil and gas industry. I cannot think of anyone better qualified than Andrew to guide BG Group at a time when the Company is developing its growth portfolio, in particular its major projects in Australia, Brazil and the United States.”

Mr Gould said: “I look forward to taking up this new appointment at BG Group, a company I have always admired for its achievements under Sir Robert’s Chairmanship. I believe that my long experience in the upstream oil and gas sector will allow me to assist the Group in its next stage of development.”

Article source: http://www.rigzone.com/news/article.asp?a_id=112240&rss=true

October 31st, 2011 | Posted in Headlines | Read More »

Expert: Capital Available for O&G Mergers, Acquisitions

Despite the global macroeconomic uncertainty and political gridlock at home, capital funding for merger and acquisitions (MA) involving U.S. unconventional hydrocarbon assets is readily available to oil and gas companies at this time, according to energy industry experts at the Rice Energy Finance Summit in Houston on October 27.

The global MA market has continued to track macro indicators, which have all experienced declines, including a two-year low for consumer confidence. However, MA activity in the energy sector experienced an uptick this month, with five of the top 10 MA deals in October done in the energy sector. These deals included Kinder Morgan’s US $38.5 billion acquisition of El Paso Corp., which topped the list of MA deals so far this year.

Energy accounted for 11 percent of the MA activity overall, smaller in comparison to the industrial sector with 26 percent of MA activity, but energy typically comprises around eight percent of MA activity.

North America is expected to have higher MA activity levels compared with Europe and the rest of the world this year, said Steven Trauber, global head of energy investment banking at Citigroup. While Europe enjoyed strong volumes in this years second quarter, sovereign debt issues are impacting current activity levels.

While Chinese companies have been involved in joint ventures with U.S.-based companies for U.S. unconventional oil plays, companies are starting to look at buying companies outright, as in the case of Statoils acquisition of U.S.-based shale player Brigham Exploration.

Russian companies also are joining the hunt to acquire North American shale assets, along with Chinese and Korean companies, said Trauber. While foreign companies at first pursuing joint ventures with U.S. based onshore players, they are seeking to buy now. These companies view the U.S. as a safe geopolitical environment, and a means of accessing shale drilling technology.

The Bakken unconventional oil play in North Dakota will remain an immediate focus of MA activity, but Trauber sees a second wave of plays starting to emerge and still sees scope for substantial consolidation and restructuring.

In the past, banks have rarely lost money in oil and gas related transactions, and view them as low-risk.

“Oil and gas companies with a BB rating can easily get financed, whereas a company in another industry with the same rating would struggle to get financing,” said Bret West, executive vice president and managing director of the energy services equipment division at Wells Fargo Energy Group.

Capital will continue flowing to the best opportunities, said Newfield Exploration Chairman, President and CEO Lee Boothby. However, increasing regulation of oil and gas activities will make it more difficult for companies to operate, and could result in capital flowing elsewhere, Boothby noted.

He and other industry leaders speaking at the summit expressed concern over the Obama administrations proposal to slash tax incentives for oil and gas exploration and development as a means of cutting the federal deficit over the next decade.

While the election of a new president with pro-business leaders will help the overall atmosphere, it will still take time for changes to be made that would incentive exploration and production.

WHAT DO YOU THINK?


Article source: http://www.rigzone.com/news/article.asp?a_id=112246&rss=true

October 31st, 2011 | Posted in Headlines | Read More »

LNG Energy Performs Hydraulic Stimulations on Lebork S-1 Well

LNG Energy is pleased to announce that hydraulic stimulations were performed on both the Cambrian and Ordovician intervals in the Lebork S-1 well following LNG’s Performanced Based Reservoir Characterization Plan.

The stimulations and subsequent flowback resulted in gas being flared from each interval, although only a small percentage of the designed proppant quantity and concentration was placed. Approximately 43% and 50% of the stimulation fluid was eventually recovered from the Alum (Cambrian) and Ordovician shales respectively.

