The Oil Situation: Some Alarming Aspects.

Ted Trainer

4.11.2017

(This adds to the document recently circulated; “Oil Wake-up Call”.)

There are four or five factors indicating that the oil supply situation is likely to become extremely problematic within a decade. There is no recognition of this within the mainstream.

Each of the themes is briefly summarised below, with documentation given in the appendix.

Production of conventional oil seems to have peaked about a decade ago .

A number of analysts think this is the case, so no documentation is given below. Oil supply has been kept up over the last decade by increasing supply of unconventional oil, e.g., from fracking.

The amount of energy needed to provide each unit of oil energy (EROI) is increasing.

It has more or less doubled in twenty years. This is because of increasing scarcity, difficulty of discovery and need to tap more difficult sources.

The discovery rate has fallen dramatically, while the capital expenditure being put into discovery and production has risen enormously.

As a result the oil companies are in serious financial trouble, carrying huge debt.

Paget reports that the 2016 world consumption was 25.1 billion barrels, but in that year only 2.4 billion barrels were discovered. The 15 year average discovery rate was 9 billion barrels.

Meanwhile the capital expenditure on discovery and production has trebled in a decade, and the top 7 companies now have extremely high levels of debt.

Fracking etc. tapping unconventional oil and gas is not likely to make much difference .

Fields deplete rapidly. They do not seem to be distributed widely; the US seems to have most of the global resource. Just about everything depends on the near future trends in output from this source; if it falls as several analysts expect, we are in for very serious economic disruption before long.

The capacity of many oil producing nations to export is declining rapidly due to deteriorating internal conditions.

Ahmed’s recent book (2017) is extremely important in pointing out that many oil exporting nations are experiencing rapidly rising populations and deteriorating ecological conditions impacting on water and food availability. These trends are beyond the capacity of governments to cope with, producing increased social dissent, conflict and rebellion, and fuelling recruitment by ISIS etc. Several are likely to become “failed states” within a decade . Meanwhile their production is becoming more difficult and their internal oil demand is rising, reducing capacity to export, which means states have less income to apply to solving their problems …and less oil will be available for the rest of the world to import.

6. Extremely disruptive effects on the global economy are inevitable .

It is difficult to see how the combined effect of these factors can result in anything other than a major and irredeemable breakdown in the global energy situation, probably within ten years.

It is not clear what is happening regarding the relationship between oil price and the economy. Various analysts think oil must be sold for around $100 barrel for the companies to survive, but oil at this price seems to mean recession for an economy. The price of oil is low now, so why hasn't the economy picked up? Tverberg thinks the recent very high price knocked the economy down to a state from which it has not been able to recover, especially because most people are getting low wages and carrying heavy debt and thus are unable to generate much demand for goods.

The low investment rates by oil corporations means the exploration and discovery rates are down, which must result in supply shortages in the near future. So if the economy picks up and oil demand increases scarcity of supply will probably result in very high prices again. Thus some believe we are in for a period of fluctuation between these two states, but on worsening underlying supply and cost curves.

General conclusion ?

If this evidence is sound it is difficult to see how we can avoid the conclusion that the noose is tightening around the brainless taken for granted “growth and affluence” ideology that drives consumer-capitalist society and that cannot be even thought about, let alone dealt with. We are far beyond the levels of production and consumption that can be sustained or that all people could ever rise to. This hasn’t been attended to because the grossly unjust global economy continues to deliver most of the world’s dwindling resource wealth to the over-consuming few living in rich countries.

There is only one conceivable way out. That is to face up to transition to lifestyles and systems that enable a good quality of life for all on extremely low per capita resource use rates, with no interest in getting richer or pursuing economic growth. Such a “Simpler Way” would easily designed, and built…if that’s what you wanted to do. (See thesimplerway.info/)

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DOCUMENTATION; Evidence, sources quotes .

The deteriorating Energy Return on Energy Invested in oil supply .

When oil was first discovered the Energy Return on Energy Invested was over 100/1, but by 2000 the global figure was about 30, and about a decade later it was around 17. (Murphy, 2013, see also Gagnon et al. 2009.)

The ER for unconventional oil is quite low, e.g., around 3/1 for oil sands.

The last 25% of the resource will be orders of magnitude more costly to produce than the first 25%.

The EROI for US oil and gas ER fell below 30 in 1968, and by 2017 was down to c. 5 2017. For shale oil it is 5.

Hall and Murphy, EROI Year in Review. SRSrocco.

