BHP Billiton: World’s Largest Mining Company To Exit Its $50 Billion Shale Oil Blunder

BHP Billiton, the world’s largest mining company, has finally decided to exit the shale energy industry entirely.  In a recent statement, BHP Billiton has asked four investment banks to assist in either selling or spinning off its underperforming U.S. shale oil and gas assets.  Unfortunately, for BHP, the company sunk nearly $50 billion on its shale assets and will be lucky to receive $10 billion.

Something must have changed at corporate headquarters because the company stated last month that they were considering selling their shale assets over the next two years.  However, the company now wants to make a decision and get the ball rolling by early 2018.  So, there seems to be a motivating factor to unload their shale assets sooner than later.

What a change in the company’s strategic position from just a year ago when they decided to stick with their U.S. shale assets for the long haul.  According to the article published in October 2016, BHP Billiton Bets Long On Its Shale Assets:

Yet the head of BHP’s petroleum business says the company remains committed to its shale assets, which he believes can outstrip its conventional oilfields and plug a supply gap that it sees emerging from the industry-wide investment drought brought about by the collapse in crude prices since mid-2014.

“We admit straight away that we didn’t get the timing right [of the shale deals],” says Steve Pastor in an interview in London. “But what we did pick up were fantastic assets.”

Interestingly, the head of BHP’s petroleum business says they were committed to their “fantastic” shale assets.  Amazing how one year’s time will change a “fantastic asset” to one that needs to be unloaded .. ASAP (As Soon As Possible).

I knew back in 2011 when BHP Billiton was buying up their U.S. shale assets that it was going to a BIG MISTAKE.  However, the company thought it had purchased some of the best “Shale Energy Jewels” the U.S. had to offer.  According to their 2011 Investor Presentation on their shale assets, the company had big plans:

The management running BHP’s petroleum business stated that they had acquired a “World class accessible resource, material to BHP Billiton Large, long-life, low cost, with significant future development.  Out of those four strategies; world-class resource, long-life, low-cost, and significant future development, only one was true.  Which one?  Well, BHP did spend one hell of a lot of money on “significant future development of its shale resources.”  I believe I came across a $15 billion capital investment figure that BHP sunk to develop, drill, and extract shale oil and gas from its resources.

And, here is a list of BHP’s shale assets as of November, 2011:

As we can see, BHP lists its high-quality shale portfolio in its Nov. 2011 Investor Presentation in which it states at the bottom, “Multiple, 30-year opportunities for optimisation.”   Well, how fast 30 years came and went… ahh?  It’s been only six years, and the company is getting ready to DUMP its assets as quickly as it can and hopefully to the next POOR SLOB who is stupid enough to purchase them.

Now, the last BHP investor presentation slide provides us with some comedic relief.  According to BHP’s Top Men running their petroleum business, “Shale offers the ability to rapidly increase volume growth and earnings over the long term:”

You see, shale energy promises that it was going to provide PAYBACK in a matter of months, not 5+ years as was true for BHP’s offshore conventional deepwater projects.  Unfortunately, BHP and the overwhelming majority of companies producing shale didn’t make any money in the process.  Thus, the one thing that was true for the industry, the companies were able to rapidly increase shale oil and gas production, but at the expense of the investor.  That’s correct.  The investor became the Shale Industry BAG HOLDER.

Also, besides the $15 billion BHP spent to produce its unprofitable shale oil and gas resources, it also suffered $12 billion worth of impairment write-downs on its supposed “high-quality” shale assets in 2015 and 2016.  So, I can imagine BHP’s CEO is looking forward to getting rid of its shale assets (liabilities) which have been one of the biggest drains on the company’s balance sheet for decades.

The American public has no clue that the Great Shale Oil Ponzi Scheme has only bought a bit more time so they can continue borrowing money to buy crap they don’t need.  While the U.S. economy seems to be humming along, few realize that its domestic shale energy industry is just a few years away from disintegrating.

When the U.S. shale oil industry finally goes belly-up, most Americans are going to be thrown into an economic depression they have never witnessed before.  Those who were wise enough to purchase these little gold and silver colored coins before-hand will enjoy better options than individuals who kept all their chips in the Wall Street Casino.