The reduced amount of proppant placed in each zone was not enough to provide effective conductivity, allow conclusive production tests, or provide the assessment of meaningful reservoir parameters. As predicted, the reservoir was over pressured but will require higher pressures to hydraulically stimulate the shales than initially designed. It appears that both the Ordovician and Alum shales have complex fracture matrices, which were predominantly responsible for the reduced amount of proppant placed. It is expected that this complex matrix will be a positive characteristic to the development of this shale play, as it will provide a larger contact area to increase recoveries and overall production. Significant data was acquired from the stimulations on both zones that will aid in the re-stimulation designs for future Lebork operations and further development within the other concessions.

Although a comprehensive test of each zone was not realized at this time, LNG is encouraged by the flared volumes and presence of methane, ethane and propane in the gas samples.

In addition to the Saponis review, LNG initiated a comprehensive review of the stimulation results by leading industry consultants Robert Jackson of BOE Solutions Inc. and Dr. David Craig of RDC Consulting to interpret the input parameters and results. In order to properly test the shales in the Lebork S-1 well, an optimized hydraulic stimulation program design across the same intervals is underway and may require a higher pressure stimulation utilizing a high pressure tubing string.

A suitable stimulation string cannot be delivered to the location before cold weather sets in, postponing the re-stimulation and testing of the well until spring 2012. Consequently, through the winter, additional testing and simulation will be undertaken with in-house and industry specialists to design a stimulation program that will further refine the stimulation parameters to provide effective conductivity, unlocking the productivity potential of this shale play. In addition, due to similar cold weather concerns, it has decided to postpone the Wytowno S-1 and Starogard S-1 hydraulic stimulations to the spring of 2012. LNG is looking forward to effectively testing of all three wells next year and continuing their Performanced Based Reservoir Characterization Plan.

The acquisition of the previously announced 2D seismic program, which consists of about 407 km on the concessions started on October 8th, 2011. The objective of the seismic program is to further define basin structure and burial history as well as to aid in the selection of future well locations.

“The stimulations confirmed the presence of burnable gas in both the Cambrian and Ordovician sections as planned. While we did not complete the stimulations as planned, we are very encouraged by the gas quality and look forward to the results of our current review and proposals for the next stage of the development of our acreage in Poland.” commented Dave Afseth, President and CEO of LNG.

Article source: http://www.rigzone.com/news/article.asp?a_id=112248&rss=true

October 31st, 2011 | Posted in Drilling & Production | Read More »

Force Energy Completes Phase 1 on Zoro 1 Property

Force Energy, a junior Lithium and Rare Earths mineral exploration company, is pleased to announce it has completed Phase 1 due diligence of its Zoro 1 pegmatite-hosted lithium property in west-central Manitoba, Canada. The exploration program has verified that the property hosts a non-43-101 compliant historic resource of 1.7 million tons of lithium grading 0.95% Li20.

Force Energy’s Zoro 1 exploration program is designed to confirm the presence of lithium-bearing pegmatite and to confirm historic ore reserves. New diamond drilling will provide a current grade and tonnage for the deposit and assess the potential to expand the resource.

Phase 1 consisted of locating, power washing and channel sampling spodumene-bearing pegmatite exposed in 16 trenches on the property. Force Energy’s field crews channel sampled 16 trenches at the target resulting in the collection of 165 samples each 0.5 m in length, 7 cms in width and 7 cms in depth. An additional 6 new trenches discovered by prospecting on the property were also sampled. All samples were analyzed at Activation Laboratories (Ancaster, Ontario, Canada), an ISO-Certified Laboratory.

Analysis of the channel samples collected from historic trenches in the pegmatite target have confirmed that a significant zone of lithium mineralization is present on the Zoro 1 claim. With the current and future importance of lithium and the mineralized zone at Zoro 1, Force Energy is now preparing for Phase 2 of its program. This Phase will assess the third dimension of the deposit and its historic resource, and determine the economic viability of mining the resource.

“This verification of historical high grade lithium resource gives Force greater incentive to further investigate the Zoro 1 property,” states Mr. Tim DeHerrera, President of Force Energy Corp. “We will continue to expand this lithium resource through continued exploration with the hopes of further discoveries on the property. We believe the existing historic resource, coupled with the potential for additional resources on the property, position the company to add shareholder value as we work to determine economic viability of this project.”

