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One of the live oaks that bless my home

Monday, April 30, 2012

The Discrete Charm of Living at the Peak

In the summer of 1858, Edwin Drake punched 33 ft of cast iron pipe into the earth to prevent near surface water from collapsing the hole. He then lowered drilling equipment into the cased hole and used a steam engine to drill a successful, 69 ft deep well. On August 27th, shallow oil flowed almost to the surface and was recovered with a sump pump. Within 10 years more than 5,500 wells had been drilled, and 1,200 were producing oil. Edwin Drake made absolutely no money on developing modern drilling technology and died a poor man.

The North American oil industry four years after Drake's well. The Phillips well is on the right, and the Woodford well on the left. Located in the middle of Oil Creek Valley (note the river at the right of the photograph), these two wells showed the early promise of the Oil Regions. The Phillips well was the most productive ever drilled to date, flowing initially at 4,000 barrels per day in October 1861. The Woodford well came in at 1,500 barrels per day in July, 1862. Source: Drake Well Museum Collection, Titusville, PA.

On January 10, 1901, captain Anthony F. Lucas drilled a well to a depth of 1,139 ft (347 m) near Beaumont, Texas. By chance, he created the "Lucas Gusher" that blew oil over 150 feet (50 m) into the air at a rate of 100,000 barrels per day (4,200,000 gallons per day). Because of that spectacular event, the modern oil industry was born overnight. By the end of 1902, more than 500 companies had been formed and 285 wells were in operation. Captain Lucas died penniless.

The Lucas Gusher, 1901, Photograph, 1901; digital image, (http://texashistory.unt.edu/ark:/67531/metapth41398/ : accessed April 30, 2012), University of North Texas Libraries, The Portal to Texas History, crediting University of Texas at Arlington Library, Arlington, Texas.

Now I want you to read loudly this magic word:


Did you hear yourself? Was the sound of your voice soothing? Almost like experiencing a church mass on a Sunday morning? If the answer is yes, you are one of the 300 million Americans, who religiously believe in the magic of technology that will see us through any difficulty whatsoever with almost no pain and multiple gains.

Enter the modern oil and gas industry in the year 2012.  Yes, my industry has created an unbelievable technology to invade the most inhospitable environments ever encountered by humans.  We now use the super machines that put to shame the U.S. space program and, in particular, the Apollo missions.

The Troll A platform is a concrete offshore natural gas platform in the Troll gas field off the west coast of Norway. It is the tallest construction that has ever been moved to another position, relative to the surface of the Earth, and is among the largest and most complex engineering projects in history.

Imagine that using this miraculous technology humanity's deep ocean scouts, otherwise known as the "Super Majors" and "National Oil Companies," decide to drill in 10,000 feet of water a 25,000 feet-long well that may encounter pressures of up to 20,000 psi and temperatures above 350 degrees Fahrenheit.  That well will be drilled 200 miles offshore by a giant, semi-submersible drill ship that costs 700 million dollars, and is operated by a crew of 200 people and dozens of people onshore, who watch the functions of the ship 24/7 via satellite links and massive computers.

Twenty five thousand feet (7,620 meters) is much taller than Mount McKinley and as tall as Gonga Shan (Minya Konka) in the Szechuan Himalayas.  On the seafloor, the well will be protected by a newly designed blowout preventer (BOP) rated to 20,000 psi. This BOP may weigh 500 tons and be 70 ft tall.  It will be quite a chore to transport this new BOP offshore and lower it through 10,000 ft of seawater onto a well head that might be 3-4 ft in diameter. The 20,000 psi BOPs do not exist yet and may be too large to fit inside the existing drill ships.

Now try to imagine 25,000 feet of high quality steel casing pipe, starting from the inner diameter of 36 inches or more, because its walls might be thicker and we still want to land a 7 inch pipe at the depth of 25,000 feet sub-seafloor.  Then imagine 25,000 feet of the thick-wall, steel production tubing that will be placed inside this casing to conduct flow of a supercritical hydrocarbon fluid, while undergoing wrenching thermal and chemical stresses for years.  Picture how difficult it will be to pump cement through 35,000 feet of drill pipe and return it along the fragile narrow space between the casing and the open hole.

One of the four new
ultra-deepwater drill ships for Noble Corporation.

When this well is successfully completed (do you see the risks?), it and other similar wells will produce through a giant floating platform that might cost 1,000 million dollars and employ many dozens of highly skilled personnel flown in-and-out by helicopters.

Let us go back to Colonel Drake and his technology.  Do you see the fundamental difference between producing 20,000 barrels per day of shallow oil from 5 simple wells that may cost 0.04 million dollars each, versus 20,000 barrels of ultradeep oil and gas from one well that will cost 200-300 million dollars?

In the first case, the initial and ongoing expenditures of energy were nothing compared with the heating value of the oil.  In the second case, in addition to the well hardware, we need to throw in two hundred miles of a seafloor steel pipeline or a bunch of tankers, seafloor facilities, ships, and other energy-intensive means of assuring production from our well for a few years.

