2014 February 01 Saturday
Rising Oil Extraction Costs

Oil production costs have been rising rapidly because the remaining oil is much harder to reach. What oil companies had to do to just keep production flat:

According to Mark Lewis writing in the Financial Times, “upstream capital expenditures” for oil and gas amounted to  nearly $700 billion in 2012, compared to $350 billion in 2005, both in 2012 dollars. This corresponds to an inflation-adjusted annual increase of 10% per year for the seven year period.

That 10% annual rate of increase held up through 2013. However, in 2014 spending on exploration and production is expected to rise by only 6.1%. The big international oil companies are struggling to maintain their production rates and profits are down at Shell and Chevron. Higher spending has failed to lift output of the majors and they are reporting big drops in profits for last quarter. Shell is cutting spending 20% in 2014.

At some point the oil field development costs for new fields will go higher that the world economy can afford to pay for oil. The big question: When? Once that happens world oil production will start to decline.

I think the high cost of oil is one of the reasons that about half the US counties still haven't recovered from the last recession. 6 years after that recession began those counties are still producing less than they did before the recession began. Think about where you live and work now. Are you well situated to weather the next recession? If the outlook isn't good then far better to make a career change before you are forced to.

Share |      By Randall Parker at 2014 February 01 08:18 PM 


Comments
Wolf-Dog said at February 1, 2014 9:46 PM:

Coal is still plentiful and dirt-cheap. If we can build a new generation of nuclear reactors that are clean and safe (such as the thorium molten salt reactors), we can use that thermal energy to turn coal into liquid fuels at a low price. With so much nuclear thermal energy, we can also turn any kind of carbon into liquid fuels, and even water can become hydrogenated liquid fuels.

Bill said at February 2, 2014 2:05 PM:

In 1900, one barrel of crude oil contained enough energy to take 22 barrels of oil out of the ground. Today in the Saudi oil fields, two barrels of oil worth of energy gets you three barrels of oil. The Canadian tar sands are even worse, because it takes more than the energy in a barrel of oil - in the form of natural gas - to extract a barrel of oil from the sand.

Oil will only get more expensive. When I was a kid driving my parents car, gas cost a quarter a gallon, and the minimum wage was $1.25. So, you worked an hour and you could buy 5 gallons of gas. Today, an hour of work at minimum wage only buys 2 gallons of gas.

Randall Parker said at February 2, 2014 8:59 PM:

Bill,

The EROEI (Energy Return On Energy Invested) for oil from Saudi is much much greater than 3:2. Bitumen (tar sands) from Canada has a ratio of 3 by one source and between 5.1 and 5.8 by another source.

Also, in the 1930s EROEI for Texas oil was around 100:1. We've fallen below 20 in the US. Not sure how far. The recent declines in EROEI have been pretty rapid.

However, if Charles Hall is correct we need an EROEI of at least 5 or 6 just to keep the extraction process going and we need more like 10 or 11 to keep something like our current civilization. I wonder if he is correct. Increased efficiency might let us operate at, say, 8:1 with current living standards.

As for oil only getting more expensive: At some point it might stop rising in price due to demand destruction.

Wolf-Dog,

The EROEI of coal has been declining as we've used up most of the highest energy grade anthracite, lots of lower energy grade bituminous, and have started using the still lower energy grade sub-bituminous.

Wolf-Dog said at February 2, 2014 9:30 PM:

RP: "The EROEI of coal has been declining as we've used up most of the highest energy grade anthracite, lots of lower energy grade bituminous, and have started using the still lower energy grade sub-bituminous."
------------------------------

But the US still has enough coal for another century, which will give us time to develop the thorium molten salt reactors. However, the funding is not there, and the government is not taking it seriously. With thorium reactors (which burn all the nuclear fuel and transmute it into short term nuclear waste), we can even turn water into hydrogen, and the hydrogen can then be converted into liquid fuels.

amac78 said at February 3, 2014 5:57 AM:

Wolf-Dog:

I have read a few backgrounders on thorium-molten salt reactors. There doesn't seem to be any fundamental barrier to the adoption of this approach to nuclear power. Instead, the obstacles appear to be on the development side of R&D, with regulation, and (I assume) with the very high capital expenditures that any type of nuclear power will demand. Are these statements correct?

If they are: it strikes me that the lack of funding for this technology is further evidence of the fundamental un-seriousness of current-day society, with respect to issues that the elites claim are their key concerns. In this case, Global Warming, as well as the cost of energy.

Wolf-Dog said at February 3, 2014 5:57 PM:

amac78:

Thorium molten salt reactors will need money to complete the commercialization, but there were already working prototypes half a century ago, and the science behind it is well understood.

As you said, there are a lot of political barriers to a successful kind of nuclear energy that would revolutionize life on earth. The established energy sources would be upset for sure.

Here is a great lecture given by Sorensen, the CEO of the new thorium energy company Flibe Energy. In this video it is shown how Richard Nixon consciously killed the thorium project in favor of the less efficient uranium reactors because in the short run the uranium reactors would have created more jobs in California (which was in his interest.)

http://www.youtube.com/watch?v=bbyr7jZOllI

And here is an introduction to Flibe Energy:

http://www.youtube.com/watch?v=6-uxvSVIGtU

But the good news is that the US STILL has enough oil, natural gas and coal to survive for another 30 years until thorium reactors are built all over the country. But time passes very quickly, and 30 years will pass very fast without any progress, and this time we will be wiped out, unless this is taken seriously.

In any case, thorium reactors would burn 100 % of the fuel and the remaining nuclear waste would have a half life in the order of 300 years in average, meaning that even if the world builds hundreds of thousands or reactors, the waste will not accumulate and it will disappear fast. In addition, less than 1 % of uranium happens to be the fissile isotope meaning that 99 % of uranium is useless for fission. This means that there is enough thorium in this planet for many thousands of years even if the entire world uses nothing but thorium to generate every kind of energy imaginable. And the cost of electricity from thorium would be very competitive with coal because the operating costs of a thorium reactor would be substantially lower than uranium reactors (because the thorium reactors would be simpler, not because uranium is more rare.)

Check it out said at February 5, 2014 4:46 PM:

Well, the U.S. uses 20% of the world's energy production. A country that sucks up more than what it actually produces is out of business in the near future.

Check it out said at February 5, 2014 5:10 PM:

Nuclear energy, solar energy, eolic energy, wave and tidal energy, electrical energy. Of course all those make better sense than fosil fuels, and the world could have them right now, but as long as we continue believing that our politicians will take that step, oil will continue to reign. In fact no politician or group of politicians can really fix any -not one- of the problems of today's world. The tendencies and vicious circles they've created have become just too powerful. Why the hell do we keep on trusting them and electing them and putting our hopes in them? They are today's worthless hindrances to the progress and evolution of mankind. A little like the Catholic Church before the Renaissance.

If we as humans don't have the guts to take the next step we'll stagnate to death. It really takes some balls to put an end to this dark age and bring about some new enlightenment. Where there are politicians there should be scientists and technologists, where there are churches and cathedrals there should be schools, hospitals and sport areas, where there's stock exchanges there should be libraries and research centers, where there are citizens there should be demonstrations. Oh but I forgot. We've grown to f***en lazy, fat and dumb for even desiring a better life.

Randall Parker said at February 5, 2014 8:37 PM:

amac78,

I'm wondering if we find ourselves in a deeper financial and economic crisis will we finally get serious thinking out of national leaders? My guess is no. My guess is the US government in event of a big economic contraction will focus on maintaining entitlements payments and political correctness.

Wolf-Dog,

Define 'survive'. We need a high rate economic growth just to pay for all the unfunded entitlements obligations. If world oil production peaks in the next 10 years then our economy is going to contract. The economic contraction will cause a financial crisis with massive bankruptcies and state and local government debt defaults. The Feds will be in deep water too. Time for hyperinflation?

Bill said at February 8, 2014 12:35 PM:

Randall -

Thanks for your reply to my comment. The information that I had was taken from Kenneth Deffeyes' book on peak oil from about ten years ago. Deffeyes was primarily a petroleum geologist, and of course there have been dramatic developments in recovery techniques since his primary work experience and career.

I note that there still appear to be big differences in exactly what EROEI involves; as I recall Deffeyes was talking about the total amount of energy involved from getting crude out of the ground, transporting it to a refinery and getting the gasoline portion, and then bringing it to your corner gas station.

Anyway, I really appreciate your work in bringing these topics out for everyone to consider.


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