The Economics of Oil: A Primer Including Geology, Energy, Economics, Politics

121 Pages·2017·2.241 MB·English

by  S.W. Carmalt (auth.)

SPRINGER BRIEFS IN ENERGY
ENERGY ANALYSIS
S.W. Carmalt
The Economics of
Oil
A Primer Including
Geology, Energy,
Economics, Politics
123
SpringerBriefs in Energy
Energy Analysis
Series editor
Charles A.S. Hall, Syracuse, USA
More information about this series at http://www.springer.com/series/10041
S.W. Carmalt
The Economics of Oil
A Primer Including Geology, Energy,
Economics, Politics
123
S.W.Carmalt
SWConsulting SA
Chambésy
Switzerland
and
Department ofEarth Sciences
University of Geneva
Geneva
Switzerland
ISSN 2191-5520 ISSN 2191-5539 (electronic)
SpringerBriefs inEnergy
ISSN 2191-7876
SpringerBriefs inEnergy Analysis
ISBN978-3-319-47817-3 ISBN978-3-319-47819-7 (eBook)
DOI 10.1007/978-3-319-47819-7
LibraryofCongressControlNumber:2016954908
©TheAuthor(s)2017
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Preface
Intheearly1970sIwasagraduatestudentingeology.AndIwasalsosittingingas
lines due to the Arab Oil embargo. When I was offered a job with Cities Service
Company,stillamajoroilcompany,IthoughtIwouldbeabletobothdogoodfor
my fellow citizens by finding more oil and collect a generous salary while doing
geology.
When I started work, I quickly realized that the oil business was a great deal
morethanjustfindingoil.That,ofcourse,wasandisnecessary.Buttherewasthe
smallmatterofhowthecompanywouldshowaprofitfromthisactivity.AfterIhad
spent several years evaluating the geology of potential exploration targets all
around the world, and perhaps because I was one of the few geologists who had a
rudimentary knowledge of computer programming, I was asked to help do the
calculations to determine whether the ventures would be profitable.
As my career developed, this led to positions in the company’s planning
department,lookingatstrategicissues.Theoilpriceincreasesofthe1970shadthe
entire industry talking about M. King Hubbert’s theory that oil production would
peak, and I was assigned to study this and other long-term issues.
CitiesServiceCompanydisappearedintheconsolidationoftheoilindustrythat
tookplaceinthefirstpartofthe1980s.AndalthoughIhadtriedtoavoidit,Ifound
myself unemployed. So were most other geologists, so I worked as a computer
specialist for a number of years.
But things do sometimes move in circles and beginning in the late 1990s oil
shortageswereagainonthehorizon.Asithappened,mycomputerconsultingwork
landed me in an environmental NGO which was concerned about climate change,
sustainability and other environmental issues on a global basis. Many environ-
mentalists believed that global peak oil would save the climate—and the world.
Although political agreement seemed impossible, the oil would simply “run out”
andearthwouldbesaved.Mypreviousworkintheoilindustrymademeskeptical
that it would work out this way.
KennethDeffeyes,whomightbecalledadiscipleofM.KingHubbert,predicted
that the global oil production peak would be in November of 2005. He was both
correct and wrong: correct because production from the type of oil deposits that
v
vi Preface
both Hubbert and Deffeyes discussed did start to decline in 2005, but wrong
because there are other types of oil deposits. As was the case when I started
working for theoilcompany,there isagreatdeal more involved than just theway
oil has accumulated in geologic formations.
This interplay between geologic oil accumulations, pure economics, and the
impact that political processes and events have on the oil economy continues to
fascinate me. We all want to know about the future; perhaps even predict it. The
challenge is to make sense out of a great many anastomosing trends. It is a chal-
lenge—and it is great fun.
My feeling is that the world we have known since the industrial revolution is
changing. Indeed, it must change due to population pressure, resource availability,
information technology, and climate change—and probably other factors. In this
book myaim istolook atthe oil industry and how it is being affectedby all these
changes. It has been a fun book to write, and I hope you will enjoy it.
