Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future

by Richard Heinberg

  This should have been the appropriate point in the article to explain the resource pyramid, and to inform readers that nearly all (if not all) of the world’s methane hydrate resources rest at the bottom of the pyramid, where they are economically inaccessible and likely to remain so. Japan has conducted the world’s most extensive research on commercial extraction of this resource, and, as Chris Nelder noted in a rebuttal to Mann’s piece, “Japan’s experiment so far has taken 10 years and $700 million to produce four million cubic feet of gas, which is worth . . . about $50,000 at today’s prices for imported LNG in Japan.”1 Mann, in a reply to Nelder’s rebuttal, countered that technology R&D costs should not be taken into account in assessing the commercial viability of a resource.2 That’s arguable. However, using the word supply to describe these resources, as Mann does (“estimates of the global supply of methane hydrates”), is clearly misleading, because virtually no hydrates are actually being supplied.

  Whatever the size of the resource base, economic reserves of methane hydrates are currently roughly zero. We simply do not know if the extraction of these resources can ever be accomplished at an energy or economic profit. Most of the geologists I’ve spoken with on the subject are highly skeptical. The EROEI (energy return on energy invested) for commercial methane hydrate extraction is unknown, but preliminary indications are not encouraging. A study of the EROEI for electrical heating of methane hydrate deposits located at depths between 1000 and 1500 meters yielded ratios from less than 2:1 up to 5:1, depending on the source of electricity. The authors of the study emphasize that this is only one of the energy inputs that must be taken into account.3

  Other authors mimic Mann’s hydrocarbon hyper-enthusiasm when discussing “oil shale” (more properly termed kerogen), which is extraordinarily abundant in Colorado and Utah. The United States has the largest deposits of this resource in the world, amounting to nearly 4.3 trillion barrels of oil equivalent. Novice commentators often take that number, divide it by America’s annual oil consumption (roughly 7 billion barrels), and arrive at the mind-melting conclusion that the nation is sitting on six hundred years’ worth of oil.

  But kerogen is not oil. It is better thought of as an oil precursor that was insufficiently cooked by geological processes. If we want to turn it into oil, we have to finish the process that nature started; that involves heating the kerogen to a high temperature for a long time. And that in turn takes energy—lots of it, whether supplied by hydroelectricity, nuclear power plants, natural gas, or the kerogen itself. Therefore, the EROEI in extracting and processing oil shale is bound to be pitifully low. According to the best study to date, by Cutler Cleveland and Peter O’Connor, the EROEI for oil shale production would be about 2:1.4 That tells us that oil from kerogen will be far more expensive than regular crude oil—right up until the time when regular crude oil itself becomes uneconomic to produce.

  In “Drill, Baby, Drill,” after carefully analyzing US shale gas and tight oil prospects, David Hughes proceeds to assess global unconventional oil resources; in the pages devoted to oil shale he points out:

  [W]ith oil shale, as with all hydrocarbon accumulations, there are variations in quality between basins and there are sweet spots within basins. For this reason, the relatively high quality oil shale resources within the Piceance Basin have received the most attention in recent years with pilot projects conducted by the oil majors Shell, Chevron, and ExxonMobil, as well as a number of smaller companies. None of these pilots has resulted in commercial scale production and Chevron has recently abandoned its operations. [p. 123]

  Again: the resources are immense, yet economic reserves are minuscule to nonexistent. Sometimes this can be hard to explain to the layperson. I recall all too many instances where I have carefully described to a lecture audience how it takes energy to get energy, pointing out that the energy profit from the production of kerogen resources is abysmal—only to hear an audience member insist that there must be some dark conspiracy preventing America from exploiting these unfathomable energy riches.