Article source: http://www.rigzone.com/news/article.asp?a_id=112249&rss=true

October 31st, 2011 | Posted in Drilling & Production | Read More »

[$$] Arch Coal Supports Stronger Earnings

Arch Coal (ACI: NYSE)

By Sterne Agee Leach ($20.22, Oct. 30, 2011)

Arch Coal’s third-quarter adjusted-earnings per share came in at eight cents, below our 15 cents estimate and the Street’s 22 cents estimate.

Preannounced geologic challenges at Mountain Laurel [West Virginia] and lower Powder River Basin [Montana/Wyoming] shipments due to Midwest flooding impacted Arch’s (ticker: ACI) third-quarter earnings.

[We rate Arch at Neutral.]

Arch maintained its 2011 adjusted-earnings before interest, taxes, depreciation and amortization (Ebitda) and earnings-per-share guidance — Arch reduced its 2011 sales volumes expectations by three million-five million tons to reflect third-quarter production challenges. Arch expects …

Article source: http://us.rd.yahoo.com/finance/external/barrons/SIG=12mvatkud/*http%3A//online.barrons.com/article/SB50001424052748703340004577009823841547022.html?ru=yahoo&mod=yahoobarrons

October 31st, 2011 | Posted in Trading | Read More »

Metals Stocks: Gold drops over $20, but readies for monthly gain

By Myra P. Saefong and Polya Lesova, MarketWatch

SAN FRANCISCO (MarketWatch) — Gold futures fell Monday as strength in the U.S. dollar and a bankruptcy announcement by MF Global Holdings Inc. helped push prices for the metal down by more than $20 an ounce, but gold was still poised to end higher for the month.

Gold for December delivery


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-1.34%



 slumped $25, or 1.4%, to $1,722.20 an ounce on the Comex division of the New York Mercantile Exchange. It touched a low of $1,705.50 earlier.


Click to Play

Bangkok struggles to stay dry

With a huge mass of water bearing down on Bangkok, the Thai capital struggles to keep its downtown streets dry even as the north of the city is submerged.

Front-month futures prices were on track to finish October with a gain of more than 6%, after posting a drop of 11% for the month of September.

In the short run, “we are seeing a strengthening dollar against all the major currencies (euro, yen, Canadian dollar) impacting gold today … based on Japan central bank intervention to curtail recent strength in yen,” said Jeff Wright, managing director at Global Hunter Securities.

A stronger dollar tends to weigh on demand for dollar-denominated currencies.

That MF Global


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  filed for Chapter 11 protection in a New York bankruptcy court also helped fuel losses in gold Monday.
Read more about MF Global’s filing.

The news on MF Global “has led to increased noncommercial/investment selling in commodities for fear of large-scale position liquidation,” said Darin Newsom, senior analyst at Telvent DTN. “This fear seems to encompass most of the exchanges and most commodity market sectors.”
Read about the losses in oil futures.

Also Monday, CME Group Inc.


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 announced that until further notice, it is limiting all trading for customers of MF Global for “liquidation only” and “will no longer recognize MF Global or any of its divisions as guarantor for purposes of floor trading privileges.” CME is the parent of Nymex.

The “liquidation only” notice means that MF Global cannot take any new orders or positions, said Wright. “They can only close open long or short positions for themselves or clients.”

MF Global “is effectively finished,” he said.

Dollar rally

Overnight, Japan intervened in the currency markets, weakening the yen and fueling a rally in the dollar which, in turn, weighed on demand for dollar-denominated commodities.

“Gold is now viewed as a quasi-currency itself and if one of the major currencies has a directional move, then this either increases or decreases demand for gold in the short term (as short as part of the trading day),” Wright wrote in a note.

On Monday, the dollar index


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 , which tracks the performance of the greenback against a basket of other major currencies, rallied to 76.074, up from 75.063 late Friday.
Read more about currencies.

The Bank of Japan sold an undisclosed amount of yen on the foreign-exchange market Monday in a bid to weaken the Japanese currency.
Read more about the yen intervention.

There’s also the possibility of “much greater coordinated G-20 currency actions, which could boost the dollar more persistently,” said Richard Hastings, macro economist at Global Hunter Securities, referring to the Group of 20 nations. A G-20 summit’s scheduled for later this week.

