Thursday, March 6, 2014

Hey, hey, my, my
Rock and Roll will never dies
-Neil Young


             Dr Dave Murphy has a new article on net energy the Philosophical Transactions of the Royal Society. (!)  with lots of new  data  (to me anyway!).  Its called "The implication of the declining energy return on investment of oil production".  Its definitely worth a read

          As most of you know,  EROI (Energy Returned on Energy Invested)  values for oil are falling.   Back in the good old days  when when oil squirted out of the ground , it was estimated that one barrel of oil invested could return 100 barrels.    The energy investment was so low, it could reasonably be ignored.  Even in recent times, the return was 30 to 1 , which was also insignificant.    In fact, as Murphy points out,  its easy to ignore EROI, until we get to a 10-1 ratio or less.   At that point, things start to go "pear shaped"  as they say.  

Current average global EROI for oil

So, what are the current EROI numbers?  Well, unfortunately that isn't something that is tracked on a day to day basis.  There are some recent studies, but the numbers are changing pretty rapidly.  Here's Murphy's summary.

 "  — the average EROI for US oil production has declined from roughly 20 in the early 1970s to 11 today, while the global average EROI was roughly 30 in 2000 and has declined to roughly 17 today;

— the EROI of oil production from ultra-deep-water areas is most probably lower than 10; and
— the EROI of producing oil from oil shale is roughly 1.5".

[I would note that when he says the global average is "roughly 17,' today' ", he means in 2007 it was 18.   This may be a little high, especially when one notes that the global figure dropped from 35 to 18 (by about 50%)  between 2000 and 2007]   

-  If EROI = 10 : Net Energy cliff
       The relationship between EROI  and "energy profit" is not linear.    Going from 50:1 to 25: 1 makes little difference on the  "energy profit".  But going from  10:1 to 5:1 makes a big difference.  You start down the "net energy cliff".  Small changes in EROI yield big changes in energy profit.      Here's a picture to illustrate.    

According to Professor Murphy

"at around an EROI of 10, the relation between EROI and most other variables, such as price, economic growth and profitability, becomes nonlinear"


"The pertinent results from the literature summarized in this subsection are as follows:
— there appears to be a negative exponential relationship between the aggregate EROI of oil production and oil prices;
— there appears to be a comparable relationship between EROI and the potential profitability of oil-producing firms;
— the relationship between EROI and profitability appears to become nonlinear as the EROI declines below 10; and
— the minimum oil price needed to increase global oil supply in the near term is comparable to that which has triggered economic recessions in the past."

 Meanwhile in the real World

      So, at a US EROI of 11,  it looks like we are getting close to the tipping point.  The world average is around 17.     But, its worth noting that the world average includes a lot of "legacy" fields that were the "low hanging fruit".    As indicated by Murphy, the EROI of the next barrel is "probably below 10"   

   It' s interesting to look at the International Oil Companies ( IOC's) , who generally have no access to the legacy  fields,( like Ghawar, Burgen , Cantarell etc), which are generally produced by the National Oil Companies (NOC).   The IOCs are left with the high cost, low EROI projects.  And, as predicted, this is affecting profitability,

Chris Nelder has a nice summary of the current situation for the IOC's.    

"The Wall Street Journal recently pointed out that  oil and gas production by Chevron, ExxonMobil and Royal Dutch Shell has declined during the past five years even as the companies spent more than a half-trillion dollars on new projects. Chevron’s costs alone have jumped 56 percent since 2010
A marvelous new presentation by Steven Kopits, Managing Director of the Douglas-Westwood consultancy, details oil supply, demand, cost and price trends with merciless precision. If you can take an hour to watch Kopits' presentation I highly recommend it, as it's the most comprehensive perspective you'll find on the global dynamics of oil. 

