Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
James Stafford of Oilprice.com interviews Chris Martenson
We are in the midst of an amazing energy boom, but by sweeping the idea of peak oil under the rug we are ignoring a significant fact: the relationship between hydrocarbon reserves and flow rates are not the same as they used to be—reserves have increased but flow rates are not as high or sustainable.
Perhaps the most important thing we need to pay attention to is net energy returns, on which we run society. Massive new discoveries are only netting a fraction of the returns compared to earlier decades.
While we must proceed into the energy future with caution—and the knowledge that analysts may be overselling the shale boom—there are also, as always, major opportunities in this story and they can be found in the wider trends related to improving energy efficiency.
Looking at our energy future in more detail we were fortunate to speak with the well known economist and author of the Crash Course Chris Martenson. You can find out more about Chris and the Crash course at his website Peak Prosperity.
In part 1 of our exclusive 2 part interview Chris discusses:
James Stafford: You’re well-known for talking about the dangers of peak oil. But are you more optimistic about the future now that we find ourselves in the middle of an energy boom—thanks to improved extraction methods like fracking and other technologies, which have opened up massive oil and gas plays once thought to be unreachable or too expensive to get to market?
Chris Martenson: Good question. The relationship between energy and the economy is the most important thing that anyone can, and should, work to understand. In the past, we’ve always had whatever amounts of oil we wanted to support the sort of economy we operate, and that happens to be an economy that grows exponentially. The rate of growth that seems to work best at about 3% real and 6% nominal growth.
Now, between the 1960s and the 1980s, the world saw roughly a 6% per year growth in oil output. From 1980 to 2000, roughly 1.5%. And since then, almost flat, maybe a .1% growth in oil output.
So shale oil discoveries may be massive in terms of the total number of barrels of oil–but what they lack are high and sustained flow rates. And there’s a lot of confusion out there in the press right now, with several analysts that should know better, waving their hands at increasing reserves and then making the utterly wrong conclusion that peak oil is a defunct theory.
Now, to illustrate this, imagine we just found a trillion barrels 40,000 feet down. Yeah, that would awesome, right? No more peak oil, at least for a long time, right? Well, what if due to technological considerations, we could only get a few wells installed, and the max flow rate we could get from that reservoir was 100,000 barrels per day. Oh, that’s it? Well, that’s nice, but it doesn’t really help the overall situation, where we’re experiencing roughly 4,000,000 barrels per day,per year declines in existing conventional crude oil fields. That is, reservoir size and flow rates were well-correlated several decades ago, because the stuff just flowed out of the ground so easily, but now that we have to drill tens of thousands of feet to achieve a single well flow rate on the order of 100 barrels per day/per well in the shale plays, or we even have to scoop up tarry sand in giant machines and then power wash the bitumen off of it, oil just don’t quite flow quite like it used to.
There’s a new relationship between reserves and flow rates, and it’s a fraction of the old rate. And it’s an entirely new world, and this has been missed by the less insightful analysts and commentators out there. I am optimistic about the new reserves and flows but not because I happen to think they allow us to forget about the challenges and snap back to ‘how things used to be.’ We’re in a new regime of higher oil prices and that alone sets today well apart from the past.
James Stafford: In your crash course, you make an interesting point that America imports 10 million barrels of oil per day, which represents the same power equivalent as 750 nuclear plants. With the new oil fields opening up in the US, is it realistic to think that America could become energy independent?
Chris Martenson: Energy independence is another confusing term that’s recently, and I think regrettably, been introduced in the conversation. The various forms of energy are simply not interchangeable at this time. We have to consider them separately.
I’ve never thought that the US has an energy shortfall. We have a lot of coal, for example, but we do have a liquid fuel predicament. Right now, we move almost nothing from point A to point B using anything other than liquid fuels derived from petroleum. Together, electricity and natural gas account for perhaps 1% of everything that moves. I believe that we could and we should work very hard towards using electricity to move things, but to do so will require many trillions of dollars in investment in infrastructure, vehicles, storage technology.
I also believe we should use our remaining natural gas as a bridge fuel to get us to a new energy future that’s durable and provides us with a high quality of life. If we were on a path towards using electricity and natural gas to move things around, then I would be willing to entertain the idea of energy independence as a useful concept, because then the various fuels would be swappable. However, we’re not on any such path at all at this point in time, at least not meaningfully so.
We will not ever become energy-independent with respect to liquid fuels in the US unless demand absolutely craters due to an economic calamity of some sort.
James Stafford: Obviously making a change would take serious political will. Do you think that will exists at this point in time, or is it something that’s going to happen when people get a nasty shock?
Chris Martenson: I think we’re going to have to go with the nasty shock at this point. The political will just isn’t there. Recent events have really confirmed for me that Washington, D.C. just doesn’t get it. They really want to believe in the story that the US is a new energy powerhouse; just don’t want to look at the complexities that are actually involved in the story at this point in time.