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57 Comments on "BHP Billiton: World’s Largest Mining Company To Exit Its $50 Billion Shale Oil Blunder"

  1. Steve,

    at the time BHP bought the shale oil field, the price for crude was at $120 pb.
    They thought the price would stay there (but not for long lol). Now the price is around $60 pb but as we know THG thinks the price will decrease further.
    I wonder if there is much more at stake, than the investments in shale oil, what is with the big oil drilling rigs or all the investments in the extraction of tar sands ?

    • Herbert,

      Yes… true. BHP purchased those assets at the top. However, even at $100-$110 a barrel for oil, NO ONE MADE ANY MONEY… LOL.

      steve

  2. Steve.

    One final thing I’m not entirely sure about: Why is the price of oil suppose to go down if we need so much of it?

    In your articles I found the following:
    – Price decreases because oil produced is of lower quality
    – Lower demand for oil from manufacturing economies because we have been in a global recession already for years
    – There will be huge short-lived price spikes in the future as the oil industry suffers a series of massive strokes.

    Is this correct?

    • Eric Bauer,

      Gosh, I need to do a video on this. Most people continue to struggle with it (I did at first), so it may be better explained using visuals.

      However, let me give you the short version. Money comes from burning energy. Our Dollar is possible by burning energy. Thus, to bid up the price of oil, the quality of the oil has to be worth it. It has nothing to do with supply and demand. Our Financial & Economic classes in High School and College have done more harm to program us to believe in a failed economic model of supply and demand. So, it becomes very difficult to UNLEARN THAT.

      The example I have given a few times is the value of a 15-year-old car. No one would BID UP the price of a typical 15-year-old car if it’s only worth the market value of a 15-year-old car. Again, this has nothing to do with supply and demand. People pay $25,000 for a brand new car because the parts are also brand new and it has a good 7-10 year lifespan if maintained properly… maybe more. However, the embedded energy in all the 15-year-old car parts is all WORN OUT. The market is just not going to pay TOP DOLLAR for a car with very short functioning lifespan.

      This is the same with low-quality shale oil and oil sands. We must remember, it’s just not the oil we receive from oil sands and shale oil production… IT’S THE NET ENERGY that makes its way to the market. With very little net energy now making its way to the market, the market can’t bid it up, only with a massive amount of debt added to the system.

      So, the public won’t be able to bid up low-quality oil because the net energy that comes from shale oil and oil sands doesn’t provide enough net energy to BID IT UP.

      steve

      • Hey Steve! I would LOVE it and really appreciate it if you did a video on it because I have a hard time understanding this one..!I guess my brain isn’t wired like that!

      • Steve: Help me out here …..I disagree with the car analogy. Literally, if the new cars (=high EROI oil production)are no longer readily available, then the still-viable supply of old cars (=low EROI oil production)will increase in value to the point where the cost of maintenance renders them non-economic. Even crap can sell if the public WANTS the cars and is willing to invest in them and keep them working. Actually, Cuba and its old 1950’s cars cobbled together comes to mind.

        Basically, the value of low EROI assets will rise as long as it fulfills some or any form of work, albeit at a higher cost per energy unit. Eventually, only the individuals or the industries capable of supporting the increase price and the maintenance required will survive. The long term affect being a shrinking economy and a less divergent economy, not necessarily a quick or catastrophic collapse, but a more slower general degradation of economic diversity. AKA survival of the fittest (economically).

        • Crude oil is finite and FRN is infinite, but I have to postulate that the value of FRN will get higher against the value of crude oil because of the falling EROEI ??????????

      • Steve, I’ve also just left a comment in the last thread on this very topic, as I – as others readers it seems – don’t see this pan out in PRICE as you do. The coming energy collapse is inevitable at this point but IMO prices will SOAR as the U$ collapses in gold terms (and possibly other fiat currencies). *They* will inflate/contr+P the heck out of it (double down with tens of Trillion$ if need be) which will just add additional fuel to rising prices as the bottom 80% will become destitute and widespread chaos will ensue quickly.

