Declining Energy Return on Energy Invested(EROI):

The submerged rock that threatens to scuttle the global (and Australian) economic ship.

Brian Bloom,

Tea Gardens, NSW. January 2014

The US accounts for +-23% of the Global Economy. Y.O.Y. rate of US GDP growth has been in a declining trend for decades - in particular since the mid 1980s.

(Source: Presentation by Dr Charles A. Hall)The declining global rate of change in liquid fuel output has tracked the declining rate of change in US GDP. This is only one side of the coin. Above are “gross” numbers. EROI has also been declining. Growth in net overall energy output has probably been negative. That is very likely what caused the Global Financial Crisis

If one of government’s primary objectives is to create a jobs-friendly environment, then we have to look beyond the old economic paradigms of central banking and “unfettered” free enterprise. What is

happening in the US has not happened for 40 years. The world economy is sailing in the shallows over submerged jagged rocks.

Governments need to embrace new thought paradigms!

The “Asian Century” is a flawed concept.

• Conventional wisdom has it that the centre of gravity of the global economy is shifting to Asia in general and to China in particular.

• The reality is that Western CB policies provided the capital to facilitate a shift of legacy industries from high cost countries to low cost countries.

• This created economic “noise” but did not address the core need to build a new, more powerful, non fossil-fuel-centric, economic engine . More “stuff” became available at cheaper prices and the consumption of that stuff was funded largely by debt, supposedly backed by security of CB facilitated, price inflated assets. There was no paradigm shift in thinking. Just more of the same.

• The end result has been almost US$50 trillion of global sovereign debt, around $6 trillion of debt-funded ghost cities in China, and around $3 trillion of local government debt in that country post 2008, as the emphasis switched from exports to domestic activity. The Chinese economic growth statistics should not be accepted a face value.

• Bottom line: Australia cannot sensibly plan to hitch its economic caboose to an Asian locomotive that emerged to capitalise on 20th Century legacy technologies. We need to become forward thinking and self-sufficient.

Looking at Oil as an example: Right now, Australia is strategically vulnerable

Blue crosses and grey diamonds: Projected oil consumption. Purple dashed line: Conservative production case. Blue dashed line: Base Case. Green dashed line: optimistic case. Red circles and black crosses: Actual and projected based on actual. Source: Hallock J., Wu W., Hall C., and M. Jefferson. 2014. “Forecasting the limits to the availability and diversity of global conventional oil supply: Validation.” Energy. Vol. 64, pp.130-153.

This is an extraordinarily risky situation!

And it is also illustrative of where the mindless and doggedly dogmatic commitment to management of “everything” by Private Enterprise might lead. If something happened to the refineries in Singapore, for example, the entire Australian economy could come to a standstill!

This presentation has 2 objectives

• 1: To communicate the critically important implications of globally declining EROI

• 2: To take a long-term forward view of where the economic puck is going to be in 25 – 50 years, so that Australia might position itself to become a global economic leader. It will be a function of energy policy.

Of paramount importance: Fossil Fuels are rapidly approaching their use-by date.

1. It is not solely about CO2 emissions, although minimising CO2 is certainly important in terms of 3 below

2. It is about EROI – which has been declining since the 1980s.

3. It is also about managing and husbanding environmental assets – which should be regarded as precious: “of great value; not to be wasted or treated carelessly”. Husbanding: “To use sparingly or economically; conserve.”

It is also about “ethics”

Definition of ethical: “relating to moral principles or the branch of knowledge dealing with these”.

For example: Regardless of the “environmental conditions” that have been imposed, the approval of an expanded coal port at Abbot Point in north Queensland (Dec. 10th 2013) was inconsistent both with husbanding Australia’s precious environmental assets (Barrier Reef) and with ethical behaviour - from the perspective of the global human population that needs to reduce its dependence on coal.