Alongtheway,Ihavehadthebenefitofagreatmanystimulatingconversations.
The list is long, but I do want to give special mention to: Roger Bentley, Arthur
Dahl, Ken Deffeyes, John Gault, Joachim Monkelbaan, Andrea Moscariello, Ken
Russell,andDeborahandFrankVorhies.Insomecasestheymaydisagreestrongly
withwhatIhavesaid,soIwanttobeclearthattheyarenotresponsiblefortheideas
presented here. But that does not detract from either their intellectual stimulation
nor, more importantly, their friendship.
AndfinalthankstoCharlesHall,theserieseditor.Inthecourseofwritinghehas
been patient and very helpful.
Chambésy, Switzerland S.W. Carmalt
November 2016
Contents
1 Introduction.... .... .... ..... .... .... .... .... .... ..... .... 1
2 Oil Company Finances ... ..... .... .... .... .... .... ..... .... 3
2.1 How Oil Companies Make Investment Decisions.... ..... .... 3
2.2 Who Owns the Resource?.. .... .... .... .... .... ..... .... 4
2.3 Seismic Surveys: Assessing the Resource.. .... .... ..... .... 5
2.4 Drilling a Well. .... ..... .... .... .... .... .... ..... .... 6
2.5 How Much Will All This Cost? Will the Company Make
Money? .. .... .... ..... .... .... .... .... .... ..... .... 10
2.6 Financial Metrics ... ..... .... .... .... .... .... ..... .... 13
2.7 More Complex Projects ... .... .... .... .... .... ..... .... 15
2.8 Government Policy Impacts .... .... .... .... .... ..... .... 17
2.9 Additional Financial Considerations.. .... .... .... ..... .... 19
2.10 Combining Prospects into Programs.. .... .... .... ..... .... 20
2.11 Finding Oil: A Risky Business.. .... .... .... .... ..... .... 21
2.12 Gambler’s Ruin—The Risk of Failure .... .... .... ..... .... 22
2.13 Selection of Projects. ..... .... .... .... .... .... ..... .... 23
3 Some Basics of Petroleum Geology .. .... .... .... .... ..... .... 25
3.1 Conventional Oil and Natural Gas Formation... .... ..... .... 27
3.2 A Brief Excursion Through the “Unconventional”
Alternative Sources of Oil . .... .... .... .... .... ..... .... 29
3.2.1 Conventional “Unconventional” Oil Accumulations .... 29
3.2.2 Tight Oil and Tight Gas .... .... .... .... ..... .... 29
3.2.3 Other Unconventional Oil... .... .... .... ..... .... 35
3.3 Non-oil Energy Options ... .... .... .... .... .... ..... .... 37
3.3.1 Natural Gas. ..... .... .... .... .... .... ..... .... 37
3.3.2 Coal... .... ..... .... .... .... .... .... ..... .... 37
3.3.3 Nuclear .... ..... .... .... .... .... .... ..... .... 38
3.3.4 Hydroelectric..... .... .... .... .... .... ..... .... 38
3.3.5 “Renewables” .... .... .... .... .... .... ..... .... 38
vii
viii Contents
4 Peak Oil... .... .... .... ..... .... .... .... .... .... ..... .... 41
4.1 Hubbert’s Predictions of Oil Supply.. .... .... .... ..... .... 41
4.2 Campbell’s Predictions of Oil Supply. .... .... .... ..... .... 47
4.3 Supply Peaks Versus Demand Peaks . .... .... .... ..... .... 48
4.4 Definitions in the Peak Oil Analysis.. .... .... .... ..... .... 49
5 Energy in the Economy .. ..... .... .... .... .... .... ..... .... 55
5.1 Some Basic Thermodynamics... .... .... .... .... ..... .... 55
5.2 Energy Systems .... ..... .... .... .... .... .... ..... .... 59
5.3 Ecologic Systems ... ..... .... .... .... .... .... ..... .... 60
5.4 Measuring the Economy... .... .... .... .... .... ..... .... 61
5.5 Energy and the Economy.. .... .... .... .... .... ..... .... 62
5.6 Net Energy and EROI .... .... .... .... .... .... ..... .... 65
5.7 Economics of Future Energy ... .... .... .... .... ..... .... 67
6 Oil’s Future Role in the Economy... .... .... .... .... ..... .... 71
6.1 Changes in Transportation . .... .... .... .... .... ..... .... 72
6.2 Additional Financial Disincentives to Transition. .... ..... .... 74
6.3 The Global Energy Transition Situation... .... .... ..... .... 75
6.4 The Global Economic Transition .... .... .... .... ..... .... 78
7 Political Issues.. .... .... ..... .... .... .... .... .... ..... .... 79
7.1 Taxes and Subsidies. ..... .... .... .... .... .... ..... .... 79
7.2 Market Stability .... ..... .... .... .... .... .... ..... .... 80
7.3 Geographical Issues . ..... .... .... .... .... .... ..... .... 82
7.4 Climate Change .... ..... .... .... .... .... .... ..... .... 83
8 Forecasting Natural Gas and Oil Production and Use... ..... .... 87
8.1 Harsh New Environments.. .... .... .... .... .... ..... .... 87
8.2 Tar Sands. .... .... ..... .... .... .... .... .... ..... .... 88
8.3 Tight Oil.. .... .... ..... .... .... .... .... .... ..... .... 89
8.4 Natural Gas ... .... ..... .... .... .... .... .... ..... .... 92
8.5 The Changing Nature of Energy Markets.. .... .... ..... .... 95
9 “Muddling Through” .... ..... .... .... .... .... .... ..... .... 99
References.... .... .... .... ..... .... .... .... .... .... ..... .... 107
Index .... .... .... .... .... ..... .... .... .... .... .... ..... .... 117
Chapter 1
Introduction
Oureconomyrunsprincipallyonfossilfuelenergy:coal,oil,andnaturalgas.Very
roughlyeachprovidesabout30%oftheworld’senergy,withthefinal10%coming
from all other sources—nuclear, hydro, wind, solar thermal, photovoltaics,
geothermal, biomass, and so forth. The 30% of oil energy is of particular impor-
tance because oil is the primary power source for transportation; the economy
dependsontransportationtomoverawmaterials,finishedgoods,people,andeven
informationfromoneplacetoanother.Ifwerunoutofoiltheglobaleconomyisin
serious trouble.
Providing enough oil for the economy is a commercial undertaking, albeit with
major government involvement over the years. The finding, producing,1 refining,
and selling of oil is a major global industry, dependent on the massive financial
investmentsrequiredtosupportallaspects ofthepetroleumindustry.Theoilprice
is part of the daily financial news, affecting everyone from the chairman of
ExxonMobil to a villager in the Mekong Delta. Oil companies, whether publicly
owned by many shareholders, state owned, or privately held, invest billions of
dollarseachyearinkeepingtheeconomyfuelledandlubricated;alargenumberof
specialized service companies support this operation, providing combined
employment for millions of people.
Government involvement in the oil industry is significant. While the image of
“big oil” generally is of companies such as ExxonMobil or Chevron, which are
publicly owned by shareholders, approximately three-quarters of world oil pro-
ductionisactuallyunderthecontrolofcompanieswhosemajorityowner,ifnotsole
shareholder, is a national government (Helman 2014). Major oil-producing coun-
triessuchasSaudiArabia,Norway,Nigeria,Russia,andVenezueladerivemuchof
theirnationalincomefromtheproductionofoil.Formanyothercountries,theUSA
is an example, the cost of importing oil is a major component of their foreign
1“Producing”isthetermgenerallyusedintheoilindustry.Othersprefertheterms“extracting”or
“exploiting.”
©TheAuthor(s)2017 1
S.W.Carmalt,TheEconomicsofOil,SpringerBriefsinEnergy,
DOI10.1007/978-3-319-47819-7_1