        When oil rebound to 40 (after the low of 26) you several times called for 10$ oil last year. But we’re now just short of 60… At 10$ oil gold would be 700 at best, but due to the cross rates with other currencies (as well as the lack of physical gold in the US) THAT will not happen IMHO (with China put in place and kicking in before long). Either way, we’ll all find out soon enough how things will pan out.

        All the best to you and a great thanks for sharing your analyses and thoughts in a great blog. GLTY+A.

      • Northwest Resident | December 15, 2017 at 7:32 pm |

        Steve, I think you need to get together will the Hills Group and get a webpage up, or a video, that answers this question clearly and succinctly. I get your car analogy, but I think there are better analogies that would make more sense to more people. Just an opinion.

        Let me take a shot at Eric’s question, the question being why is the price of oil suppose to go down if we need so much of it?:

        Simple. The economy runs on energy. No energy = no economic activity. Reduced energy = reduced economic activity. We are now at the point where we have significantly reduced energy PER CAPITA, relative to say the 60’s or 70’s. That means that on average everybody is using less energy and therefore on average having less income. There is still a LOT of oil, but due to falling EROEI — scraping the bottom of the barrel — that greater quantity of oil does NOT equate to greater amounts of energy for economic activity. In fact, the global economy is so energy deprived at this time in history, that not only do we not have enough energy to grow the economy — which it must to remain viable — we don’t even have enough energy (or natural resources) to maintain current infrastructure and “way of life”. But millions more people are coming into the world daily, wanting their piece of the energy pie = less for everybody. Sure, they can raise the price of oil if they want to, but the more they raise it, the more people will simply not be able to afford it. To maintain economy of scale, oil companies need to sell vast quantities. If people are less and less able to use that oil, then the only way to try and maintain economy of scale is keep the price at point where the seething masses can continue to afford it. — Well, I gave it my best effort.

    • Hi,
      As per my understanding, it’s easier to understand, if we look at fuels as economic generators. So, when costs of production increases or quality of end product decreases, the net economic potential decreases. Hence, it doesn’t make sense for the price to go up. If the fuels’ economic output on dollar terms was 1:20 in 1970s & now it’s 1:10 or lower, the net economic potential is down by 50%.
      Although I understand the logic behind the reasoning by Steve, I am not sure if we can totally discount demand & supply impacts on the price.
      Arvind

    • The price of oil is not going to down.
      Steve’s Logic is completely faulty.
      It is the BTUs in the oil that give it value, not how many (or little) BTUs the oil takes to produce.
      The car analogy does not work with a barrel of oil because oil doesn’t depreciate, you burn it for the BTUs

      Steve also fails to recognize that scalability is just as important EROEI.
      An oil sands project that has a EROEI of 4 to 1 that can use the embedded energy to produce the sands and scale to a million barrels a day is far more valuable that a conventional well that has a 100 to 1 EROEI but can only produce 5,000 barrels a day

      • You forget the fixed costs, it could very well be, that at current oil prices new oil sand procects cannot be developed, because the break even is too far away in the future.
        If there is a high EROI the probability to reach the break even fast is much higher and therefore the risk of the investment is much lower.

      • Steve,

        You bring up some interesting arguments, but the one important factor you left out is the SECOND LAW OF THERMODYNAMICS. It doesn’t matter if oil production is scalable at an EROI of 4/1 when a society needs 12/1+ EROI to survive. However, the Hill’s Group work on the AVERAGE BARREL of oil and it thermodynamic decline shows the following:

        Furthermore, there was probably GOOD REASON that a lot of the majors have SOLD OFF their Oil Sands Projects:

        Last year, Statoil abandoned Canada’s oil sands, selling off its assets to Athabasca Oil Corp. But Statoil is hardly alone in the exodus. ConocoPhillips unloaded a whopping $13.3 billion of oil sands assets to Cenovus Energy earlier this year. Shell sold off $4.1 billion in oil sands assets to Canadian Natural Resources. Meanwhile, ExxonMobil wrote off 3.5 billion barrels of oil sands from its book in February, admitting that they were unviable in today’s market.