So will we change through pain or insight? Those are the two main avenues of change, either at the individual or cultural level. I truly believe that pain is probably the most likely way we’re going to change in this story. Maybe not – hope springs eternal – but from a betting standpoint change will follow pain.
James Stafford: What do you see happening with the oil market in the coming, say, three to five years?
Chris Martenson: Despite all of the hoopla about tight oil, which I think has been oversold by the way, I remain focused on the fact that for whatever reasons, world oil production has been effectively flat for six years running despite a tripling in the price of oil. Brent crude remains solidly over 100 a barrel, and 2012 will be the highest yearly oil price on record for global oil.
So my ideas here are that oil’s an utterly non-negotiable necessity of modern life. Demand for it is going to grow further on the world stage. New oil discoveries all have a marginal cost of production that ranges from 60 bucks on the low end per barrel to 100 dollars per barrel on the high end. What this means is that my new floor, for the price of oil, is somewhere in the vicinity of $70 to $80 a barrel. That’s my low end target.
On the upper end, so much depends on whether the world economy finally recovers, which is looking increasingly unlikely, or whether there are further geopolitical difficulties in the few remaining productive oil basins, notably West Africa and the Middle East. Should either or both of those regions see their oil production shut in for any length of time, I can easily see the price of oil doubling from here to $200 a barrel, with very dire effects on the struggling world financial system.
James Stafford: What are your thoughts on the situation we are seeing with declining net energy returns?
Chris Martenson: This is really the important part of this conversation. I think it’s a subtle idea, but it’s actually the most important one here, and that is that net energy returns are what we run our society on. And the net energy returns we’re getting from these new finds are a fraction of those that we enjoyed in prior decades. So that surplus energy left over after exploring and extracting energy, that’s the stuff on which our complex, just-in-time economy runs.
With less surplus or net energy, there’s just less left over to do other things with, such as growing our debts–at nearly double the rate of underlying economic growth, which is what we’ve done for the past four decades. Or shipping billions of economic items tens of thousands of miles from low cost labor markets to high profit consumer markets. Those activities require net energy, and that’s the part of this story that’s really missing, that even if we have these large finds, the tight oil shale plays, the heavy oils, the ultra-deep water finds, the net energy we’re getting back from those is just a fraction of what we used to get.
Chris Martenson Interview (Part 2)
In part 2 of our exclusive interview with Chris Martenson economist and editor of the popular financial website Peak Prosperity Chris talks about:
· Why Governments should help renewable Energy innovation
In part 1 Chris spoke about: Why we shouldn’t be speaking about Energy Independence, why we could see $200 a barrel oil in the near future, why peak oil is not a defunct theory, what we aren’t being told about the shale boom, and much more… Click here to read part 1
James Stafford: With cheap oil looking like a thing of the past, what other energy sources should we be looking at developing? What are your thoughts on nuclear?
Chris Martenson: I believe nuclear can be done much more elegantly and safely than we’re currently doing it. And I am intrigued, also, by the possibility of thorium reactors. There are a variety of developments that we could look into. It will take quite a bit of investment, and there are a number of issues to be worked through, clearly. But nuclear does provide us with the possibility of having very low emission, very cheap electricity, which is important.
And if we’re going to talk about how we need to move towards electricity, which I believe we do, the thing we need to solve first is storage. We need to figure out how to store electricity.
The batteries that we can manufacture at scale have not advanced much since Volta first invented them in the 18th century. So we need batteries, we need storage, we need to start building zero-footprint buildings. All of these things can be done, but we really are not yet doing them on a serious basis.
Saving energy is something that really gets overlooked, but it’s where the biggest savings always happen to be. If I could wave a magic policy wand, I would take just one month from the Federal Reserve and I would dedicate it to a national prize to whoever can solve making batteries at scale from common materials and at a much higher energy density. The tasty prize would be $40,000,000,000, which may sound like a lot but is roughly two weeks of money printing by the Fed.
James Stafford: What role do you see renewable energy playing in the future? And do you think governments should help innovation in this area?
Chris Martenson: Governments right now are providing more than half a trillion dollars in subsidies for oil and gas, so they’re already in the business of shaping the alternative market, mainly by making their competitor’s products much cheaper. So is there a role for government to play in helping to boost alternatives at this point? The answer has to be yes, because there really isn’t a lot of time left on the clock. Left to its own devices, the market would deliver us an alternative energy future, but history suggests that energy transitions take a minimum of 40 years, sometimes 60 years, and we don’t have that kind of time.
When we’re truly threatened, such as when a nation has to go to war, we’d never think of leaving that up to the markets. When you’re in a predicament and coordination is necessary–to be effective requires a collective response, not 300,000,000 individual responses.
