Chris Hodrien comments on key recent ‘maverick’ studies downgrading coal reserves estimates

Comments from Chris Hodrien on “Peak Coal” article – R Heinberg 21may07 (Energy Bulletin- Online Opinion.com

Fred et al,

I guess that this paper, reporting both the key recent ‘maverick’ studies downgrading coal reserves estimates (up to 5/07),  has been a critical input in forming your views on likely future coal reserves. I happened to come across an old printed copy of it and decided to re-read it in depth and ponder.

 

I have decided that while much of the numerical content and basic maths logic is sound, he has:  ignored several key factors (including obvious ‘lessons of history’),  drawn far too sweeping conclusions, and that these betray his (and probably the original authors’) anti-coal bias and ‘wishful thinking’. I should make clear that I cannot speak for the original authors as I haven’t read their reports in depth (….but would love to find the time to!) – am I right that you know one of the ‘EU’ pair, from the JIC? –if so, could you raise my points below with them for discussion and get a  response?

 

Some points:

1.      Of course coal will peak, just like oil. The issue is when, which is  a complex inter-play of factors.

2.      Of course the  R/P ratio is just a (convenient, simple, standardised) ‘nominal’ figure and does not allow for demand growth. But neither does the ‘R’ stay static either, see below. The relationship between R/P ratio and real peak production timing is well understood in the industry and no-one is trying to ‘conceal’ anything by using it. He is just ‘axe-grinding’ or admitting his own naivety to imply otherwise.

3.      Of course he’s right that supply of high-grade bituminous coal will become ‘tight’ before the average (cf. carbonisation and steam loco coal, c.1960!), especially in USA, and he’s right to refer to total energy content rather than tonnage as the proper measure.

4.      I am happy to accept (fait-accompli) that the stated (nominal) world remaining coal reserves have shrunk by 60 percent in the last 25 years (…..BUT see compensating factors below). But that still leaves 4.2 TRILLION (not billion!) tonnes. And that still represents  155 years* at current global consumption rate (World Coal Inst, first page, para 5) (…presumably implying that the R/P was c.390 years back in  1984!). So now let’s factor-in that doubling of coal consumption rate by 2030 he mentions. That means that even if there were no reserves additions due to either exploration or rising real product prices by 2030 (both highly improbable – see 6. below),the R/P in 2030 at 2030 consumption rates , allowing for the average cumulative consumption at 50% more than current rate in the intervening 20 years, would still be a healthy 60 years, i.e. nominally to 2090. So I see ‘no need to panic just yet’.

5.      I have always tended to trust the IEA and EIA official reserves estimates (and the BP Energy Review data copied from them) for all energy sources as by far the most ’definitive’ in the past, up to say 2004. Now that they have been ‘caught with their pants down’ over oil, both  reserves and prices, (per Hugh’s wonderful trend-graphs!), with clear signs of (Bush + OPEC) political meddling, it leaves us a bit ‘rudderless’, as very few other agencies have the data collection/processing resources to be ‘definitive’, given the large data set.  (World Coal Institute is one such body technically, but hardly free from bias!). However, just because they have been falsifying the oil figures and making clearly ridiculous near-future price projections for oil does not necessarily imply that the same ‘game’ has been played for coal (which is nowhere near peak yet (hence no need to ‘fiddle the numbers’) – his own first paragraph talks about ‘above-average’ production growth for  at least 5 years, 2000-05.)

6.      It is quite true (self-evident) that reserves estimates have to be adjusted downwards for cumulative production year-on-year. However, it is also necessary to adjust them upwards for:

a) new discoveries,

b) larger amounts of known geological reserves becoming economic over time due to:   i)rising real average commodity prices, ii) reducing real costs of production due to technology improvements. The latter has had a dramatic effect on workable oil reserves, and also impacts on new discoveries since it has allowed oil to be affordably extracted from many areas  (deep water, Arctic etc) that would have been technically impossible only a few years before (e.g. latest BP GoM oil discovery:  very large field in 4000 ft of water and 35,000 ft rock depth). A concrete example is that the North sea would have peaked (with exploration stopping long before) by or before about 1990 under the economic conditions (prod’n costs, technology and prices) of 1975. For coal, increasing mechanisation not only makes more coal economic to work, it also dramatically increases the rate at which it can be extracted. This will tend to maintain high plateau production for an extended period as Peak Coal is approached or passed.

 

Heinberg completely ignores these compensating factors, in my suspicion, wilfully. The net result of these compensating factors in the case of oil has been to maintain the nominal R/P ratio at around 30+ years for about the last 30 years, where on his type of analysis it would have rapidly peaked and declined long ago. I see no reason why things should be any different for coal, as similar underlying factors apply.

My major point is that, as real oil and gas prices will rise very rapidly in near-mid term due to ‘tight’ reserves as soon as the Global economy picks up again, the ‘economic leverage’ effect on how much coal becomes “economic” to work (you’ve got to keep saying to yourself- “compared to WHAT?” – even the real cost of building windfarms has more than doubled* in the last 10 years due to steel prices etc, I was just seeing some official figures at a windfarm seminar last Friday) will be very large, much more so than for oil itself as there’s a large real production price gap (….think about it.). I’ve been saying similar things in other EM’s to you a few weeks back about the specific UK situation, where I still find the 90% downgrading of the nominal reserves since 1988 (demise of the NCB) a total mystery – I don’t believe the NCB was lying on their previous high reserves estimates, and it was all based on very recent (then) exploration drilling data.

 

7.      Short-term supply/demand balance and price fluctuations are particularly misleading  for coal because the real response time (developing new mines) to rising real market prices is much longer than for oil, for obvious technical reasons. That means that we should probably be using 10-year smoothed data to draw any conclusions, and that no useful conclusion can be drawn from e.g. the current Chinese situation. I would say that the supply/demand balance in China in 10 years time is ‘impossible to call’ and could go either way – I’d almost be prepared to put some money on supply/demand ratio  increasing by then.

8.      But where he really ‘comes off the rails’ is in his remarks on oil/gas price comparison. It is utterly ludicrous/naive to suggest that the relative gap between coal with 155 years of reserves  and oil (peaking) + gas (R/P of c.40) will ‘narrow’, the exact opposite will of course be the case.

 

 

One comment: the stated supply difficulties in US/China/UK/Ger/Poland seem ‘out of kilter’ with a general global reserves estimate of 155 years. So ‘where’s all the rest’ (apart from Russia + Australia)?

 

What does worry me in the real world are:

 his data on US total coal energy output having already peaked in 1998 (like oil before it),

the effect that my point 8. will have on increasing coal consumption rate as oil prices really bite, especially direct-substitution coal-based synfuels (CTL +SNG) whose production  was beginning to ramp-up in the far East just before the Credit Crunch,

the fact that actual global coal production/consumption rate increase was 4.8% over 2000-05 rather than the average 2.5% rate assumed elsewhere in the paper,

the ludicrously ‘over-sensitive’/unstable current global energy trading market paradigm, ‘in thrall’ to oil-storage speculators, refinery shutdowns etc, leading to ‘infeasible’ energy price swings on the tiniest of supply/demand ratio swings like those for oil in late 2008 (-‘Mr Micawber writ large’!).(-let’s hope the coal trading market’s a little more slow/stable).  It’s high time the G8, G20, UN etc rolled up their sleeves to tackle this issue. No engineer would ever design a system with this behaviour!

the ‘scary’ apparent ‘real-world’ data over last 15 years that real costs of windfarms (so presumably also other renewables) in EU are rising rather than falling as everyone predicted would occur due to ‘learning’ +scale-up effects, (comment please, Dave? – you were at the seminar.),

the likely effect of future ‘NIMBY’ protests and official environmental regulations in several developed countries holding-back approvals for new mines and associated transport systems to well below the ‘economically justifiable’ output arising from 6. +8 (certainly already the main factor in the UK – see my recent ‘newts’ mail),

ditto re. availability of volunteer young miners.

 

I look forward to your (all) comments on this, please  use the Comments section

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