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Scraping the barrel
DEEP-DIVE: We need to talk about energy return on energy investment (EROI)
Does the winter energy crunch mark the start of a much longer energy crisis? New studies into the oil industry’s diminishing energy returns (EROI) suggest we are slipping down a perilous energy cliff. If the models are to be believed, simply ‘producing more’ might not be possible, and would only make matters worse. Energy Flux delves into controversial EROI theory – and asks what it means for decarbonisation, peak demand, energy security and economic stability.
From oil gushers to energy cannibalism
At the dawn of the 20th century, a one-armed American mechanic and lumber merchant by the name of Pattillo Higgins identified a hilltop location near Beaumont, Texas, to drill an oil well. Having taught himself rudimentary geology, Higgins was convinced Spindletop Hill held vast amounts of oil. He persevered despite being ridiculed by investors, and his efforts paid off in the most spectacular way imaginable.
On 10th January 1901, a drilling derrick struck a high-pressure reservoir beneath Spindletop Hill. An intense oil eruption blew the six-tonne drill pipe out of the ground and sent a 150-foot geyser spewing crude into the air, coating the hill with sludgy residue. In a flash, America’s oil production more than doubled. News of this dramatic event spread like wildfire, triggering the first Texas oil boom – a period that would later become known as the Gusher Age.
Fast-forward 120 years and oil gushers can be found only in the history books. Oil does not spring violently from the ground in any major conventional oil province. As fields mature and flow rates decline, oil must be coaxed up by pumping other liquids or gases down the borehole to create the reservoir pressure required to maintain commercial flows.
Over time, more energy is being expended to recover the same amount of crude. Every well is at its own stage on the decline curve but on a global aggregate basis, the oil industry’s energy return on energy invested (EROI) is falling. The EROI of conventional fields peaked years ago and is now declining rapidly.
The rise and fall of peak oil
Scientists have known about this for decades. An entire field of study is dedicated to furthering our understanding of EROI. Early literature on this topic underpinned the ‘peak oil’ school of thought that emerged in the 1950s and captured popular imagination in the early 2000s with claims that global production would soon peak, plateau and gradually taper off.
The conviction of peak oil proponents swelled with the oil price. As Brent crude shot above $100/barrel in 2008 and bumped around the triple-digit mark until 2011, claims of gradual demise morphed into alarming warnings of impending cataclysm – “an interpretation surely not based on anything that the model in itself could support,” wrote prominent peak oil advocate Ugo Bardi in a 2018 article reflecting on the demise of peak oil theory.
Bardi and his cohort underestimated the significance of unconventional oil resources such as shale. This proved to be fateful. The American shale boom of the 2010s, which saw hydraulic fracturing unleash gargantuan volumes of shale oil and gas, trashed peak oil’s credibility in the eyes of investors and politicians.
With echoes of the Spindletop gusher, the US ‘shale gale’ flooded oil markets and contributed to the precipitous 2014 oil price crash. This revived US claims to global energy dominance, redrawing the energy map and recasting geopolitical power balances. Technical innovation and market forces had finally silenced the peak oil doom-mongers – or so it would seem.
Drill baby, drill!
The shale boom ended peak oil debate and pickled EROI in controversy. High oil prices had spurred innovation, unlocking previously uneconomic reserves that put a lid on prices. The market was working. This view became a mainstay rebuttal to any suggestion that global oil production might someday run into physical limits to growth. Investors gleaned comfort from the idea that the declining energy returns of shale oil and gas could be offset by endless efficiency improvements and more drilling.
Capital poured into the shale patch, unencumbered by concern over the energy cost of fracturing tight rock formations to recover highly disperse hydrocarbon molecules trapped in vast shale formations. The Wall Street philosophy became: These wells will deliver double-digit internal rates of return, lifecycle analysis be damned! The mantra was ‘drill baby, drill!’
But the laws of physics are impervious to Wall Street bravado. Unconventional fossil fuels have a lower EROI than conventional ones, and decline more quickly. Numerous estimates over the years have all arrived at this conclusion.
The quick drop-off in shale well production rates partially explains why so many investors’ fingers were burned. Fracking, it turns out, merely delayed the onset of terminal decline in upstream EROI by compensating for the production plateau of conventional oils since the mid-2000s.
