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Sunday, January 30, 2005

Vulture Capitalists

A couple of venture capitalists, Peter Huber and Mark Mills, have written an op-ed piece in the Wall Street Journal Online (subscription here and cached here) arguing that conventional oil depletion will lead us to alternative non-conventional oil sources as soon as the market finds them cost effective. The scary thing is that the authors are not only venture capitalists but also a PhD in Mechanical Engineering and a physicist, respectively.

Maybe we should contact the schools the authors went to so we can ask to have their degrees retracted? I say that because what follows is my sentence-by-sentence deconstruction of the entire article. I count a couple of truthful assertions in the entire commentary. Not a good batting average for engineering.

Oil, Oil, Everywhere

January 27, 2005; Page A13

The price of oil remains high only because the cost of oil remains so low.
A meaningless misleading statement. One could even more truthfully state the tautology "The price of oil remains high only because the cost of oil remains so high.", and contradict the premise. Utterly vacuous.
We remain dependent on oil from the Mideast not because the planet is running out of buried hydrocarbons, but because extracting oil from the deserts of the Persian Gulf is so easy and cheap that it's risky to invest capital to extract somewhat more stubborn oil from far larger deposits in Alberta.
Again misleading. That stubborn oil in Canada they refer to is tar sands. Tar sands contains oil much like Wolfowitz's hair contains oil, i.e. it takes a lot of spit and polish to extract it.

The market price of oil is indeed hovering up around $50-a-barrel on the spot market.
One correct, sirs.
But getting oil to the surface currently costs under $5 a barrel in Saudi Arabia, with the global average cost certainly under $15.
And what about global transportation costs, etc.?
And with technology already well in hand, the cost of sucking oil out of the planet we occupy simply will not rise above roughly $30 per barrel for the next 100 years at least.
Unfortunately, these two never mention EROEI (energy returned on energy invested). At some point, you have to consider more than monetary cost. Energy to extract costs money, and if that energy exceeds the energy gained, BYE-BYE. Cheap slave labor does not count (although I wouldn't put it past them)

The cost of oil comes down to the cost of finding, and then lifting or extracting.
Plus transporting, plus refining, plus security (i.e. terrorism), plus ad nauseum.
First, you have to decide where to dig.
Pedantic. ... life started as single celled organisms, then dinosaurs appeared -- from these humble beginnings we eventually arrived at the brilliance of William Shakespeare ....
Exploration costs currently run under $3 per barrel in much of the Mideast, and below $7 for oil hidden deep under the ocean.
Which of course does not include the cost of exploration for oil that is not found, which will continue to increase as we deplete more and more oil.
But these costs have been falling, not rising, because imaging technology that lets geologists peer through miles of water and rock improves faster than supplies recede.
WTF. The units of imaging technology (in Einsteins?) do not match the units of supplies (in Barrels). These guys have engineering degrees?
Many lower-grade deposits require no new looking at all.
Yeah, like recycling the oily rags in the alley behind the Jiffy Lube. Low grade, sure, but right under our noses!

To pick just one example among many, finding costs are essentially zero for the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in Venezuela, and the Athabasca tar sands in Alberta, Canada.
You know what? You can extract an ounce of gold from a 10x10x10 yard cube of earth if you care to try that as well (numbers from Learn more about Precious Metals!).
Yes, that's trillion -- over a century's worth of global supply, at the current 30-billion-barrel-a-year rate of consumption.
No, you knuckleheads. You have to consider the EROEI costs of extraction first. You may end up using up a lot of energy (likely oil) to get at this "supply".

Then you have to get the oil out of the sand -- or the sand out of the oil.
Like I just said: a false premise.
In the Mideast, current lifting costs run $1 to $2.50 per barrel at the very most; lifting costs in Iraq probably run closer to 50 cents, though OPEC strains not to publicize any such embarrassingly low numbers.
The Iraq cost must be hypothetical -- as in we own it.
For the most expensive offshore platforms in the North Sea, lifting costs (capital investment plus operating costs) currently run comfortably south of $15 per barrel.
Bad move, you did realize that North Sea oil has peaked?
Tar sands, by contrast, are simply strip mined, like western coal, and that's very cheap -- but then you spend another $10, or maybe $15, separating the oil from the dirt.
Is that $10-15 in hard labor? No. It is the cost of energy -- it's the EROEI, stupid.
To do that, oil or gas extracted from the site itself is burned to heat water, which is then used to "crack" the bitumen from the clay; the bitumen is then chemically split to produce lighter petroleum.
Such simplicity: use energy to create energy from the energy that you have recovered from using energy that you have recovered from.... Brilliant. In the blurb to their book on Amazon.com, we find the reference to this line "[f]uels recede, demand grows... but logic ascends, and with the rise of logic we attain the impossible--infinite energy, perpetual motion and the triumph of power." How could MechEng PhD Huber advocate perpetual motion?