Net energy gain from the ultradeep wells can be much, much less than producing the old East Texas oilfields.  Net energy gain from the various oil and gas shale projects can be less yet. And this is the main energy problem the twenty first century Earthlings face.  Most are ignorant, others are in denial.  The current state of affairs is not a prescription for a meaningful social discourse on what to do next, when the current global economy is strangled by the lack of cheap reliable crude oil. For those in chronic denial, please note that I said "when," not "if."

P.S. What I just showed you is translated into the official business language as follows:
Our analysis of the 50 largest publicly traded oil and gas companies (ex-FSU) shows that cost inflation continues to increase sharply within the global upstream oil and gas industry. In 2011, production costs increased by 26% while the unit cost of production increased by 21%, which was higher than longer term trends. In 2011, the marginal cost of production the same companies increased 10.8% to US$92.26/bbl.
"Era of Cheap Oil Over As Secular Growth in Upstream Cost Inflation Underpins Triple Digit Oil Prices," Bernstein Research, May 2, 2012.

Do not feel guilty if you can't understand this quote, but it surely is scary when you superimpose it on top of the actual declines of production by most major oil companies.

Friday, April 6, 2012

The World is Finite, Isn't It?

Yesterday I gave a presentation to a group of distinguished business leaders.  In my presentation, I tried to show that the global rate of production of petroleum and the associated lease condensate is at an all-time high or a "peak" that at a greatly expanded scale looks like a "plateau."  I used my published, peer-reviewed extensions of King Hubbert's approach to support my arguments.

Figure 22 in King Hubbert's report "Nuclear Energy and Fossil Fuels," Publication No. 95, Shell Development Company, Exploration and Production Research, Houston, TX, June 1956.

I received a significant push back from several members of the audience.  Their arguments were as follows:
  1. King Hubbert tried to address the question of finite resources and today we know he was wrong.
  2. Even though Hubbert cycles emerge for individual oil provinces, they cannot emerge for the world. 
  3. We have been predicting the peak of global oil production for a long time and it never happened up until now.
  4. Technology will always be ahead of geology and, therefore, we will continue to produce ever more petroleum each year, just from different places, and at a higher price.
  5. Oil shale plays in the U.S. and elsewhere are such technological game changers that they will offset the ongoing declines of the conventional petroleum reservoirs such as Ghawar, Burgan, Cantarell, Samotlor, Prudhoe Bay, and many others. 
    I definitely encroached on the deeply held, personal beliefs of some of the members of my audience, and they became rather upset with me. But their arguments are at the center of the national myth in the U.S., which means that I am in a small and unpopular minority.

    So how does one begin convincing so many people in the U.S. that the Earth is spherical and finite, her crust is very thin, and her fossil fuel resources cannot be produced forever at arbitrarily high rates? Quoting my friend, Dr. Albert A. Bartlett, Professor Emeritus of Physics at the University of Colorado, such convincing is an uphill battle because:
    These people believe that perpetual growth is desirable, consequently it must be possible, and so it can’t possibly be a problem. At the same time there are still a few remaining “spherical earth” people who go around talking about “limits” and in particular about the limits that are implied by the term “carrying capacity.” But limits are awkward, because limits conflict with the concept of perpetual growth, so there is a growing move to do away with the concept of limits.
    "The Physics Teacher," Vol. 34, No. 6, pp. 342-343, 1996.

    Let me try to address points 1-3 above with the graph below. I have digitized King Hubbert's original prediction of global oil production from his 1956 Shell Development Co. report. I have superimposed the actual history of world's production of crude oil (petroleum) and the associated lease condensate liquids in millions of barrels of oil per day (MBOPD). Over the last 8 years, this rate oscillated around 72-74 MBOPD despite of the whole world trying to do its best to meet the ever-growing demand for petroleum.
    King Hubbert's prediction of global oil and lease condensate production revisited 54 years later.  The actual production data are from a combination of EIA statistics and other sources for the early production. It seems that Hubbert got the timing of the plateau (peak) of oil production almost perfectly, and he was off by a factor of two in the production level. He could not have possibly accounted for the offshore production in the North Sea, Nigeria, Angola, Brazil, deepwater GOM, etc.  He had no way of predicting the discoveries and ascent of Cantarell, Tengiz, Majoon, Samotlor, Zakum,  Prudhoe Bay, and many other supergiant oilfields.  Most of these supergiant fields have now been discovered and it is increasingly unlikely that more will be discovered in the future. Hubbert's data said nothing about about the impact of 3D seismic, deviated wells, horizontal wells, massively hydrofractured wells, drilling in two kilometers of seawater, etc. Yet, almost 60  years ago, Hubbert was off by a factor of two in the production level and perfect in the timing of the peak. Now think about an economic forecast for the entire world that is this good after mere 10 years. If you find one, please share it with me and I'll refer to it in this blog.

    Given the incredible impact technology (point 4 above) has had on petroleum production worldwide over the last 60 years, Hubbert's prediction is close to a miracle, demonstrating that the sum of uncorrelated random variables (annual increments of oil & condensate production from all oilfields in the world) with arbitrary distributions and finite variances does tend to a Gaussian, no matter what economists and other laymen say.  Hubbert simply did not have enough random variables in his data set, because these variables were still in the future when he plotted his Figure 22.  In the intervening six decades, technology created by people like me brought these new random variables (oilfields) to life and doubled the production outcome, but did not change the location of the peak.

