Monday, March 6, 2017

Thermodynamic model of oil depletion sparks controversy

This is a post by François-Xavier Chevallerau, a Brussels-based public policy professional who is in the process of setting up a new international think tank to support the emergence and promotion of biophysical economics in the public debate and the policy conversation. Here, he comments on the "Hill's Report" that was also discussed in a previous post on "Cassandra's Legacy." 

Guest post by François-Xavier Chevallerau

A report on the world’s oil depletion problem published several years ago by an obscure association of anonymous consulting engineers and professional project managers is suddenly coming under fierce criticism. 
In December 2013, an ‘association of consulting engineers and professional project managers’ calling themselves ‘The Hill’s Group‘ published a report titled ‘Depletion: A determination for the world’s petroleum reserve’. Depletion, as is well known, is the inevitable consequence of non-renewable resource extraction, and determining how this depletion will affect petroleum production has been a key focus of energy analysts and researchers for a long time.

Arriving at an estimate for the remaining extractable petroleum reserve is usually attempted by adding together the quantity of petroleum believed to be present in each field, a method which is error-prone and imprecise. The Hill’s Group’s study proposed an alternative model of oil extraction and depletion, rooted in thermodynamics – i.e. the branch of physical science that deals with the relations between all forms of energy. This model, called ‘ETP’ (Total Production Energy), is allegedly derived from the fundamental physical properties of petroleum, the first and second laws of thermodynamics, and the production history of petroleum.

The methodology used by The Hill’s Group is based on ‘exergy analysis’. Exergy in thermodynamics means ‘the maximum amount of work that can be extracted from a system’. The system being considered, in this case, is a unit of petroleum. The Hill’s Group’s study calculates the maximum amount of work that can be extracted from a unit of petroleum, using the physical properties of the crude oil in question, equations derived from studies of the First and Second Laws of thermodynamics, and the cumulative production history of petroleum. It then uses these these values to construct a mathematical model that it claims can predict the status of the world’s petroleum reserve with a much smaller margin of error than can be provided by the quantity measurement approach.

Optimistic estimates place the world’s total petroleum reserve at 4,300 billion barrels. Of that quantity the model proposed by The Hill’s Group predicts that it will only be possible to extract 1,760.5 billion barrels, or 40.9% of the total reserve. Its model suggests that petroleum’s ability to supply the energy needed to sustain its own production process is declining, that petroleum depletion is further advanced than generally assumed and that oil production will decline or even collapse much faster than commonly anticipated.

From its ETP model the Hill’s Group also derives a petroleum cost curve, which it says maps the price of petroleum since 1960 with a correlation coefficient of 0.965, making it the most accurate oil pricing model ever developed. It also says that the price of oil depends, in addition to production costs, on the amount that the end consumer can afford to pay for it, and derives from its ETP model a Maximum Consumer Price curve, representing the maximum price that the end consumer can pay over time for petroleum. It is based on the observation that the price of a unit of petroleum can not exceed the value of the economic activity that the energy it supplies to the end consumer can generate. According to the Hill’s Group, its model shows that 2012 was the energy half way point for petroleum production, i.e. it was the year when one half of the energy content of the petroleum extracted was required to produce the petroleum and its products. From then on, it says, the price of oil can only be pulled down along the descending Maximum Consumer Price curve, which it says is curtailed at $11.76/ barrel in 2020. At this point petroleum will no longer be acting as a significant energy source for the economy, and its only function will be as an energy carrier for other sources. In other words, the oil industry as we know it will disintegrate, with a myriad of negative consequences for the world economy.

The Hill’s Group’s original report was published over three years ago, and a second version was published in March 2015. It gained significant popularity and was favorably commented on many blogs and websites. All this however seems to have change, and the Hill’s Group’s ETP model is now coming under fierce criticism from various sources:

‘SK’, a professor emeritus in the department of Mechanical and Aeronautical Engineering at a Major U.S. University, delivered a strong critique of the ETP oil extraction model at The fact that The Hill’s Group said that a threshold for oil markets was passed in 2012 and that oil prices would tend to go down shortly after seems to give the report a superficial credibility. But according to SK the thermodynamic analysis is incorrect and therefore any calculations and graphs based on this analysis must also be unreliable.

