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When the party comes to an end


Nicole Foss famously compared the oil industry to a late night drinking binge.  The early oil found in pressurised deposits just 70 feet beneath the ground was the best booze.  The North Sea was the cheap stuff.  Hydraulically fractured shale oil and tar sands, though, are the last-ditch equivalent of using a straw to suck up the booze that spilled into the carpet; giving an energy return on investment (EROI) of less than 10:1 and possibly as low as 2.5:1.

This being so, then what the Kuwait Oil Company just began doing is the early morning equivalent of giving up on finding any more booze and going for the furniture polish in the cupboard beneath the sink.  As a report in The National notes:

“Kuwait has begun injecting chemicals into complex oil reservoirs to extract heavier grade oil, in the first operation of its kind in the Middle East…

“It is a costly enhanced oil recovery and extraction process and sometimes used where conventional production enhancement such as fracking and acid stimulation are not sufficient to yield commercial results.”

Kuwait aims to recover 4.75 million barrels of oil per day by 2040 using this technique.  But the real issue is less to do with the numbers than with the energy/cost.  As professor AS Hall – who first developed the concept of EROI – says, at an EROI of 1:1, you get to look at the oil; an EROI of 2:1 allows you to pump it to the refinery; 3:1 allows you to turn it into useful products.  This is why the Canadian tar sands have ceased producing, why Venezuela is a basket case despite having massive tar sands of its own, and why fracking is only proceeding in a handful of sweet spots in the USA.

Ultimately, falling EROI means less energy to power the wider economy.  This is why productivity has been falling despite the money-printing efforts of the central banks.  To some degree, this is reflected in the current price standoff between oil producers and consumers.  For the moment – at $50 per barrel – the economy can (with low interest rates and quantitative easing) just about limp along, while the global oil industry can just about (by cutting its capital expenditure) stay in business.  Allow prices to rise to the point – $100 per barrel or more – where the oil industry can expand, and the economy collapses into recession.  But lower the price to the point – around $20 per barrel – when the economy was last booming, and the oil industry goes broke.

What the Kuwaiti move suggests is that the current standoff is coming to an end.  Just as nobody did fracking in the USA or tar sands in Canada when there was easier and cheaper oil elsewhere, so the Kuwaitis did not use surfactants while their conventional fields were spewing pressurised sweet crude to the surface.  The fact that they are returning to depleted fields with this ultra-expensive technique tells us that they are running out of the cheap stuff.  And where Kuwait goes today, the rest of the Middle East will go tomorrow.

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