Casting doubt…or when it’s useful to question your own oil forecasts

It’s a brave man who heads a statistical agency and then admits publicly that its forecasts are guaranteed to be wrong. But that is the stance that Adam Sieminiski, Administrator of the US Energy Information Administration, took when he addressed a meeting of energy analysts earlier this week at the Royal Institute of International Affairs in London.

“I am absolutely certain that the EIA’s long-term forecast is going to be wrong” Sieminski said.

He has plenty of time in which to be judged, since the EIA’s long-term forecasts run to the year 2040, by which time some of the audience of energy analysis gathered to hear him give a talk, formally entitled “The Geopolitical Implications of Shale and Tight Oil Production” but which in fact covered pretty much the entirety of the global energy scene, won’t be around to find out just what did happen.

As for the forecasts cited by Sieminski, they were a straight re-statement of the recent EIA forecast, unveiled in July, that global energy consumption would increase 56% between 2010 and 2040; that fossil fuels would still account for 80% of all consumption in 2020 despite a 2.5% annual growth in renewables; and that CO2 emissions would hit 45 billion tonnes in 2040.

But the doubts Sieminski raised are worth pursuing because they go to the heart of the problems faced by anyone seeking to assess the next few years, let alone the next few decades.

The EIA Administrator listed six problems in particular.

First, the uncertain economic situations in the United States, Europe and China. What would be the strength and timing of economic recovery on either side of the Atlantic, and what woulPEC be the impact of a Chinese switch to a more service-oriented economy? He left these as open-ended questions that nonetheless set the scene for a seemingly unfathomable energy future.

Secondly, there was the question of nuclear power in Japan in the post-Fukushima era. Sieminski noted that Japanese Prime Minister Shinzo Abe “may be looking to re-open some nuclear” and that he thought perhaps half of the country’s former nuclear generating capacity might someday come back on line. But he freely acknowledged it could be much, much less than this, and that perhaps there would no return to nuclear power at all.

Third, there was social unrest in the Middle East and North Africa, and political unrest elsewhere in the energy producing world. He noted that unplanned outages in OPEC countries had increased, as shown by the current virtual elimination of 1.5 mb/d of Libya oil from the market. Previously, he said — clearly referring to an era before the Arab Spring — unplanned outages might amount to around 500,000 b/d, but today they can account for as much as 2 million b/d. And that, he noted, was the same figure as Saudi Arabia possessed in spare production capacity. And the Saudis, he continued, were now the only major producer with any significant spare capacity.

Fourth, there was the potential of shale gas and shale oil to change the global energy equation. By 2040, shale gas would account for half of US gas production while shale oil from the Bakken, Eagle Ford and elsewhere was already drastically reducing US import requirement.

But, he asked, was the US experience replicable elsewhere?

One key advantage the US possessed, Sieminski argued, was that owners of land invariably owned the sub-surface mineral rights. True, they might not be happy to hear of some company contemplating tearing up their roads and causing a general nuisance whilst drilling for shale oil or gas. But then they could be offered hard cash in monthly installments to allay their concerns. He didn’t say so, but that’s not how land ownership works in most of the world, where the state retains the rights to sub-surface resources. He also stressed some other characteristics of US unconventional development which might be hard to replicate elsewhere, notably the role played by medium-sized independent energy companies prepared to take risks in a way that larger companies, or state ventures, might not be.

Sieminski clearly took the view that shale gas and oil would eventually get developed, notably in China, but set no timeframe for this. As for Europe, where exploration does not necessarily give a company a right to develop resources, he was just as reticent to draw his own conclusions as to when significant commercial production might start.

Fifth, there were questions concerning OPEC market share decisions. Was it possible, he wondered, that “we could see a market share fight,” particularly if Iraq were to succeed in its current efforts to increase its oil output dramatically and if the Iranian oil sector were to rebound successfully should the current nuclear/sanctions issue be resolved. His implicit question was whether Saudi Arabia would be prepared to function as a swing producer if that required a significant fall-off in production.

Lastly, there was the question of climate change policies. Sieminski noted that the Inter-governmental Panel on Climate Change had concluded that the world could only sustain a maximum 2% increase in CO2 emissions, leading cumulatively to some 25 billion tonnes of output in 2040, if it were to avoid disastrous climate change. “Some kind of carbon sequestration is required to tackle the increase in coal-based Co2 emissions” he said. But on current trends, as represented in the EIA forecast, the world was on course to produce 45 billion tonnes by 2040.

Sieminski raised further questions, notably concerning the role of the Strategic Petroleum Reserve in a crisis, in comments to Platts just after his presentation. In a changed world, with the US less worried about crude oil imports but facing problems in matching its own crude to its own refineries, he wondered whether it was time to take a fresh look at the role of the SPR in a crisis.

“What do you do with the SPR?” he asked rhetorically. “It’s designed to move oil inland. There’s a law that you can’t export crude from the SPR.” But in a crisis, he argued, “it would be logical to export crude to Europe” with that crude “returning to the US as refined product.”

He added: “We — the IEA (international Energy Agency) members — are going to have to sit down and see how use of strategic reserves fits into a much more contemporary vision of energy markets.”

As for ways in which the US could further improve both its oil import situation and reduce its CO2 output, he noted drily that “if you could substitute LNG for diesel in trucking in the US, you could save 2 million b/d alone.”

Sieminski had a droll sense of humor. Toward the end of his presentation, when the time came to assess just how much of the original forecast he hoped he would get right, the EIA Administrator noted that in his former job as Chief Economist at Deutsche Bank he was happy to get 55-60% accuracy for his forecasts. Then he added: “That would take you a long way in a casino!”

Platts