Spanish physicist Antonio Turiel published on his website an analysis of the theoretical basis of the ETP model (in Spanish). Applying the principles of thermodynamics to evaluate the limits of the oil’s capacity to deliver net energy to society makes sense, he says, provided it is done in a proper way. The ETP model, however, is according to him based on an incorrect use of thermodynamic theory, erroneous deductions, definitions that do not make sense from a physics point of view, deficient data processing, and ignorance of the interactions between oil production and the economy as well as other energy sources. Given these important shortcomings, he says, the ETP model cannot be used for a serious discussion of oil depletion, at least not until it is fundamentally revised and rebuilt.

Another Spanish physicist, Carlos de Castro from the University of Valladolid, also published a scathing critique of the Hill’s Group’s report (in Spanish). The physical, technological and economic foundations of the report are erroneous, he says. The Hill’s Group in fact focuses on the loss of thermal energy involved in the oil extraction process (oil moving from a high temperature reservoir to ambient temperature outside), which he says has nothing to do with the energy cost of the oil procurement process for human societies. What matters to society, he says, is not oil’s thermal energy but its chemical energy – even if this chemical energy may then be used to generate heat. The ETP model, he concludes, is not an adequate model to assess the net energy derived form petroleum extraction and its evolution.

Prof. Ugo Bardi from the University of Florence is also taking aim with the Hill’s Group’s work in a recent blog post. The Hill’s Group’s report, he says, is badly flawed. While it is true that the oil industry is in trouble, the calculations by the Hill’s group are, at best, irrelevant and probably simply plain wrong. The problem of diminishing energy returns of oil production is real, Bardi says, but the way to study it is based on the ‘life cycle analysis’ (LCA) of the process. This method takes into account entropy indirectly, in terms of heat losses, without attempting the impossible task of calculating it from textbook thermodynamic principles. By means of this method, we can understand that oil production still provides a reasonable energy return on investment (EROI). It is anyway erroneous, says Bardi, to draw conclusions regarding the economy from net energy analysis. The economy is a complex adaptative system that evolves in ways that cannot be understood in terms of mere energy return considerations.

This controversy surrounding the Hill’s Group’s report reveals some inconvenient truths that the ‘peak oil’ community now has to face. The Group’s work was widely embraced and disseminated in this community, with no or limited critical scrutiny. It indeed has an aura of scientific accuracy that comes from its use of basic thermodynamic principles and of the concept of entropy, correctly understood as the force behind the depletion problem. But behind the thermodynamic terminology, it proposes a series of assumptions, not always explicit, and of complex mathematical calculations that nobody until recently had apparently taken the time to review. As pointed out by Antonio Turiel, the Hill’s Group’s work would probably not have passed a proper peer review process in its current form.

Yet the report was widely accepted and commented in the ‘peak oil’ community. According to Ugo Bardi, this episode shows that “a report that claims to be based on thermodynamics and uses resounding words such as ‘entropy’ plays into the human tendency of believing what one wants to believe“. As many in the ‘peak oil’ community want to believe in imminent collapse and disaster, works like the Hill’s Group’s report that are perceived as providing a serious scientific basis to catastrophism are widely embraced. If the scientific basis is revealed to be not as sound as initially thought, as seems to be the case for the Hill’s Group’s work, then its embrace and dissemination can only be detrimental to the peak oil community and undermine its credibility.

Energy researchers and analysts should probably be particularly cautious and vigilant when using the concept of ‘entropy’. As pointed out by Ugo Bardi, “entropy is an important concept, but it must be correctly understood to be useful. It is no good to use it as an excuse to pander unbridled catastrophism.” The problem being, of course, that entropy cannot be correctly understood so easily. As famous scientist John von Neumann (1903-1957) once advised a colleague: “You should call it entropy (…) nobody knows what entropy really is, so in a debate you will always have the advantage.



  1. Spanish physicist Antonio Turiel says “Applying the principles of thermodynamics to evaluate the limits of the oil’s capacity to deliver net energy to society makes sense, he says, provided it is done in a proper way.”

    Is anyone else beside the Hill’s Group going to attempt Thermodynamic analysis of how much oil can be extracted? Do we think it might be useful to know how much longer we can maintain a production flow rate of ~34Billion barrels/year and the refined fuels there from, to feed the billions of engines in the world that power the global economy? (Yes, a little sarcasm, maybe even a dark humor at what might be a later hour than we know, because…we don’t know.)

  2. Thermodynamics mainly tells us what we cannot do. Then, it is up to people to decide how not to do what they cannot do, and that leaves a lot of leeway.

