Thursday, April 28, 2005

Gambling on the Future

By the time most of you read this, Las Vega’s newest resort the Wynn Las Vegas will have opened. This 2.7 billion dollar spectacle features a 50-story hotel structure featuring 2700 rooms, 18 restaurants, a few dozen high end retailers, one full-service Ferrari and Maserati dealership, an art gallery and theater complex. Outside, in addition to the usual pool and spa, the Wynn features a full sized 18-hole golf course with a number of little lakes scattered around for good measure. This being Las Vegas, it also contains a casino, though these days that fact usually gets lost somewhere in the overarching theme that most of these marketing giants wrap themselves in. Finally should the 197 acres of sheer extravagant fun not prove exciting enough, Wynn has an additional 20 acres of Strip frontage available to build whatever Las Vegas’ next “new thing” is.
Lost somewhere in the nicely manicured greens or super-cooled casino floor is a contemplation of the long term future of this project or the city as a whole. For if the looming energy crisis threatens to slowly squeeze the life out of much of the Los Angeles Basin, it most likely will obliterate Las Vegas. The city and all that is contained inside is situated in one of this country’s hottest and driest regions and as such requires almost heroic measures to make it suitable for year-round human inhabitation. Huge amounts of water must be imported to support the rapidly growing human population and their thousand of acres of (non-native) landscaping. Cheap gas, diesel and jet fuel are required to keep the stores stocked with food, the resorts stocked with people and the local economy stocked with money. Massive quantities of electricity are required to light the night sky, power those mega-resorts and generally keeping everyone from baking to death under the hot Las Vegas weather. With these underlying facts and growing prospects for both energy and water shortages, you would assume that this city, more so than others, would sit up and pay attention.
Instead it is full speed ahead. Growth continues at phenomenal rates (85% in the 1990’s, highest rate in the US), showing little evidence of slowing halfway through this decade. New arrivals from California, Mexico and a number of cold weather states continue to stream in year after year, searching for their piece of the American Dream somewhere out amidst the cactus and the sagebrush. It’s not just people flooding Las Vegas. Money continues to flow in, and not just in the form of multi-billion dollar casino-resort ventures on the Strip. Millions of dollars have been invested in Las Vegas area real estate projects ranging from thousands of tract homes to office parks, shopping centers and other trappings of Suburbia, USA. Like everywhere else, housing prices there have risen smartly (36.2% last year, also the highest rate in the country).

To many, this rapid growth is a source of civic pride, even if it is a hassle to have to open a new elementary school every few weeks or cope with several hundred new residents each day. At least the civic boosters can revel in the fact that this one time train stop has overtaken a number of old Eastern cities in size. Whether they are from California, the upper Midwest or southern Mexico, few (if any) new residents question the wisdom of pulling up stakes and moving to one of the 20th Century’s most egregious planning mistakes. Unlike other locations in this country, which may be able to retrofit themselves towards a low energy paradigm, Las Vegas has no such options. With scant native water resources, a huge dependence on cheap and plentiful electricity and a land use and marketing plan focused on cheap-oil driven entertainment tourism and growth-driven construction jobs, post-Peak Las Vegas will be a bleak place indeed.
Barring a calamitous crash or global conflict, the life will squeezed then squashed out of Las Vegas over a period of several years. The city’s main economic engine is highly dependent on the continuation of cheap energy-driven tourism and perpetual construction growth. Both industries are highly susceptible to a downturn in the economy, which would almost certainly accompany an overall decline in energy availability. The loss of those sectors would render over a hundred thousand jobless. The smart ones would leave. The rest would remain awaiting an end to an economic downturn that would never arrive. How long the city remains inhabitable all depends on how long the lights can be kept on and the water and food flowing in. The last item is exceptionally important given how the surrounding hinterlands have little to no chance of seeing the commencement of viable cultivation activities needed to support a bloated local population.
In all likelihood, none of those considerations are being considered by the local politicians, the gaming industry, city and county planners or the general population. Everybody in Vegas continues to go about their daily business, gambling on the continuation of unceasing growth and the cheap energy lifestyle. In the end, that is one gamble even the house will lose.

