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Turning low-EROI oil into no-EROI oil

There is a story – possibly apocryphal – about a conversation between former Exxon CEO Rex Tillerson and then President George W. Bush at a swanky Washington dinner party in 2003, in which Tillerson is reputed to have remarked: “FFS George why do you want to invade Iraq?  Why not just offer them a deal?”  Sixteen years, more than 350,000 deaths and over five and half a trillion dollars later and it seems that a great many Americans – including the current incumbent of the White House – are asking the same question.

As we now know, the governments of the USA and UK took their countries to war in 2003 on an entirely false and fabricated story that Saddam Hussain had built an arsenal of weapons of mass destruction and, according to lies peddled by Colin Powell to the United Nations, was attempting to manufacture a nuclear bomb.  The reality was far more sordid.  Saddam had committed the cardinal sin of attempting to sell Iraqi oil in Euros; an action that, if repeated by other oil producing states, could undermine the artificially inflated value of the US dollar.  Saddam simply had to go.  And if a military invasion was required, then so be it.  As a bonus, Iraq contained the last large-scale reserves of conventional crude oil on the planet.  US oil companies could be brought in once the fighting was over to start shipping America’s Iraqi oil back to the motherland.

The failure to win the war in Iraq, together with the Obama administration’s decision to expand the conflict into Syria and to trigger entirely new conflicts in Ukraine and Libya are the main reason why US government debt is officially running at more than $22 trillion; and maybe double that if stories about off the books spending prove to be correct.  Unanswered for now is whether the oil was worth the investment.

During the 2016 US presidential election, then candidate Trump referred to the ongoing Iraq war and the broader US destabilisation of the Middle East as “the worst decision” America had ever made.  Indeed, it may have been Tillerson’s advice to Bush all those years ago that persuaded Trump to bring him in as Secretary of State in 2017.  In the meantime, of course, the USA has been lulled into the false sense of security derived from the apparent “fracking miracle” that has seen the USA briefly emerge (with the help of some manipulation of the statistics) as the world’s biggest oil exporter.  To the uninitiated eye, fracking has rendered Middle Eastern adventurism unnecessary – this, no doubt, being the main reason why you have to go all the way back to Franklyn Delano Roosevelt in the 1930s to find the last US president that got this far into his term of office without starting a new war.

Behind the fracking boom are two fundamental flaws.  The first is that the cost of obtaining the oil is far higher than the cost of conventional crude.  The reason is simple enough.  When oil was formed over millions of years and under great heat and pressure, a large part of it rose to the surface and dissipated.  Some – the oil fields we have been working our way through since the 1860s – could not migrate to the surface because it was trapped beneath non-porous cap rock.  Most oil, however, remained in tiny droplets in the source rock where, given time, it would eventually migrate into larger pools and either form new oil fields or migrate to the surface.  When conventional oil is recovered, engineers simply drill through the cap rock and release the pressurised oil beneath (as the pressure drops, water and later carbon dioxide is pumped in to keep the oil flowing).  When a shale deposit is fracked, in contrast, engineers are attempting to rapidly complete to process of gathering oil droplets into pools.  Clearly, this is more expensive than conventional drilling – far more energy goes into the recovery process, and far less oil comes out as a result; the whole process depending on unrepayable debt financing.

The second problem with fracking is that the oil recovered is of a lower quality than most conventional crude oil.  Refineries are set up to handle “goldilocks” oil – not too light, not too heavy – in order to optimise production of mid-range fuels like aviation fuel, diesel and kerosene (with petrol/gasoline as a useful waste product).  The trouble with fracking is that it produces too much light oil (including natural gas condensates) and too little of the really useful mid-range oil.  The – apparently unsatisfactory – work around has been to blend US shale oil with Canadian and Venezuelan ultra-heavy oils in an attempt to create something – at additional cost – akin to the sweet crude that comes (or at least used to come) gushing out of a conventional oil well.

Trying to assess the relative worth of Iraqi versus US shale oil is complicated, however, by our failure to account for the full cost – in energy and cash – of recovery.  Most calculations of Energy Return on Investment (EROI) are made at the well head, whereas what we need to know is the cost at the point of use.  While a lot less energy goes into getting a barrel of Iraqi oil out of the ground compared to US fracking, this misses the point.  The full EROI cost must also include the ongoing military occupation of the country that was required to allow US oil companies to get their hands on it to begin with.  It is with this in mind that we should view America’s latest attempt to foist “freedom and democracy” on yet another unwilling populace; in this instance, Venezuela.