        ConocoPhillips’ CEO said that it would no longer invest in any oil project that needs a breakeven price of $50 or higher, according to the FT.

        steve

        • Steve: You like to cavalierly mention SECOND LAW OF THERMODYNAMICs, to explain all this, which is great if one is a physicist. But how about EXPLAINING in laymen’s language WHY IT IS APPLICABLE and how you get a DECREASING price when the world’s industries need more lower quality BTU oil to meet it needs.

    • Gail Tverberg from Ourfiniteworld.com has the simplest explanation. The reason price goes down is because we are at a point in time where oil is too cheap for the oil producers to pull out of the ground and too expensive for the consumer to buy. Hence why you see price swings, and one of the reasons why the economy collapsed in 2008. When oil hit the $4.50 p/g mark in 2007-08 the consumer cut back on other goods and services. The economy went into a death spiral.

      Oil needs to be at a high enough price to make it worth the effort to pull it out of the ground. If the price stays too low then the producers get hurt and lose money and go bankrupt.

      • rodster: Yes that is logical, except that 2008 was not a death spiral, but a rapid decline, eventually arrested. My point is that the system will make adjustment over a period of time, between brackets of a high or a low oil price. In this case, a lower producer EROI, will start winnowing out the highest cost producers and eliminating the least efficient consumers ….returning the market temporarily to equilibrium, awaiting another cycle. No vast collapse, but a degradation of diversity amougst the economy.

        • Nope, you’re wrong. 2008 was in fact a death spiral if not for the CB’s coming to the rescue and saving the TBTF Banks. In the words of then Assistant Secretary of the US Treasury Hank Paulson who told US President George W. Bush, “if we don’t bail out the Banks, the World’s economy will come to a grinding halt and we’ll have Martial Law in the US with military tanks rolling in the streets.

          I’m tired of people calling what happened in 2008 the Great Recession when it fact it was a collapse of the financial and banking sectors. What took place in 2008 was the Great Depression Part Deux. That’s the reason why the CB’s are so F-in frightened of deflation and they are doing everything possible to keep this Ponzi Scheme going via “INFLATION”.

          It was not a decline but a precursor for what is to come and it will be 10-20 times worse this time because the Central Banks have shot their wad at the problem and only made it exponentially worse. Which is why Bitcoin is going thru the roof because people are starting to wake up that it’s us against the upper 1% and this whole FRB system is nothing more than a Ponzi Scheme.

          • But so is BTC – once the energy is gone, good luck with THAT. Till then a lot more craziness is to be expected. We’re now in a almost-everything bubble – except of course PMs, Energy and real wages of the bottom 80%… not hard to figure out why… *THEY* like it that way.

    • Betty Harris | January 7, 2018 at 3:23 pm |

      Look at how countries are moving to ban gas vehicles… and how large corporations are going to renewables as well as how utilities are moving to renewables because it is cheaper.

    • MASTERMIND,

      Gosh, I have been feeling a bit depressed lately. However, now that you have brought some BRIGHT & SUNNY NEWS, I feel better.

      steve

      • And remember Hitler and the German Nazi party rose to power during the Great Depression. And now we have Trump and the Alt Right Nazi’s rising to power again..History repeats…Imagine that? American’s are so ignorant of History and have been kept that way..They can’t see this for what it is….

        • You obviously are a far-left pussy-hat wearing loony who thinks Trump is ‘literally Hitler’ and is working with this ‘secret Nazi-Alt-right’ group.

          In reality, the progressive liberal babyboomers who during and after the sexual revolution went into academia in mass to brainwash the future generations into the Marxist utopia of big government and how socialism and communism will ‘cure’ us of the evils of so-called capitalism and the freedoms America has.

          Hitler rose to power because his country was raped by elites, just as a the big government baby boomers have raped and pillaged the country and middle class and world with war so they can keep wasting the finite resource of oil. The Alt-right is just reaction of the decades of far left Marxists blaming white males for everything and being racist against them, while ironically hiding under the guise of “fighting racism” and “social justice.” They’re the same as the bottom feeders who envied the producers and successful in Communist Russia and ended up killing off all the productive class and farmers.

