Environmental Engineering Reference
In-Depth Information
these years. That means the oil industry spent more than $3.5 trillion to achieve a
decline
in overall
conventional production.
The year 2013 was one of the worst ever for new discoveries, and companies are cutting explor-
ation budgets (if there's nothing worth finding, why waste money?). A recent Reuters article quoted
Tim Dodson, the exploration chief of Statoil, the world's top conventional explorer: “It is becoming
increasingly difficult to find new oil and gas, and in particular new oil . . . . The discoveries tend
to be somewhat smaller, more complex, more remote, so it is very difficult to see a reversal of that
trend. . . . The industry at large will probably struggle going forward with reserve replacement.”
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Here is how energy analyst Mark Lewis and US Army lieutenant colonel Daniel L. Davis de-
scribed the situation in a recent article in the
Financial Times
:
The 2013 [
World Energy Outlook
, published by the International Energy Agency] has the
oil industry's upstream [capital expenditure] rising by nearly 180 per cent since 2000, but
the global oil supply (adjusted for energy content) by only 14 per cent. The most straightfor-
ward interpretation of this data is that the economics of oil have become completely dislo-
cated from historic norms since 2000 (and especially since 2005), with the industry invest-
ing at exponentially higher rates for increasingly small incremental yields of energy.
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The squeeze is also being felt by the global economy, which has sputtered ever since oil prices
began their steep march up to the “new normal” of $90-$110 per barrel (more about this below).
The costs of oil exploration and production are currently rising at about 10.9 percent per year,
industry's profit margins, since it's getting ever harder to pass these costs on to consumers.
In 2010,
The Economist
magazine discussed rising costs of energy production, musing that “the
direction of change seems clear. If the world were a giant company, its return on capital would be
falling.”
10
Tim Morgan, formerly of the London-based brokerage Tullett Prebon (whose customers consist
primarily of investment banks), explored the averaged energy return on energy investment (EROEI)
of global energy sources in one of his company's
Strategy Insights
reports (regrettably failing to
cite the work of Charles Hall, on which he was basing his calculations), noting in 2013:
For 2020, our projected EROEI (of 11.5:1) [would] mean that the share of GDP absorbed
by energy costs would have escalated to about 9.6 percent from around 6.7 percent today.
Our projections further suggest that energy costs could absorb almost 15 percent of GDP (at
an EROEI of 7.7:1) by 2030. . . . [T]he critical relationship between energy production and
the energy cost of extraction is now deteriorating so rapidly that the economy as we have
known it for more than two centuries is beginning to unravel.
11
From an energy accounting perspective, the situation is in one respect actually worst in North Amer-
ica—which is deeply ironic since it's here that production has grown most in the past five years, and
here that the industry is most boastful of its achievements. Yet the average energy profit ratio for
and more oil comes from tight deposits (shale) and deepwater. Canada's prospects are perhaps even
more dismal than those of the United States: the tar sands of Alberta have an EROEI that ranges
from 3.2:1 to 5:1.
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