Hall and Cleveland are two of the originators of this net energy type of analysis in the oil and gas business, and often referred to by those who hijacked the idea for use in peak oil scenarios. Do you happen to know how many years in the oil business these two had doing these EROEI calculations which our local experts say isn't used, and doesn't exist as a metric in their industry?
As to your claims that Cleveland and Hall are “industry experts”. Far from it, they are academics, both long-term university professors. They are industry outsiders who like to characterize oil and gas and other energy through the concept of energy use and return. That is fine and valid for what they do but it does not impact how oil and gas companies make their decisions. They do not work for the industry and apparently have not even consulted to companies who make the investment decisions. They consult to policy makers in government organizations and think tanks and not to oil companies.
Also, the point about economics and EROEI being different isn't right, as energy use can be measured in terms of dollars. Of course, if you're referring to the manner by which credit can be created easily, then you are right, but that only shows the ineffectiveness of using economics for calculations.
From an academic standpoint the two are related, from a practical one (which is what drives industry decisions) they aren’t at all. People on the outside of the oil industry look at Energy use EROEI to compare and contrast the effectiveness of various sources of energy. This concept is of absolutely no value to the oil industry in terms of making decisions.
Put simply when I want to drill a well for oil there are only a few things that matter to me. Firstly I want to insure that on a risked basis I will find a significant amount of hydrocarbon. Finding that hydrocarbon is of course not useful if I can’t do it at a profit. What goes into the equations that I will then calculate are 1. The costs to drill the well, 2. The costs to complete and tie-in the well, 3. The on-going costs to operate that well including manpower, 4.The commodity price minus any adjustments for quality, 5. Transportation tariffs. 6. Royalties and taxes. If EROEI were important I would be worried about how much energy it took to build the rig I plan on using, how much energy it took to build the coiled tubing unit I might employ or the pipeline I will access, but I am not worried about it. All I am worried about is what it costs me. The drilling company is going to charge me a going rate for use of his rig, it will be higher when the industry is booming and there are fewer rigs available and lower when the industry has contracted and there is an abundance of standing rigs. The owner of the drilling company builds his rigs not using the concept of energy but rather cost/benefit. He looks at what it is going to cost him in terms of manpower and kit to build the rig versus what the market demand currently is and what it is projected for the next couple of years. In most cases drilling companies can pay out their rig investment in a couple of years (in good times under full utilization). At no time does the rig company look at how much energy was expended to create the steel used to build the rig nor do they look at how many kcal were expended by workers, they simply look at how much it costs them, and salaries are in no way tied to btu expenditure by workers. Another example would be if I need gas injection to maintain pressure in my reservoir. In this case I couldn’t care less how many Mbtu’s of gas I use other than what it costs me. When gas is in short supply the cost to me to acquire the right amount of gas to inject is going to be much higher and it might threaten the economic value of the project. When gas prices are lower (as they are now) due to a glut of supply my project stands a much better chance of being economic. At no time will I look at how many btu’s I consume versus how many I put out. The incoming product is valued differently in a different market than the outgoing product….if the price/btu is lower for gas than it is for the oil I will extract then I will likely have positive economics and will decide to do that project. On the other hand if the mbtu’s of gas used is lower than the mbtu’s of oil I get out and the gas is more expensive than the profit I can get from selling the oil there is no way in the world I will do the project. Price is not always tied to EROEI.
There are a host of books explaining petroleum economics , software to calculate it and books papers on petroleum decision making. Here are some linkshttp://www.pandell.com/oilandgas/ea_nexus.html
this is an example of typical oil and gas economic software. You will find no mention of the concept of energy herehttp://blogs.bakerhughes.com/reservoir/category/oilfield-economics/page/2/
baker hughes site which has a number of brief discussions on the various aspects of oil and gas economic assessmentshttp://www.serafimltd.com/pdfs/WellNumbers.pdf
a presentation showing a typical set of calculations conducted in order to determine economic value in an oil projecthttp://www.ccop.or.th/ppm/document/PHWS3/PHWS3DOC15_oh.pdf
another presentation showing how KNOC (Korean National Oil Company) does it
One of the more referenced text books in this subject is:Economics of Petroleum Production -A Compendium Volume 1: Profit & Risk • Volume 2: Value & Worth
by Ian Lerche & Sheila Noeth
Vol. 1: published March 2004 • ISBN 0 906522 23 4
Vol. 2: published July 2004 • ISBN 0 906522 24 2
Not surprisingly a look at the table of contents shows no reference to concepts of energy in/energy out
The most referenced textbook for Petroleum economics and decision making is:Newendorp, P, 1976, Decision Analysis for Petroleum Exploration, Penn Well Books, Tulsa, OK, 668 pp.
The book discusses concepts such as measures of profitability, decision tree analyses, preference theory, principles of profitability, exploration risk analysis, simulations for risk analysis etc. I have this book sitting in my home office library, no mention of EROEI in it.
Or there are numerous publications out there showing how decisions to make investments in the oil and gas industry are made. One from the MMS:http://www.gomr.boemre.gov/PI/PDFImages/ESPIS/4/4218.pdf
Capital Investment Decisionmaking and Trends: Implications on Petroleum Resource Development in the U.S. Gulf of Mexico
The purpose of this report is to examine the factors that impact the oil and gas exploration
and capital markets. We begin with a general overview of the oil and gas industry and
product demand and supply, provide background information on oil and gas resources,
and describe the defining characteristics of exploration and capital markets. The factors
that impact supply and demand and investment decisions are then reviewed. We then use
this information to relate “conventional expectations” concerning these factors to future
investment trends in the Gulf of Mexico. The “conventional expectation” is a subjective
characterization by the authors of the perceptions, opinions, and analysis prevailing
among those that follow the oil and gas industry. We conclude with a summary outline of
the fiscal systems used in the exploration and production industry.
Again no mention of EROEI