I n this post and in future posts I will attempt to continue to refer to the methodology of the HillsGroup using thermodynamic principles to examine world petroleum depletion. I will try to do my best to simplify and explain concepts foreign to some readers and if I explain correctly and perhaps more simply, the interested reader might be better able to draw his/her own conclusions
Unfortunately the Hills Group doesn’t give background and history on how their research started. That might be a worthy subject for an extended magazine article but I will try to imagine the early steps. Keep in mind these guys are engineers, not poets and what counts with engineers are numbers and data.
In a recent lecture on Oil depletion Dr Alister Hamilton who is senior lecturer in the School of Engineering at the University of Edinburgh pulled up a graph from the book “The Limits to Growth” in which he presented a graph of how the relative resource cost of the extraction of a resource ( eg oil) changed over time as the resource headed toward depletion. The graph showed that the relative cost remained relatively fixed until about 60% of the resource was consumed. After that point the cost started to climb ever more steeply as the remaining resource was extracted. This seems intuitive. IF I were to relate this to oil I would say that the early extraction up to about 60% represented the “Cheap oil”, the easy to get oil. That is in fact how the oil business has been run. In the early days of the Spindletop Field in East Texas all they had to do was sink a pipe and the oil shot out under its own pressure. EROEI analysis of these early days estimated the energy output received versus the energy input was enormous, perhaps 100:1 or more. This was the case for many of the early Texas and Oklahoma fields. This was fossil energy that was virtually free. It was the same case later in the Middle East where mammoth fields like the Ghawar in Saudi Arabia produced vast gushers of oil with little energy input or trouble. But today more than 60 years after the Ghawar was discovered the worlds petroleum industry has become long in the tooth. Depletion of the early huge fields is an undeniable fact and except for the North Sea and Alaska North Slope discoveries, almost no new significant easily accessible fields have been found. There have been some significant discoveries in the deep sea and there is some hope that some big finds might await in some other regions such as Siberia and the Arctic but as yet almost all the great fields have been petering out declining at 5-8% a year.. Small oilfields decline twice as fast as big ones and HSBC Global Research in a report issued last September (2016) entitled "Global Oil Supply: Will mature field declines drive the next supply crunch?" stated that the typical new oilfield size 40 years ago was 500 million to a Billion barrels whereas in the past decade that has fallen to only 75 million barrels, an amount only enough to power the world for one day! Last year the exploration success rate hit a record low of 5% and the average size was a miniscule 24 million barrels enough to supply the world for less than 8 hours! US tight oil had been one of the few bright spots and currently is providing about 4.6 mbpd, about 5% of world supply, but there has been declining production in almost all fields due to the natural 5-8% depletion rate and low world oil prices. However, world demand continues to grow at more than 1 million bpd. The Hills Group in their paper gave the USGS resource estimate in 2000 of as much as 4.3 Trillion barrels . The world currently is using 33 Billion barrels a year. The world’s cumulative consumption since 1859 has been 1.29 Trillion barrels. So what’s the problem? It turns out that a resources depletion state has as much to do with the efficiency and cost with which it can be produced as it does with how much is in the ground and what it can be sold for. So to look at Depletion comprehensively Hill et al emphasize that the entire production system has to be looked at, not just the volume remaining and extraction at the well head. The term they use in the paper is what quantity in the resource or the reserve meets their engineering requirement which they define as “fit to use”. Hill further states that each succeeding barrel in a field costs more in energy terms than the previous barrel in effect yielding less energy to the end user, a mandate of the second law. I understand this to mean that in addition to oil being removed, heat energy is also being removed. The temperature of the earth increases 1 deg/F for every 70 feet. A well 7000 feet deep might have a temperature 100 degrees higher than the surface. Early on in their project they must have realized that accurate prediction needed accurate data and trying to get data on 48000 fields all over the world from small and large oil companies and oil producing countries as well as knowing the geology would be impossible. Not only was the data incomplete or inaccurate or lost, oil resource and production was often kept secret by the producers for a variety of reasons, some of which are obvious. The group decided the most reliable data set was the cumulative production produced and that data was available from energy organizations such as the EIA and the IEA. Price history was readily available as well. The Hills group chose the data set from the EIA as their starting point starting arbitrarily in 1900. At this point I will digress temporarily to explain a bit about the energy available to be used in the petroleum producing system.
