Peak Oil: Investment Issues # 3

CAPEX, AGAIN

[T]he 2013 WEO has the oil industry’s upstream capex [see this and this] rising by nearly 180 per cent since 2000, but the global oil supply (adjusted for energy content) by only 14 per cent. The most straightforward interpretation of this data is that the economics of oil have become completely dislocated from historic norms since 2000 (and especially since 2005), with the industry investing at exponentially higher rates for increasingly small incremental yields of energy. [1]

I pretend no expertise whatsoever in any and all economic matters … never have. But I understand just enough to realize that those numbers (from that excellent article by energy analyst Mark Lewis) suggest that the oil industry isn’t getting anywhere near its expected “bang for the buck.” And since those increased investments are made possible courtesy of the high prices you and I are coughing up every time we fill our gas tanks, the modest increase in global supply despite the exorbitant capital expenditures [CapEx] means we’re not getting our money’s worth either.

That’s a problem all the way around. This quote from the above-referenced November post of mine is worth repeating:

That a company with the technical ability and cash of Shell would find production from fracked shale had not ‘play(ed) out as planned’ should give pause to the investors and commentators who have become believers in the shale miracle.
Mr. Voser [Peter Voser, retiring chief executive of Royal Dutch Shell] commendably took responsibility in August for a $2.b1n writedown on the value of the company’s US shale assets….
As Mr Voser told the [Financial Times]: ‘[Shale well] decline rates are very high, so after 18 months your production drops very sharply, which means you have a business model of constant investment.’ (links in original) [2]

We continue to read and hear a lot about the (legitimate) fossil fuel production increases here in the U.S. over the past few years. Predictably, the industry cheerleaders are quick to seize on that fact as proof-positive that peak oil is just a fantasy of a few lost souls who derive great pleasure in spreading doom and gloom in the face of the great ingenuity and technological marvels blessed upon us by the capitalism god. (Apparently, we can’t tolerate the thought of good news.)

Actually, those of us who urge greater awareness about the challenges and realities of our fossil fuel-driven energy future would be thrilled if the facts we deal with were wrong and the cherry-picked or outright misleading Happy Talks offered up by the cheerleading squad were genuine indicators of that future.

They’re not, and it is information such as that offered above which tells us that the reality all of us will be dealing with in the years to come is a different one from that which industry shills continue to offer. That’s the one we’ll actually have to contend with. Planning for that would be an ideal step to take right about now. If we could go back in time, it would be an even better idea about a decade ago … give or take.

But why get bogged down with unpleasant truths inflicting harm on today’s bottom line when you can spin a yarn that leaves everyone feeling better but every bit as uninformed as they were before your latest media foray, Right? Profits no matter what the cost to others appears to be the guiding light.

FACTS STILL SUCK

If the above quote from Mark Lewis was a bit confusing, he offers an even more direct statement from that same article:

Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance.

And as Mr. Lewis noted, joining a long chorus of others in the know, the increased supply over these past few years is not the same good ol’ crude oil we’ve been using for more than 150 years to power our magnificent achievements. Most of what’s being extracted from the tight oil formations via hydraulic fracturing (“fracking”) in North Dakota and Texas is an inferior, more costly B-Team version of crude oil— and from wells whose production rates decline rapidly in a very short period of time.

The “solution” to that problem is to drill more expensive wells from areas not quite as resource-rich as the first round. So we’re getting even less bang for the buck. Even with my limited understanding of all matters economic, I don’t think that’s how oil industry investing and production is supposed to work.

The knock-off-your socks statistic is this: 50 percent of all the oil consumed by the human race has been consumed since 1986….
[Vince Matthews, the former Colorado state geologist whose presentation is cited in this quote] … described decline rates [of wells] of 16 percent in the early 1990s rising to 30 percent in 2007 and now at 48 percent.
‘I don’t make predictions,’ said Matthews, ‘but somehow, it just doesn’t seem sustainable to me.’
Instead of a game changer, this new bonanza seems to be a third-quarter run by the visiting team. Here is why: Of the world’s 63 producing countries, 53 are in decline. Only the boosts in Saudi Arabia and the countries that constitute the former Soviet Union have increased global production. The United States, despite the much-heralded boom in production in North Dakota and Texas, is still producing less oil than it did in 1970….
[D]eveloping countries are ramping up demand….
‘We are,’ said Matthews, ‘depleting our resources at a faster and faster rate.’ [3]

That aspect of finite resources in particular is so damned annoying when you are trying to ignore evidence and reality to protect your own narrow interests at others’ expense. If someone could just remind me again why that’s good for us, I’d be grateful.

peak oil matters