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.