  3. UGO I really respect your work and excellent posts and I welcome your critiques of the Hills Group. I have reviewed their work and have numerous personal email contacts with B Hill as well. He agrees there might be valid criticisms of their methodology such as the water cut aspect in the various reservoirs. What is not in dispute in my opinion is the falling eroei and diminishing new field discoveries. I covered this in some recent blog posts. I tried to be skeptical but I do think the thermodynamic model has some validity and if the criticism of the model come from non physicists, their criticism may lack validity. Obviously using a detailed life cycle analysis would be the bombproof way to get at the picture but you of all people well versed in systems analysis know how difficult that task would be. If a analyst had access to all financial records and production statistics of a single very large field comparable to the bulk of the very large fields I think that analysis would be useful or even conclusive. The only big US field which might provide that kind of data set might be Alaska if BP would be cooperative. A telling point which I covered is the declining finances of the big three oil companies in the US. Another suggestion that we are nearing the end of the oil economy comes from M KING Hubbert who interestingly enough comes to similar figures of ultimately extractable oil using an entirely different statistical methodology over 50 years ago.. Bradford Hill said new oil extraction could proceed for some time if its extraction is subsidized by another energy source like gas and obviously they were talking about new marginal barrels, not legacy fields. I covered an interesting report from HSBC on the finances of new field discoveries and decline of existing fields published last September. My posts are at Great work UGO. I have read every post of yours.

    1. Yes, the problem is that it is difficult to explain that YES, the EROI of oil is going down and that's causing lots of troubles but NO, the EROI is not yet so low that oil production is a net loss or that it has to be subsidized by means of other energy sources. According to Brandt, the EROI of oil production is around 30 - at least for the fields they examined, others give it in a range of 10-20. Sure, it lower than it used to be in the good old days. But even if it is just 10, that means you have to re-invest ca. 10% of the production into new fields to keep going; that's perfectly possible. Things don't start becoming truly hard until you go down to less than 5. We are not there yet and we won't be there very soon, no matter what Hill and Co. say. The troubles of the oil industry nowadays are caused by the financial system that's imploding. It is because the system is complex and doesn't react linearly to perturbations. And, BTW, thanks for this comment and nice blog, yours. I placed it in my feed.

  4. Ugo another timely post which helps to remind readers (and others) that catastrophism has a lot of unsophisticated and erroneous assumptions or methodologies behind the views espoused. A lot of debate about our energy predicament troubles me because their is a lot of opinion spouted but little sensible analysis. The current financial assessments of the oil industry focus on those industries from a perspective of their being simple businesses producing a simple product which they are not. Financial assessments or so called economic assessments are also using tools based on flawed equilibrium theories and neoclassical economic theory and while it is the dominant western world view of technocrats and financial institutions across the globe that does not mean it is a whole or scientific valid world view, how many times to so called forecasters (Central Banks included) get it completely wrong or are simply suffering from inbuilt optimistic bias in the models? A lot. The debates that follow are political not scientific. I have a problem with EROI as far as using financial or account data because the costs or financial issues may not have anything to do with the costs of production per se, after all, equipment does not wear out or need to be replaced all that often but rather the dubious accounting of costs and the manipulation of profit reports combined with the normal practise these days of business of hiding true profits, offshoring profits, price transfers and share buyback schemes all which may create a picture of distress but are more related to neoliberal economic theorems and dodgy accounting practices world wide. The simple model that still works is demand and supply, so we know what demand is or can be and we know what supply is or can be but there are a significant number of factors that can impact on this simple measure. We know that the key problem is price, namely there is a price level at which the resource will not be bought or used because it is too expensive for the buyers or they reduce demand, this is the history of all three oil shocks, 1973, 1990 and 2008. The key problem is reserves and quantifying them because oil is a finite resource. Now one of the distopian views about arises from the economic notion of substitution but we know excepting for a few small areas there is no viable suitable substitute for liquid hydrocarbons and not just for transport, think petrochemicals etc. That is our dilemna each year that goes buy the available reserves decrease and previously unviable reserves are exploited but they remain unprofitable within the confines of the current monetary and financial systems where reserves are not based on a finite resource but can be created indefinitely as long as people accept the money created. The only activity that human beings engage in that does not obey the laws of nature or physics is banking and money at a sovereign level. So I agree it will be the implosion of our social and economic systems that will wreak havoc, political and social, not diminishing oil supplies. I guess my views still reference the 'Limits to Growth' that shows us clearly that it is a multi-faceted system dynamics problem in a finite singular planet. Unless we can come to grips with thinking and implementing political systems based on equity and access with common good in mind we are heading into a long tunnel of violent turmoil, this is the catastrophe, that is when we find out that Malthus, Marx and Keynes were all right all along. Fancy equations borrowed from the laws of theromdynamics will not tell you anything, a simple exponential function is all that is required with respect to supply and demand, that should give us what the Limits to growth team gave us, a multitude of curves for different things crossing over at different times.

