[Keith_McClary]

Think about it: every component used to drill a well, either directly or offsite, has an energy input component, right? And so do you think all those manufacturing companies get that energy for free? Of course not. Do you think when those companies sell the components or lease the hardware they eat the cost of the energy input or do they add it to their price? Da...another easy answer.

So again guys...a little common sense: do you think the cost of every Btu consumed to create the entire oil/NG development dynamic isn't paid by the companies doing the drilling? And do you think all the service companies (drilling contractors, cement companies, casing companies, trucking companies, etc) are only charging the cost of the energy they consume in their operations? Of course not.

The bottom line: the monetary cost of drilling a well is much greater then the cost of all the energies used in the process.

Do they spend more on energy than on executive bonuses and expense accounts?

Today's "Free Range" comic:

[Pops]

The guy in the hat must be a Californio if he is putting oil in his radiator.

And none of those huge price swings impacted the EROEI one tiny bit.

That is interesting ROCK, I usually imagine cost is a good stand in for EROI. Obviously this isn't usually and when people are trying to just keep afloat and make the next payment all other calculus goes by the way.

You mention steel and that was one of the materials I was thinking of as a good example since a long fracked horizontal well takes obviously more than a shorter one. And, I have no idea the "average" spacing on the "average" well into a conventional reservoir of 50 years ago but as I understand a fracked well only draws from an limited area, so more wells in a play than normal.

But the ratio we are worried about isn't steel per well, call it steel per barrel. A couple miles of casing might have gone into 2 or three conventional wells 50 years ago. Wells that produced for many years. That same amount of casing now might go into one fracked well that produces for only a few years amounting to much less oil.

More steel in, less oil out = lower ERI

.

[Revi]

We are going to have to figure something else out, because the utility of oil is dropping, and we'll be walking pretty soon. Most of us...

[ROCKMAN]

Pops – “More steel in, less oil out = lower ERI.” Don’t misunderstand: I’ve never argued that the EROEI in general hasn’t decreased over time. But have just been saying that the EROEI isn’t the determining factor if a well gets drilled or not. OTOH a well with an EROEI of 50 should produce a much better profit margin than a 10 EROEI. OTOOH the EROEI doesn’t determine the price that oil sells for. Consider we just saw the oil price drop 50% and the EROEI of any well drilled this month is the same as it would be if drilled 12 months ago. The EROEI of the shale wells NOT BEING DRILLED is identical to the EROEI of those same wells drilled 6 months ago.

As far as vertical steel vs hz steel the calculus isn’t that easy. Lots of conventional reservoirs were drilled on spacing much smaller than today’s hz wells. Consider 4 vert wells 8,000’ deep drilled on 40 acre spacing and one 18,000’ hz drilled on 160 acre spacing. Thus 4 wells X 8,000’ = 32,000’ of csg vs one 18,000’ well = 18,000’ of csg.

[Revi]

That's good to hear Rockman. Now does the horizontally drilled well deliver the same volume of oil over its lifetime that the vertical ones did?

[Pops]

But have just been saying that the EROEI isn’t the determining factor if a well gets drilled or not.

I wouldn't argue that either, even if I had standing to argue such things, LOL

I'm kind of a moderate on the ERI thing, I'm pretty sure it wouldn't matter even if it cost energy to deliver gasoline as long as it were profitable and total energy into the system were sufficient to cover it. I've read tar sands are probably energy negative and use more nat gas energy than they produce — not to mention the energy needed to frack ND shale simply to provide thinner to move the sludge from place to place. But it gets produced anyway.

OTOH, or maybe 'in addition', I'm convinced high ERI oil, virtually too cheap to meter, is what got us to this point as a civilization. It made survival easy peasy, and along the way it turned surplus into a minimum requirement. Not only did FF make waste affordable but it is now required to keep the current economy rolling. Falling eri will have big consequences.

[godq3]

Nothing that has ever happened in the oil patch has used EROEI as a determining factor nor will it ever. Until folks like you understand that you'll never be able to appreciate the dynamics of the situation.

You still don't get that if EROEI of a given energy source drops, maximum tolerated price of it will also drop? If that maximum price is below level needed to drill a tight oil well, then it means that EROEI is affecting tight oil business. IMO now worldwide oil extraction EROEI is too low to support price needed for many TO wells. And I don't read your replies since long time ago, because I know that they are wrong.