Energy industry eats itself
The benefits of shale will be short-lived and hard to replicate. This is just the tip of the iceberg. As EROI dwindles, the oil industry will have to grow ever bigger to compensate for the growing amount of energy lost in the extraction/production process and keep up with rising global demand. In effect, it will have to run faster and faster just to stay still – with all the attendant environmental impacts that this entails.
This phenomenon of ‘energy cannibalism’ poses an existential threat. Can humanity produce enough ‘net energy’ – after deducting production and refining losses – to sustain modern industrialised civilisation? Can it do so while simultaneously pivoting to cleaner, more sustainable energy sources – which will require their own up-front fossil fuel investment before delivering an energy payback from the sun, wind and rain? Can renewables and nuclear arrest declining EROI? If not, what will happen as EROI falls to ‘dangerously low’ levels?
This special deep-dive series will grapple with these big questions, with references to the latest scientific literature. This first part explains key technical concepts pertaining to EROI, quantifies historical shifts in EROI ratios for fossil fuels and explores some fascinating projections to 2050.
A follow-up will delve deeper into the EROI of renewables and nuclear, and weigh up what this panorama means for energy transition capital allocation, peak fossil fuel demand, decarbonisation policy-making and post-Covid commodities inflation.
Diminishing energy returns
EROI studies emerged from Net Energy Analysis (NEA), a conceptual framework drawn up in the early 1970s in response to the Arab oil crisis. NEA defines ‘gross energy’ as oil, gas or coal reserves prior to development or exploitation. ‘Net energy’, as mentioned, is what’s left after accounting for the cost of extraction, refinement and delivery.
EROI is the ratio between net and gross energy. When the ratio is greater than one, an energy system can be deemed an ‘energy source’. If EROI is equal to or less than one, it becomes an ‘energy sink’. So, if a well produces 25 barrels of oil for each barrel of oil-equivalent energy spent drilling and pumping, it has an EROI of 25:1. This is a typical ratio for oil production today.
We don’t know how much energy Higgins and co. spent partially drilling Spindletop Hill in 1901. Considering the well wasn’t even completed and it then spewed ~100,000 barrels every day for nine days straight, the initial EROI might have been as high as 1,000,000:1 or more. Gushers like this are extreme outliers.
Attack of the energy cannibals
Ambitious new research analysing global oil production data as far back as 1950 gives a startling view of declining fossil fuel EROIs over time. A study published in scientific journal Applied Energy in 2021 uses historic data to model EROI trends out to 2050. The findings are quite incredible.
The paper — by French researchers Louis Delannoy, Pierre-Yves Longaretti and Emmanuel Prados of the National Institute for Research in Digital Science and Technology (INRIA), and David Murphy of St. Lawrence University in New York — is a real barn-stormer.
It finds that the amount of gross energy consumed by the oil industry has ballooned from less than 5% in 1950 to 15.5% today, “and is expected to grow exponentially to reach 50% in 2050”. This implies one-and-a-half barrels produced for every barrel expended, or an EROI of just 1.5:1.
The study depicts the oil industry’s net energy production peaking in 2024 at 415 petajoules per day (PJ/d). But gross production peaks 13 years later, at 551 PJ/d in 2034. All of this extra output (depicted as the top yellow band in the chart below) is essentially wasted compensating for the sharp decline in EROI.
Imagine, if you will, the absurdity of increasing the productive size of today’s oil industry by one-third over the next 13 years just to extract the same amount of usable crude. This is what’s known as the ‘energy trap’ – ramping up output to offset diminishing EROI.
When you’re in a hole, stop digging. Producing more oil from ageing wells or lower quality sources to compensate for diminishing energy returns drags EROI lower still. This is like feeding the ‘energy cannibals’, who grow hungrier with every mouthful.
The EROI situation is not much better for natural gas. Another 2021 paper by Delannoy et al tells us that the average energy requirement for gas production today is equivalent to 6.7% of the gross energy currently being recovered – and that this will also increase “exponentially” to 23.7% by 2050:
The peak oil zombie stirs
How seriously should we take these claims? Is renewed academic interest in EROI merely a rebranding of peak oil’s misplaced alarmism? EROI projections appear similar to the iconic ‘bell curve’ graph used by peak oil advocates to claim (erroneously) that global crude production would peak by ‘X’ date:
The crucial difference is that peak oil theorists claimed crude stocks would essentially run out. This proved to be divisive and ultimately wrong. Delannoy et al, by contrast, acknowledge “we clearly have too much fossil fuels stock to respect ambitious climate targets”.