The deteriorating discovery rates.

Many sources describe the large and rapid fall in the discovery rate, and the discovery rate per dollar spent on exploration.

The essential and most disturbing figures are for discovery, and capital cost; e.g.., from Paget.

Global oil consumption in 2016 was 25.1 billion barrels. Global oil discovery in 2016 was 2.1 billion barrels Global oil discovery, averaged over the last 15 years, 9 billion barrels.

N. Pagett, (2017), “From oilslick to tyranny. A prosperous society is an orderly society.” EXTRANEWSFEED,

The cost of discovering a barrel of oil rose from 2003 to 2009 from $1 to $3, i.e., it trebled in less than a decade.

Heinberg, R, (2016) The Case of the Vanishing Oil Reserves, Resilience. NOV 3, 2016

Between 1985-95 the amount of oil discovered averaged 15,000 mb/y with 11,000 wells drilled. Between 2005 and 2015 it averaged 11,000 mb/y from 2600 wells drilled. Thus the ratio fell from 10 to 4.2.

Wood McKenzie, HSBC

The conventional oil discovery trend line plotted by the IEA between 2009 and 2016 fell from an index of 11 to 4.

The annual discovery index for conventional oil 1956-1967 was 73, but for the period it was 2006 - 2016 it was 10.

Blomberg, 2016, Aug. “Oil discoveries lowest since 1947.”

Discovery cost has trebled in a decade … Johnson says the cost of discovery is “…staggering”.

Johnson, C., (2010), “Oil exploration costs rocket as risks rise”, Industries , London, Feb 11.

“… discoveries are below production. The number of fields discovered each year is the same today as in the 60’s, but volumes are 4 to 5 times lower, which means that the average size of a field discovered is 4 to 5 times smaller than then (which makes exploitation more difficult and costly)”.

Jancovici, J-M., (2012), A couple of thoughts on the energy transition. Le Debat , Sept.

… in the early 1990s fewer than 10% of oil discoveries were located in deep water areas. By 2005 the number jumped to greater than 50%. (Murphy and Hall, 2011, op. cit.)

2. Falling oil company profits, and escalating capital expenditure and debt, falling discovery effort now .

Because the difficulty of finding and producing oil is increasing rapidly oil companies are having to invest far more capital to produce oil. They have gone into very high levels of debt to keep going. A few years ago oil co debt was c. $200 billion, now $18,000 billion.

Hall and Murphy, EROI Year in Review .SRSrocco.

In 2011, ExxonMobil, Chevron and ConocoPhillips made combined profits of $80.4 billion. As of 2016, their combined profits haemorrhaged to a mere $3.7 billion. Over the same period, their combined debt rose from $40.7 to $95.7 billion.

The US Energy Information Administration reports that in 2014, 68 US public energy companies spent 25% of operating cash flow to service their debt. This has now risen to 75% — mostly due to the higher costs of producing shale oil …

(Note that the falling profit means they cannot survive if oil sells for only c. $40-50/bbl. See section below.)

The production costs for oil sands are roughly $85 per barrel compared to roughly $40 for average global oil and perhaps $20 (or less) per barrel for Saudi Arabian conventional crude (CERA, 2008).

Because of deterioration in profitability, capital expenditure on discovery and production has fallen 49% between 2015 and 2016 alone.

Martinson;

Capital expenditure on exploration and production per barrel, 1985 - 2000. grew at 0.9%p.a. Between 2000 and 2014 it grew at 10.9% p.a.

Articulating the Future, Thermodynamic Failure Phase 2

7/19/2017. http://articulatingthefuture.weebly.com/home/thermodynamic-failure-phase-2

In 1994 the oil production cost necessary to enable a 12% “Internal Rate of Return” for a producing company was $20/bbl … by 2010it wa $75/bbl.

Heinberg R., and D. Fridley, (2016), Our Renewable Future, Post Carbon Institute. (…referring to Barclays Capital Equity Research.)

World petroleum discovery expenditure in1998 was $1.5 trillion and found 8.6 mbd. In 2005 expenditure was $4 trillion and found 2.4 mbd. That is the cost per barrel discovered went up by a factor of almost 10.

“The world’s largest oil companies are in serious trouble as their balance sheets deteriorate from higher costs, falling profits and skyrocketing debt.”

“…the seven top global oil companies … made a combined $213 billion in cash from operations in 2013. However, they also forked out $230 billion in capital expenditures. Thus, the net free cash flow from these major oil companies was a negative $17 billion.”