“Japan alone cannot successfully intervene and absolutely change the dollar-yen balance. So the threat of coordinated global action is building up and this is a new threat, and the [New York] markets absolutely do not like the tone of this,” he said.

Though dollar strength has put pressure on gold Monday, “after a short period of consolidation in gold, I believe it will continue upward progression,” Wright said. “We are comfortable with gold rising back to $1,800-$1,900 level in early 2012 with a spike above $2,000 in the first half of 2012.”

For now, other metals saw broad declines. Silver futures for December delivery


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 fell 86 cents, or 2.5%, to $34.43 an ounce on Comex and December copper


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-1.88%



 traded at $3.61 a pound, down 9 cents, or 2.5%. Even so, both were poised to end the month with gains of more than 14%.

January platinum


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-2.58%



 sank $37.60, or 2.3%, to $1,614.20 an ounce, trading around 6% higher for the month. while December palladium


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-2.71%



 shed $11.20, or 1.7%, to $657.15 an ounce, poised for a monthly gain of nearly 7%.

In economic news Monday, the Chicago PMI business barometer edged back to a 58.4% reading in October from 60.4% in September. The reading was in line with a MarketWatch-compiled economist poll.

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Myra Saefong is a MarketWatch reporter based in San Francisco.
Polya Lesova is chief of MarketWatch’s London bureau.

Article source: http://us.rd.yahoo.com/finance/external/cbsm/SIG=12fdgmge6/*http%3A//www.marketwatch.com/news/story/gold-drops-over-20-readies/story.aspx?guid=D9C8297A-03A6-11E1-B7EF-002128040CF6&siteid=yhoof

October 31st, 2011 | Posted in Trading | Read More »

Declining Fossil Fuel Supplies and the Energy Trap

Many Do the Math posts have touched on the inevitable cessation of growth and on the challenge we will face in developing a replacement energy infrastructure once our fossil fuel inheritance is spent. The focus has been on long-term physical constraints, and not on the messy details of our response in the short-term. But our reaction to a diminishing flow of fossil fuel energy in the short-term will determine whether we transition to a sustainable but technological existence or allow ourselves to collapse. One stumbling block in particular has me worried. I call it The Energy Trap.

In brief, the idea is that once we enter a decline phase in fossil fuel availability—first in petroleum—our growth-based economic system will struggle to cope with a contraction of its very lifeblood. Fuel prices will skyrocket, some individuals and exporting nations will react by hoarding, and energy scarcity will quickly become the new norm. The invisible hand of the market will slap us silly demanding a new energy infrastructure based on non-fossil solutions. But here’s the rub. The construction of that shiny new infrastructure requires not just money, but…energy. And that’s the very commodity in short supply. Will we really be willing to sacrifice additional energy in the short term—effectively steepening the decline—for a long-term energy plan? It’s a trap!

Energy Trap

When I first encountered the concept of peak oil, I was most distressed about the economic implications. In part, this was prompted by David Goodstein’s book Out of Gas, which highlighted the potential for global panic in reaction to peak oil—making the gas lines associated with the temporary oil shocks of 1973 and 1979 look like warm-up acts. Because I knew Professor Goodstein personally, and held him in high regard as a solid physicist, I took his message seriously. Extrapolating his vision of a global reaction to peak oil, I imagined that the prospect of a decades-long decline in available energy—while we strained to institute a replacement infrastructure—would destroy confidence in short-term economic growth, thus destroying investment and crashing markets. The market relies on investor confidence—which, in some sense, makes it a con job, since “con” is short for confidence. If that confidence is shattered on a global scale, what happens next?

I still consider economic panic to be a distinctly possible eventuality, but psychology can be hard to predict. Market optimists would see the tremendous investment potential of a new energy infrastructure as an antidote against such an outbreak. Given this uncertainty, let’s shy away from economic prognostication and look at a purely physical dimension to the problem—namely, the Energy Trap.

Energy Return on Energy Invested

Our goal will be to quantitatively assess the Energy Trap, and see if there is any substance to the idea. We will rely on a concept that has acquired a central role in evaluating our energy future. This is energy return on energy invested, or EROEI.

