Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future (15 page)

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.
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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.”
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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.
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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
.
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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.
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Technology can trump geology for a while, at least in certain instances.
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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 fuels (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.
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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.”
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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.
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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.

Still, there are real hurdles to overcome.

The world’s largest current renewable source of energy is hydroelectric power. It can’t grow by very much, and building dams often creates enormous environmental problems.

The main renewable energy sources that
are
capable of significant growth are solar and wind. Both are intermittent; this can create challenges for grid operators. Typically those challenges are addressed by building energy storage capacity and by managing the grid to take advantage of a diverse portfolio of wind and solar generators sited in different places with different weather conditions. Some recent studies suggest that clever electricity supply and demand management could enable renewables to provide most, or perhaps even all, of America’s power without serious difficulties.
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However, the grid operator in Germany—a country with extensive experience in solar and wind—reports that, with high grid penetration, intermittency leads to problems like blackouts and brownouts, which in turn can damage electronic devices.
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For the world as a whole, growth in supply of renewable energy is not occurring at a sufficient rate to entirely displace fossil fuels any time soon. Some countries are seeing relatively quick adoption: Germany generated 23% of its electric power from renewables in 2012 (the proportion doubled in six years); Denmark achieved 41% renewable power; and Portugal, 45%. Here in the United States, Texas produced nearly 30% of its power from wind on some days last year. Yet the IEA notes that “worldwide renewable electricity generation since 1990 grew an average of 2.8% per year, which is less than the 3% growth seen for total electricity generation.”
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Moreover, there has recently been some slowing in the furious growth pace of solar installations in many countries because of reductions in government incentives, due in turn to the debt crisis in Europe and the squeeze on all older industrial economies from high oil prices.

Renewable energy boosters hope that falling prices will make solar and wind cheaper than fossil fuels, so that incentives will no longer be needed, and the growth rate for renewables will soar. Prices for both solar and wind have dropped steadily in recent years, and in some cases are competitive with natural gas (especially given the cost to utilities of hedging against gas price volatility). However, for the solar industry, low prices are a mixed blessing. Many photovoltaic (PV) producers are losing money, and factories are closing. A massive consolidation of the solar industry is under way.
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Prices may have to rise in order for solar manufacturers to remain profitable. If that happens, the growth rate for solar penetration into electricity markets will be further constrained.

Another hurdle is the fact that solar and wind produce electricity, while transport runs on oil. How can we make transport energy renewable? All routes to that goal are problematic.

Electric vehicles offer a partial solution, but market penetration is not occurring nearly fast enough. And there are problems with high energy and materials costs for manufacturing batteries. There are no electric airliners on the drawing boards and probably never will be.

Hydrogen-powered vehicles have been hailed as a vector for renewably energized transport, but these have been very slow to deploy because fuel cells are expensive, and hydrogen is hard to store.

Advanced biofuels are another proposed solution. Companies are working to develop biofuels from city sewage, from contaminated grains and nuts, from cannery wastes and animal manures, and from forest wastes. Efforts are also under way to make liquid fuels from algae. Add up all these potential sources and they could nearly equal current transport energy; the remainder could be dealt with through better vehicle efficiency. But all biofuels have a low EROEI. Indeed, many of these potential fuel sources are likely to have a zero or negative net energy balance. Some make sense as ways of dealing with waste products, but as ways to economically produce energy—not so much. Alan Shaw, the chemist and former chief executive officer of Codexis, the first advanced biofuel technology company to trade on a US exchange, now says, “Cellulosic fuels and chemicals are not widely manufactured at commercial scale because their unit production economics have not yet been shown to be competitive with incumbent petroleum.”
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EROEI is not the only criterion by which we should assess energy sources. We also need to take into account their environmental risks and their long-term viability. On these latter criteria, renewable energy sources score better than fossil fuels, though renewables do entail environmental costs (building solar panels and wind turbines requires extraction of depleting nonrenewable resources and generates pollution). However, without a high EROEI, renewable energy sources will never power the kind of growing, fast-paced consumer society that policy makers mistakenly believe to be the necessary goal of all economies.

Mark Jacobson at Stanford University and Amory Lovins of Rocky Mountain Institute say we can power the world entirely with renewable energy sources in 20 to 40 years with no real economic sacrifice.
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Skeptics like Ted Trainer at the University of New South Wales say the transition will be expensive and littered with engineering nightmares.
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One can cherry-pick data to support either position.

One thing we can say for sure: by the end of this century the world economy will be running mostly, if not entirely, on renewable energy sources, whether that economy is robust or withered, and whether or not we have made substantial investments in alternative energy. Fossil fuels simply won’t get us to that far shore. Even if we don’t know exactly what kind of ride they will give, renewables are the only boats we have that don’t leak.

Energy Scenarios

It is, of course, impossible to predict exactly what our energy future will be, but current trends suggest a few likely possibilities.

Let’s start with prospects for oil. During the past couple of years, global prices have bounced around within a band ranging from $95 to $115. This results from an uneasy supply balance maintained by the ongoing depletion of conventional oil fields and the simultaneous appearance of more expensive oil from unconventional sources. This is an inherently unstable dynamic. One might think that higher oil prices would inevitably follow as drillers are forced to move to ever-more expensive prospects, but this is not necessarily the case. A renewed global recession would cut energy demand; in that case, oil prices could fall significantly. With a dramatic reduction in trade and higher unemployment, we would also see declining overall oil production.
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If the price of oil falls below $90 per barrel, new deepwater drilling will slow. At $80, new tar sands projects will be put on hold. At $70, nearly all drilling will be called off (except where required in order to maintain lease agreements). At $60, tar sands production from some existing projects will be throttled down.
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With cheaper oil, the economy might rebound somewhat; but then demand for oil would likely pick up again and so would prices. Altogether, the picture is bleak for oil economics.

The prospects for natural gas are not much better. Two trends are likely to drive gas prices higher. Currently, US drilling rates are down, so production will inevitably start to slide in the next couple of years as a result of the high per-well decline rates of shale plays and the drilling out of the core regions within each play. Also, if and when the United States begins exporting LNG, this will serve to push up domestic gas prices. These are not mutually exclusive developments, and if both happen, America could be facing both lower natural gas production rates and much higher prices.

There is one scenario in which natural gas prices would fall, but it’s not a pretty one: it entails a serious economic recession that would destroy demand for the fuel through massive unemployment and a collapse of manufacturing.

Higher natural gas prices would be welcomed by the US coal industry, which has been struggling for the last few years under the onslaught of (temporarily) cheap shale gas. American coal producers want to export their product to China, which has nearly maximized domestic mining capabilities. China’s options for new energy sources to fuel economic growth include imported oil, imported coal, imported LNG, nuclear, solar, wind, and shale gas; all are more expensive than the country’s own fast-depleting coal. If China begins importing coal from the United States at the same time as American domestic natural gas prices soar (which would entice utilities to burn more coal once again), the result could be a spike in domestic coal prices. Higher coal prices would be abated only by a serious recession or falling gas prices. Several recent studies conclude that world coal extraction rates have little headroom: despite the vastness of the resource base, most of the high-quality, easily accessible coal is already gone.
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