[ROCKMAN]

god - "If that maximum price is below level needed to drill a tight oil well, then it means that EROEI is affecting tight oil business.". and you still don't apparently that it costs much more then the energy input to drill a well...typically 10X as much. IOW you, and so many others, grossly over estimate the price of the energy (including the embedded energy) that it takes to drill a well. In fact, as a category, energy is one of the least expensive items. And that obviously means the cost of the energy is one of the smallest components. Which means the cost other components will kill a drilling project long before the cost of the energy. IOW long before the EROEI could kill it. If you understand the concept of "limiting factors" it's easy to express the dynamics in such terms: EROEI has never been and never will be a limiting factor in the develop of oil/NG reserves.

If you still don't get I'll let Revi try to explain it to you. He gets it now. LOL.

[tita]

You still don't get that if EROEI of a given energy source drops, maximum tolerated price of it will also drop?

If the ERoEI of an energy source drops from 20:1 to 10:1, that means that energy costs surge from 5% to 10%. Which is not very high. You still have 90% (instead of 95%) of your gross product to cover all your other costs before making profit. You really have to go on a very low ERoEI to see the energy price being sensitive. And at a very high price of energy, your 90% gross product will be higher, while your other costs stay the same. IOW, high energy prices favors low ERoEI energy sources.

ERoEI is a physic measure. It doesn't tell much about the economic viability of an energy project, which has other costs aspect (time, technology, etc.). But it tells that subsidied farmers growing corn ethanol is nonsense. It tells that old PV panels were not good. It tells that Coal-To-Liquid process is really bad (but it could make economical sense if liquid energy is really more expensive)

[ROCKMAN]

tita – Well put but I have to make a bit of a qualification. “If the ERoEI of an energy source drops from 20:1 to 10:1, that means that energy costs surge from 5% to 10%.” In reality the EROEI of the oil that ultimately supplies the fuel I use to drill a well doesn’t determine what I pay for that fuel. Consider what has just happened. Currently the diesel I use to drill a well is running about $2.79/gallon and a year ago it was about $4.00/gallon. But most of the diesel being produced during both periods came from wells with the same EROEI. About a 30% decrease in energy cost and the same EROEI. OTOH the cost to drill a shale well today is significantly lower also. Probably approaching 30% less and may still decrease in the coming months.

But whatever the current cost to drill many of the shale wells today the price of oil doesn’t justify the investment otherwise we would not have seen the big drop in rig count. Which implies that wells still being drilled must have a larger reserve potential then wells that had been drilling. But given the same energy input (in Btu’s) and a higher production yields the wells currently being drilled must have a higher EROEI then those that were drilling last year. I estimated then that a well with an EROEI of less than 5 or 6 probably couldn’t be justified by economic analysis. Which would mean that wells still being drilled must have an even higher EROEI to be justified by economics. My WAG: 10+ EROEI.

[kanon]

You still don't get that if EROEI of a given energy source drops, maximum tolerated price of it will also drop?

If the ERoEI of an energy source drops from 20:1 to 10:1, that means that energy costs surge from 5% to 10%. Which is not very high. You still have 90% (instead of 95%) of your gross product to cover all your other costs before making profit. You really have to go on a very low ERoEI to see the energy price being sensitive. And at a very high price of energy, your 90% gross product will be higher, while your other costs stay the same. IOW, high energy prices favors low ERoEI energy sources.

ERoEI is a physic measure. It doesn't tell much about the economic viability of an energy project, which has other costs aspect (time, technology, etc.). But it tells that subsidied farmers growing corn ethanol is nonsense. It tells that old PV panels were not good. It tells that Coal-To-Liquid process is really bad (but it could make economical sense if liquid energy is really more expensive)

Your second paragraph makes much more sense than the first. Experience shown that prices are set at the margin, so to speak. Relatively small over- or under- supply results in large price changes on a percent basis. The EROEI calculation tells us when energy projects are likely to be boondoggles or to provide net energy, but it does not appear that EROEI tells us much about pricing or economic/political motivations. It may seem logical that low EROEI fuels are less valuable and lower price, but I think it is more logical to say that low EROEI fuels will be less widely distributed or lower volume, with more of the population using something else or going without. It may or may not be expressed in price, but there are other ways to rationing a supply.