In sum, it costs under $5 per barrel to pump oil out from under the sand in Iraq, and about $15 to melt it out of the sand in Alberta.
Melt as in smelt? Alberta, meet the closed taconite mines of northern Minnesota, and the energy-and-water expensive technique know as iron smelting..
So why don't we just learn to love hockey and shop Canadian?
No problem, as the U.S. Hockey Hall of Fame is on the iron range of northern Minnesota. Heck, unemployed iron-rangers would move, fishing's better north of the border anyways.
Conventional Canadian wells already supply us with more oil than Saudi Arabia, and the Canadian tar is now delivering, too.
News flash: Canada has peaked in conventional oil extraction. In any case, sliding the minimal tar sands output into the argument is pure marketing B.S.
The $5 billion (U.S.) Athabasca Oil Sands Project that Shell and ChevronTexaco opened in Alberta last year is now pumping 155,000 barrels per day.
Which if it all went to the US, would provide less than 1% of our consumption needs.
And to our south, Venezuela's Orinoco Belt yields 500,000 barrels daily.
Not tar sands, but extra-heavy crude. Guys, why the deception?

But here's the catch: By simply opening up its spigots for a few years, Saudi Arabia could, in short order, force a complete write-off of the huge capital investments in Athabasca and Orinoco.
And Microsoft can engage in monopolistic practices as well. So? Plus, the premise is hypothetical; no one knows if Saudi Arabia can increase output.
Investing billions in tar-sand refineries is risky not because getting oil out of Alberta is especially difficult or expensive, but because getting oil out of Arabia is so easy and cheap.
Two correct, sirs.
Oil prices gyrate and occasionally spike -- both up and down -- not because oil is scarce, but because it's so abundant in places where good government is scarce.
No, prices fluctuate wildly when reserves are tight. See the problems of the silver market for an introduction to this behavior.
Investing $5 billion dollars over five years to build a new tar-sand refinery in Alberta is indeed risky when a second cousin of Osama bin Laden can knock $20 off the price of oil with an idle wave of his hand on any given day in Riyadh.
But I thought you said that we currently get more of our oil from Canada than from Saudi Arabia, right? And this situation applied before last year's huge oil price increase? Most depletion analysts don't buy this possibility anyways. As Rumsfeld would say: "It's the physics". As I would say: "It's the physics of EROEI, stupid".

The one consolation is that Arabia faces a quandary of its own.
As in Middle-East terrorism?
Once the offshore platform has been deployed in the North Sea, once the humongous crock pot is up and cooking in Alberta, its cost is sunk.
I guess they weren't referring to terrorism.
The original investors may never recover their capital, but after it has been written off, somebody can go ahead and produce oil very profitably going forward.
Sounds like a good economic plan -- hope for someone (the original investors) to fail first. Then let the vultures take over. Yea, that's the ticket.
And capital costs are going to keep falling, because the cost of a tar-sand refinery depends on technology, and technology costs always fall.
Not if technology costs are related to energy costs. Something these dimwits are not willing to admit.
Bacteria, for example, have already been successfully bioengineered to crack heavy oil molecules to help clean up oil spills, and to mine low-grade copper; bugs could likewise end up trampling out the vintage where the Albertan oil is stored.
The grand prize in stupidity. It took millions and millions of years of bacteria and algae activity to generate our current fossil fuel supply. Delusional thinking to expect bioengineering to provide an overnight solution.

In the short term anything remains possible.
Monkeys can fly out of my butt (according to Heisenberg).
Demand for oil grows daily in China and India, where good government is finally taking root, while much of the earth's most accessible oil lies under land controlled by feudal theocracies, kleptocrats, and fanatics.
And how does either premise advance your argument?
Day by day, just as it should, the market attempts to incorporate these two antithetical realities into the spot price of crude.
As far as ambiguous economic theory goes. Three correct, sirs.
But to suppose that those prices foreshadow the exhaustion of the planet itself is silly.
No oil analyst ever used the price of oil to foreshadow geological depletion.

