Gail in China Report #3

Greetings Finite Worlders!  Gail is on her 1 month lecture tour of China. She’s unable to access WordPress from China, but does have access to email, so she’s sending me updates to publish here on OFW.  My Byline/About appears at the bottom here, but the China Travelogue articles are authored by her. -RE

From Gail below:

Greetings from China again!

As I mentioned previously, it was Prof. Feng at China University of Petroleum in Beijing who invited me to come to China for the first two weeks. In the second two weeks I would be doing a variety of other things. I am now in the “other things” part of the visit.
One thing we did during the first two weeks is make video recordings of the talks I gave during the first two weeks. I also I have the PDF slides. After I get back I will work on putting those things up on OurFiniteWorld.com.
One thing that Prof. Feng has talked to me about is that he would like to host a “Finite World” conference in Beijing in 2016, if he can get the details worked out (and if the financial system stays together well enough, and if I would help with the endeavor). Because of the cost of transport and other details involved, he expects that the vast majority of the attendees would be from China–perhaps 80 Chinese attendees and 20 attendees from elsewhere in the world. Given the way Prof. Feng does things, I expect the plan would be to make videos of those talks available on line, to the many people who would not be able to travel to China.
I have been working on a number of other things. Together with Prof. Feng and a graduate student, I wrote an article called, “The Myth of Everlasting Oil from Shale Formations,” which we are hoping will run in the “People’s Daily.” The graduate student translated it into Chinese.
One morning, I gave a talk to a group of about 20 people doing research related to energy and the economy at an institute in Beijing. This is a photo of Prof. Feng, the director of the research group (Prof. Fan), and myself, standing in front of their buildings. They seemed to be interested in what I had to say. This talk was videotaped as well.
Gail-China-3
One evening, I met with the vice president in charge of international operations for BGP, which is the subsidiary of China National Petroleum Corporation (CNPC) that does the initial geological assessment of proposed new locations. He told us that the work of his staff is down by 50%, but that the company has held off in laying off workers, because they are hopeful that prices will rise in the next few months. He is also hopeful that technological innovation will solve our other problems. He said that he is hesitant to lay off staff, because if he loses his staff, he loses the heart of his operations. It is very hard to build the expertise back up again.
I visited Ordos, Inner Mongolia for a short time. I received a very warm welcome there, from the extended family of the graduate student who invited me to visit the area. This is a photo of me shaking hands (in a symbolic handshake of friendship) with the graduate student’s father, while the graduate student looks on.
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Ordos is the gateway to many of China’s coal operations. One of the things we noticed was how few cars were on the road. The road was a new four lane highway, but we drove for miles without seeing another car or other vehicle. The Ordos airport had few patrons, and many spaces available for stores were not rented. The airport had been built at the time the growth in coal operations was at its highest, but growth has not continued as hoped. Another thing we noticed is that while apartments seem still to be being built in Ordos, many of the apartments seem to be unoccupied.
I am now in Daqing (pronounced Daching), China, the home of China’s largest oil field, Daqing Oil Field. The city is a very modern city that grew up after Daqing oil field began production in 1960. It now has about 2.5 million inhabitants. The economy is very much tied to oil–I have been told that there are something like 300,000 CNPC employees living in Daqing, and many more indirectly tied to the oil field. The production of Daqing Oil Field is now in decline. We (I am here with others from Petroleum University of China, Beijing) visited some of the oil field operations today. The question a person might ask is whether low oil prices will adversely affect Daqing operations. When we attempted to ask CNPC employees questions along this line, we were told that the oil field is profitable at $40 barrel. We were also told that the company is testing the use of fracking and long horizontal wells, in the hope of increasing production (or slowing the decline).
When I asked how long oil prices would have to stay low before Daqing employment would be affected, the CNBC employee I asked (who may not be knowledgeable about this) said “one to two years.” When I talk to people at Petroleum University of China in Beijing, the point is made that the Chinese government realizes that there is a need for employment for a huge number of people–laying off a large number of employees would simply turn one problem into a different one. That is probably the reason why employment at CNPC is as high as it is–300,000 employees is a huge number for a field producing less than 1 million barrels a day. A large number of people are involved with monitoring well production. This part of the operation could probably be significantly mechanized, reducing the needed number of workers–but then what would all of the laid-off workers do? We will be meeting with some of the folks at the Daqing branch of Petroleum University of China tomorrow–perhaps they will have some additional insights. If the numbers I quoted above are right, the employees are not earning very much a piece–or the story about being profitable at $40 barrel is not true.

