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Wrong Questions Lead to the Wrong Answers on Oil and Gas Development

Mitchell Beer's picture
Publisher Energy Mix Productions

I’m publisher of The Energy Mix, an e-digest and online archive on energy, climate, and the shift to a post-carbon economy. Also president of Smarter Shift, an Ottawa-based firm that specializes...

  • Member since 2018
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  • Feb 4, 2014

Oil and Gas Development Questions

You don’t get the right answers by asking the wrong questions.

And nowhere is that more obvious than in the annual projections from governments, international agencies, and major oil and gas companies, all pointing to massive, dangerous increases in fossil fuel production over the next 10, 20, or 25 years.

We already know that 80% of the world’s proven fossil fuel resources have to stay in the ground to avert runaway climate change. More and more analysts are predicting future oil shortages, as shale wells deplete far faster than predicted. And the wave of skepticism about natural gas fracking, new oil pipelines, and fossil fuel investment is eating away at the fossil industries’ social licence to operate.

Yet the band plays on, with sources like the International Energy Agency, BP, Exxon-Mobil, and Canada’s National Energy Board all predicting rapid growth in fossil fuel production.

“Ongoing advances in exploration and production technology continue to expand the size of the world’s recoverable crude and condensate resources,” according to Exxon-Mobil’s 2014 Outlook for Energy. “North American liquids production is expected to rise by more than 40% from 2010 to 2040,” and Latin American production will nearly double, while the Middle East will grow 35% and show the largest absolute increase in output.

In the National Energy Board’s main scenario, Canadian oil production grows 75% between 2012 and 2035. “In 2035, oil sands account for nearly 86 per cent of production, compared with 57 per cent in 2012.” The NEB says production forecasts from the Canadian Association of Petroleum Producers and the Canadian Energy Research Institute are about 15% higher between 2021 and 2030.

The Past Doesn’t Predict the Future

These projections only make an ounce of sense if our future is locked in by our past. Energy is one area where that assumption is usually wrong.

Decades ago, when I was a reporter at Canadian Renewable Energy News, I was assigned to interview Larry Higgins, the chief forecaster at Ontario Hydro. At the time, Hydro was North America’s second-largest electrical utility, and it was making some drastic assumptions about the province’s energy future. Its forecasts called for electricity demand to rise 7% per year (that’s a doubling every 10 years, or a quadrupling every 20). The utility had recently called for a string of new nuclear plants along the St. Lawrence River to keep up.

By that time, we knew that energy efficiency could cut into the demand for new sources of electricity, at far less cost than new supply. But I was still shocked (and delighted) when Higgins—the economist responsible for Ontario Hydro’s load forecasting—told me that the chances of any future projection being correct were purely coincidental.

We ran the story, but by the time I called Higgins back for a follow-up interview, he had retired.

The history since has shown that Higgins was right and the predictions were wrong. Ontario Hydro essentially bankrupted itself with cost overruns from the Darlington nuclear station. The province’s electricity demand in 2009 was about the same as in 1989, despite rising population and a growing economy. Ontario will stop generating electricity from coal by the end of this year, and has declared efficiency improvements the cornerstone of provincial energy policy.

As governments get serious about addressing climate change, and the cost of renewable energy continues to plummet, a similar wake-up call could be just around the corner for oil and gas.

Backcasting Rather Than Forecasting

Hydro’s mistake was treating Ontario’s energy future as “something to be predicted, instead of something to be created,” said veteran energy and climate modeller Ralph Torrie. The utility crashed because “what happened was even outside the 90% confidence band on their sensitivity analysis. What was about to happen was outside their experience, and therefore they were blind to it. And that’s so often the problem: people can’t believe anything they haven’t experienced could happen.”

Torrie was speaking from his home office on the shore of Lake Ontario, after weeks of winds gusting to 80 or 100 kilometres per hour, on a day when robins showed up on his lawn in late January.

There’s a smarter, steadier way to accommodate a higher degree of uncertainty and move toward a low-carbon energy future, without the price shocks Ontario experienced when Ontario Hydro had to be restructured. (Nearly a quarter-century after Darlington began producing electricity, ratepayers are still on the hook for the cost overruns.) By backcasting from a future goal to our present reality, we can come up with the first steps that will move us toward a target that might otherwise be unattainable…like, say, a minimum 80% reduction in greenhouse gas emissions, no later than 2050.

Those first steps won’t likely include massive increases in oil and gas production or continuing billion-dollar subsidies to fossil fuel companies.

And with a coherent energy strategy in place, we’ll realize pretty quickly that those bullish predictions of future oil and gas production were about as substantial as the virtual paper they were written on.

Photo Credit: Oil and Gas Development Questions/shutterstock

Mitchell Beer's picture
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Michael Berndtson's picture
Michael Berndtson on Feb 4, 2014

I like your Canadian utility example. I’m just not sure it directly applies to oil and gas. Utility hydro capital investment is big, as you say. It’s product, electricity, is sort of locked into a finite number of users. So if its fininte number of customers cut back use, the utility is really screwed. Oil and gas capital cost, though enormous, is spread out between industry players, investors and governments all over the world. For example, a hypothetical production project in Brazil goes bad. There will be some big losers and some little losers. The big loser, as independents and wildcatters, reorganize after bankruptcy and move on to the next big thing. The little losers, as majors, see its stock price drop a fraction of a penny. Who knows maybe even goes up, since they are able to writeoff exploration losses.

I’m not sure promoting over capitalization of oil companies as a means to cut CO2 emissions is the right path to take. It’s kind of like Carl Pope (whose now with one of the environmental think tanks I think) saying that the way to cut emissions is to over produce oil and gas so that prices drop. I guess he’s hoping this will price out unconventional crude projects like tar sands and shale. Something tells me that this strategy has not really been well thought out.

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