Sunday, April 05, 2009

"Economically Recoverable" Threshold for East Coast Oil Exploration

I haven't written (or really thought) too much about oil lately (too busy), but the discussion surrounding the recent announcement opening the US eastern seaboard for more oil exploration and production needs to be rounded out with a discussion of net energy, something that has been almost entirely lacking to date.

I won't wade into the discussion of whether this is a good idea or not, except to say that I think it's generally a good idea to permit seismic exploration, and I doubt the environmental impact of the decision will be significant for the simple reason that I doubt much, if any production will actually take place.

How much oil actually gets produced off the eastern seaboard is a function of two things (once it's made legal):  how much is there, and the net energy of producing it.  We don't have a good answer to the first question--undoubtedly there is some oil off the eastern seaboard, and very likely not hugely significant amounts.  I've heard the figure 3.4 billion barrels floated around, which is significant but not forecast changing.  Of course, that's just a guess.

However, even if there's 30 billion barrels there, the question is how much can be economically produced.  If it costs $200/barrel for everything beyond the easiest 2 billion barrels, none of that will be produced (except, perhaps, as the accidental byproduct of a failed exploratory well).

It seems to be common practice to estimate the cost of production per barrel for reserves--these are figures that are critically important for understanding whether or not a new "discovery" or newly opened production territory will actually result in any significant increase in oil production.  It doesn't matter if there's 200 billion barrels of oil, or if there's oil that can be produced at $2 a barrel--what matters is the combination, e.g. there's "1 billion barrels of oil that can be produced for $40/barrel."  We simply don't have this information for the US eastern seaboard, and until we do the discussion of the impact of that region is purely posturing.

None of the above is really interesting (at least not to me), but what I do find interesting is what it sets up:

The other complication for US eastern seaboard oil production is that it will take many years to complete seismic studies, drill test wells to confirm reservoir quality/size/location/etc.  Optimists think that we'll have oil flowing out of this region in 7 years, whereas pessimists (realists?) argue that there will be no significant production for well more than 10 years.  Right now, "economically recoverable reserves" tend to be those reserves that can be produced for less than the current price of oil.  More conservative E&P companies won't start a project unless they think they can produce for significantly less than the current price of oil (they don't want to bear the risk that prices go down), while others say that, because the price of oil will go up over the long term, even oil that can be produced at "current price +$10" or so is economically recoverable.  All of this misses some important considerations.

First, to rephrase the assumption a bit, I agree that the scarcity of energy globally will continue to increase over the long term (that's not the same as saying that the *price* of *oil* will mirror that trend).  This is significant because the cost of producing oil is, when it is reduced to its core components, nothing but energy--the energy needed to provision/train/pay the workforce, the energy needed to construct the production platforms/tenders, the energy to perform survey work, even the energy representing the inevitable management/legal/political/regulatory/etc. overhead associated with any project of this kind of scale and complexity.  For that reason, and especially, as here, when it will take so long to even get to the production phase, we need to keep in mind the backdrop of continually increasing energy scarcity.  That energy scarcity will, ultimately, make the cost of producing oil increase (if not in absolute terms, then at least relative to the value of the energy produced).  How much will it increase over the next 7-10+ years that it will take to begin to produce oil from the eastern seaboard?  I don't know the answer to that, either, but it certainly seems reasonable to suggest that it is likely to double.

So what?  Well, if oil is roughly $80/barrel today, conventional wisdom is that oil producible at $60-70 a barrel is the threshold of what is economically recoverable.  However, if the cost of producing oil doubles, then 7-10+ years from now oil will only be economically recoverable if it could be produced today at $30-35 a barrel.  That's a long winded way of saying that, when we finally get preliminary numbers on whether oil off the eastern seaboard is "economically recoverable," I would be very skeptical.  If there are 3.4 billion barrels of theoretically recoverable reserves, of which 2 billion barrels are deemed (by interested parties) to be "economically recoverable," the reality is that in 7-10+ years the amount of oil actually economically recoverable may be much, much less than 2 billion barrels.  It could be 0 barrels.  If an impartial source says that a billion barrels are recoverable at $20/barrel (very, very unlikely), then I'd say that oil is likely to actually get produced.  Beyond that I wouldn't count on it...

Of course, this notion of "economically recoverable" is really just a different way of discussing net energy.  However, the net energy analysis I've seen so far has offered little insight in to future projections for the net energy of newly opened/explored reservoirs--it tends to focus on existing producing reservoirs where actual energy input/output data is available.  With newly opened territory like the eastern seaboard, it's more clear than ever that we'll need to take financial forecasts of input costs and then convert them (imperfect process, to say the least) by comparing to the price of the energy produced to reach any kind of prospective net energy calculation.  If any EROI experts have thoughts on prospective net energy analysis, I'd certainly be interested to hear it...

1 comment:

Rice Farmer said...

I'm not an EROI expert, but this new drilling appears to be an exercise in futility, if its purpose is to help the US achieve "energy independence." Since such drilling will make little or no difference to the bottom line -- something that the administration certainly realizes, even if it doesn't admit this publicly -- I see this as being largely show: the government wants to give the public some reassurance that it's doing something about energy. Perhaps there is also some expectation that no matter what happens in the end, the effort would at least create a few jobs.