  5. I agree with the difficulty of explaining ‘exergy’ which is the concept I think figures in this discussion.

    Can we ask a question in the meantime: what is it that makes profit-seeking outfits walk away from an extractable resource, particularly a fuel source? For the USA (net importer of crude oil since well before the 1973 peak in domestic production), we see some of the answer below. (I guess there might be a useful subsidiary discussion on the role of ‘stripper wells’ in the USA.) We have seen a recent return to expansion in USA crude oil production since 2010 reaching a recent peak followed by a downturn.

    Art Berman on the beginning of the end of the Bakken Shale play.
    “The decline in Bakken oil production that started in January 2015 is probably not reversible. New well performance has deteriorated, gas-oil ratios have increased and water cuts are rising. Much of the reservoir energy from gas expansion is depleted and decline rates should accelerate. More drilling may increase daily output for awhile but won't resolve the underlying problem of poorer well performance and declining per-well reserves.”

    Oil production must move on all the time to new wells and new plays to provide or increase the daily net supply. At some time in different places this will mean a ‘net-retreat’ from oil production across a country or region. This has been an ongoing story as oil has peaked. The Hill group seems to have claimed a truism based on poorer well performance. However, we can look to recently expanding Iraq, Iran and Russia as well as the enigma of Saudi Arabia as evidence for continuing fungible global oil supply.

    There is, however, a whole story about China (key economic global player) and the economic underpinning from electricity produced by coal alongside rising domestic oil production and consumption. Both oil and coal production apparently peaked 2014 to 2015. But this comment is already too long …


    1. Oops! (see correction to my comment above)
      Having declined for decades US oil increased very significantly from 2010 to peak in April 2015. Since then production shrank by 1.02 million barrels per day to September 2016 and then started to rise again by 0.42mbpd to date.

      The EIA forecast US production to continue this latest increase to exceed a total of 10mbpd by December 2018, thus restoring more than the production lost since 2015. This will still leave the USA a large net importer of crude oil. I guess we shall see.

  6. I'm impressed by the intelligence of the discussion in this thread, but my concern is that it seems to have detached itself from the purpose of having it in the first place. It seems so often the preoccupation of men (plus dear Gail Tverberg) to try to guess the shape of the decline or collapse of fossil fuel production, and when exactly the ripples will hit us in the developed world, with those who disapprove of "catastrophism" just thinking the date is further in the future than others. But really we're all just trying to guess the weight of a cow at the county fair unless we keep this discussion in the broader context of overshoot, since peak oil (and declining EROI) is just one symptom of a larger systemic collapse that's already in progress. The coral reefs are dying, 90% of sperm in a typical male are now malformed or otherwise non-viable, the great methane release has begun all over the world - how does peak oil fit in that contest? Whenever it arrives - 2020 or 2050 or 2005 (if it's already happening) it apparently will be too late to stop the industrial machine that artificially supports an unsustainable population of 7 billion people and paradoxically threatens our extinction. Is there a way to return or direct this discussion back to the larger context, so it can support public policy)(or revolution) that might save our children and descendants? BTW, for the record, the cow weighs 2,143 pounds and 9 ounces.

  7. I think the Hill Group asked some really important questions:
    1. Will oil prices move up or down as EROI falls?
    2. Since money is just a marker for energy, how much resource can be converted to reserve long term at a positive energy balance?

    Sadly, while the IMF, IEA and World Bank have millions to spend on analysis using money (and not energy) it seems left to a handful of unfunded academics and enthusiasts (like the Hill Group) to try to push humanities understanding of biophysical economics forward. I think they made a good attempt with the view of the system they have. I would encourage inviting the Hill Group into friendly discussion.

    Ugo, I appreciate you keeping Cassandra's Legacy going so there is some place for these kinds of posts. This is where I especially miss The Oil Drum.




Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)