I see the challenges to us at this date, such as declining net energy and debt markets, tuned for an energy reality that does not currently exist, being so profound that we’re going to need a response along the lines of World War II times an Apollo project plus the Manhattan project. In other words, a response more complete, complex, and challenging than anything we’ve ever faced. So on that basis, absolutely I think we need a collective response because we are quite rapidly running out of time. In other words, a government response.
James Stafford: And what can cause this to happen? As you say, there’s no political will to make these changes at present.
Chris Martenson: We need a different narrative. Right now, the narrative we’re running is simply this: “We need our economy to grow.” That’s the first, second, third, and last piece of discussion that we ever seem to have.
It turns out we need another narrative in here which says, “Hold on. We can’t grow infinitely, we know this.” The question becomes, “When the remaining resources do run out, where would we like to be? What do we want the world, the landscape, and our energy infrastructure to look like?” And that’s the thing that’s completely missing. We’re just saying, ‘Our strategy is we’re just going to continue to grow.’ It’s not a strategy, it’s a tactic.
I am among many people who are working fervently if not feverishly to help change our narrative in time. Away from a story of growth for its own sake and towards a future shaped by design, not disaster, where we value prosperity first and growth second, if at all.
How do we do this? I really don’t know the answer to that because it has never been done before at this scale. But people and cultures do change, all the time in fact, and so this is not an impossible task, just a very tricky one, which makes it both challenging and fascinating.
James Stafford: You mentioned earlier that you thought the shale boom was being oversold. What are your thoughts on America’s oil and gas boom?
Chris Martenson: Well, this is really important. The current story is something along these lines: “Hey, look at how clever we’ve been. Because of the magic of technology, we have discovered how to unlock these incredible oil and gas resources that we just didn’t even know about before.”
When I talk to people who are in the oil business, they say, “Oh, no, no, we’ve known about those shale deposits, we’ve been drilling into and through them for decades. We’ve had horizontal drilling for decades; we’ve had fracking for decades. What we haven’t had is $80-a-barrel oil reliably enough to support us going into those with those technologies.”
So what really unlocked those reserves was price. Not technology, not cleverness, not ingenuity. Don’t get me wrong, there’s a lot of very clever, ingenious stuff going on in those drilling actions, but price was the primary driver here.
Here’s the thing, though: When more expensive energy comes out of the ground, it means that everything that you use to go get that energy, after a lag, becomes more expensive too. This is doubly compounded by this idea that there’s less net energy coming from these finds.
They use more energy to get that energy, but that more energy is more expensive. So that feedback loop is already in play here. It simply means that there’s less to be used as we like elsewhere in the economy.
When I look at America’s apparent energy abundance I’m a little worried that it’s been oversold. In particular, the dynamics of depletion that exist in both the tight shale oil and shale gas plays are very different from conventional reservoir depletion dynamics. I’m concerned that people are accustomed to the old and relatively slow reservoir depletion dynamics and are lulled by the sharp increases in output that these new reservoirs offer without really understanding just how rapidly they fall off as well.
Here’s an example, in the Barnett shale gas play, in one region where they drilled 9,000 wells, there was just this exponential increase in gas output. But then there was no more room for any more wells in that section, and within one single year the gas output from that region with all of those beautiful, technologically marvelous 9,000wells had fallen by 44%. One year!
So as long as America can continue to forever increase the number of wells that it’s completing and bringing online every year, it will be able to maintain rising production from the shale plays. Obviously that’s an impossibility. You run out of space eventually, you don’t have enough rigs or talent to drill incrementally more wells each year, or the capital just isn’t there for some reason. Sooner or later, there are only so many wells you can complete. At that point, we discover that the rapid increases in oil production almost immediately begin to drop. And this is a whole new dynamic. I think we need to build in a little caution for ourselves around this story that seems to be almost completely missing from most mainstream news reports.
So really, we’re on a very elaborate treadmill right now, where as long as we can continue to drill, drill, drill, drill, drill, drill, drill, then we’ll get an increasing output. I’m not convinced that that’s going to happen.
There are a number of factors that will cause that to slow. One is environmental concern. Another is, I don’t think they’re going to have the capital to do that forever. A third is that we’ve already drilled through all of the known sweet spots in these plays, and so we’re down to the more marginal portions of the main plays. The wells going into the less-than-sweet spots are going to require higher energy prices to break even than did the initial wells. And fundamentally, sooner or later, you just run out of places to put new wells.
The biggest problem I have with how the shale story is being sold is it is being used to justify a blind resumption of business-as-usual and I think we really need to be asking some deeper questions of ourselves because eventually even these plays will run out too. I say we should have a distinct and well thought out plan for how we want to use the potential work those resources represent to build ourselves the finest country energy can supply.