Hill states that if crude oil is to be a useful as energy source it must be capable of delivering enough energy to support its extraction, processing and distribution. That is, oil provides the energy to produce oil. The drilling energy used on most drilling rigs is diesel which may be used directly or by means of diesel powered generators which in turn generate electricity or power hydraulic pumps and air compressors and a variety of pumps to add or remove water or drilling muds for example. Once oil appears at the well head it must be processed to remove undesirable contaminants, processed to separate the oil into component fractions and then moved to refineries to yield the various needed fractions of diesel, gasoline, asphalt and bunker fuel for ships. All this energy available to do this work is called its Exergy, which is defined as energy available to do work. Keep in mind that the energy contained in the oil is not destroyed. This is mandated by the first law of thermodynamics. The available energy to do work, its exergy is what is consumed as the oil energy is transformed into work with a large part of the energy lost to heat as entropy which always increases in irreversible processes such as these. Once the exergy has done its work, its value falls to zero. It is necessary to keep in mind that in this inefficient exergy cascade, heat is lost, “wasted” all along the way. All those diesel engines and refining and transportation engines generate entropy and waste heat and energy prodigiously. Electricity in the oil production/processing system might be coming from a coal power plant which is 35% efficient or generated by a gasoline or diesel engine which is 20-30% efficient. Let’s not forget the 175 pound workers arriving to work in 6000 pound trucks powered by those inefficient engines, the vast majority of energy being used to move the 6000 pound truck's mass and that transportation efficiency (175/6175 lb) a paltry 2.5%! And I almost forgot to mention that the very process of burning of the oil yields only 71% of the energy in the original crude. This is derived from the combustion equation for crude oil. That is, there are 140000 btu in a gallon of crude but after burning you are left with 99,400 btu as energy left to do work, as crude’s Exergy or if you will, its net energy. The other 29% is wasted as heat, adding to the entropy in our world, contributing to global warming. By now I hope the reader is getting an understanding of the vast amount of energy flowing into the production system. The MOST IMPORTANT POINT TO KEEP IN MIND is that it is energy of the fossil fuels being returned as exergy to society that provides the vast majority of the wealth in our industrial civilization. Just like past civilizations, we still have slavery leveraging the work needed to be done but the slaves powering our industrial lifestyle are primarily the bond energy released from cleaving the carbon-hydrogen bonds in fossil fuels, the most important being oil. Oil Exergy to a huge extent is the portal where wealth flows into society. By this I mean of course our current fossil fuel dependent industrial society. Energy or exergy always was the driver of wealth but in the pre industrial era, that exergy came from our own backs and hands and the power of our animals whose energy came from eating plants grown by energy received from the sun. If follows then that if exergy from fossil fuels depletes, then wealth generation will also decline unless of course energy from another source can be found and substituted. It also follows that if more and more work goes into the oil producing industry, energy is being subtracted from society. Wealth is being subtracted from society and diverted back to oil production. This means that we in society are getting poorer. The point is not far off when all the energy, the “wealth” is flowing into oil and nothing flowing back to soon to be poor little us. As Bob Dylan said “It doesn’t take a weatherman to tell you which way the wind is blowing.” It doesn’t take an economist to understand that if wealth is subtracted from an economy, the economy will contract. I think it is very possible that our recession both here and world wide is partly caused by energy and wealth being diverted back to oil production and if energy available to the world economy declines then growth will decline, or stop or become negative in the not too distant future. So is it happening as the Hills Group seems to indicate and if so when will it happen? Will we have to pay more to fill up our Landcruisers here in Jackson Hole? Will all the central bank officials, bankers and hedge fund managers still be coming here every summer to strategize how to keep money flowing from the periphery of society into the financial globalized elites? Stay tuned as I continue to try to unpack this little known and very complicated problem.