Abbot Point is 100km away from the Whitsundays

Link between CO2 and Ocean Acidification 1985 – 2005 (IPCC 2007)

Acidification does not bounce around. The ecological balance of the oceans is under threat. Humanity needs to

reduce its dependence on coal

From a pragmatic perspective: What are the EROI ranges of Fossil Fuels?

• Coal: 50:1 – 85:1 (Murphy, 2011.)• Oil: 17:1 (Murphy, 2013 – Appendix 1)• Natural Gas: 20:1 – 40:1 (Murphy, 2011)• Shale Gas (Marcellus): 85:1 (Aucott and

Melillo, 2013 – Appendix 2). The uncertainties surrounding this calculation are high

Note: Dr Charles A. Hall was deeply involved in the original research that facilitated the above numbers. Quote: “..the EROI [of shale gas] will be cut in ?half? by the time it is delivered, and will be less when you move off the sweetest spots. “ (From a personal email to Brian Bloom from Dr. Hall)

Two North Pole ViewsThe left frame shows the North Pole marker in 2000. 

The right frame shows the same marker standing in a lake of melt water on July 22, 2013.  Anyone who still doubts climate change might refer to Appendix 3, which shows a series of charts regarding methane.

EROI of all fossil fuels has been declining

• Oil: “Global average EROI was roughly 30 in 2000 and has declined to roughly 17 today” (Murphy, 2013 Appendix 1)

• Brown Coal “densification” (upgrading its calorific value) involves removing the high moisture content which, in turn, requires greater energy investment Lower EROI.

• Carbon Capture and Storage requires greater energy investment Lower EROI

• The Shale Gas Industry is very young, and early evidence shows that new shale wells have rapid rates of decline in daily production. EROI calculations are not yet meaningful.

Fracked Gas – In Principle

• Canadian and British research warn of low reclamation percentages of shale gas.

 • In principle: “In conventional reservoirs, as much

as 95 per cent of the natural gas can be recovered. For shales, recoveries are expected to be around 20 per cent because of low permeabilities despite high-density horizontal drilling and extensive hydraulic fracturing.” Source: “A primer for understanding Canadian Shale Gas”

http://www.neb-one.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/ntrlgs/prmrndrstndngshlgs2009/prmrndrstndngshlgs2009-eng.pdf

Fracked Gas – Some specific examples

• Marcellus wells in US show over 50% decline in daily output over 2 years (See Appendix 2)

• Similar declines have manifested in 1,931 shale gas plays across Barnett, Fayetteville, Woodford, Haynesville & Eagle Ford. (See Appendix 4)

• The decline curves are steepening. Annual rate of decline was 23% in 2001 and 32% in 2011. (See Appendix 5)

Contribution to global energy pie(Can gas fill the oil gap?)

Total World Shale Gas Resources?

• In a June 2013 report, the US Energy Information Administration estimated world gas resources at 22,882 Trillion cubic feet. (See Appendix 6)

• Converting this to Barrels of Oil equivalent at around 5,800 cubic feet per barrel, the “resources” are 39.5 Trillion boe

• Current global production of all liquid fuels is around 90 million bpd or 33 billion barrels a year (round numbers)

• Unfortunately the key is not “resources” but Estimated Ultimate Recovery (EUR) of these resources. i.e. Extraction must be technically feasible, the gas must have an EROI above 10-15:1, and financial returns must be taken into account. EUR is likely to be small fraction of resources.

Conclusion: The above model is probably near enough to reality. “Peak Gas” in around 2030.

Source: New Scientist Magazine, 2 May 1985

Looking Forward

• Clearly, it’s also about “jobs”. We cannot just abandon known facts for hopeful dreams or paranoid fears.

• Nevertheless, if we can develop a high level of confidence regarding future trends, then jobs can be created in a more permanent manner than by supporting geriatric legacy industries. Also, unethical projects like Abbot’s point will not get off the drawing board. That behaviour must be stopped in its tracks.

• We need to support economically relevant emerging industries.