The cost of extracting oil from the earth has not gone up over the past century, it has held remarkably steady.
Idiotic statement. Those oil platforms in the North Sea -- chump change.
Going forward, over the longer term, it may rise very gradually, but certainly not fast.
Ambiguous weasel words, what is gradual? what is fast?
The earth is far bigger than people think, the untapped deposits are huge, and the technologies for separating oil from planet keep getting better.
More qualitatively ambiguous weasel words.
U.S. oil policy should be to promote new capital investment in the United States, Canada, and other oil-producing countries that are politically stable, and promote stable government in those that aren't.
Apparently the new-and-improved Neo-Con agenda (more here).

Messrs. Huber and Mills are co-authors of "The Bottomless Well: The Twilight Of Fuel, The Virtue Of Waste, And Why We Will Never Run Out Of Energy," just out from Basic Books.
Basic Books? How about Kindergarten Cut-and-Paste?


Professor Blogger Bubba said...

Hope that exercise was cathartic for you.

I work with lots of people who have similar pedigrees and seem to be just as deluded. The most arrogant group of people I have ever met are physicists. They truly believe that 1) they are smarter than you and 2) because they are smarter than you, you could not possibly understand the full depth of their reasoning.

Peak oil will, like the greenhouse effect, become overwhelmingly apparent with time. Proactive human political actions may delay it by decades, but unless something as bizzare as "Cold Fusion" shows up, Peak Oil will overrun the believers and nonbelievers alike.

1:26 PM  
Professor Blogger monkeygrinder said...

I also think there is a thread of libertarian thought, kind of the "Long Boom" crowd from Wired Magazine circa 1999, which fully and deeply believes in a perpetually ascending economy married to sophisticated technology.

The tar sands bit always cracks me up. People strongly believe in technology. It is a common retort I get when I bring up peak oil; some tech will come along.

In other words, the "Internet" and cell phones and the clapper are conflated into something that might help us extract more oil.

In fact, at the tar sands, they are still using something developed many moons ago.


(Granted, big 'uns)

2:46 PM  
Professor Anonymous Anonymous said...

All right, how much does it currently cost to extract a barrel of oil from the tar sands? Assume the cost is $25, and that all of it is spent on oil. That would mean you burn half a barrel for every barrel extracted. Not a great EROEI, but does it matter? You'd still be able to extract half of the n trillion barrels, right?

3:44 PM  
Professor Blogger WHT said...

I don't know about cathartic. It's just rare that you find an article in which you could potentially debunk every single sentence. The fact that the debunkees are engineer/scientists counts as gravy.

Don't get me going about cold fusion.

4:44 PM  
Professor Blogger WHT said...

I have seen one case of EROEI for tar sands estimated at 3 barrels extracted for 2 equivalent barrels consumed. Probably not less than 1:1 currently (where ethanol/methanol resides), but close enough that beyond the low-hanging fruit currently being extracted, the bulk of the trillion barrel supply may represent negative return.

Wikipedia has a good background on this:

Actually, the VC's should change the Wiki entry if they think they are correct. They do have the credentials :)

5:16 PM  
Professor Anonymous Anonymous said...

Alberta: Wikipedia says "at most 315 billion barrels are considered recoverable by the oil companies given current technology", and this report says proven reserves are 174 billion barrels: http://www.energy.gov.ab.ca/osd/docs/osgenbrf.pdf

Presently extraction costs are $15/barrel. That gives you an EROEI of >3, assuming all energy spent in the process is in the form of oil and included in the costs.

The Orinoco reserves are about equal to the Alberta reserves. So with EROEI=2, the proven reserves would give us 175 barrels, enough to last almost six years at the current rate. Is this accounted for in the ASPO model?

2:56 AM  
Professor Blogger Bubba said...

1. I think the ASPO model has a peak "heavy oil" output of about 5 million barrels/day (don't quote me, but that number is close)

2. A bigger problem than supply is demand and the ability to meet that. To make 10,000 BOPD in the deepwater offshore or in Saudi Arabia you need one well, and the oil flows directly into the pipeline. To make that kind of production in tar sands, you need a huge industrial infrastructure. To get to 10,000,000 BOPD you may have to employ half of the population of Alberta, and basically forego an pretense of protecting the environment. I think you (maybe) could do it, but I don't think you could keep up with the double whammy of accelerating depletion and increasing demand.

3. If anyone starts talking to you about oil shale, grab on to your wallet, and leave as quickly as you can. This is something I have intimate knowledge of. I have made significant (but not extrordinary) amounts of money on tar sand investments recently, but I wouldn't invest a dime in oil shale.

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