Thanks, ROCKMAN.

Yes, much appreciated, roc.

It strikes me that, like most extraction industries, oil extraction works on boom and bust cycles and we're due about now for another boom (or at least a boomlet?).

But I can't help but be skeptical about the stated projections of the mega-projects. It seems to me that promoters have every reason to overstate their projections and no reason to understate or downplay them.

I do agree the combination of the unwinding of the global economy and some bump from the mega-projects could push the bumpy plateau out a few years.

One last point/question. Roccman, have you looked at any of shortonoil's postings and recearch on his "Available Energy Model"? I think he makes a compelling case that, well before oil goes into serious decline, available energy from that oil will hit a wall because of decreasing EROEI.

Thoughts?

As far as the oil patch goes, we've been booming ever since oil went over $50/bbl. Virtually every well drilled in 2005-07 was based on oil/NG prices much lower than we've seen the last 8 months. Even when oil hit $147 no one I know was using a price over $70-80 for their economic analysis. And most of them actually had oil dropping a bit after the first two years. No one but promoters would sell a prospect on the high prices we've seen recently.

I understand EROEI quit well. A valid concept but difficult to qualify. I've had many discussions as to its impact on future drilling projects. In essence, EROEI will have no impact on drilling/development decisions. Projects are evaluated strictly on a $ in vs. $ out measure adjusted for perceived risk. In theory, even if a project were to deliver less net energy then that expended to produce it, the project would be drilled if it appeared economic. I've seen many wells completed even though it was obvious the well would never recover the ENTIRE investment. An example: it cost $10 million (sunk cost) to drill down to the target sand. When you reach it instead of having the $100 million of oil/NG you had hoped for it only has $10 million worth of reserves. But at that point it will only cost you $3 million to complete and produce it. So you complete it because you make back 3X the completion cost. But the entire project cost you $13 million and you make back $10 million. Thus you lost money on the over all project but made money on the completion decision. In such a project the EROEI might well be less than one. Such is life in the oil patch.

Again, thanks for the hands-on perspective.

The EROEI issue was more on the level of oil extraction as a whole. When that goes to one or less, I believe oil will still be drilled, but the nature of oil will change from an energy source to a conveyor of energy for special uses--kind of a boutique fuel.

As more and more of our oil comes from deep sea and other difficult-to-extract sources, won't we come closer to that point, where on average oil is more expensive in energy terms to extract it than the energy it yield?

It'll probably take a lot more than a few weeks for the financial system to die. The great depression took years, and that's just a depression...

It might well happen. But this brings us back to quantifying EROEI. Let's take an offshore drilling rig. Today it costs around $800 million to build a deep water rig. Lots of steel and energy consumed for sure. But how do you amortize that cost to an individual well or a project? Rig life might be 30 years. But how many wells will it drill during that time? Boom times now and all are very busy...non-stop contracts. But drop prices for a couple of years and the rig might sit idle ("stacked") for 2 years. These rigs run about $700,000 per day to lease. About 5 years ago they could be had for half that rate. The fuel consumption for drilling any well is easy enough to compute. But it tends to be a pretty small number compared to total costs. Bottom line: the energy spent to build the rig has been expended regardless of how many or few wells are drilled. The operator drilling a well didn’t expend any of that energy. He’s just paying a day rate. But, if the energy had not been spent he wouldn’t have the rig to drill his well.

And you can't just look at it from a production cost (energy cost) stand point either. Production costs will be almost non-existent early in the life of a well. As the well depletes the proportion goes up. Even when a well gets down to generating just $1 a month in profit it will continue to be produced for any number of sound management reasons. I've even seen operators produce at a loss for a while so as to maintain the lease (most leases terminate when a well stops paying royalty) and avoid, at least for a while, the expense of plugging the well.

As I said, EROEI is a valid concept but difficult to quantify. But it works both ways: if the price of oil/NG drops significantly, projects with attractive EROEI's won't be drilled because the profit incentive is no longer there. The oil patch is a fairly simple model: make a profit or cease to exist. EROEI efficiency will never be a determining factor in the process short of a gov't mandated criteria.

FYI, oil has a negative EROEI, just that we don't consider the energy to transform the "dinosaurs" into oil, ie, solar, thermal, gravity, tectonic, etc. Thus, oil is not a source of energy, but it is indeed a conveyor or energy.

Thanks again for the insights. Quantification is indeed difficult, as is precise timing.

And thanks for the reminder of the bigger picture, VMH. We are indeed running on borrowed ancient sunlight.

Irony?

Irony is oil dropping to the 80's yet everyone in Atlanta is driving on fumes.



My mouth just hangs agape in bewilderment.