• The core driver of all economic activity is “energy”. Primarily, that is where we need to focus.

New thought paradigms!• Remembering that fallacious reasoning by Central Bankers got us into this mess, we

need to think like industrialists, not like bankers or economists.• We also need to recognise that Private Enterprise decisions must be subject to

ethical rules of conduct. We cannot just defer to Private Enterprise and “get out of the way”. Look how exposed we are to oil imports!

• We also need to recognise that Private Enterprise will not act until it can see short to medium term returns on investment. (3-10 years)

• Governments will therefore need to think like “entrepreneurial” industrialists, taking a longer term (15-25 year) profit oriented view for the benefit of the public as a whole.

• The key words are “profit oriented”. We are not talking socialism. • The profits will flow from arbitrage. Buy low (high risk) sell high (low risk).• And, if we are taking the risk, then the returns we expect should be high! If our

actions are to be funded from public coffers then the results should be for the benefit of the public.

• In thinking about the future, perhaps we might develop a mindset relating to Collaborative Capitalism rather than the Crony Capitalism of the past.

Okay! Let’s get practical. Where should we be looking?

Wait! Governments can’t manage!

• The idea that Private Enterprise will always do a better job than Bureaucracy is dogmatic nonsense. There are three issues:– Yes, Governments should not compete in the market place (conflicts

of interest)– Profits from infrastructure management should be for the public’s

benefit – Management is about HR structuring. Competent teams of managers

backed by appropriately experienced Boards of Directors need to be recruited in NON-Competitive and/or infrastructure management areas. Once the businesses have been commercialised and competition emerges they can be exited – at a profit

• With regard to energy and associated infrastructure, where should we be focussing? What follows is the “what”. The “how” can be discussed at a later date, if necessary.

What are the EROI’s of alternate energies?(See Appendix 7)

Which energy paradigms?(With a mindset of Collaborative Capitalism)

• Nuclear, because it has potentially the highest EROI (which will grow substantially when Generation IV has been perfected) and “safe” nuclear may eventually replace coal completely

• Subject to high EROI, biofuels can replace oil and gas, and also be e feedstock for animal feeds and pharmaceuticals. These should be targeted because they are CO2 neutral and can be used as a means of recycling high nutrient wastewater

• Wind, because technological advances will lead to increased EROI

• Solar, for the same reason• Energy Storage – to augment wind and solar

What is “safe” nuclear?

• Analysis of the nuclear industry leads to the conclusion that profits have trumped safety. Corners have been cut (eg Fukushima’s back-up generators were located in the basement instead of on the roof), maintenance has been less rigorous than it should have been (rusting pipes and leaking valves) and licences for several old plants have been extended past the plant’s originally contemplated use-by. date These issues flow from a mindset of maximising profits. Nuclear should not be managed by Private Enterprise.

• Generation IV nuclear promises to yield little radioactive waste. At the current rate of R&D (because Private Enterprise is profit oriented) , we may be 30 years away from commercialisation. Government involvement in the commercialisation process would be constructive because the time period might be significantly shortened.

Q: Which biofuel? A: Algae• Biological plants convert solar energy to mass. Over hundreds of thousands of years,

the process has been perfected by natural evolution.• Algae seems to have the highest reproductive rate – some strains in line with bacteria.

Under ideal conditions, some algae strains can replicate several times a day. This promises to yield extraordinary high EROI.

• Appendix 8 shows that there are many reasons why algae will “never” become economically viable. But the reality is that the core issues associated with algae cultivation are all technically addressable. For example:

– Nutrients needed can be extracted from sewage water. This will address another thorny water management problem. (2 birds with one stone)

– The “cooking” of algae in high temperature environments may be manageable by using solar energy powered technology to cool the water

– The turbidity issue (prevention of the sun’s rays from reaching the algae) has been solved by the UV disinfection industry.