The problem is rather that the flow of oil liquids, which will be needed to sustain the global economy during the energy transition, “may be constraining… from a net-energy perspective”.
The French researchers are decidedly not trying to predict the future, and advise that their models “will in all likeliness not depict reality”. They are motivated to understand the impact of deteriorating energy returns on the energy transition and society at large.
Are they unduly worried? Scientific literature indicates a minimum safe EROI ratio to sustain the global industrialised economy lies somewhere between 7:1 and 11:1. Today’s ballpark ratio of 25:1 to 30:1 for all fossil fuels would suggest there is little cause for concern.
But much depends on where EROI is measured along the value chain. All the ratios cited so far in this article relate to EROI at the primary energy stage: oil/gas at the wellhead, or coal at the mine mouth. This standard form of EROI is referred to under the subcategory of EROIst.
Crude oil must be transported, refined, processed and distributed to end-users. Losses are incurred at every stage, and in the thermal combustion process (e.g. a car’s internal combustion engine, or power plant). EROI measured at this final point of use is known as EROIpou.
A third subcategory measures extended EROI, which includes energy required to build the pipelines, trucks and other infrastructure to get useful energy to consumers. This is known as EROIext.
Since some usable energy is lost at every point in the chain, EROIst is always greater than EROIpou, which is always greater than EROIext. And the differences are huge.
Galloping off the energy cliff
A 2019 study by Brockway et al concurred with common estimates for upstream fossil fuel EROIs of around 29:1. But it found extremely low ratios at the end-use stage, where EROI fell by around 10% between 1995 and 2011 to 6:1, and declining rapidly. (Note this study refers to EROIprim and EROIfin, which are analogous to upstream EROIst and downstream EROIpou, respectively.)
This is worrying because, as the graph above illustrates, the relationship between falling EROI and net energy availability is non-linear. If EROI falls from 40:1 to 20:1, net energy availability falls by 2.5%. But if the ratio moves from 10:1 to 5:1, net energy falls by 10%.
This is known as the energy cliff. The more one slides down it, the greater the temptation to redouble production to compensate for parasitic energy cannibalism. This would be disastrous from a climate perspective – and perhaps impossible if large and easy-to-extract fossil energy reserves are hard to come by.
“[T]he fossil fuel EROI at the final energy stage is closer to the ‘net energy cliff’ than has been supposed at the primary energy stage… Our results suggest that we may already have entered this zone of highly nonlinear change, where further modest declines in EROIfin ratios lead to increasingly rapid reductions in the net energy available to society.
“We find it credible that declining EROI ratios of fossil fuels will lead to constraints on the energy available to society in the not-so-distant future, and that these constraints might unfold in rapid and unexpected ways.” – Brockway et al, 2019 (emphasis added)
Everything is at stake
This matters because every part of the economy requires energy inputs. The ‘real’ economy is fundamentally a thermodynamic system; the financial system is merely an artificial overlay of paper claims to current and future energy resources. Put simply, printing money does not generate energy or value. Real growth cannot happen without access to cheap and abundant surplus energy (Hall et al, 2014). And yet this is exactly where EROI theory says the world is headed.
The argument over declining upstream fossil fuel EROI is all but settled. As Delannoy et al put it, there is “little doubt that an all-oil liquids peak will take place in the next 10 to 15 years”.
Yet there is a lively academic debate over how to model the end-use/extended EROI of renewable energy sources such as wind and solar, since these impose on the wider system the burden of balancing intermittent output with back-up generation, over-capacity, grids and storage.
Considering what could be at stake, EROI and net energy deserve greater scrutiny and scientific enquiry — even if they do turn out to be nothing more than a distraction. We need to know if the peak oil corpse is merely twitching, or about to come spluttering back to life.
Seb Kennedy | Energy Flux | 4th February 2022
Will decarbonisation save us from the energy trap, or push us further into it? What does rapidly falling EROI mean for peak oil demand, energy transition velocity, energy security, inflation and socio-economic stability? These questions will be explored further in part two. Don’t miss it, sign up now: