An urban legend to comfort America: oil is oil, even if it is not oil

This is the fourth post in a series examining “urban legends” about energy that comfort Americans. These five myths are:

I. Our massive reserves of unconventional oil.

II. We’ll run crash programs to solve peak oil, just as we mobilized for WWII.

III. Demand creates supply, by raising prices.

IV. Oil is Oil, even if it is not oil

V. Demand creates supply, from new technology.

(4) Oil is Oil, even if it is not oil

A common reply to warnings about peak oil is that we have vast reserves of oil. True, but misleading and of limited significance over short- and medium-term horizons.

When the world relied mostly on oil from the wonderful super-giant fields, the distinction between different types of oil was trivial except to those in the oil business. Sweet, sour, deep — these were technical terms. Now that these conventional sources are peaking, we must turn to unconventional sources. Calling unconventional sources “oil” leads to serious confusion.

More accurately seen, there is a spectrum of petroleum resources beyond conventionals. Peak oil is a transitional period during which we move…

from reliance on relatively scarce, cheap, and easily tapped conventional oil

to more abundant, expensive, and difficult to exploit unconventional sources (and alternative energy).

Another way to see this: extraction of conventionals are constrained by their limited abundance. Unconventionals are constrained by our ability to produce them, due to their greater operational complexity and lower energy-return-on-investment (EROI). The result: the price of the oil products increases over time. No matter how frequently said, the development of unconventionals probably will not lower the price of oil. I believe that technological breakthoughs eventually will produce new energy sources — a faith-based statement — but that might be years or even generations in the future.

The difference in EROI is esp important and often ignored. Conventionals require investment of little energy to yield a lot. Unconventionals require substantial input of energy for extraction and processing. This also makes it difficult to rapidly increase output, as their net energy gain scales differently than do conventionals.

One step further along the spectrum

Petroleum resources lie along a spectrum, as there is no bright line between conventional and unconventional resources.

For example, oil found deep under the ocean or in the polar regions is oil in a chemical sense, but economically quite different — due to the greater cost, technical hurdles, and time required for extraction compared to drilling conventional oil wells. So they are somewhat arbitrarily considered unconventionals.

Further along the spectrum, Venezuela’s heavy oil is chemically oil — but with far greater processing requirements and a far lower EROI than regular oil.

Two steps further into fantasy

(1) Bitumen (aka “oil sands”)

Conflating bitumen is misleading (at best). This is often done when calculating global oil resources, giving Canada the world’s 2nd largest reserves. Its economics are radically different than for conventional oil, mined and processed rather than pumped and refined. Both capital costs and operating costs are far higher than for conventional oil. Note that comparison of “operating costs” and “breakeven points” are useless unless they include amortization of capital costs (which they seldom do).

Also, the massive infrastructure required to mine, transport, and process the ore makes scaling up operations difficult and slow — as companies are finding in Alberta. Current plans call for Alberta to be producing 5 million barrels/day of synfuel by 2020. That is probably insufficient to replace the decline of North America’s production by 2020, might exceed the available water and energy (natural gas or nukes) resources, and would leave much of Alberta looking like a moonscape.

For more information about mining bitumen see the following studies of the oil sands industry. They provide balanced looks at the challenges and costs of expanding production in Alberta.

Excerpt from article #5, one of the few calcuations that include all costs and list most of the assumptions:

A new report found the break-even oil price required by new mining projects in the oil sands has jumped to $85 a barrel, an increase of $20 or 31% in barely more than a year. In the report, National Bank Financial senior vice-president Peter Ogden said the break-even price– which assumes an 8% rate of return, capital costs of $120,000 per flowing barrel and operating costs of $27 a barrel — has crept up because of climbing labour and material costs and higher royalties in Alberta under a new fiscal regime beginning in January. The break-even price in May, 2007, was $65 a barrel, assuming an 8% rate of return, capital costs of $100,000 per flowing barrel and operating costs of $20.50 a barrel.

Excerpt from the report described in article #6:

At the revised costs for Fort Hills, we believe a typical made-in-Alberta oil snads project generates a 10% IRR (after-tax) at approximately $100/bbl versus our previous view in the $80/bbl range. … This ugly combination of events mean we are likely at the breaking point for some oil sands development (including Fort Hills).

(2) Kerogen (aka “oil shale”)

Conflating deposits of kerogen with conventional oil reserves is outright deception, as there is as yet no proven large-scale commercially feasible process for mining and refining shale oil (although some are under development). It is not just a question of cost, but of developing the necessary technology.

Most estimates show that decades will be required to perfect and scale-up extraction and refining of these reserves — assuming the many problems can be overcome. I believe the largest running plant today is that of Fushun Mining Group in China, scheduled to produce 7,400 barrels/day in 2008 and 14,000 b/day at some point in the future (source).

For more information about mining kerogen see WiIkipedia on shale oil and shale oil extraction, and the Congressional Research Service report on Shale Oil dated 13 April 2006 (32 pages).

Conclusions

Now these distinctions are often ignored, as easy assurances of our vast energy resources are used to cloud our minds to the risks ahead. As we come to rely more on unconventional energy resources, understanding these distinctions might mean the difference between prosperity and poverty.

Can we increasing production from such sources sufficiently rapidly to replace declines from super-giant fields like Mexico’s Cantarell and Kurwait’s Burgan fields? Based on our experience to date, probably not without crash programs on a scale like that of major wars. Avoiding a crash following peak oil might require starting these crash programs well before peaking — meaning research and planning on a scale far greater than today’s.

Just because we can does not mean that we will. Optimists often confuse the two. Much of the literature about Peak Oil seeks to create a sense of urgency so that we start work now, while rebuttals tend to urge (by result if not intent) complacency — starting tomorrow, next year, or whenever.

Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more more information

Some posts about unconventional and alternative energy sources

Here is an archive of all my articles about Peak Oil.

To see studies about energy — including oil, coal, nuclear, and alternative energy — see the FM Reference Page: Peak Oil – Other Resources.