About Reverse Engineer

Reverse Engineer is Admin and Chief Cook & Bottlewasher on the Doomstead Diner Blog & Forum, and hosts the Collapse Cafe Video Discussions and Podcasts, and the Frostbite Falls Daily Rant spleen venting Collapse-tainment show. Fans of George Carlin, Bill Hicks and Rick Mercer tend to like the material, Academic folks, not so much.
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187 Responses to Gail in China Report #3

  1. Tolstoy's Degenerate Grandson says:

    http://www.bloomberg.com/news/articles/2015-04-14/fossil-fuels-just-lost-the-race-against-renewables

    The price of wind and solar power continues to plummet, and is now on par or cheaper than grid electricity in many areas of the world. Solar, the newest major source of energy in the mix, makes up less than 1 percent of the electricity market today but will be the world’s biggest single source by 2050, according to the International Energy Agency.

    The question is no longer if the world will transition to cleaner energy, but how long it will take. In the chart below, BNEF forecasts the billions of dollars that need to be invested each year in order to avoid the most severe consequences of climate change, represented by a benchmark increase of more than 2 degrees Celsius.

    The sheer idiocy of this. Imagine the amount of fossil fuels that would need to be burned to create the solar panels and other gear required for this miracle to happen.

    Renewable energy ‘simply won’t work’: Top Google engineers

    http://www.theregister.co.uk/2014/11/21/renewable_energy_simply_wont_work_google_renewables_engineers/
    http://techcrunch.com/2011/11/23/google-gives-up-on-green-tech-investment-initiative-rec/

    Two highly qualified Google engineers who have spent years studying and trying to improve renewable energy technology have stated quite bluntly that whatever the future holds, it is not a renewables-powered civilisation: such a thing is impossible.

    Even if one were to electrify all of transport, industry, heating and so on, so much renewable generation and balancing/storage equipment would be needed to power it that astronomical new requirements for steel, concrete, copper, glass, carbon fibre, neodymium, shipping and haulage etc etc would appear.

    All these things are made using mammoth amounts of energy: far from achieving massive energy savings, which most plans for a renewables future rely on implicitly, we would wind up needing far more energy, which would mean even more vast renewables farms – and even more materials and energy to make and maintain them and so on. The scale of the building would be like nothing ever attempted by the human race.

    In reality, well before any such stage was reached, energy would become horrifyingly expensive – which means that everything would become horrifyingly expensive (even the present well-under-one-per-cent renewables level in the UK has pushed up utility bills very considerably).

  2. Tolstoy's Degenerate Grandson says:

    So what does $50 oil mean?

    Big oil counts the cost of tapping new discoveries – FT.com

    “One hundred dollars per barrel is becoming the new $20, in our business.” With that pithy analysis, John Watson, chief executive of Chevron, summed up the oil industry’s plight.

    As companies pursue the ever more challenging oil reserves that they need to increase or merely sustain their production, their costs have risen to the point that the most expensive projects, such as deepwater developments or liquefied natural gas plants, need an oil price of at least $100 a barrel to be commercially viable.

    Now a growing number of oil executives are saying that has to change. As discussions at the IHS Cera Week conference in Houston made clear, cost-cutting is back at the top of the industry’s agenda.

    The issue has come to a head after three years in which the price of crude has drifted down, in part because of the extra supply coming on to the market from the US shale oil boom, while costs have continued to rise.

    The result has been a squeeze on margins, declining returns on capital, and underperforming share prices.

    Chevron and ExxonMobil’s shares have both risen 11 per cent in the past three years, and Total’s by 8 per cent, while Royal Dutch Shell’s have fallen 2 per cent. In the same period the S&P 500 index rose more than 40 per cent.

    Futures prices show oil is expected to fall further, with five-year Brent at about $91 a barrel, suggesting that the pressure on oil producers’ profits will intensify.

    Shares in companies such as Schlumberger and Halliburton, which provide services to the big oil groups, have over the past five years comfortably outperformed their customers. Under mounting pressure from their shareholders, oil companies are being forced to act.

    In part, the roots of the industry’s cost problem lie in part in the increasing technical difficulty of the new projects being developed, such as large LNG plants or offshore oilfields in deep water. They demand complex equipment such as drilling rigs, specialised materials such as sophisticated steel pipes, and highly-skilled engineers, all of which are in limited supply.

    As Peter Coleman, chief executive of Woodside Petroleum of Australia, put it when explaining the soaring cost inflation in the country’s LNG projects: “Everybody jumped into the pool at the same time, and we’re all trying to fight for the same floatable toys.”