I think there is also a system type analysis that implies an EROEI factor. I think there are specific systems that depend on specific fuels, e.g. the highway system. When we consider the cost/benefit of roads and highways, the EROEI of oil is relevant, but I cannot recall seeing a breakdown of petroleum fuel energy allocated to components of the transportation system. Instead there are nebulous, non-specific inferences such as "economic growth" is low due to low EROEI. I think it would be more valuable to say whether the net energy of oil is sufficient to support the transportation system and what is left over.

[ROCKMAN]

kanon - "The EROEI calculation tells us when energy projects are likely to be boondoggles or to provide net energy, but it does not appear that EROEI tells us much about pricing or economic/political motivations." I think that statement goes a long way to explaining why some folks are confused about the lack of control EROEI has over drilling decisions. I don't think about the nature of EROEI in any other endeavors then oil/NG development because that's my area. As explained no oil/NG project can ever be considered with an EROEI much lower the 6 or so because the economics (dominated by all the costs and not just the energy cost) won't pass the minimum acceptable rate of return. Which isn't to say some wells don't eventually prove to have a much lower EROEI. Consider the ultimate worst case scenario...a dry hole: many tens of thousands of gallons of diesel used to drill a well and zero bbls of oil produced. But obviously the economic analysis didn't use zero bbls of oil as the target.

But consider corn ethanol. If X Btu's are used to produce a gallon of ethanol which can produce X Btu's then the EROEI would be 1 given how most define the term. But if using a low cost energy source, like some alt, reduces the cost to make that Btu to $Y and then that Btu can be sold for $3Y it would could make economic sense to do the project. I don't know if that's even feasible but this is just a thought exercise. Essentially using 1 Btu to make a product containing 1 Btu might make no sense from an EROEI view point. But if that produced Btu can be sold for significantly more than the value off the input Btu wouldn’t that be the determining factor? I'm thinking of gas to liquids: a Btu of NG is selling for less than a Btu of oil which means it’s also selling for less than a Btu of gasoline. So even if it takes 2 Btu of NG to make 1 Btu of gasoline if that gasoline can be sold for 4X the value of the NG (including the energy consumption of the conversion) it could make economic sense to create less energy than it takes to produce it.

Which brings us back to a point made here many times before: all Btu’s are equal…just some are more equal than others. LOL.

[Subjectivist]

ROCKMAN the problem is corn ethanol is political not practical. Corn is not even in the top six ethanol crops when calculated on an acre by acre yield. Depending on whose numbers you use it might or might not be the highest ethanol yield cereal crop, but root crops like regular beets, sugar beets, white potato and sweet potato give vastly more ethanol per acre than any cereal crop.

[ROCKMAN]

sub - Roger. Just used it as an example. But brings up another issue: a Btu from some edible might be worth a good bit less then a motor fuel Btu made from it...to the person driving a car. But to a third world father trying to feed his family losing that price war with a redneck Texan driving a V8 pickup it could be a bit difficult to accept.

[Revi]

tita – Well put but I have to make a bit of a qualification. “If the ERoEI of an energy source drops from 20:1 to 10:1, that means that energy costs surge from 5% to 10%.” In reality the EROEI of the oil that ultimately supplies the fuel I use to drill a well doesn’t determine what I pay for that fuel. Consider what has just happened. Currently the diesel I use to drill a well is running about $2.79/gallon and a year ago it was about $4.00/gallon. But most of the diesel being produced during both periods came from wells with the same EROEI. About a 30% decrease in energy cost and the same EROEI. OTOH the cost to drill a shale well today is significantly lower also. Probably approaching 30% less and may still decrease in the coming months.

But whatever the current cost to drill many of the shale wells today the price of oil doesn’t justify the investment otherwise we would not have seen the big drop in rig count. Which implies that wells still being drilled must have a larger reserve potential then wells that had been drilling. But given the same energy input (in Btu’s) and a higher production yields the wells currently being drilled must have a higher EROEI then those that were drilling last year. I estimated then that a well with an EROEI of less than 5 or 6 probably couldn’t be justified by economic analysis. Which would mean that wells still being drilled must have an even higher EROEI to be justified by economics. My WAG: 10+ EROEI.

