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One of the live oaks that bless my home

Friday, May 24, 2013

Disruptive Technologies? Really?!

My dear old friends from McKinsey & Company have come up with their view of the world's top technologies.  As a historical note, beginning in the mid 1980's and through the 1990's, McKinsey was instrumental in irreversibly damaging the U.S. oil and gas industry.  McKinsey was hired by the scared oil & gas managers to do a hatchet job on the researchers and operations staffs across the U.S. and - for a lot of money - did a awesomely devastating job.

Suffices it to say that the oil and gas industry in the U.S. will never again have the same breadth and depth, ever.  This statement of fact has some interesting connotations when it comes to operating in the ultra-difficult, super-inhospitable environments, which seem to enter into our future.  In fairness to McKinsey and several other consulting outfits, they acted as expensive mercenaries used by management to execute (no pun intended) the already agreed upon plans, as in: "What do you want me to conclude, boss?"

But I digressed.  So here is how the research arm of McKinsey, their Global Institute (MGI), sees potential benefits from a variety of technologies:
By 2025, these 12 technologies identified by McKinsey have the potential to deliver economic value of up to $33 trillion a year worldwide.  Source: The New York times.  Image based on Exhibit E3 in McKinsey's 178 page report, "Disruptive Technologies: Advances that will transform life, business, and the global economy."

The sumptuous, 178-page report by MGI is full of colors and smart information that ought to daze you, just as it dazed me until I came across Exibit E2, and in it a boast about "3x increase in efficiency of U.S. gas wells between 2007 and 2011 [due to] advanced oil and gas exploration and recovery":

Among others, Exhibit E2 in the MGI Report claims that the efficiency of U.S. gas wells has increased by a factor of three between 2007 and 2011.
Suddenly, I grew curious just how exactly the three-fold increase of efficiency of U.S. gas wells was calculated.  Would this be a 3-fold increase in the efficiency of gas production per new well compared with old wells?  Which new well?  What old wells?  Over what interval of time?  A month?  A year? How does one define "advanced"?

Since I do not have the resources of MGI to carefully analyze the entire gas production in the U.S., let me focus on Texas, the largest gas producer in the U.S.  Luckily, the Texas Railroad Commission provides easily accessible well production data which allowed me to construct the following plots:
The total rate of gas production in Texas over the last 80 years in Tscf/year.  Note that today Texas produces 1/3 of U.S. gas consumption. Also note the fundamental Hubbert peak in 1972 or so.  The most recent, separate peak is due to a new resource: The Barnett Shale.  This recent production increase was achieved by drilling some 16,500 mostly horizontal wells, and the average production per Texas gas well continued to decline as shown in the next plot. Data source: Texas Railroad Commission.
Production rate of an average gas well in Texas in millions of standard cubic feet per day versus time.  This figure was obtained by dividing the total gas production rate reported in Texas for a given year by the number of active wells in the same year.  If the current trend of production decline continues, an average gas well in Texas will produce nothing 27 years from today.  Data source: Texas Railroad Commission.

One might argue that this plot is not definitive, because the production decline in tens of thousands of older gas wells more than offsets the new production from the fewer new, more productive wells.  So how about plotting an increment of production in a given year, divided by the number of new wells that were put on production in the same year?  Well, here it is:
Incremental gas production rate in a given year per incremental well that came on line in the same year.  The big spike in the 1970's corresponds to the peak of gas production in Texas. It is followed by an even more rapid decline.  If one disregards the second spike in the early 1990's, the incremental gas production per incremental gas well in Texas has been either constant or slowly declined over the last 30 years.  There was no 3X increase of productivity as stated in the MGI report. The only explanation for the MGI claims I can think of is that the flash, initial production from the new massive horizontal wells is many times more that from the older wells.  But these horizontal wells also decline much faster, at 20-40% per year. Thus, MGI experts may be confusing a few individual trees with a large forest. Note that this plot approximates the derivative, dq/dn, q being the gas production rate and n the number of active gas wells;  hence the spikes.
Now, let's look at the total production of dry natural gas in the U.S. since the beginning of accounting:
Historic production of dry natural gas in the U.S. resolved into several Hubbert cycles.  One EJ/year is about 1 Tscf/year. Nothing short of miracle, the U.S. is the only country on the Earth able to create a secondary Hubbert cycle that was almost as large as the fundamental one that peaked in 1971.   Much of the production rebound came from offshore wells in increasingly deep water. The recent shale and tight gas revolution thus far has added the rightmost spike.  Note that the sum of the current Hubbert cycles declines very rapidly in the near future.  Therefore, without continued incredibly intensive drilling, the U.S. will not be able to maintain its current gas production.