In order to utilize energy, we must exert some energy to secure the source and prepare it for use. In order to burn wood in our fireplace, we (or someone) must chop down a tree, cut it into logs, and split the large logs. To drive our gasoline-powered car, we must expend energy finding the oil, drilling and possibly pumping the oil, then refining and distributing the gasoline. To collect solar energy, we must invest energy to fabricate the solar panels and associated electronics. The result is expressed as a ratio of energy-out:energy-in. Anything less than the break-even ratio of 1:1 means that the source provides no net energy (a drain, in fact), and is not worth pursuing for energy purposes—unless the form/convenience of that specific energy is otherwise unavailable.

In its early days, oil frequently yielded an EROEI in excess of 100:1, meaning that 1% or less of the energy contained in a barrel of oil had to be expended to deliver that barrel of oil. Not a bad bargain. Oil production today more typically has an EROEI around 20:1, while tar sands and oil shale tend to be about 5:1 and 3:1, respectively. By contrast, it is debatable whether corn ethanol exceeds break-even: it may optimistically be as high as 1.4:1. Switching from conventional oil to corn ethanol would be like switching from a diet of bacon, eggs, and butter to a desperate survival diet of shoe leather and tree bark. Other approaches to biofuels, like sugar cane ethanol, can have EROEI as high as 8:1.

To round out the introduction, coal typically has an EROEI around 50–85:1, and natural gas tends to come in around 20–40:1, though falling below the lower end of this range as the easy fields are depleted. Meanwhile, solar photovoltaics are estimated to require 3–4 years’ worth of energy output to fabricate, including the frames and associated electronics systems. Assuming a 30–40 year lifetime, this translates into an EROEI around 10:1. Wind is estimated to have EROEI around 20:1, and new nuclear installations are expected to come in at approximately 15:1. These are all positive net-energy approaches, which is the good news.

The Inevitable Fossil Fuel Decline

Let’s explore what happens as we try to compensate for an energy decline with an alternative resource having modest EROEI. On the upslope of our fossil fuel bonanza, we saw a characteristic annual growth rate of around 3% per year. The asymmetric Seneca Effect notwithstanding, a logistic evolution of the resource would result in a symmetric rate of contraction on the downslope: 3% per year. I borrow a graphic from the post on the meaning of “sustainable” to illustrate the rationale for expecting an era of decline for a one-time finite resource.

Fossil Fuel Age

On the long view, the fossil fuel age is a blip, with a down side mirroring the (more fun) up side.

We could use any number for the decline rate in our analysis, but I’ll actually soften the effect to a 2% annual decline to illustrate that we run into problems even at a modest rate of decline. By itself, a 2% decline year after year—while sounding mild—would send our growth-based economy into a tailspin. As detailed in a previous post, across-the-board efficiency improvements cannot tread water against a rate as high as 2% per year. As we’ll see next, the Energy Trap just makes things worse.

Arresting the Decline: Take 1

Let’s say that our nation (or world) uses 100 units of fossil fuel energy one year, and expects to get only 98 units the following year. We need to come up with 2 units of replacement energy within a year’s time to fill the gap. If, for example, the replacement:

• has an EROEI of 10:1;
• requires most of the energy investment up front (solar panel or wind turbine manufacture, nuclear plant construction, etc.);
• and will last 40 years,

then we need an up-front energy investment amounting to 4 year’s worth of the new source’s output energy. Since we require an output of 2 units of energy to fill the gap, we will need 8 units of energy to bring the resource into use.

Of the 100 units of total energy resource in place in year one, only 92 are available for use—looking suddenly like an 8% decline. If we sit on our hands and do not launch a replacement infrastructure, we would have 98 units available for use next year. It’s still a decline, but a 2% decline is more palatable than an effective 8% decline. Since each subsequent year expects a similar fossil fuel decline, the game repeats. Where is the incentive to launch a new infrastructure? This is why I call it a trap. We need to exacerbate the sacrifice for a prolonged period in order to come out on top in the end.

Energy Levels

The figure above shows what this looks like graphically, given a linear fossil fuel decline of 2 units per year. The deployment steps up immediately to plug the gap by providing an additional 2 units of replacement each year, at an annual cost of 8 units. While the combination of fossil fuels and replacement resource always adds to 100 units in this scheme, the ongoing up-front cost of new infrastructure produces a constant drain on the system. In terms of accumulated energy lost, it takes 7 years before the energy sacrifice associated with replacement starts to be less than that of just following the fossil fuel slide with no attempt at replacement. This timescale is beyond the typical horizon of elected politicians.