          Enjoy Trump because war-loving, oil-sucking/wasting baby boomer necons and statist democrat progressive Marxists like yourself have become so radical that they pushed the country into voting for him.

          • @Enjoy Trump: You are right.

            @Matermind: And Trump is just the beginning. Nationalist revolts happen after private bankers are done looting the corpse of a nation and turning it into a perversion. Hitler was a reaction the the French and British Empires’ attempts to destroy a rising rival empire with WW1, when they were blamed for it, had their ports blockaded and cities starved until they voted the Versailles treaty and became the destitute economic slaves, blamed for a war they did not even start. Ironic that you say we are ignorant of history when you buy Allied propaganda about German villainy hook, line and sinker. Of course you can’t be blamed. We have the myth of Hitler and the evil Germans pumped into our skulls daily from the time we are children.

            Trump is a civic nationalist. He still believes in multi-culturalism, and zionism. If you hate him now, just wait to see what happens when Americans suffer through hyper-inflation and empire collapse, when the oil stops flowing, the dollars abroad come flooding back, the diversity finally kicks in and the cities go up in flames. We are going to see this country cleaned up.

            It’s going to be glorious.

          • Nationalism is the measles of mankind – Albert Einstein

          • @Mastermind: I’d like to see him say that to his fellow jews in the Middle-east today. Jews have always hated the nationalist impulse in goyim because it is a threat to their activities and power. If you aren’t jewish then you are under the influence of brainwashing. If you are, then you know exactly what you are doing. The goyim are waking up.

          • Extremest on the left are hippies and they are the most open and tolerant people we have. And they are the ones who hate war the most and protest opening against it…Its the bloodthirsty Christian right who love war. Because they are such poor and insane people with low IQ’s from so many centuries of imbreading.

  3. Scientific American: Apocalypse Soon: Has Civilization Passed the Environmental Point of No Return?
    https://www.scientificamerican.com/article/apocalypse-soon-has-civilization-passed-the-environmental-point-of-no-return/

    NASA Study: Industrial Civilization is Headed for Irreversible Collapse (Motesharrei, 2014)
    http://www.sciencedirect.com/science/article/pii/S0921800914000615

    The Royal Society: Study, Now for the First Time A Global Collapse Appears Likely (Ehrlich, 2013)
    http://rspb.royalsocietypublishing.org/content/280/1754/20122845

    Study: Limits to Growth was Right. Research Shows We’re Nearing Global Collapse (Turner, 2014)
    http://sustainable.unimelb.edu.au/sites/default/files/docs/MSSI-ResearchPaper-4_Turner_2014.pdf

    Study: Financial System Supply-Chain Cross-Contagion: in Global Systemic Collapse (Korowicz, 2012)
    http://www.feasta.org/2012/06/17/trade-off-financial-system-supply-chain-cross-contagion-a-study-in-global-systemic-collapse/

    The End of the Human Race will be that it will Eventually Die of Civilization –Ralph W Emerson

  4. Thanks Steve great work mate regards

  5. Mastermind, ever think of starting your own site, hawking silver coins & canned tuna ?:-)
    It’s not shocking that a company dumps assets that aren’t performing. If EROI isn’t bogus, why are companies (Suncor, Chevron, etc), buying Alberta oil sands assets – the highest cost land oil play by far – when they are selling oil for $30-36/barrel ?!
    http://business.financialpost.com/commodities/energy/chock-full-enbridge-warns-its-pipeline-system-is-full-as-canadian-oil-prices-crash

    • This seems to be a case of mistaking a cause (in this case they have a bottleneck in the supply) for an effect (higher prices are justified irrelevant of the EROI thesis represented by Steve.