As the plot above shows, petroleum engineers in the United States, created a miracle and maintained essentially the 1970 peak level of gas production for another 40-50 years. This epochal achievement has been largely unnoticed by the public. However, the laws of nature being what they are, will not permit a continuation of the past exponential increase of production rate:
This semilogarithmic plot of gas production rate in the U.S., shows the uninterrupted exponential increase of the rate for 80 years (the red line denotes exponential growth at 6.6 %/year). Note that production rate has stabilized after 1970.  This curve reflects the miracle of U.S. gas technology.  This miracle was not duplicated by any other country on the Earth,  but there is no 3x growth of well efficiency anywhere.
So far, I have shown you that the gas production claims in the McKinsey report seem to be exaggerated. I could repeat the same analysis for oil production, but I will spare you. Why spend so much time chasing nonsense?

But wait, there is more of more insidious nonsense. Let's look at the MGI claims that the mobile internet, automation of knowledge work (as in layoffs of professionals), internet of things (as in shutting down small stores around the world), cloud, advanced robotics (as in layoffs of industrial workers), etc., will  increase the current global GDP of roughly 70 trillion USD by 50%.  Just think about it:  MGI hopes to increase the world's GDP by 1/2 by replacing people with technology.  How exactly will these people retain their buying power to gorge on the new Internet of Things?

What do these technologies have in common? Oh, yes, they all use astronomical quantities of electricity and other forms of mostly fossil fuel power, as well as clean water and rare-earth metals.  Without the cheap, reliable, uninterrupted fossil fuel power, ample clean water, and more rare metals than exist on the Earth, the projected growth of these resource-devouring technologies will remain on the glossy pages of MGI reports. So how does one square their estimate that the fundamental enabling technologies (oil and gas exploration and production) will contribute a measly 0.6 trillion of U.S. dollars, but their high-order derivatives will contribute tens of trillions of dollars?  Isn't it all upside down?  Like an inverted pyramid of the increasingly imaginary activities of our society, such as insurance and financial services?

An inverted pyramid of activities of a modern society.  Those that matter the most, agriculture and forestry, mining, oil & gas recovery , and utilities are at the very bottom in terms of their importance, while finance is at the top. No wonder that this pyramid is unstable and must tip over. Image adpated from  Dr. Kurt Cobb, www.resilience.org/stories/2007-07-29/upside-down-economics
In summary, there is much more to life than staring at your iPhone that is connected to the Cloud and the Internet of Things.  Too many experts from McKinsey and elsewhere seem to think that life is like an iPhone screen.  But here is the bad news: Life does not care about iPhones, iPads, and similar.  Life will go on regardless and the upside-down pyramid will fall as it must, no matter how hard people like me and their children will try to slow down this fall.

P.S. Unnoticed by MGI, but a truly disruptive technology that has just surfaced is the illegal, genetically modified wheat with the glyphosate  (Roundup)-tolerant genes.  My other old friends from Monsanto introduced this wheat to the West Coast, and totally disrupted U.S. wheat exports to Japan and South Korea.  They also disrupted lives of thousands of farmers and agricultural service workers in Oregon and Washington State. Oops! But these temporary difficulties might be considered as necessary sacrifices needed to arrive at a futuristic supply of truly inedible food in the U.S. In the long run, this new food supply will  make us die faster and thus stimulate the new economy of things.

P.S.P.S. The smart people from the uppermost shelf in the figure above have now figured a way of manipulating resource prices.  Goldman Sachs is in the food commodities, aluminum and oil business, and J.P. Morgan is in the copper business.  All banks derive huge profits from keeping the oil price as high as possible and loaning money to the oil companies to start projects that would be impossible if the oil price were lower than, say, $70-80 per barrel.  Have you noticed that price volatility has all but disappeared from oil trading since that summer of 2008?  The big boys are making sure that no one disturbs them from making money quietly. Many tens of billions of dollars per year. This is how wealth is transferred even faster from the base of the pyramid to the top.  Now, that's a truly disruptive technology! Sort of like the invisible Ethernet of Things that translates physical goods into electronic cash to do even more damage.  Or like a 3D printer to print money from nothing.


10 comments:

  1. Well straight away mobile internet is going to add between 4-11 trillion, and renewables <0.5. This report has no meaning for me at all. I'm sure it would be fun to read and disagree with everything, but I wont. I believe in economics efficiency is to do with man hours/labour units or money, yes it is production, but production divided by something, not just overall production.

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  2. Thanks for that, and this 3x of course directly retaken in the media, like for instance in :
    http://www.lemonde.fr/economie/article/2013/05/23/ces-technologies-qui-vont-transformer-le-monde_3415893_3234.html

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    1. Yes, the power of modern propaganda campaigns is awesome. Orwell and Barneys would be surprised how much reality surpassed their predictions. With this magnificent power in their hands, the modern propagandists can manipulate billions of people and suck them dry of their savings and investments. And the naive greedy people willingly participate in this dance macabre.