    Paolo Scaroni, chief executive of Eni of Italy, argues that his rivals’ rising costs also reflect their failure to discover more easily-developed resources. Companies such as Exxon and Shell have been adding production in the oil sands of Canada and US shale, which generally have higher costs per barrel because of the need for techniques such as hydraulic fracturing to extract the resources from the shale, or processing to separate the oil from the sand.

    Exploration is more risky, but offers higher returns, Mr Scaroni says. Because with oil sands and shale the resources are known, “you are sure of everything, but the point is profitability is lower than if you make a discovery”.

    Christophe de Margerie, chief executive of Total, adds another explanation: companies – including his own – have lost sight of the need to control costs. When oil prices are rising, managers are tempted to relax on cost control because their projects will still be profitable.

    “If you have $110 [per barrel], and the budget is at $100, it’s easier. You can say ‘we’ve made it’. But what about the ten dollars? Where are they? Gone with the wind,” he says. “That’s not the way engineers or commercial people should behave.”

    All the large western oil companies have reached similar conclusions. Andrew Mackenzie, chief executive of BHP Billiton, the mining and energy group, suggests the oil companies have reached the same point the miners were at a couple of years ago: facing up to the need to improve productivity in an environment of weaker commodity prices.

    Total, Chevron and Shell have announced cuts in capital spending, and were joined on Wednesday by Exxon. Several companies have been “recycling” projects: delaying them to try to work on improving their economics.

    BP’s Mad Dog phase 2 development in the Gulf of Mexico, Chevron’s Rosebank oilfield in the Atlantic west of Shetland, and Woodside’s Browse LNG project in Western Australia are among the plans being reassessed.

    Mr Coleman told the Houston conference that as originally planned Browse had an estimated budget of $80bn, which was “not a commercially acceptable risk”.

    The prospect of an investment slowdown already appears to be having an impact. David Vaucher, an analyst at IHS, says the firm’s survey of oil and gas production costs shows they levelled off last year, in a sign that the industry is moving into a more sustainable balance.

    Day rates for drilling rigs have started to fall, even for advanced deepwater rigs. The prospect of further falls has helped send shares in Transocean, one of the largest rig operators, down 20 per cent in the past 12 months.

    However, Mr Vaucher observes that costs tend to be easier to raise than to cut.

    At Total, Mr de Margerie still sees a lot of work to be done. He is promising a cost-saving plan throughout the company, a new process for designing projects to build in cost control right from the start, and reshaped relationships with service companies.

    “You need to create a new culture,” he says. “Yes, safety first, yes environment. But also at the same time, yes cost is important. And to achieve a project with lower cost is good.”

    http://www.ft.com/intl/cms/s/0/b7861cc8-a51b-11e3-8988-00144feab7de.html#slide0

  3. Adam says:

    From “The Telegraph” (UK):

    IMF: oil price collapse will cripple North Sea producers
    Fund’s analysis suggests industry’s crisis is worse than feared, as IMF claims oil price slump has hit UK “earlier and more intensely” than in other countries.

    http://www.telegraph.co.uk/finance/oilprices/11535265/IMF-oil-price-collapse-will-cripple-North-Sea-producers.html

    “Chancellor George Osborne extended a £1.3bn lifeline to the North Sea in the Budget by cutting the industry’s tax burden and providing more support for exploration in the UK Continental Shelf”.

    Which reminds me of a prediction from July 2013 by Steve Kopits:

    “The marginal consumer banged into the price of the marginal barrel, on a static basis, somewhere in 2011 at about $110-115 Brent. There was a price at which the marginal global consumer would rather reduce oil consumption than pay more, and that price is around $110-115 Brent.

    But since 2011, depending on rapidly rising oil prices is no longer a viable strategy. The global economy has said, “this is how much we’ll pay and no more.” At the same time, geology just kept marching along right down the back half of Hubbert’s peak, and costs have continued to rise.

    You are looking at a world in which the marginal consumer is beginning to reject the marginal barrel. And if you run this out for a period of time, you will peak out the oil supply. I think the peak occurs in a finite time frame—not 2030, not 2020. Maybe 2014 or 2016—I’m not exactly sure, but sometime pretty soon.

    But if the cost of production is increasing, then the value of reserves is falling. Put another way, current levels of government take are likely unsustainable. Oil companies will need tax relief in one form or another. Far from being able to raise taxes on oil companies, the sober reality is that governments are going to have to get used to getting less. Expect this theme to come front and center in the next couple of years. If government take is reduced quickly, then oil production levels could be sustained for a few more years.”

    • The big problem is that governments are desperate for tax revenue. They really can’t afford to give a break to oil companies. This is especially the case for oil exporters, but it is also true in places like the North Sea as well. Governments are the vulnerable link in the whole chain. If they don’t get enough revenue, they tend to collapse.

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