Very interesting. So you feel that 10+ is needed in order for a well to be justified by economics. I read somewhere that shale oil rigs are running around 5 or 6 Eroei and that that's the reason they are not making it with today's energy prices.

[ROCKMAN]

Revi - That sounds reasonable. It's all clear in my head but difficult to explain. Let me see if this works better. Well A requires a MINIMUM of X bbls of oil to justify spending $Y to drill and complete it. Let's say that minimum amount of oil, X bbls, would represent an EROEI of 6. But now oil prices have fallen 50% so I need to find 2X bbls of oil to match the economics of the original plan. But obviously it will take the same amount of energy to drill both wells. So now a new well with the same energy investment as the original well that yielded 6X that energy will now have to yield 12X that energy since I have to produce twice as much oil to justify the investment. Which as you've cleverly figured out, grasshopper, is why the shale wells that continued to be drilled must have a better EROEI. At least on paper. LOL.

Of course this doesn't take into account any decrease in drilling/frac'ng costs which would produce an EROEI of something less then 12. But that also assumes a company has the capex to take advantage of the new lower costs. You can se how this becomes a bit more complex calculus when you start trying to account for all the variables.

[Revi]

I see. So the economics are really bad right now for drilling. Maybe with $75 oil it will make sense again.
Thanks for the explanation. So the only places that make sense are the "sweet spots" where the amount of oil produced will make sense to drill for.

[ROCKMAN]

Revi – The dynamic is rather straight forward. A company calculates the future revenue stream in terms of $’s to calculate the rate of return. Which means : bbls produced X a risk factor X the price of oil. The company can’t control the price of oil. All it can control is the amount of oil they can project for a particular well and the probability of that volume being correct. So they can do is drill smaller targets that have a better probability of success (your sweet spots). But that could actually mean a lower EROEI then going for bigger targets with a lower probability of success. These days management is very hesitant to take chances going for the big reserves. But those would be the projects with a higher EROEI due to bigger reserves…if they do find them.

That’s one of the blind spots folks have with trying to analyze the EROEI of drilling: al particular well might have an EROEI of 6. But what about the dry hole the same company drilled looking for another 6 EROEI score? Obviously a well that never produces a single Btu pulls the average down. As would marginal producing wells with EROEI’s less than 3. Consider that I just pulled up 130 Eagle ford wells on Drilling Info that produced less than 5,000 bbls of oil (47 that produced less than 1,000 bo) before they were depleted. You see a lot of press releases from companies bragging about the better wells. Not so much about the wells that have produced very little oil.

[Revi]

Thanks Rockman. It's really interesting to hear about the reality of the shale oil situation. the "sweet spots" are still producing quite a bit still, from what I've heard.

[ROCKMAN]

Revi - Sweets spots are producing along with very sour spots that will never recover their investment. Lots of good shales wells have been drilled. And a lot of poor ones also but even those have added to the production surge. Yes: a portion of the production that has risen so high is coming from money losing shale wells. The MSM love to focus on the wells that initially produce 800 bopd. But they ignore that ones that come on less than 100 bopd and never pay out. You may understand but just in case: often the concept of "producing oil reserves" is confused with "developing oil reserves". Producing means just that: oil coming out of EXISTING wells. It doesn't matter if it's a great well or a piss poor one virtually every shale well capable of producing today is doing just that...producing. OTOH the rig count drops represent a huge decline in DEVELOPING new reserves.

Which is why we haven't seen production drop much...YET. Besides the time delay between a rig moving off a well and production beginning (4 to 6 months) it's very typical when prices fall for operators to not reduce their production rates. Some might cut back a little but it's rare and usually doesn't add up to much. In fact it's more common for companies to try to produce their wells even harder. It's almost always driven by cash flow demands. The dynamic between the depletion of existing wells, the rig count drop, increased focus on the sweeter spots and the voluntary frac'ng delays of wells already drilled is difficult to model with any great certainty IMHO. But it doesn't really matter: by the 3Q and 4Q of 2015 we should start seeing the net result. And if prices stay below $60/bbl for the rest of 2015 the cornucopians will certainly have the breath knocked out of them as 2016 progresses IMHO.