Monday, April 25, 2005

On a Road to Nowhere

Well we know where we’re goin’
But we don’t know where we’ve been
And we know what we’re knowin’
But we can’t say what we’ve seen
And we’re not little children
And we know what we want
And the future is certain
Give us time to work it out

We’re on a road to nowhere…

(With respect to the Talking Heads)
In countless locations around the world, thousands of planners are dutifully engaged in preparatory planning efforts for future outcomes that have little chance of occurring, given our energetic reality. Foremost among those pointless planning tasks would be the development of road improvement plans. Here you literally have a situation where millions of dollars and hundreds of thousands of man-hours are being expended preparing for a future where driving will almost certainly be limited to the wealthy or well-connected (if we are lucky). Of course, today almost no one acknowledges or recognizes the possibility that the ultimate limiting factor for traffic is not road capacity, but the underlying energy availability that fuels these vehicles.

So how did we get to this point?

Planners—like most other people—base their assumptions of future conditions by recalling historical trends. Rear view mirror planning if you will… Unfortunately for these hapless individuals, the past 50 to 75 years worth of history were brought to us courtesy of the greatest cheap-energy bonanza this planet has ever seen. Banished (or so we thought) to the rubbish bin of history were memories of hardship, limited growth, famines, economic stagnation and an overall lack of progress. The planning profession unquestioningly acknowledged the cheap energy paradigm and set out to implement or allow progress to occur in a more orderly manner.

“Progress” of course included road improvements.

From the first push for improved roads for those new-fangled horseless carriages in the early 1900s to the first construction of superhighways in the late 1930’s, engineers quickly worked out the best way to move large numbers of vehicles. At the time, most people in the engineering or planning fields were not aware of the growth inducing impact these infrastructure improvements would bring. Planners and politicians ended up being forced to respond to the inevitable increase in traffic by proposing an ever-increasing number of road projects. Over time, road projects became grander in scope and come to dominate political agendas from the local government on up to national level. Predictions of future conditions have gotten ever more sophisticated, courtesy of computerized programs that can predict which road segments will become severely congested with an additional 30 years of cheap-energy induced growth. From those results, the planning process initiates discussion on a variety of “improvement” projects to address those “assumptions”.

Here is an excerpt from a study from the San Diego Association of Governments (SANDAG) that attempts to justify the need to make multi-million dollar improvements to a freeway system.
Anticipated Growth -
Projected population and employment growth in the region will result in additional travel demand on the I-805/I-5 corridors. By the year 2030, population growth in the area surrounding the corridors is expected to reach 39 percent while employment growth is anticipated at 28 percent. In particular, growth in the South Bay subregion is expected to be higher than the San Diego regional average. For example, in Chula Vista, population is anticipated to increase by 60% from 2000 to 2030 or nearly 105,000 residents (from 173,600 to 278,200 residents).
Even with the completion of SR 125 South, traffic forecasts indicate that travel demand on the I-805 corridor will increase up to 50 percent and up to 46 percent on the I-5 corridor south of SR 54 by 2030. Without improvements, additional segments of these corridors are projected to operate at LOS F in 2030.
Nowhere in this document or countless others similar to it, are underlying assumptions of energy availability ever questioned. Instead of asking “will the existing growth rates be able to be maintained over the next 30 years” most planners ask “what will we have to do to deal with the next 30 years of growth?” This unquestioning assumption of future conditions based on past occurrences will leave most planners (along with the engineers and politicians they work with) ill-prepared to paradigm-shifting events.

The planning process itself is ill-equipped to handle alternative visions of the future. With most officials blindly marching off into a glorious vision of the future, instigators of change will almost certainly originate externally. At the moment, most of those agents of change take the form of scientists, activist groups and public citizens unconnected to those in charge. When viewed from within, most of those individuals are viewed as idealists, obstructionists, NIMBYs, or crack-pots. So when someone from that sector actually questions the underlying growth assumptions, they are more often than not given the polite brush-off and their comments ignored (with the decision makers more or less having already made up their minds).

Examples of unconnected activists questioning the fundamental need for additional roads given the imminent decline of cheap motoring and ultimate destruction of the concept of Suburbia have begun to surface globally. The need for future road projects in a handful of locations in this country and abroad from Ireland to New Zealand are now being questioned in light of the looming peak in oil production by a variety of organizations and individuals. At the moment it appears that most of those questions are being brushed off as none of the project principals seem to acknowledge the possibility changing circumstances. Nor are similar suggestions being addressed on the general planning level either. Google “Peak Oil” and “general plan” and you will get a small number of responses, with most of those peak oil positions having been authored by those unconnected individuals and included in the comments section of whatever document they were commenting on.

In the end of course, planners like the vast majority of folks on this planet will realize that oil supplies and easy growth were an aberration of history. Unfortunately until then we will waste precious time and resources going on a road to nowhere.

Tuesday, April 19, 2005

Natural Gas[p]! A conversation with an Industry Insider

Real late posting but so worth it...

As a natural resource planner for a county updating its General Plan, understanding resource use and depletion is important to understand when formulating a plan of action for the next quarter century. Getting the best information to present to the decision makers is tough when there is an overload of available information out there to draw upon. So a goal of mine has been to contact individuals in various positions that may have first hand information that may shed more light on the energy situation. Today was one of those days. I had an interesting discussion with a senior level executive of one of this country’s reputable energy firms. Both the executive and the firm will remain nameless for purposes of this posting. What follows is a general synopsis of key points of discussion on the subject of natural gas supply, depletion, pricing and trade.

On the overall North American Natural Gas situation:

When asked about the various natural gas supply and demand charts circulating out there from various sources (such as the EIA, Matthew Simmons, CERA, California Energy Commission, Sempra, and ASPO) that paint differing pictures of depletion in North America, the executive confirmed that the pessimistic projections of future gas supply were in fact the most probable to occur. In his professional opinion (which was backed by years of hands-on experience in the energy sector) the natural gas situation is on the verge of significant shortfalls. Depletion is taking an increasing toll on producers by forcing them to drill more frequently and in more challenging locations. New wells are producing less and depleting faster than ever before. Drilling activities are at all time highs with exploration firms unable to significantly increase capacity due to acute equipment and labor shortages. (This fact has been corroborated by various business journals observing the run-up in drilling rates charged to the various energy firms). Meanwhile depletion rates in mature regions are reaching distressing proportions. South Texas depletion rates have begun to reach levels of 14 to 15 percent. The overall Lower 48 depletion rate is now approaching 2 percent per year, which in itself is problematic as natural gas demand has been increasing by 2 percent per year.
On the accuracy of the various projections:
Our executive was very familiar with the Simmons assessment of the natural gas situation. His company’s own internal projections aligned closely with the pessimistic scenarios of natural gas supplies painted by Simmons and others. He was less than impressed with the commonly referred to assessment of future North American supplies depicted by the EIA however. That assessment—in his opinion—relied on ridiculously optimistic assumptions of future production that were unlikely to ever materialize. The agency’s perennially optimistic assessments largely originated out of political considerations. According to the executive, they used to make more pessimistic assumptions until Congress cut their funding in the mid 1990’s. Since then, the EIA has sung a more upbeat tune about energy reserves. This similar level of optimism permeates the USGS and influences some of the consultants (that accept federal funds) as well.
On pricing of natural gas:
Natural gas prices in North America now move more or less in tandem, regardless of the actual location on the continent, due to the interconnected nature of the transcontinental pipeline network. Any increase in supply in one area will affect prices everywhere else. Likewise, increased costs in one or more areas will raise overall prices. In recent years, there has been a tremendous amount of drilling for tight gas in the Rocky Mountain region, drilling that is relatively expensive when compared to conventional sources. Costs for tight gas and other similar sources tend run at $5-6 per MMBTU, significantly higher than the 1990’s averages. (This, when combined with increased demand and decreasing supply have introduced volatility into the gas futures market and lifted overall prices to unseen levels.) Over the longer term he believed natural gas could get significantly more expensive, due to both supply limitations and crude oil price increases. Under no scenario could he foresee prices ever falling below $4.50 per MMBTU.
According to this executive, LNG is North America’s last hope. Although not expressed in those words, per say, it appeared to him that perhaps it is our only hope. He is of the opinion that significant global supplies of natural gas will continue to exist for sometime to come, primarily in Russia, Qatar and Iran. Those sources ultimately will need to be accessed and developed. His enthusiasm for LNG was tempered however by realistic expectations. Globally, the demand for LNG has outstripped supply capabilities, resulting in capacity limitations at the point of liquification. This demand will only increase as North American needs increase in concert with those of Asia and Europe. As more liquification facilities are constructed, the next supply constraint appears to be the vessels themselves. A further chokepoint for this country exists with the regasification plants. Only four are operational, none on the West Coast. Over a dozen have been proposed for construction along the coast but as of this spring, only one, Sempra’s Energy Costa Azul plant has actually completed the permitting stage and is under construction, with a completion date of early 2008, according to their website. The remaining LNG facilities still face numerous obstacles ranging from governmental permitting to local opposition groups.
The plants themselves are huge undertakings, capable of supplying one to two BCFs of gas per day. Each ship actually holds on average 3.3 BCFs of gas, though some hold as much as 4.5 BCF. This translates into a ship mooring on average, every three to four days. The unloading process takes approximately 12 or so hours (as does loading in fact), with an average voyage from the West Coast to Indonesia (the only country to have signed a formal contract with a US firm) taking around 20-24 days. Voyages to Sakhalin could probably be made in less than 20 days and those to Australia, probably longer than 25 days.
For the next decade, the executive expects the LNG situation to remain very tight due to the capacity constraints described above, with significant price upside risks. Over the long haul, he expects LNG to become a dominating component of North American supply. By 2020 he believes that LNG will comprise one third of North American supply to potentially as high as one half of all supplies. This is much higher than the EIA estimate. LNG will have to grow if the US has any hope in meeting the expected demand. What is not clear is how all of this will be paid for. LNG infrastructure is a significant investment and a study conducted a few years back by Exxon indicated it takes an average of 4-6 billion dollars and many years of preparatory work to add one BCF of new gas capacity. In addition to the regasification plant siting difficulties, producing countries have been hesitant to allow liquification facilities to be situated or expand to meet the market forces due to either sheer greed (seeking the best possible terms) or nationalistic concerns. And as mentioned before, new tanker construction capacity will also serve to limit throughput in the system. Also not clear from this discussion is how many vessels will actually be required to serve the California market. If a one BCF LNG terminal requires one delivery every four days and each ship can make a round trip every 50 days, my calculations indicate that you would need about 12 ships to service that one facility. Obviously more new terminals would imply more ships and therein lies the problem. According to Sempra, their ships have been secured, however this remains to be seen for the rest of the domestic demand. The number of ships required by my own estimation to serve the anticipated 2020 demand would likely exceed the total number of ships in existence or contracted for at present.
On Supply and Demand in general:
He, like everyone else was surprised how dramatically the supply/demand balance for North American gas supplies shifted since 2000. No forecasts saw this happening and no economic model currently exists to predict the impacts of significantly high energy prices. Since the first price run-ups, a sizable amount of industrial gas demand has been destroyed (permanently) in North America (e.g. the fertilizer industry). Future supply problems will likely run into more painful periods of price adjustments as the “easy demand” has already been destroyed. The executive does not believe any true shortages (e.g. rationing) will ever occur in North America, unless one or more governments start setting prices. Either the price will ration off the remaining supply or government price controls will force the local utility to ration the physical supply. In either case, reading between the lines indicates what seems to be an underlying concern that serious natural gas supply imbalances are certain to occur over the next few years.
On Peak Oil:
On the subject of Peak Oil, our executive was not only fully aware, but was actively following recent developments. Though oil is not his area of expertise, he understood and accepted the theory of Peak Oil production and was monitoring recent developments with both Ghawar and Cantarell with understandable apprehension. Oil in general, is of particular a concern to him since natural gas prices have been tracking somewhat similar to that of oil, per BTU. He anticipates that if oil prices were to climb through the roof, gas prices will follow suit, throwing a monkey wrench of sorts into supply and demand projections. When asked about a near term peak of global oil supplies in the next year or two, he responded by saying he did not want to even think about the implications of that possibility. Apparently it had crossed his mind already.
In Summary:
This was a good conversation. He was very knowledgeable and very forthcoming with both facts and opinions. Since he was, I will respect his wish to remain anonymous on the subject matter, so I will not divulge his name or his employer. I guess when you badger as many energy firms as I have, you’ll find someone with something to say.