In the brain-dead commentary sections of the mainstream media, the reason Venezuela is in crisis is simply “socialism;” although those making this crude analysis would reject the similar claim that the crisis in Haiti is “capitalism” or that the travails of Somalia are “libertarianism.”  A more subtle analysis reveals that the main cause of Venezuela’s woes is the same “curse of oil” that has afflicted resource-rich but economically poor states since the dawn of industrialisation:

“When it comes to wasted wealth, and the problems that bedevil poor countries that are rich in natural resources, especially oil, there is plenty of blame to go around. Economists have long observed that such countries tend to do badly. In a study in 1995, Jeffrey Sachs, now of Columbia University in New York, showed that the resource-rich grow more slowly than other poor countries—even after such variables as initial per capita income and trade policies are taken into account.”

Like so many other poor but oil-rich states, Venezuela – under governments of all shades – became dependent upon export revenues.  Prior to Chavez’ socialist government, Venezuela fitted the oil-state description set out by Emma Ashford in her review of Leif Wenar’s Blood Oil: Tyrants, Violence, and the Rules that Run the World:

“Oil wealth pours into these states, enriching elites, enabling corruption and repression, and damaging the prospects for economic development and good governance. In buying their oil, we are enabling the addiction.”

For a brief period that coincided with Chavez’ period in government, oil prices rose above $100 per barrel; bringing in enough cash to fund some of the social programs that have since collapsed as rapidly as the global oil price.  The tightening of US sanctions hasn’t helped the situation.  Nevertheless, Venezuela’s big energy crisis was the result not of oil, but of the decision to throw all of its energy eggs into the single basket of hydro-electric generation from the Guri Dam.  The main driver for this is the same as for the deployment of solar and wind power in Saudi Arabia and the Gulf states; to maximise the amount of the remaining oil available for export.  It may look “green,” but it is anything but.

Unlike oil and gas – industries that in Venezuela depend on hydro-electric power to operate – electricity has problems of its own.  As Gretchen Bakke at the New Yorker pointed out a couple of years ago:

“Venezuela has failed to design its electrical infrastructure in a way that accounts for the natural unpredictability of energy sources like hydro, solar, and wind. After the last bad El Niño drought, in 2010, the government did almost nothing to revamp…

“Less water means less power, right now. In countries with more modern energy infrastructures, the solution has been to balance different sources of electricity. In the United States, for instance, new wind capacity tends to be paired with new natural-gas capacity, so that when the weather changes and the wind stops blowing, fossil fuels can make up the difference. In places with a robust enough grid and the right sort of computerization, even solar can balance wind, and vice versa. But in Venezuela no such balancing exists, because most of the oil that is pulled up from underground is exported, and much of its plentiful natural-gas production is used to keep the oil fields pumping.”

It was the climate-induced collapse in the electrical energy system that powers Venezuela’s domestic economy – something that bodes ill for electricity importing states like the UK that are increasingly dependent upon wind power – that triggered the initial economic chaos that has since morphed into a full-blown geopolitical crisis that may yet see US military intervention; replete with the usual politicians’ and journalists’ hypocrisy about liberating the people from tyranny.

Again, however, we should be asking key questions about the value of Venezuelan oil at this stage in the game.  A damning report by Rystad Energy points out that the biggest harm from US sanctions has been on the US Gulf Coast refineries that need the heavy oil to blend with light shale oil:

“Heavy oil usually trades at a discount to lighter grades. Now, however, Heavy Louisiana Sweet is trading at a premium to Light Louisiana Sweet. That shows just how tight the market for heavy oil has become. Sanctions could increase the premium for heavy crudes, and that would be fundamentally bad for US refiners.”

It is the chart attached to the Rystad Energy report, however, that drives home the deeper point about the value (EROI) of Venezuelan oil:

Venezuelan heavy oil production

While much of the world’s media has made much of the fact that Venezuela has the world’s biggest quantity of oil reserves, few have given thought to the issue of quality.  The state has rapidly depleted its remaining mid-range reserves – largely, it appears, to export to India and China.  What remains is more like the asphalt used to surface a road rather than the fuel you put in a truck:

“Venezuela’s heavy crude is almost solid when it comes out of the ground, so it cannot flow through pipelines.

“It needs chemicals, diluting agents such as naphtha, to turn into a lighter substance that can eventually be exported. Sanctions include a ban on US firms exporting these agents.”

The energy invested just to get the oil flowing is sufficient to lower the value to the wider economy.  It is only because the world is experiencing a slowdown in heavy oil production and the relative value of blending heavy and light oils that Venezuela’s oil can be considered an economically viable resource at all.  Throw in the eye-watering costs of an Iraqi-style “boots on the ground” invasion and occupation to expropriate the oil for US use and it is doubtful that there will be any return on investment at all.  Tillerson’s 2003 advice is as good today as it was then– FFS Trump, cut a deal!

As you made it to the end…

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