      Gas prices are a mess all over Canada, and I think this is perfectly desirable for these parties. But don’t mistake a bottleneck they control for intrinsic demand…

  6. Wow, awesome and insightful analysis as usual !

  7. Bill Sodomsky | December 13, 2017 at 6:48 pm |

    Steve,

    I think an excellent idea for a video would be one where you interview Steve Ludlum from Economic Undertow. The two of you would put “Paid” to this ridiculous prediction/assumption that the price of oil will go higher as demand increases. Ludlum has used the term “Energy Deflation” as a means of explaining what you’ve been stating as ever diminishing net energy returns. The two of you would knock it out of the park!

  8. 63percentwater | December 13, 2017 at 6:50 pm |

    Who could saw that coming?

  9. Thanks again, Steve! Great work…….

  10. Steve,
    Excellent analysis. I have taken to heart owning gold/silver and actually bought most of it when prices where low, $300 gold in about 2001. It was not that I was so brilliant, just lucky. Have made some awful financial decisions as well. My question is how else do I prepare for hard times. I am 68 now and don’t envision fighting off the masses when the SHTF at my age. I know a person will have to stay flexible and adaptable to face future serious problems. Any suggestions that you have or have done to prepare would be greatly appreciated.

  11. Steve,
    I have names for my monster boxes, the one I picked up today I named after you.
    Thank you for all your research.
    You will have a new patron soon, ME!
    Thank you!

  12. Great article Steve!

    I know some big (food) companies that had invested heavily in this infinit future demand from China (One Belt One Road Initiative) that was going to be fuelled by cheap energy (Shale was mentioned) and ever expanding middle class. I have attended some of these presentation.
    It seems like we are going to be left with a gigantic overcapacity. Big waist of time and energy, I must say.

  13. Andrew Hopkins | December 14, 2017 at 1:54 am |

    Very sobering article. Thank you. I have always maintained that shale oil is a ponzi. Fortunately BHP has decided to quit before all is lost…. That was a big loss by Continental. Far out. No wonder Hamm is losing his hair. A huge hedging cock up and now continuing negative earnings. All in the face of continued optimism. No wonder Hamm wants the oil price up.

    This is a long term comedy not enjoyed by shale oil investors.

  14. IMHO it’s very difficult to conceive the future in the framework of “price” rather than value because of hyperinflation.
    It’s proposed oil price will tank, but it very well could be $200/barrel, but the kicker is bread might also be $200/loaf.
    What will be the value of the last gal of gas, not much.

  15. Keep digging for nuggets of truth. Proud to be a patreon.

  16. It all comes down to the bottom line.

    It was announced by bhp Billiton 4 months ago in August, that it would sell off its US shale oil and gas business. Anyone could see the writing on the wall after looking at their financials from 2016, where they reported $31 billion in revenue, with a profit of $6.2 billion, yet recorded their worst annual loss in their history of $6.4 billion!

  17. Steve,

    Wonder where and how BHP Billiton might have gotten some their fantastic information regarding just how valuable their huge shale gas play was back in 2011?

    Maybe in part from Aubrey McClendon the original and now deceased piped piper of Chesapeake Energy fame? Aubrey hit BHP for an estimated $4.8 billion for now worthless assets.

    “Chesapeake sold some of its shale assets to BHP Billiton in 2011 for $US4.75 billion, part of the mining giant’s ill-fated $US20 billion shopping spree to push into the US shale business. Shortly after, gas prices plummeted, forcing BHP to write down $US2.84 billion off the assets’ value and famously costing then BHP boss Marius Kloppers his annual bonus.”

    McClendon was the “expert” who called Arthur Berman a, “third rate geologist” when Berman started raising questions about shale gas valuations.

    Seems McClendon did not fare particularly well either from his shale gas days:

    “Aubrey McClendon, US shale gas baron, dies in car crash a day after indictment”

    Courtesy from a vast majority of worldwide media outlet reports or perhaps this is just “fake news”?

    Best regards,
    Bob

  18. I day trade CL Crude Oil Futures and price doesn’t matter to me as much as volatility does. It’s the best futures market for making money, or you can also lose if you let bias set in. OPEC has sucessfully manipulated market price through supply & demand by cutting production, and now extending cuts to June 2018. It’s all smoke & mirrors created through endless rhetoric & (in my opinion) some disasters that are elaborately well timed. They’ll do anything to keep it propped up. Just like the Deep State has done & continues to do with the financial markets. You can throw fundamentals & mathematical logic in the shit can because it doesn’t matter right now. Someday maybe.