    Point 5 needs careful addressing beyond the scope of this simplistic blog. Basically, if the power expenditure necessary to produce a resource is greater than the power delivered by that resource, production will stop even if payments are in pure gold.  The large mudstone formations, falsely called "shales," are very difficult to produce and a lot of power must be invested for these formations to produce power as light crude oil.  Thus our ability to produce the low-quality impermeable mudstones at sustained rates reminiscent of  the high-quality permeable oil fields, like Ghawar or Cantarell, is nil. Period.  I'll leave it to the real experts: journalists, economists and fifth graders, to paint a pink rosy picture of the new limitless opportunities.

    Now let me focus on my other favorite subject: demonstration of the cosmic arrogance and limitless ignorance of some economists. My least favorite economist, Dr. Julian Simon, is famous for his belief that there are no limits to growth, and for "defeating" Professor Paul Ehrlich in the equally famous commodity bet.

    Simon also wrote the following nonsense, for which he became a college professor and darling of some policy makers and think (sic!) tanks:
    • Technology exists now to produce in virtually inexhaustible quantities just about all the products made by nature - foodstuffs, oil, even pearls and diamonds...
    • We have in our hands now - actually in our libraries - the technology to feed, clothe and supply energy to an ever-growing population for the next 7 billion years ...
    • Even if no new knowledge were ever gained ... we would be able to go on increasing our population forever...
    As Professor Bartlett dryly observed, even if Simon was off by a factor of 1,000 (economists habitually are off by a lot) in his estimate of duration of the future expansion of humanity (7 million, not 7 billion years), and humanity grew by only 1 percent per year, the number of humans would exceed 10 to the power 30,410. It turns out that Simon's prediction of the number of humans supported by technology and economics is 1 followed by 30,000 zeros times larger (like in 1,000,000,000,000,000,000,000,000,000,000,000,000...) than the number of atoms in the Universe. How does Hubbert's factor of 2 strike you now?

    My other all-time favorite is a 3-day prediction by Irving Fisher, a Yale economics professor, who on October 21, 1929, stated: "Stocks have reached what looks like a permanently high plateau." Three days later, Black Thursday ushered the United States into the Great Depression. Recently, another genius economist from Princeton declared that oil was irrelevant to modern economies.

    My first personal encounter with the high-power economic forecasting was at Shell.  Shell paid a fortune to Goldman Sachs, Chase Manhattan Bank, Deutsche Bank, and a dozen other organizations for the crude oil price forecasts spanning a range from 1 to 30 years.  Shell was very happy with these forecasts, until we plotted all of them together, with several years of starting points.  All the zigzags would start tangentially to the last segment of real data and then would wander off  in every which direction literally covering the entire page like tangled spaghetti, with the predicted end-prices ranging from $5 per barrel to $300 per barrel. We concluded that these very expensive economic guesses had no predictive capability, and settled on a constant low oil price for business planning.  Since the year was 1985, that rough engineering guess was good for almost 20 years and cost nothing.

    I dread to think what the immediate fallout from such hubris might be. The remorseless Goddess of Rhamnous, Nemesis, or Zeus Himself might get angry:
    Seest thou how God with his lightning smites always the bigger animals, and will not suffer them to wax insolent, while those of a lesser bulk chafe him not? How likewise his bolts fall ever on the highest houses and the tallest trees? So plainly does He love to bring down everything that exalts itself. Thus ofttimes a mighty host is discomfited by a few men, when God in his jealousy sends fear or storm from heaven, and they perish in a way unworthy of them. For God allows no one to have high thoughts but Himself.
     History of Herodotus, VII, 10, translated by George Rawlinson (1910).

    Come to think of it, I have not seen recently any economists sacrificing their best rams or bulls as offerings to God, so that He may shine some light on the opaque magic they call forecasting.

    An economic forecaster at work. Now you can see more clearly why we believe the economic dilettantes so much.
    Image source: picsbox.biz/key/magician%C2%A0
    P.S. And here is how the 1972 predictions of the widely discredited Club of Rome look like 30 years later. Did you check them? Not bad for a bunch of ignorant fools those scientists were according to Dr. Simon and every other main-stream whatever.  Now think for one second what will happen if their predictions continue to hold on this finite spherical Earth?  Yes, I can hear you saying : "Why bother thinking about such unpleasant things? We shall always get more, way more of everything with our superior technology. We always did."

    P.S.P.S.  I deeply value wisdom of some economists.  In particular, Professor Nicholas Georgescu-Roegen has changed my life forever.  My two-year study of his magnum opus, "The Entropy Law and the Economic Process," 1971, Harvard University Press: Cambridge, Massachusetts, and the dozens of monographs he quoted there, changed my outlook on everything, and made me a different scientist.  The writings of Professors Filip Mirowski and Herman Daly have also impressed me greatly.  The problem is that these giants of science have been thoroughly ignored by the mere technicians and dilettantes (see the photo above), who also call themselves main-stream economists.