Another aspect of the trap is that we cannot build our way out of the problem. If we tried to outsmart the trap by building an 8-unit replacement in year one, it would require 32 units to produce and only dig a deeper hole. The essential point is that up-front infrastructure energy costs mean that one step forward results in four steps back, given EROEI around 10:1 and up-front investment for a 40 year lifetime. Nature does not provide an energy financing scheme. You can’t build a windmill on promised energy.

We can mess with the numbers to get different results. If only half the total energy invested is up-front, and the rest is distributed across the life of the resource (mining and enriching uranium, for instance), then we take a 4% hit instead of 8%. Likewise, a 40-year windmill at 20:1 EROEI and full up-front investment will require 2 years of its 2-unit gap-filling contribution to install, amounting to an energy cost of 4 units and therefore a 4% hit. It’s still bigger than the do-nothing 2%, which, remember, is already a source of pain. Anyone want to double the pain? Anyone? Elect me, and that’s what we’ll do. Any takers? No? Wimps.

Ramp It Up!

It is unrealistic to imagine that we could jump into a full-scale infrastructure replacement in one year. To set the scale, the U.S. uses about 3 TW of continuous power. A 1% drop corresponds to 30 GW of power. Our modest 2% replacement therefore would require the construction of about 60 new 1 GW power plants in a single year, or a rate of one per week! Worldwide, we quadruple this number.

What capability have we demonstrated in the past? In 2010, global production of solar photovoltaics was 15 GW, which is only about 6% of what we would need to fill a world-wide energy gap of 2% per year. Even on a tear of 50% increase per year, it would take 7 years to get to the required rate. Wind installations in 2010 totaled 37 GW, or 14% of the 2% global requirement. It would take 5 years at a breakneck 50% per year rate of increase to get there. When France decided to go big on nuclear, they built 56 reactors in 15 years. In doing so, they replaced 80% of their electricity consumption, which translates to about 30% of their total energy use. So this puts them at about 2% per year in energy replacement.

I am being cavalier about comparing the thermal energy in fossil fuels to electricity delivered (factor of 3 in heat engine), but I more-than-compensate by not incorporating the large intermittency factor for wind and solar (factor of 4–5). For nuclear, expressing the replacement in terms of displaced fossil fuel makes for fair play. But in the end, this point only addresses realistic rates of infrastructure addition, and does not bear on the general Energy Trap phenomenon.

Arresting the Decline: Take 2

Let’s imagine a more realistic trajectory for the replacement effort. In our scenario, the world faces a huge crisis, so we could perhaps outperform France’s impressive nuclear push and ultimately replace energy infrastructure at a rate of 4% per year. But it takes time to get there. If it takes 10 years to ramp up to full speed, we have the situation seen in the following graph.

Replacing energy infrastructure

The energy investment still forces us to steepen the decline, initially looking like a 3.2% rather than a 2% decline. But it’s not as jarring as a sudden 8% drop. On the other hand, we fall farther before pulling out, bottoming out at 14% total drop around years 8–9. It takes more than 10 years to make out better than the do-nothing approach in terms of net energy loss. A table corresponding to the plot appears below for those interested in poring over the numbers to figure out how this game is played.

Energy table

Note that anywhere along the path, a cessation of the replacement effort will bring instant relief. For example, at the beginning of year 6, having installed 6 units of replacement energy up to that point, abandoning the effort will see 88 units of fossil fuel plus the 6 units of replacement for a total of 94 units. This would be a considerable step up from the previous year’s 88 units of available energy, and an even larger apparent gain over the 86.8 units that would be available under a continuation of the crash program. Likewise, if one stopped the program at the end of ten years, the installed 22 units of replacement would complement the eleventh-year fossil fuel amount of 78 units to bring us back to a peachy 100 units—like nothing had ever happened, and far better than the 88 units that we would otherwise endure under a continuation of the program. But stopping renews the dangerous decline. The point is that there will always be a strong temptation to end the short-term pain for immediate relief.