This deteriorating return on capital employed reflects deteriorating EROI.

In 2008 the return was 35%, in 2016 it was 8%. In 2008 the price of oil was higher, $38 compared with $43 in 2016.

“What has really hurt the group’s Free Cash Flow, is the much higher capital expenditures of $117.5 billion in 2016 compared to the $67.7 billion in 2004.”

Stasse, M., 2017, “Major oil companies debt explode since the GFC”, Damn The matrix. From SRSROCCO Oct. 14.

Even though Chevron’s revenues nearly tripled in twenty years, its profit was decimated by the falling EROI.

Return on capital employed is down tone quarter of what it was in 2008. “The coming bankruptcy of the once mighty global oil industry will be the death-knell of the world economy. Without oil, the global economy grinds to a halt.”

“WORLD’S LARGEST OIL COMPANIES: Deep Trouble As Profits Vaporize While Debts Skyrocket”, SRSROCCO, Oct. 14, 2017

“ the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programs. Nearly half of the industry needs more than $120.”

The EIA said the shortfall between cash earnings from operations and expenditure — mostly CAPEX and dividends — has widened from $18bn in 2010 to $110bn during the past three years. …

“The major companies are struggling to find viable reserves, forcing them to take on ever more leverage to explore in marginal basins, often gambling that much higher prices in the future will come to the rescue. Global output of conventional oil peaked in 2005 despite huge investment. The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years.

Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow…

Source not recorded, but Kopitz deals with these issues in, “Interview with Steve Kopits”, Exploring Hydrocarbon Depletion, Peak Oil News and Message Boards , 13th April, 2013. http://peakoil.com/production/interview-with-steve-kopits

Between 2000 and 2012, $2.6 Trillion USD was invested in oil infrastructure CAPEX, with no gain in oil production (this data includes shale oil production in USA).

S. Michaeux, “The implications of peak energy”, 2 March, 2016.

“ … the total spend on upstream oil and gas exploration and production from 2005 to 2013 was $4 trillion. … Despite all that investment in conventional oil production, it fell by 1 million barrels a day. By way of comparison, investment of $1.5 trillion between 1998 and 2005 yielded an increase in oil production of 8.6 million barrels a day.

“… the costs of the independent oil majors are rising at 2 to 3% a year more than their revenues.”

Davey, B., (2017). “Using energy to extract energy”, Resilience , 23 June.

The world’s largest oil companies are in serious trouble as their balance sheets deteriorate from higher costs, falling profits and skyrocketing debt. … Even though Chevron’s revenues nearly tripled in twenty years, its profit was decimated by the falling EROI.

SRSROCCO, Oct., 14, 2017

Fracking; Unconventional oil and gas will not save us.

Russia and US have more shale oil resources than the next 8 countries. That is, most countries do not have many resources of this kind. Looks like $50-100 to break even

The plot of probable future output from these sources shows that the US has the most by far… only 10 % from outside US, and supply will all fall by 2040.

Webster, J., (2014), Going Global; Tight Oil Production , IHS. Global Oil Markets.

“On current evidence, tight oil appears unlikely to offset the depletion of crude oil for an extended period of time, in part because the resource base appears relatively modest (figure 9). The IEA mean estimate of 240 Gb is comparable to McGlade’s [ 66 ] (278 Gb) and is only 10% of its estimate of conventional oil resources.”

“…we estimate that around 11–15 mb per day of non-conventional liquids production could be achieved in the next 20 years at costs similar to or higher than today’s ‘marginal barrel’ at approximately $90–120 per barrel.”

Note that this obscures the falling energy content per unit volume of global liquids supply,

“Most authors accept that conventional oil resources are at an advanced stage of depletion and that liquid fuels will become more expensive and increasingly scarce. The tight oil ‘revolution’ has provided some short-term relief, but seems unlikely to make a significant difference in the longer term.”

Miller, R. G. and S. R. Sorrell , (2014), “The future of oil supply”, Philos Trans A Math Phys Eng Sci ., Philosophical Transactions, Royal Society Publishing.Jan 13; 372(2006): 20130179. doi: 10.1098/rsta.2013.0179

US shale oil peak estimated as 2015.

Matt Mushalik, originally published by Crude Oil Peak | Apr 13, 2016

“Can we compensate, then, with “shale gas”? Alas, the European reality will probably not meet the hopes that we can see expressed here and there. In the US, shale gas in the true sense is far from being dominant in the production of non conventional gas: its production amounts to 100 million tonnes oil equivalent per year (on a global US gas production of 600). Meanwhile, gas coming from coal seams (firedamp enclosed in deep coal seams, brought to the surface after fracking the seam) represents roughly 50 million tonnes oil equivalent per year, and tight gas (gas coming from reservoir rocks that are almost alike “regular” reservoir rocks, with the difference that pores have stopped being connected and fracking is needed to re-create permeability) roughly 200 million tonnes oil equivalent per year.

In Europe, there are no tight gas reservoirs, and no significant amount of deep coal seams. We do have mother rocks (shales) in France and Poland, but without exploration wells it is impossible to know whether the recoverable amounts are significant or… close to zero (and both can happen). In Poland, after a couple of preliminary drillings, Exxon has decided to give up looking for shale gas (June 2012). Let’s recall that a reserve is a volume for which extraction is certain, and not the result of a hypothetical calculation made with surface observations.

…”These wells each require a couple hectares, where, as the case may be, forest has to be cleared (or crops become impossible). It is necessary to have a pretty dense pre-existing network of gas pipes – since there is a well every other km – to evacuate the gas extracted. The country must have a whole bunch of drilling companies to constantly drill and maintain thousands of wells. And last but not least, the existing law must allow all these operations to be conducted at a very fast pace, because a non-conventional gas well has lost 50% of its output after one year, and 80% after two years.”

Typical tight or shale gas down to 10% of initial flow in 5 years.

“In the US, the owner of any piece of land owns by right any mineral resource located beneath the land. Therefore in this country any land owner can drill his land without asking the permission to anyone, be it for oil, gas, coal, or anything else (the only limit is respecting existing regulations, for example regarding the environment).”

“Europe is a different place, first of all because the authorization to mine a resource is always granted by the state, no matter who owns the land from which the extraction takes place. Besides, our Old Continent does not possess the network of drilling companies that has been existing for long in the US, and which is necessary to drill everywhere all the time.

As a result, … an annual production that … have a hard time going over several tens of million tonnes oil equivalent (for the whole Europe) after one or two decades.”

The most probable is therefore that the production peak in Norway will mean the beginning of an accelerated decline of the gas supply in Europe (at the world level gas production should enter a long plateau around 2020). If, on top,

Jancovici, J-M., (2012), A couple of thoughts on the energy transition. Le Debat , Sept.

“The Bakken/Three Forks play in North Dakota and Montana and the Eagle Ford play in Texas … provide more than 80 per cent of the country’s production, indicating the rarity of good fields. Well-decline rates are between 81 and 90 per cent in the first 24 months. ... Oil production is projected to peak in 2017 and then collapse – providing a resource bubble lasting about ten years.”

“US shale oil production peaked in March 2015, and has since declined a million barrels a day. US shale gas production peaked in February 2016, and since declined 2.1 billion cubic feet per day. … the US shale boom has already ‘peaked’.” “US shale oil production, as of June 2016, is down 13% from its peak in March 2015.”

“Arthur Berman predicted that US shale oil and gas production would collectively peak by around 2025 before tapering off.”

Ahmed,N., (2016), “Fracking revolution now in decline”. Insurgent Intelligence . Dec 15.

“Several regions and countries, including France, have banned fracking outright, but even where countries are keen to frack, the results have mostly been poor.

“Chinese shale is buried twice as deep as that in the US, and it is too clayey and not sufficiently brittle to frack profitably. As a result, in 2014 Chinese shales produced just 1.5 percent of the oil and gas volume extracted out of Pennsylvania’s shales, at a cost two to three times greater.

Australia has lots of shale, but the first wells drilled in Australia’s Cooper Basin, in 2014, have also yielded poor results, and companies are quietly slinking away. Argentina, paradoxically, has great shales but a political environment that works against their exploitation.”

Flannery, T., 2016), “Fury Over Fracking.” New York Review of Books April 21.

“It is unlikely that fracking will do other than delay the inevitable US peak and decline by more than about a decade.” 128

Hall, C. A. S., (2017), Energy Return on Energy Investment , Dordrecht, Springer.

The output from the three main US shale oil regions is declining by 2.1% per month, i.e. 25.2 % pa.

Mushalik, M. (2016), “The Myth of US Self-sufficiency in Crude Oil”, Crude Oil Peak, January 26.