    It’s all a grand scheme of collusion by world CB’s & OPEC. EROI makes sense & sounds logical until you realize we no longer live in a “real” world. There is no price discovery. Only that which has been artificially fabricated. Traders hang on weekly EIA forecasts for U.S. crude storage numbers. Why? Because supply or perceived lack of supply moves the price of oil, while the masses are led to believe that demand hasn’t diminished and will only increase exponentially in the future. That is supply/demand side economics nothing else.

    • EROEI is actually simply thermodynamics. It is the law of thermodynamics applied in an artihmqtic way. Those who say EROEI is theory actually do not understand the laws of physics/thermodynamics.

      A system or orgasm cannot be mainainted or live if it does not exist because of energy surplus. If you take in less energy (via food) than you burn you eventually stave to death within a relatively short amount of time. If your metabolic requirement is 2000 calories per day but you only have 10,000 calories worth of food, you will only have enough food (stored energy) for five days. If your metabolic requirements were to increase that five day of food energy in calories becomes less than five days and you end up losing weight/burning energy until you find more food or die of starvation.

      The problem with regards to oil is that our appetite is growing as time passes and our energy requirements are growing as developing countries move towards becoming fully developed countries and as societies become more complex (increased complexity requires more energy).

      Well, our stored energy/food supply is finite. The more our metabolic requirements for calories/energy increase (San scoiety becomes more complex and as population grows) the smaller our stored energy/food supply becomes until one day we wake up to go to the store and see empty fridges.

      That’s basically EROEI simplifies and applied. It’s not theory, and price manipulation CANNOT make finite energy supplies magically reappear. Manipulating prices will only prolong things a little at best.

      Just because we have built up more complexities and have enough energy TODAY it will allow us to live on to cojntinue beliving in fairy tales like EROEI doesn’t apply in the real world. That’s rubbish. It’s just that the real world hasn’t yet to smack us up the sides of our heads, which it will by the mighty iron clad hand of the law of thermodynamics.

  19. Steve

    Your completely correct on your assessment of the oil industry. The reason that people can’t understand that oil prices will decline is they naively think all oil is the same. It’s not. WTI is an index grade of oil. So Permian Shale or North Dakota Sour trade at a discount. The problem is oil is of no value to the average consumer. Only refineries buy oil. They only buy oil they can turn into a marketable energy product.

    Refinery efficiency has been collapsing since 2012. Meaning they can’t turn shale and oil sand poo into a salable product like diesel or petrol. The only way they are willing to take the unconventional poo is to increase the discount rate. This is why the crude export ban was lifted.

    That’s the front end problem the backend problem is affordability.

    If the refinery raises its sale price to reward the poo sellers with the cost of production they need the end user can’t profit from his purchase. No one buys energy products unless they give him or her an appropriate ROI. This applies to snow plowers and commuters. Supply and demand has muddied the water so badly that most can’t grasp that economy is built on affordability which is a balance of productivity vs cost. No one demanded smart phones. Markets are a function of utility. Until people grasp that they’re lost.

    These are the fundamental principles of Jevon’s paradox.

  20. Wow-and JTRoberts appears on Steve’s blog. At the risk of seeming to be a stalker I read with interest all of JTR’s comments when they appear on blogs. They are always interesting and insightful.So far I’ve only seen them on Gail Tverberg’s and Tim Morgan’s blogs which are among the crème de la crème as far as I’m concerned. I feel a need to increase (my admittedly pathetic) patronage- you’re on a bit of roll at the moment.

  21. The so called green energies (wind, solar, bio fuels etc.) can not be the main solution of the future, when the cheaper sources of oil are running out, because of the declining EROI. Furthermore it would require to build a different kind of infrastructure and the society needs different kind of devices (e-cars for example), which is very expensive and needs a long time (decades) to convert to.
    So what could be done, if we are running out of conventional crude oil and also unconventional oil, that can be extracted at a reasonable EROI ?