The graphic above shows how capital spending (capex) by the world's publicly listed oil majors has increased by more than a factor of five since 2000, while their production of oil has fallen back to the 2000 level after a few years of very modest increases. In Kopits' earthy metaphor, the companies kept watering the plant but it just wouldn't grow anymore—precisely as the peak oil model predicted.
In late February, Bloomberg finally addressed the most problematic issue in shale gas and tight oil wells: their incredible decline rates and diminishing prospects for drilling in the most-profitable "sweet spots" of the shale plays. I have documented that issue at length (for example, "Oil and gas price forecast for 2014," "Energy independence, or impending oil shocks?," "The murky future of U.S. shale gas," and my Financial Times critique of Leonardo Maugeri's widely heralded 2012 report).
The sources for the Bloomberg article are shockingly candid about the difficulties facing the shale sector, considering that their firms have been at the forefront of shale hype. 
The vice president of integration at oil services giant Schlumberger notes that four out of every 10 frack clusters are duds. Geologist Pete Stark, a vice president of industry relations at IHS—yes, that IHS, where famous peak oil pooh-pooher Daniel Yergin is the spokesman for its CERA unit—actually said what we in the peak oil camp have been saying for years: "The decline rate is a potential show stopper after a while…You just can’t keep up with it."
The CEO of Superior Energy Services was particularly pithy: "We've drilled all the good stuff…These are very poor quality formations that I don't believe God intended for us to produce from the source rock." Source rocks, as I wrote last month, are an oil and gas "retirement party," not a revolution.
The toxic combination of rising production costs, the rapid decline rates of the wells, diminishing prospects for drilling new wells, and a drilling program so out of control that it caused a glut and destroyed profitability, have finally taken their toll. 
Numerous operators are taking major write-downs against reserves. WPX Energy, an operator in the Marcellus shale gas play, and Pioneer Natural Resources, an operator in the Barnett shale gas play, each have announced balance sheet “impairments” of more than $1 billion due to low gas prices. Chesapeake Energy, Encana, Apache, Anadarko Petroleum, BP, and BHP Billiton have disclosed similar substantial reserves reductions. Occidental Petroleum, which has made the most significant attempts to frack California’s Monterey Shale, announced that it will spin off that unit to focus on its core operations—something it would not do if the Monterey prospects were good. EOG Resources, one of the top tight oil operators in the United States, recently said that it no longer expects U.S. production to rise by 1 million barrels per day (mb/d) each year, in accordance with my 2014 oil and gas price forecast.
Bottom Line - These Are the Good old Days
        Nelder argues that this is all good news.  The oil industry's problems make this particular fossil fuel less inviting, and improves the likelihood of a move toward less problematic renewable fuels.

                  That is a nice spin.  However there are two factors which he doesn't address.  First, the renewables he mentions, solar and wind, are not much help for transportation.   If we decide to "leave oil" where do we go?

   Its been nearly 10 years since the Hirsch Report was originally issued.   Are electric vehicles "ready for prime time?".    (about 200K on the road - about.01% of total) .  And what about natural gas vehicles?   Are they the wave of the future?  Not according to this study   

“Switching from diesel to natural gas, that’s not a good policy from a climate perspective,” said the study’s lead author, Adam R. Brandt, an assistant professor in the department of energy resources at Stanford.

Second, problems in the oil industry is a two edged sword.   Hirsch  made it clear that a high priced oil has often been associated with reduced economic activity.  Less economic activity has implications for investment of all kinds, including investment in renewable energy.     As Murphy notes :

"...without high levels of economic growth, the investment capital needed to build, install and
operate renewable energy will be hard to acquire."

How will this play out?   One scenario is that as oil prices rise, economic activity declines.  Oil prices rise and fall unpredictably.  As oil companies have difficulties with profitability, they will do less exploration and development.  This further reduces supply.

    Murphy's conclusion is particularly sobering:

           Transitioning to lower EROI energy sources has a number of implications for global society.
          First, it will reallocate energy that was previously destined for society towards the energy industry alone. This will, over the long run, lower the net energy available to society, creating significant headwinds for economic growth. 
          Secondly, transitioning to lower EROI oil means that the price
of oil will remain high compared to the past, which will also place contractionary pressure on the economy.
           Third, as we try to increase oil supplies from unconventional sources, we will accelerate the resource acquisition rate, and therefore the degradation of our natural environment.

It is important to realize that the problems related to declining EROI are not easily solved.
Renewable energy may indeed represent the future of energy development, but renewables are a long time off from displacing oil. Lastly, it seems apparent that the supply-side solutions (more oil, renewable energy, etc.) will not be sufficient to offset the impact that declining EROI has on economic growth.

 All of this evidence indicates that it is time to re-examine the pursuit of economic growth at all costs, and maybe examine how we can reduce demand for oil while trying to maintain and improve quality of life.

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