General Behaviors

As mentioned before, the Energy Trap is a generic consequence of modest-EROEI sources requiring substantial up-front investment in energy. We would need the EROEI to be equal to the resource lifetime in order to have a null effect during the decline years, or better than this to ease the pain or allow growth. For a 40 year lifetime (e.g., power plant, solar panels, wind turbines), this means we would need 40:1 EROEI or better to avoid the trap. Our alternatives simply don’t measure up. Curses!

For resources that do not require substantial up-front cost in the form of infrastructure, the trap does not apply. Fossil fuels tend to be of this sort. The energy required to deliver a barrel of oil or a ton of coal tends to be specific to the delivered unit, and is not dominated by up-front cost. It is similar for tar sands, which requires substantial energy to heat and process the sludge. Even at 5:1 EROEI, filling a 2-unit gap can be achieved by producing 2.5 units of output while losing 0.5 units to investment. Thus it is possible to maintain a steady energy supply. The fact that fossil fuels don’t trap us encourages us to stick with them. But being a finite resource, their attractiveness is the sound of the Siren, luring us to stay on the sinking ship. Or did the Sirens lure sailors from ships? Either way, fossil fuels are already compatible with our transportation fleet, strengthening the death-grip.

Conversely, solar photovoltaics, solar thermal, wind, and nuclear, are all ways to make electricity, but these do not help us very much as a direct replacement of the first-to-fail fossil fuel: oil. This is a very serious point. As Bob Hirsch pointed out in the 2005 report commissioned by the Department of Energy, we face a liquid fuels problem in peak oil. As such, not one of the five immediately actionable crash-program mitigation strategies outlined in the report represented a departure from finite fossil fuels. The grip is tight, indeed.

We must therefore compound the Energy Trap problem if we want to replace oil with any of the renewable sources listed above, because we need to add the energy investment associated with manufacturing a new fleet of electric vehicles of one form or another (plug-in hybrid qualifies). This can’t happen overnight, and will result in a prolonged transportation energy shortfall even greater in magnitude than depicted above.

Do We Have What it Takes?

Many of us have great hopes for our energy future that involve a transition to a gleaming renewable energy infrastructure, but we need to realize that we face a serious bottleneck in its implementation. The up-front energy investment in renewable energy infrastructures has not been visible as a hurdle thus far, as we have had surplus energy to invest (and smartly, at that; if only we had started in earnest earlier!). Against a backdrop of energy decline—which I feel will be the only motivator strong enough to make us serious about a replacement path—we may find ourselves paralyzed by the Trap.

In the parallel world of economics, an energy decline likely spells deep recession. The substantial financial investment needed to carry out an energy replacement crash program will be hard to scrape together in tough times, especially given that we are unlikely to converge on the “right” solution into which we sink our bucks.

Politically, the Energy Trap is a killer. In my lifetime, I have not witnessed in our political system the adult behavior that would be needed to buckle down for a long-term goal involving short-term sacrifice. Or at least any brief bouts of such maturity have not been politically rewarded. I’m not blaming the politicians. We all scream for ice cream. Politicians simply cater to our demands. We tend to vote for the candidate who promises a bigger, better tomorrow—even if such a path is untenable.

The only way out of the political trap is for a substantial fraction of our population to understand the dimensions of the problem: to understand that we’ve been spoiled by the surplus energy available through fossil fuels, and that we will have to make decade-level sacrifices to put ourselves on a new track. The only way to accomplish this is through sober education, which is what Do the Math is all about. It’s a trap! Spread the word!

By. Tom Murphy

This is a guest post by Tom Murphy. Tom is an associate professor of physics at the University of California, San Diego. This post originally appeared on Tom’s blog Do the Math.

Article source: http://feedproxy.google.com/~r/oilpricecom/~3/FsFb5qpUT-w/Declining-Fossil-Fuel-Supplies-and-the-Energy-Trap.html

October 31st, 2011 | Posted in Headlines | Read More »

China’s Electrical Needs Soon to Outstrip Production

As China surges towards becoming the 21st century’s dominant economy, its progress may be hobbled by a growing gap between its electrical production and demand.