Two tight oil plays in the US – the Bakken/Three Forks play in North Dakota and Montana and the Eagle Ford play in Texas – provide more than 80 per cent of the country’s production, indicating the rarity of good fields. Well-decline rates are between 81 and 90 per cent in the first 24 months.

Report on Hughes, “Drill, Baby, Drill: Can Unconventional Fuels Usher in a New Era of Energy Abundance?”

US shale boom has already ‘peaked’ says former govt. geoscientist.

Fracking revolution now in decline. Insurgent Intelligence.

Ahmed on reduction in oil exports due to Failing States .

The most worrying aspect of the oil situation detailed in the book Nafeez Ahmed has just published entitled Failing States, Collapsing Systems, (Springer, 2017.) It explains the desperate and deteriorating situation that the Middle East oil producing countries are in. He confronts us with the following basic claims:

In several countries Oil ER is falling, and oil production has peaked, and thus their oil export income is being reduced.

In recent decades populations have exploded, due primarily to decades of abundant income from oil exports.

There has been accelerating deterioration in land, water and food resources, ecological conditions, including climate change.

So, more and more of the falling oil income now has to go into importing food.

Increasing amounts of oil are having to go into domestic uses, reducing the amounts available for export to the big oil consuming countries.

In many of the big exporting countries these trends are likely to more or less eliminate oil exports in a decade or so, including Saudi Arabia.

Falling oil income means that governments can provide less for their people, so they have to cut subsidies and raise food and energy prices.

These conditions are producing increasing discontent with government, civil unrest, and conflict between tribes over scarce water and land. States are decreasingly able to cope. Unemployed, desperate and hungry farmers and youth have little option but to join extremist groups such as ISIS where at least they are fed.

Thus there is a vicious positive feedback downward spiral towards failed states, to which it would seem there can be no escape, because it is basically due to the oil running out in a context of too many people and too few land and water resources.

There will at least be major knock on effects on the global economy and the rich (oil-consuming) countries, probably within a decade . It is quite likely that the global economy will collapse as the capacity to import oil will be greatly reduced. When the fragility of the global financial system is added (… remember, world debt is now around 6 times world GDP), instantaneous chaotic breakdown is very likely.

Nothing can be done about this situation. It is the result of ignoring fifty years of warnings about the limits to growth. Had these been attended to by now we might have begun to move to lifestyles and social systems that do not require enormous resource inputs.

Implications for the economy.

Various commentators think oil price has to be around $100/bbl to enable companies to make any profit. See Clarke,T., (2017), “The end of the “Oilocene; The demise of the Global Oil Industry and of the Global Economic System as we Know it.”,. Resilience. Jan.31.

According to Kopits, the vast majority of the publically quoted oil majors require oil prices of over $100 a barrel to achieve positive cash flow and nearly a half need more than $120 a barrel.

Davey, B., (2017), “Using energy to extract energy”, Resilience , 23 June.

To cover the cost of providing high cost oil US companies must get $130/barrel or more.

Jancovici says, “The slowdown of the economy has a main cause: the slowdown of the energy availability per capita. He shows rate of increase in energy per capita in the world parallels rate of change in GDP…i.e., falls in both. He gives the very tight correlation between energy and GDP that Tverberg uses. He sys “energy = economy”; everything done uses/needs energy to do it.

Graph showing oil price rises and onset of recession. For six of the seven recessions this is clearly evident.

There is going to be a fall in GDP. Energy transition will have to be coped with in a context of no growth “…and most probably in a slow structural recession.” Capital will be harder to find.

Jancovici, J-M., (2012), A couple of thoughts on the energy transition. Le Debat , Sept.

The oil industry is between a rock and a hard place, unable to viably develop oil fields at prices below US$70 per barrel and a world economy that would be crippled if the price of oil rose to the levels required to cover the extremely high costs of exploration in increasingly difficult locations such as the Arctic.

Graham Palmer.

“…cost-cutting efforts have made tight oil profitable at about $60 per barrel (roughly $7 higher than the current WTI price). But much of that cost cutting was due to high-grading (drilling only in the so-called “sweet spots,” which are quickly being exhausted), … Real profitability probably lies in the $100 range or above. But at that level oil prices impact the overall economy; one of the results is a reduction in demand, which leads back to lower prices.” … in the next ten years following 2005, when oil approached $100 per barrel and gasoline reached $4 per gallon, the average family of four spent $8,800 (22 b/p/y times $100) annually to fuel their petroleum-based lifestyle. A low income family trying to survive on minimum wage or social security could not afford the $8800 cost so gasoline demand.”