• The real reason that algae will “never” become a viable source of biofuels is that an algae biofuel industry will require significant infrastructure, which is the responsibility of government. It will require long term planning so that all the vectors will eventually align. “Never” is an emotive word. Australia has plenty of unproductive land in sunny areas. Yet another problem might be solved. Algae biofuel may be an extraordinary opportunity

Which wind technology?

• All emerging technologies go through a learning curve.

• Wind technology seems to have reached the threshold of a new generation.

• Reference to Appendix 9 shows a new “Venturi” design wind capturing technology which, for various reasons – including potentially extraordinarily high EROI – the Australian Government will be well advised to investigate with a mindset of collaborative capitalism. (The “how” will require significant further discussion)

Hydrogen

As an aside: If the EROI of wind can be increased significantly, the extraction of hydrogen from seawater might be facilitated. At present, hydrogen has a negative EROI.

Which Solar?

• A brand new, next generation (?) solar technology was recently announced. (See Appendix 10)

• For similar reasons and with a similar collaborative capitalism mindset, the Australian Government would be well advised to investigate this technology.

But Nuclear is not PC at present. The Public will never accept it!

Public perceptions can be managed. This can be done by indoctrination and misinformation – as may now be happening on the negative side by interested Private Enterprise parties who may be seeking to gain strategic control over this industry – or by education, which is once again Government’s responsibility. It is being done elsewhere by Government:– Cigarettes– Sunscreen– Macular degeneration– Mammograms– Bowel Cancer– Other “nanny state” activities.

But the Coalition stands for Free Enterprise and hands-off government!

Does anyone seriously believe that people still buy into such anachronistic concepts? Adam Smith’s invisible hand was amputated in 1944 at Bretton Woods. It was replaced by crony capitalism. When government’s hands are off the controls, dishonest (unethical) hands lunge for them. Our world is in trouble. It’s time to get real. We need to jettison our losing ideas and run with our winning ideas – for the benefit of all Australians.

Let’s think the nuclear idea through

• What’s “step #1”?

• If we can agree that the world is inexorably heading towards nuclear because of its high EROI, and if we can agree that it is only a matter of time, then we must also agree that anyone who corners the uranium market now will make a killing later. Here’s the evidence:

Uranium chartPrice per lb fell nearly 75% off its peak price between 2008 and

2013. From an entrepreneurial perspective, now’s the time to buy.

The Gold Price chart looked very similar between 1984 and 2001

The month end gold price fell from $1764 to $338 or by 80%. Source:

http://www.macrotrends.net/1333/gold-and-silver-prices-100-year-historical-chart

UK sold its gold at the bottom

• “The UK government's intention to sell gold and reinvest the proceeds in foreign currency deposits, including euros, was announced on 7 May 1999, when the price of gold stood at US$282.40 per ounce.” (Wikipedia)

• Gordon Brown – then Chancellor of the UK Exchequer – sold all of the UK’s gold reserves between 1999 and 2002 (right at the bottom)

• Are we going to make the same in-principle mistake with Australia’s uranium?

Uranium• Australia should not allow its uranium resources to be

sold from under its nose at low prices. From the perspective of Australian citizens, We should be buying now, not selling.

• Australia owns >25% of the world’s uranium resources• If we can agree that nuclear should not be managed by

Private Enterprise, and if we are confident that the world is heading towards embracing nuclear, then the Australian Government should move to nationalise the country’s entire uranium resources ASAP.

• If we do this now, then time will become our friend.

What infrastructure will we need?

• Australia is a dry continent. If we understand that the world is inexorably heading towards embracing nuclear, then we can anticipate that one major application will be seawater desalination.

• Water pipelines should criss-cross the continent at that time.

• The cost of laying potable water pipelines and secondary sewage water pipelines, now, side by side in the same ditch, is unlikely to be double the cost of laying potable water pipelines only.

In principle, for example, the “back of Bourke” could become an important agricultural development area if both desalinated potable grade water and secondary sewage water are piped from the major cities to it.