  Other unconventional hydrocarbons are viable, but still problematic and often overestimated. Canada’s tar sands (better termed bitumen) are clearly an economic source of fuel, and again the resource is immense—1.84 trillion barrels, or about 60 years of global oil consumption at current rates. But only about a tenth of that resource is currently counted as reserves. The EROEI for tar sands production is poor, between 3:1 and 6:1 by most estimates. “Syncrude”—synthetic crude oil made from bitumen—is profitable to produce only because oil prices are high and natural gas prices are low. (Heat from gas is often used to liquefy the tar.)5 Bitumen, like all nonrenewable resources, is subject to the low-hanging fruit extraction principle: the very best resources are being mined first—which means that, as time goes on, the requirement for financial and energy investment per barrel of finished syncrude will tend to increase.

  Like tar sands, Arctic and deepwater sources of oil are currently economic—at least in some instances. For the United States, the Gulf of Mexico is the site of nearly all current deepwater production. The Gulf boasts a total of almost 70 billion barrels of reserves plus estimated “undiscovered technically recoverable resources.” Shell is currently developing some of the deepest wells ever drilled, in nearly two miles of ocean water two hundred miles south of New Orleans.6 Deepwater petroleum resources also exist off America’s Pacific and Atlantic coasts, and the North Slope of Alaska. In all instances, deepwater drilling entails high environmental risks (recall the Deepwater Horizon disaster in the Gulf of Mexico in 2010), but especially so in ice-choked Arctic waters. The realistic prospect is for a combined production rate no greater than 1.7 million barrels per day from all US deepwater projects through 2035 (which equates to about 2% of world crude oil consumption), after which production will decline.7 Deepwater projects typically suffer from high production costs: a single well may require the investment of $100 million or more. Drilling costs are highest in the Arctic, as Shell recently discovered: in January 2013, a Shell drilling rig called the Kulluk broke free from a tow ship in stormy seas and ran aground near the island of Kodiak. The immediate loss was assessed at $90 million, and there were no oil production revenues from the project to offset it.8 Deepwater exploration and production are only profitable when oil prices are high.

  Our problem is not that there aren’t enough hydrocarbon molecules in the ground. (Charles Mann is right on that point.) There are certainly plenty to fry the planet many times over, if we were to burn them all. Instead, our most pressing energy conundrum—from a purely economic standpoint—is declining EROEI. We built industrial societies on high-EROEI fuels that enabled a small amount of investment, and relatively few workers, to supply enough cheap, concentrated energy so that the great majority of citizens could use ever-increasing amounts of energy and thereby become more productive. Millions of farmers (who are traditional societies’ primary energy producers) were freed up to become factory workers, salespeople, computer technicians, perhaps even hedge fund managers or journalists. During this time, labor productivity soared—not because people were working longer and harder, but because they were using more energy at their jobs (by way of machinery) to generate more wealth. Urbanization, globalization, specialization, rapid economic growth—none of these would have been possible without increasing flows of energy that was spectacularly cheap in both monetary and energy terms.

  Lower the overall EROEI of the energy system of a modern industrial society and the predictable result is a requirement for more investment in the energy sector and for more workers there as well. Economic growth slows, stalls, or reverses; jobs in non-energy sectors disappear; globalization falters. Meanwhile, more expensive energy translates to a stagnation or even decline in worker productivity.

  This is exactly what we are beginning to see.

  GEOLOGY VERSUS TECHNOLOGY

  A key point of Charles Mann’s article in Atlantic was that technology changes the game. It was new technology (hyd
rofracturing and horizontal drilling) that made a torrent of new shale gas and tight oil production possible. Technology is driving expanded extraction of Canada’s tar sands. Technology could make methane hydrates accessible and could make Arctic oil easier to reach. We simply don’t know how much of the world’s currently inaccessible, vast, unconventional hydrocarbon resource base can be turned into economic reserves through further advances in technology. Therefore (so goes the argument), to discount the likelihood of a future of cheap, plentiful fossil fuels simply because we’re depleting reserves of conventional fuels is foolish.