James Stafford: What is the most serious problem facing humanity? Resource depletion, population growth, climate change?
Chris Martenson: I’d rate these threats in the horizons. My most immediate concern, personally, is that our world financial system could crumble with the slightest provocation right now, with pretty disruptive effects. It’s not yet out of the woods by any stretch.
On a longer horizon, humans are living well beyond our ecological and energy budgets, and we’re eating into our principal on both accounts. Either we adjust on our own terms, or it will happen eventually on some other terms.
These are actually linked threats. At the root of it all we have a monetary system that enforces perpetual growth without which it wobbles and constantly threatens to utterly collapse. So even as our financial system is wobbling right now, sooner or later we have to come up with a system that can operate perfectly well within limits.
James Stafford: You talk about the world financial system crumbling. How would this look and how do you see this playing out?
Chris Martenson: So at heart what we have is a debt-based money system that requires exponential growth, just to not fall completely apart on a yearly basis. And that’s something that I can’t see working in a post-peak world.
We grow our use of mineral resources about 2% per year. Which means that every 30 years, roughly speaking, we’re going to be doubling the amount of those resources that we’re pulling out of the ground and putting into the world economy. Obviously you cannot constantly double your extraction of finite resources. This means we’re going to need a new money system at some point, and fortunately, they exist.
People really need to be concerned about this right now. And our current crop of leadership on both the monetary side and on the Fed and the fiscal side in Washington, D.C., have made it abundantly clear that they’re going to preserve the status quo as long as possible, and at any cost.
And so the risk contained in that observation is that we’re going to chug along until something forces us to change. And at this point I think that it will be a complete meltdown in the financial markets. And the possibility, then, of a dollar crisis that ends in either the complete destruction of the dollar as a useful form of money or something pretty close to that. I’m not saying that it will happen, but I am saying that the risks of that outcome are now increasing.
Fortunately, there are things that we can do to increase our personal and community resilience that are easy, fun, fulfilling, and great investments to boot. So, we still have a lot of control on this story.
James Stafford: The crash course paint’s a pretty bleak picture for our future. Are you optimistic about any technologies that can help us out of our various predicaments?
Chris Martenson: We don’t need any new technologies, we have everything we need right here on the shelf now to begin living a very different life. It begins with, I believe, the most fundamentally important thing we can do, conservation, at this stage.
If you look at a nighttime satellite photo, you can see that there are probably a few lights we could turn off and save a bit of electricity. There’s technology on the shelf right now enabling homes, either residential or commercial buildings, to be built that use a fraction of the energy they currently use, just by tilting them south and putting windows on the right side and ventilating them. Very simple things like that that can be done. All we have to do is decide that we’re going to use them, and that’s missing still.
So, yes, I am very optimistic about technologies and processes and understandings that already exist. The mystery to me is why they are not being deployed. They make complete sense from economic, political, national security, ecological and social justice standpoints yet we don’t use them at scale. That’s not a technology problem, that’s a narrative problem. Another way of saying that is I am very optimistic about technology but decidedly less optimistic that we will use it intelligently and rationally.
James Stafford: Should the US export natural gas?
Chris Martenson: Fossil fuels. They’re a one-time gift. You get to extract them and burn them exactly once. That is, whatever you choose to do with them is what gets done. They perform work for us. So we really should be focused on what sort of work we want those fossil fuels to do for us.
There are, right now, about a dozen proposals to liquefy and export US natural gas, and a study just came out this past week, commissioned by the EIA, saying that that’s a good idea. Wrong, it’s a terrible idea. Fully 25% or more of the energy contained within the natural gas is expended just in the process of liquefying it. That’s what you get to do with 25% of the units of work. You get to turn the gas into a liquid, and nothing else.
We should be using every possible unit of work that we extract from the ground contained within that natural gas to do something actually useful. If it were mine to say, we’d be using that energy to rebuild our nation’s crumbling infrastructure; we’d have a 30-year plan for exactly what we want our country to look like and how we were going to use our natural gas to get there. So when the natural gas runs out, and it will someday, we’ll at least have a resilient, well-built country that can run on alternative energy sources.
James Stafford: What are the big future opportunities for investors?
Chris Martenson: The big trends are very clear. Food, fuel, water, those are the big, obvious trends that a burgeoning population are going to place increasing demands on. But the things that excite me the most are those technologies, those things that we can do that are going to save us the most energy.
Anything that has a visible, obvious improvement in energy use, or new and improved ways of really growing food of higher quality with less embodied energy, those are the sorts of places where I think the most extraordinary opportunities exist.
And they’ll make economic sense right now, because they make energy sense right now, and in the future.
James Stafford: Chris – thank you for taking the time to speak with us.