A look at the map shows that Bourke is roughly equidistant from Melbourne, Adelaide and Brisbane (+- 750 – 850 km) and a couple of hundred kms closer to Sydney. A total of 3000 – 4000 km of pipelines (X 2) will be required.

Mass Transportation

• In principle, (again by way of conceptual example) if we have access to cheap energy, Bourke could be linked to all the major cities including Darwin and Perth via magnetically levitated bullet trains.

• All the east coast cities, including Canberra, would be <1.5 hour bullet train journey away, and Perth and Darwin would be a 5 hour bullet train journey away

This is all theoretical nonsense! How would we pay for all this infrastructure?

• Remember that carbon tax you were so quick to want to wind back? In principle, that could provide the equity. Joint Venture and other financing could be structured around that.

• The Joint Venture partners would be other industrially/commercially oriented entities who see long term strategic benefits (Collaborative Capitalism); as opposed to financial investors.

And the economic impact?• The laying of thousands of kilometres of water pipes and thousands of

kilometres of mag-lev railway lines – in the confident anticipation of cheap energy – would create large numbers of jobs. The economy would be “stimulated” & the multiplier effect would kick in.

• Some of the additional tax revenue might be diverted to funding R&D into 4th generation nuclear and algae biodiesel.

• Some of the additional tax revenue might be diverted to commercialising next generation wind and solar power throughout Asia, as a principal.

• Within 25 years, Australia might emerge as a potential major exporter of liquid fuel, algae based animal foods, nuclear, wind and solar technology and high priced uranium (which at today’s price constitutes around 0.5% of the retail price of electricity)

• We might even consider developing the expertise to reclaim the 160,000 tons of nuclear waste that is lying in cooling ponds next to nuclear power plants across the planet. A reprocessing plant might be located a few hundred km away from Bourke in a remote location, but accessible via one of the new railway lines.

What will be required?

• A decision to stop thinking in terms of 20th century economic paradigms.

• The courage to face up to the high probability that nuclear will eventually replace coal, and that oil and gas have limited life expectancies – by reason of declining EROI, in addition to carbon pollution issues

• A shift in mindset from crony capitalism to collaborative capitalism• Moving to ensure an emphasis on “ethical behaviour” of

government and business relative to the population as a whole• A jettisoning of dogmatic beliefs regarding the relative

competence of Private Enterprise and Government. Human capital is embodied in individuals not the organisations which house them. Inefficient organisations need to be restructured.

CONCLUSION

For the Global Economy to stand still (and not go backwards whilst all the sovereign debt is being either written off or repaid) we need to embrace higher EROI energy paradigms than fossil fuels. And there is an urgency to act. Fossil fuel EROI’s are falling; in oil’s case, precipitously. The models show we have maybe 15 – 20 years to get our act together. Nuclear is coming. Australia’s uranium resources should be regarded as a precious asset that needs to be husbanded.

AcknowledgementsGrateful thanks to the following people who had significant input to my understanding of the subjects

discussed herein:

• Dr .Charlie Hall, retired, Professor Emeritus State University of New York, Syracuse, New York 13210. Dr. Hall was one of the world’s pioneer researchers into the subject of EROI.

• Dr. Anselmo Pedroni, Physicist, Geo- and Cosmo-chemist, now retired for health reasons. Dr. Pedroni was active as a research scientist and university teacher at several renowned European institutions, such as the SIN, the ETHZ (Switzerland), the MPI and the Free University Berlin (Germany).  He has mentored me specifically in the subjects of Physics , Energy and Climate Change.

• Mr. Steven B. Kurtz, retired and lecturing part time on global matters that might impact on humanity’s future. Mr Kurtz’s extensive personal network has enabled me to have any question on any subject of interest to me answered by a world-class expert in the appropriate field.

• Dr. Michael L. Aucott, environmental scientist. Adjunct professor of chemistry at the College of New Jersey, Ewing, NJ and also teaches at Temple University, Philadelphia, PA.