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  3. I think McKinsey & Company, and CERA, etc, all believe what they say, and that they are a very natural product of this culture.

    US peak oil production and the Gold Standard forced us to live with reality. But we managed - temporarily - to suspended reality for 4 decades and lived off of "other country's resources."

    So after 4 decades of stolen/borrowed-prosperity, our Inverted Pyramid Culture Naturally Selected for a population that no longer has a strong grip on reality - including most of it's "successful" leaders.

    The CERAs, McKinsey & Company's, and all those who "follow" them, will be Naturally Selected For out of the gene pool when the Inverted Pyramid can no longer be maintained (deafening applause here).

    What will become of the HUGE pile of "middlemen" (see "finance, insurance, real estate.."), who will soon be mostly unnecessary?

    Hmmm... if we here at Tad's Blog are as kind, compassionate and thoughtful as we would all like to believe we are... Maybe we should take a page from Douglas Adam's "HitchHiker's Guide to the Galaxy" : we should build McKinsey & Company an Arc, and call it "Arc B" ... and give them all a good farewell party... ;)




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  4. Hi Tad,

    I posted the below on resilience.org but not sure if you read the comments there or not.

    Interesting work.

    Your "Production rate of an average gas well in Texas in millions of standard cubic feet per day versus time." is the same as what I have called production per unit effort (PPUE) here for oil rigs: http://www.resilience.org/stor...

    It is an interesting point you make that "this plot is not definitive, because the production decline in tens
    of thousands of older gas wells more than offsets the new production
    from the fewer new, more productive wells." and one that I had not fully considered. You are of course correct that a large number of old, poorly producing wells could mask the new more efficient wells. I think what removes those doubts though is that that individual well counts have sky-rocketed over the past few years and so we can relatively certain that a majority of the wells in the data set are indeed new. Your next graph shows that incremental decline.

    Cheers,

    Andrew

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    1. Hi Andrew,

      In order to maintain gas production, the new wells must offset the decline of old wells, including the older new wells. This could be achieved by having fewer, fabulously productive and slowly declining gas wells, or by drilling a huge number of good, but quickly declining wells, and then continuing the massive drilling program for as long as possible. It seems to me that in Texas we have achieved the latter and we are sentenced to drilling more of the more expensive wells.

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  5. ....Also, from the plot of incremental gas production per incremental gas well it follows that ever since the global peak of production in Texas in 1971, the rate of replacement of gas production hovered just above zero or was slightly negative. In other words, an increase of gas production rate in 2004, was achieved by drilling lots of new wells. The incremental productivity per incremental well became slightly positive after 2004, and a little later it became negative again. The new horizontal wells in Texas could not outpace the overall decline of productivity of all gas wells.

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  6. Hi Tad,

    I totally agree. It is an increase in effort for the same (or only slightly better) results.

    I have recently done some work on PPUE for oil rigs which may be of some relevance to you. It looks like my first link didn't work, here it is directly to my blog: http://www.southernlimitsnz.com/2013/05/drilling-faster-just-to-stay-still.html

    "We can see that PPUE for most regions peaked around 2000. The big exceptions being Canada in 1992 and Europe and Africa in the mid 2000s. What this means for the majority of the world is that in little over ten years the average number of barrels of oil a single rig produces has almost halved. Put another way oil companies have had to double the number of rigs in operation just to maintain oil production at 2000 levels. This is the very definition of drilling faster just to stay still."

    Regards,

    Andrew

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    1. Andrew,

      I would encourage all readers of this blog to read your thorough analysis entitled "Drilling Faster Just To Stay Still: A Proposal To Use ‘Production Per Unit Effort’ (PPUE) As An Indicator Of Peak Oil" at

      www.southernlimitsnz.com/2013/05/drilling-faster-just-to-stay-still.html

      Thank you, Tad

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  7. I think the most telling phrase in this informative piece is 'Unnoticed by the public'. There you have the whole thing encapsulated in the proverbial nutshell. The 'public' expects fuel to appear, Until gas fails to come out of pumps or cookers, the 'public' will never notice anything wrong. Being told that things are fine is much more comforting...I would prefer that comfort too!
    In casual conversations, I've tried to point out that the cost of extraction of energy is getting close to the value of energy produced. when they reach parity, civilisation ends. I've pretty much given up on that one.
    There is more denial over this issue now, than there is about climate change. At least with climate change we are beginning to see its effects at first hand. But with energy depletion, supermarkets and gas stations are still full and functioning. Rising food prices and unemployment are just the fault of the current government. The fact that both need constant inputs of cheap energy is dismissed as an irrelevance.
    Energy has been on tap (at least in the nations of the developed world) for longer than anyone can remember. Fuel is fuel, no matter how much we burn, there will always be more.
    I want a Nobel prize for cornucopian economics!!

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