Thursday, April 14, 2005

That Forgotten Element

In planning, much like every other field, energy availability is overlooked or taken for granted. From the identification of ideals to the development of concepts to the formulation of alternatives and on to the adoption and implementation of the final plan, all steps assume that no significant changes in energy availability manifest themselves during the plan’s duration. Any consideration to energy is only given as a response to another problem, such as pollution. Case in point—our General Plan process.

In my county, like many in California, we have two universal concerns and few specific ones. Every plan is forced (by law in some cases) to address those concerns. The two universal ones are water and air pollution. Any planning or development decision must address those two issues. “Is there enough water to support this development?” and “how will this project impact ambient air quality?” are two frequently asked questions. Other questions seek to address a project’s impact on traffic, infrastructure, agriculture (more so in our county), existing neighborhoods and on the socio-economic fabric as well as other variables. Whole decisions and applied solutions are geared around addressing those very concerns. So we ended up with some of the following policy elements that address energy concerns for unrelated reasons:

* Pursuit of alternative fuels as opposed to conventional sources to reduce air pollution.
* Promotion of public transit to reduce traffic congestion
* Density bonuses for developers to build more smaller units to increase housing affordability.
* Promotion of natural gas use over other fuels for air pollution concerns
* Pursuit of “New Urbanism” development principles for aesthetic reasons
* Promotion of biomass industries for economic reasons

The list could go on. In every case above, policy choices with energy implications were made for non-energetic reasons. Some choices do fit well within a paradigm of declining energy availability, while others will make the situation worse.

In the case of the county’s general plan, policy decisions are being made that make not only energy assumptions but also actually affect “energy policy” for the sake of accomplishing an unrelated goal. The general plan efforts to date mostly relegate energy planning mostly toward the economic policy considerations. Thus we end up with policy objectives like “the pursuit of alternate energy industries, such as biomass and solar represents sound planning strategy to diversify the county’s economic base while providing new forms of energy to its residents.” Some consideration is also give to the infrastructure level energy needs, which translates into simply ensuring that new growth can be accommodated by the public utility companies. No consideration on whether any of this can actually be accomplished without violating the laws of thermodynamics has been given.

At the same time, consideration is being given to planning constraints. While policies and scenarios are being crafted, constraints are also being considered. Once again, oft-repeated questions get asked when developing constraints:

* Is there enough water to support this?
* How will this affect ambient air quality?
* Will this affect the agricultural industry?
* Will the local economy support this?

Not directly asked, but ever present of course is “how will this play, politically?” In this county, air quality and water are politically palatable to discuss. The air quality focus was largely forced upon us by state and federal agencies and the water focus simply because, well, this is part of the US Southwest and a lack of water just goes with the territory. Energy on the other hand just does not rise to that level. Part of this is because most people just have not fully comprehended the full magnitude of the problem as the issue has not risen to the same level of consciousness as water, while the other part belies the faith in human progress that we will figure something out before then. Being told that everything they believed would occur will not because there simply will not be enough energy to permit it, is just incomprehensible.

So we carry on like a freight train barreling down the tracks to where the bridge is out. Can, I as the solitary person on staff that is even concerned about this actually stop the train before it is too late? Or am I going to get run over?

Energy, that forgotten element will not be forgotten for long.

stumbleupon toolbar