The Oil Drum

In Part 2, I talk about my take on the current debt situation, and in Part 3, my take on what's ahead.

I agree, there are a lot of economic issues involved with our ability to continue business as usual, in more and more risky environments.

Estamos Jodidos

I'm not an economist either, but rather a little tiny independent contractor in the oil and gas business that occasionally has a fairly accurate flash of insight. I'm pretty well Texocentric, because Texas is where I was raised and make my living. And as westexas has repeatedly pointed out, Texas is big enough to draw conclusions about multiple basin oil trends, but started its main production enough earlier than the rest of the world that we can make some pretty good inferences about world trends by looking at Texas drilling and production history.

Lately I've been cogitating on the concept of Energy Returned On Energy Invested, or EROEI as we call it here. The concept isn't nearly as complex as the name, its how many feet of drilling does an operator have to do to find the reserves. At the beginning of the oil industry of the Gulf Coast the returns were pretty fantastic. Although the EROEI at Spindletop is quoted at 70:1 this is actually way too low. The Kucas Gusher was the third well to attempt to drill at Spindletop, and the discovery was at 1100 ft in depth. Although the field at Spindletop has produced around 160 million barrels from both the cap and sides, the cap rock reservoir has produced about 55 million barrels. That means that if the total footage drilled was about 2500 ft. in these three wells, the amount of oil found was 22,000 barrels per foot and the total cash expended on all three wells was less than $10,000.00. Technology has changed so much that is hard to make a comparison, but an equivalent depth well can be drilled and completed for around $200.00 a foot ($220K for an 1100 ft. well). At $80.00 per bbl for the oil discovered, the Spindletop well would have discovered $4.4 Billion dollars worth of oil for a Return on Investment of 88,000,000 to 1 and an EROEI of 1,760,000 to 1.

However, I wouldn't hold my breath waiting for the discovery of any new salt dome cap rock fields. The last one discovered onshore in Texas was the Humble Field in 1905.

The real return on investment was nowhere near that high, either, as there were no tanks, no shipping, no refineries so oil prices were all over the place in a thinly traded market. But, the return on investment was so high that Texaco, Gulf and the guys who started the Humble Company can all trace their roots to the 200 acres at Spindletop and it was the beginning of the modern oil industry. Other early fields were very profitable too, and the oil industry expanded very rapidly.
The peak of Texas exploration was in 1930, while the peak of US exploration in 1950. Production for both peaked in 1973. After Texas exploration peaked, the big oil companies began to explore in other parts of the world, and after about 1950 in offshore waters. The cost of finding oil went up exponentially as they adopted much more expensive methods of geophysical exploration and went to frontier areas that were further afield. Meanwhile, the major oil companies had no real setback since the Great Depression.

In the middle 1970's the rest of the world began to catch on to how good a deal they had, the immense profits that the majors were making from the addiction of modern society to crude oil. In the Middle East, the government of KSA (The Kingdom of Saudi Arabia) renegotiated the original leases that gave the KSA 12.5% of the gross sales price of the oil to the formation of Aramco, with the KSA owning 50% of the Saudi fields and western oil companies 50%. Soon the result was that the majors were forced out of Aramco. The Iranians threw out the Shah, and the western oil companles with them and the wave of National Oil Company (NOC) production began in earnest. Escalating prices even resulted in an oil price freeze by Nixon in the US, and then the Windfall Profits Tax.

But the market was growing so fast and the costs were still so low that the Majors continued to make money as fast as they could rake it in. But, the Majors became merely the big oil companies. The NOC's now owned 82% of the world production, the independents in the US about another 6%-8% and the majors were pushed off their fat, full teat to sucking away at rapidly depleting ones.

In the meantime their overhead has kept swelling. They can't make any money off fields that have less than 25 million barrels, and they've drilled up all the acreage thats possible for giant fields in US onshore or offshore waters. Thats why they like the Alberta Bitumen. Its the only place they can see a big prize in a halfway politicially safe area. And, they act like dinosaurs on a short grass prairie. Because some of their tactics worked in the past, they think they will work today. Political donations worked wonderfully with the Democrats and Lyndon Johnson, so they have kept putting more and more money in politics. This was OK with Lyndon Johnson and John Nance Garner, because they were good men and true patriots. But they've put their money behind more and more cheap theives who are greedy for power, and now we have the Bush Dynasty, Cheney and James Baker, whom I consider to be traitors because they could care less except where their pockets are concerned.

The big oil companies are just about finished. They can't survive as giants, and aren't smart enough to get smaller to get nimble, just as the car companies can't see that they need to ditch the internal combustion engine for hybrids and electric cars. And what scares me is they may decide to take down the world rather than change while they have time and money to change.

` Bob Ebersole