According to the China Electricity Council, the country’s estimated total generation capacity may total about 1,050 gigawatts by the end of this year, a rise of about 8.8 percent from 2010 levels, but the country may still face a total peak deficit of 30-40 gigawatts, raising the specter of rolling brownouts during the winter months.

And Beijing’s leadership is well aware of the populace’s incipient anger if it is denied a piece of the country’s economic dream. While the projected shortages total less than three percent of China’s generating capacity, the government’s decision earlier this year to increase power tariffs in some provinces to spur power production and restrict demand from energy-guzzling industries is hardly a recipe for social tranquility.

China’s startling economic growth over the past decade has led the country to become the world’s largest electricity consumer, but the nation’s rampant economic growth has put increasing stress on the nation’s electrical generation grid.

While China ranks third in coal reserves, behind the United States and Russia, its coal is of low quality containing sulfur, fly ash and dust, which not only reduces power generating plants’ efficiency, but leave environmentally unfriendly residue. Furthermore, many of its coal-fired electrical power stations are elderly, some dating back to the 1950s, when China began to industrialize under its Communist leadership.

While the winter power projection shortfalls are new, since April Chinese power plants have been battling electric power shortages due to a perfect storm of increasing demand, higher coal prices and a drought in southern China diminishing hydroelectric electrical output, as precipitation was 50 percent below recent annual averages, which in turn caused a 20 percent reduction in projected hydroelectric power generation growth. Since 2006 coal prices have doubled in China, reaching $130 a ton for coal with high heat content and 2010 statistics from the China Electricity Council indicate that electricity demand has risen 12 percent.

Even worse for Beijing authorities is the disconnect between the country’s coal fields in the north-east in Heilongjiang, Jilin, and Liaoning and northern Shanxi, Shaanxi, and Henan provinces and hydropower resources in southwestern China in Sichuan, Yunnan, and Tibet provinces, which are far removed from the nation’s dynamic industrial eastern and southern coastal regions of Shanghai-Zhejiang, Guangdong and Fujian, and China’s power transmission system remains underdeveloped. A Barclays report issued earlier this year estimated China’s northern and northwestern regions have generating surpluses of up to 14 gigawatts apiece but they cannot be effectively channeled to power-short coastal areas, a situation that will only worsen in the short term.

Coal electrical power generation represents 73 percent of China’s total generating capacity, and produced 83 percent of its total power generation in 2010.

As for China’s electrical future? It’s apparently brown, as China is the world’s largest coal producer and consumer, consuming 3.5 times as much coal as the United States. Energy experts believe that China’s coal-fired power generation will increase until at least 2020, and China’s installed capacity of coal-fired power generating units will remain at more than 70 percent. Zhang Lizi, principal assistant of North China Electric Power University said simply, “The vicious circle, if left unchecked, will hurt the country’s economic development.”

So, where to acquire future coal reserves?

Overseas, naturally.

U.S. coal producers are looking to sell their coal to Asian markets since U.S. laws and environmental regulations are negatively impacting new growth. A perfect fit of producer and consumer, as during the period January-September China burnt 2.28 billion tons of coal, 10.3 percent over 2010 levels, lading China to become for the first time in its history a net importer of coal importing a 111 million tons since the beginning of the year, and in September alone importing 19.12 million tons of coal, a 25.1 percent increase from the same period last year.

In order to stoke China’s economic prowess, Beijing’s red mandarins are willing in the short term at least to dip into its foreign reserves to buy foreign coal to keep its manufacturing humming and its citizens warm, a situation that delights western coal producers, increasingly bedeviled by pesky environmental regulations. How long this capitalist-Communist economic marriage made in heaven will last is anyone’s guess, but as China still produces nearly four-fifths of its electricity from coal, the sunny situation will doubtless continue for the foreseeable future, as China’s rulers are understandably loathe to see Tiananmen Square flooded yet again with protesters, this time not seeking political rights, but access to reliable and reasonably priced power to maintain their rising lifestyles.

By. John C.K. Daly of Oilprice.com

Article source: http://feedproxy.google.com/~r/oilpricecom/~3/pzofBqTVr7w/China-s-Electrical-Needs-Soon-to-Outstrip-Production.html

October 31st, 2011 | Posted in Headlines | Read More »

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