  A discussion about the unknown capabilities of future technology could easily descend into the trading of empty claims based on contrasting prejudices. We can avoid that wasted effort by clarifying the essence of the dispute and then examining the evidence. The question we really need to answer is this: Can technology improve the overall EROEI of fossil fuel extraction enough to overcome declines in resource quality resulting from the depletion of conventional fuels? Now, let’s look at the relevant facts.

  Technology can certainly improve the EROEI of oil, gas, and coal production. Examples of energy-saving innovations include clustered pad drilling for shale gas, cogeneration in tar sands production, longwall coal mining, and closer well spacing in tight oil plays.9 The industry is always looking for ways to save money, and efficiency measures undertaken in order to reduce investment requirements usually end up saving energy as well.

  Technology or geology: Which horse will win? In the end, geology is destined to triumph. Energy efficiency moves us in the direction of solving the EROEI dilemma, but it is always subject to the law of diminishing returns: the first 5% increase in energy efficiency typically costs less than the next 5%, and so on. Meanwhile, the effects of depletion compound: fossil fuels are finite, regardless of any attention-grabbing headline to the contrary, and the extraction costs for fossil fuels tend to rise exponentially as resource quality declines below certain thresholds. Efficiency improvements will eventually be overcome by the sheer physical burden of harvesting hydrocarbons that are increasingly deep and dispersed.

  However, “in the end” and “eventually” are too vague to be helpful. What we really need to know about is the short term—say, the next 20 years. During the next two decades, society will still be largely dependent on fossil fuels even if it makes a substantial effort to reduce that dependency in order to avert catastrophic climate change. In fact, fossil fuels will be doing double duty: they will be keeping major sectors of our current economy going (most essentially, our transport and food systems), while also providing energy for the manufacture of millions of solar panels and wind turbines (it’s only just this year that the world’s solar power plants installed to date have produced as much energy as was required to build them).10 Whatever fossil fuels we continue to use will have to be highly productive—especially since most renewables have energy profit ratios lower than those of fossil fuels (as we will see in the next section). To focus the relevant question even further: Can improvements in extraction technology enable fossil fuels to keep modern, complex societies economically viable during this crucial transition period?

  The signs are not favorable. Currently, the overall EROEI for fossil-dominated global energy is declining. That’s the conclusion of a boatload of ongoing research by a growing number of scientists.11 Charles Hall is the father of EROI research. (He prefers the term EROI, or energy return on investment, because it considers capital and environmental investments as well as energy investments in energy production; EROEI refers only to the investment of energy in energy production.) He writes that “the world’s most important fuels, oil and gas, have declining EROI values. As oil and gas provide roughly 60 to 65% of the world’s energy, this will likely have enormous economic consequences for many national economies.”12 Hall’s finding is based on numerous recent studies: “This pattern of declining EROI,” he writes, “was found for US oil and gas (Guilford et al.), Norwegian oil and gas (Grandell et al.), Chinese oil (Yan et al.), California oil (Brandt), Gulf of Mexico oil and gas (Day and Moerschbaecher), Pennsylvania gas (Sell et al.), and Canadian gas (Freese).”13

  A few energy financial analysts have explored the implications of EROEI, often without observing Hall’s methodological rigor and without properly citing his original work in this field. Andrew Lees of UBS, writing in The Gathering Storm, has argued that global EROEI is currently about 20:1, deriving this figure from energy’s 4 to 5% share of world GDP. Given recent trends, Lees calculated that the ratio might fall to 5:1 over the next decade, which would translate to a massive disruption of the world economy.14 Discussing Lees’s conclusions, the Economist magazine mused that “the direction of change seems clear. If the world were a giant company, its return on capital would be falling.”15

  Tim Morgan, of the London-based brokerage Tullett Prebon (whose customers consist primarily of investment banks), discussed the averaged EROEI of global energy sources in a recent Strategy Insights report, noting:

  [O]ur calculated EROEIs both for 1990 (40:1) and 2010 (17:1) are reasonably close to the numbers cited for those years by Andrew Lees. For 2020, our projected EROEI (of 11.5:1) is not as catastrophic as 5:1, but would nevertheless mean that the share of GDP absorbed by energy costs would have escalated to about 9.6% from around 6.7% today. Our projections further suggest that energy costs could absorb almost 15% of GDP (at an EROEI of 7.7:1) by 2030. Though our forecasts and those of Mr. Lees may differ in detail, the essential conclusion is the same. It is that the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course, some way is found to reverse the trend.16

  In two of three primary fossil fuel energy sectors, extraction costs are rising. Technology may be winning a battle here or there, but the evidence shows that, as of now, it’s losing the war.

  Charles Mann discusses EROEI briefly in his Atlantic article, pointing out one apparently bright spot in the landscape: shale gas. He reports that the EROEI of shale gas is a shining 87:1. He doesn’t provide a source for this figure, but it apparently comes from a study by Bryan Sell, David Murphy, and Charles Hall.17 In it, the authors analyzed “tight gas” production in Indiana County, Pennsylvania, using drilling and production data from before 2003. In other words, the data do not reflect the energy costs associated with the new and more complex and costly technology associated with horizontal drilling and hydrofracturing. The authors did not attempt to account for transmission and processing energy costs (which might lower the result by up to half). They were also very conservative in accounting for other energy costs. Crucially, they note that “highly complex-drilling environments, such as some shale gas reservoirs, could ultimately show relatively low EROI values.” No evidence suggests that the technology of fracking has actually raised the EROEI for natural gas production. (It temporarily lowered prices, but only by glutting the market.) Moreover, in their concluding remarks, Sell, Murphy, and Hall discuss the spectacularly high decline rates of shale gas wells and note, “catastrophic drops in gas supply can be expected if shale gas is relied upon as a replacement [for] conventional gas.”

  There is good reason to think that the EROEI of shale gas is probably higher in the Marcellus (where operators are still drilling in “sweet spots”) than in older plays like the Barnett, Haynesville, and Fayetteville. As core areas are drilled out and rapidly deplete so that drillers are forced to move to areas with lower productivity, the overall energy return for shale gas drilling and production is probably declining rapidly. Indeed, David Hughes, in “Drill, Baby, Drill,” speculates that if all energy inputs are properly accounted for, the EROEI of shale gas in the older plays may be 5:1 or less on average.18

  Technology can trump geology for a while, at least in certain instances.19 But we have entered a new era in which geology is negotiating harder all the time, and the costs of new technology often outweigh the economic benefit promised. Some fossil fue
ls (coal and gas) still have a relatively high EROEI, but oil is crucial to the global energy mix since it fuels virtually all transport, and oil’s energy profit ratio is plummeting.20 The economy is not likely to respond in steady increments to declines in energy profitability. This is how Tim Morgan at Tullett Prebon puts the matter: “[T]he critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.”21 Failing to notice this historic shift, while celebrating a temporary breakout in oil and gas production numbers in Texas, Pennsylvania, and North Dakota, seriously hampers our ability to adapt to dramatically and quickly changing circumstances.

  RENEWABLE ENERGY

  We need much more renewable energy, and we need it fast. We must replace fossil fuels in order to prevent a climate catastrophe. And we must leave oil, gas, and coal behind because they are depleting, nonrenewable fuels that will inevitably become more expensive and dirtier the longer we rely on them.

  The EROEI for most renewables is lower than the historic energy profit ratios for fossil fuels (see Figure 13 in Chapter 1). But the EROEI of oil and gas is declining, while the EROEI of wind and solar photovoltaics is improving.22 As we’ve just seen, the efficiency improvements in the production of fossil fuels are temporary, because they are quickly overcome by declining resource quality. But with renewable energy sources, technological improvements do not face the same headwinds. This is a crucial trend in our favor, and we should make the most of it.