    The process of liquefaction of coal which results in a slightly different kind of oil than crude but is usable to produce diesel fuel has an EROI of 0.2 – 0.3. Today coal extraction has an EROI of about 40.

    The combination of both processes gives us an EROI between 8 and 13. The costs per barrel oil are estimated at around $60 pb, which is near the current crude oil price.

    The big advantage is, that there is no need to change the infrastructure. Disadvantages are the extreme high costs for investment and the CO2 output (minimum two times as much CO2 production compared to conventional crude).
    It is estimated, that it needs more than 10 years to build up reasonable capacities, but it can be done. The only company which operates CTLs (Coal to liquid plants) today is SASOL in Southafrica.

    Another alternative are GTLs (Gas to liquid plants):
    https://oilprice.com/Energy/Natural-Gas/Qatars-Giant-Gas-To-Liquids-Plant-To-Yield-Profits-Of-6-Billion-A-Year.html
    https://oilprice.com/Energy/Natural-Gas/Can-Qatars-Success-with-Gas-to-Liquids-Fuels-Be-Repeated-in-the-U.S.html

    • Excellent post Herbert. Indeed, analyzing energy alternatives gives better perspective on the oil EROI itself, which is what explains why there are so many rail cars full of coal delivered to the power plant here in western NC. I quickly add that the only “visible” emission seems to be steam, and this exhaust is rendered invisible after a few hundred feet as it cools but then again, aren’t CO2, SO2 etc, when stripped of ash and soot, colorless?

  22. Herbert

    One thing that is often missing from EROEI calculations is the complete cost of an energy source. It is more then just the raw cost of extraction and refining. Transportation and delivery has to be calculated in. That’s why we see such variations in EROEI and often too much optimism.

    When we add all costs including depreciation in real energy terms we find we need very high EROEI to maintain the system.

    For example if we drive on a road we have benefited from a store of energy embedded in the roadway. That energy has to be calculated into the transportation cost not just the diesel in the tank. The energy to fuel the driver must also be calculated in. If the roadway is lighted it must be included. And the depreciation of the light poles as well as the guard rails.

    When all energy is calculated in we find that we are presently living on borrowed time. Our present lifestyle is an endowment of a bygone era of abundance of surplus energy. Even if we could lock-in the present EROEI of the existing system it’s not enough to maintain present infrastructure. And the fact remains that the EROEI is in decline.

    Obviously some here are familiar with Tim Morgan’s site. There he deals with the fact that money itself is energy. And the fact that money must grow, meaning energy must grow. So it’s not enough to find an adequate replacement for fossil fuels it means that to save the system it would require some energy source that would exceed the original conditions of fossil fuels when they were first applied. That is physically impossible.

    This is the predicament. Fred Hoyle once stated that our present system is a one time event we will either get it right or wrong but it will never happen again.

    He is partially right and partially wrong.

  23. Chris Martenson (PeakProperity.com) has even found something related to shale oil.

  24. Christoph Weise | December 29, 2017 at 7:30 pm |

    I read through the comments above and some of them are seriously flawed: (1) A gallon of fuel or heating oil is standardised product and it’s market price is independent from the quality of the input oil (tar sand, shale etc). It is incorrect to conclude that oil price goes down because the quality is lower. The consumer is not paying for “net energy”. The consumer is paying for the caloric value and the expenses for generating the caloric value reduce the profits of the oil company. It has been demonstrated that the profits of the oil and gas companies are eroding which means the “thermodynamic” concept could be correct but can not explain the development of the oil price. (2) The suggestion that the oil price fell because “its to cheap to drill and too expensive to sell” is based on the assumption that the global energy prices reflect affordability. I think that is not correct. Why did prices go up to USD 150 a barrel, a level that was clearly not affordable. The price conundrum, I think, is better explained by the “hated” demand / supply equation. Zero interest policy produced desperate investors which funded the generally cash-burning shale industry. The fight between shale and traditional producers did create havoc for the price. One day the shale industry will die and then the price will recover irrespective of the “law of thermodynamics”.

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