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[ pp. 178-199, ENERGY AND RESOURCE QUALITY,  by Charles A.S. Hall, Cutler J. Cleveland, Robert Kaufmann, Univ Pr Colorado, 1992; http://www.amazon.com/exec/obidos/ASIN/0471087904  ]

Rapid technical advance in the oil exploration industry, particularly from 1945 to 1965, has been effective only in decreasing the rate of decline in oil and gas discoveries. This has important implications for the impact of declining prospect quality on the cost of finding new oil. Norgaard (1975) found that technical advance in the oil industry between 1939 and 1968 was able to offset only partially the cost of finding a new deposit. Norgaard found that without any technical improvements, the real cost of successful wells would have increased 233%. Even with the actual improvements made during this period, the impacts of the decline in prospect quality outweighed the impacts of the new technology, and the real costs of successful wells increased 64%.

Net Energy Analysis of the U.S. Oil and Gas Exploration Industry

It was noted previously that production and proved reserves of crude oil and natural gas peaked in the early 1970s. Dramatic increases in both exploratory and development drilling effort made possible by oil price increases during the 1970s have been able only to moderate the downward trend in both production and proved reserves. High levels of drilling effort are likely to continue in the future because imports carry a heavy economic and political price and because oil companies will continue to have substantial amounts of working capital from high oil prices, although the recession of 1981-1982 and resulting declining world oil prices have somewhat dampened drilling effort. It is important therefore to analyze the potential of the recent increases in drilling effort to add to our reserves of petroleum.

    Although Davis (1958) and Hubbert (1967) found a decline in the rate at which petroleum was found per foot drilled, during the 1960s this trend stabilized and even increased, contrary to Hubbert's predictions of a continued decline. Because of this apparent contradiction of Hubbert's predictions, some analysts thought that his analysis was no longer applicable. It gave encouragement to those who thought that large new quantities of petroleum would be found in the contiguous United States, for the increase in drilling effectiveness could be attributed to the many improvements in geophysical theory and exploration technology. During the 1970s, however, the ratio of petroleum found per unit drilling effort fell to levels at and below those of the 1950s (Root, 1980; Hall and Cleveland, 1981).

    Hall and Cleveland (1981) offered a revision and extension of the classic Hubbert analysis, based on the returns of petroleum per total drilling effort as a function of both time and drilling effort at any one point in time. As Davis (1958) recognized, and as developed in this section, the variable success rate of drilling for any given year can be explained simply as a downward trend in YPE as the resource is depleted over time (i.e., as a function of cumulative effort), coupled with an inverse linear relation to drilling effort at any point in time. Periods of high drilling effort are associated with low YPE, and vice versa. The inverse relation between yield and effort is similar to the one for some minerals like copper described in Chapter 4 and has been a basic tool in fisheries analysis for many years (Schaeffer, 1957).

    The data used in Hall and Cleveland's analysis are essentially the same used in the previous analyses described in this chapter. Estimates of annual additions to proved reserves are available from the American Petroleum Institute (1980), subdivided according to new fields (NF), new pools in old fields (NPOF), revisions (REV), and extensions (EXT). The analysis is complicated somewhat by the fact that about 80% of the oil added to reserves each year is through revisions and extensions, some of which are confirmed through exploratory drilling (De) and others via development drilling (Dd) and production history. Since what is of interest is total gains (additions to reserves) related to total drilling effort, the YPE ratio used by Hall and Cleveland was:

YPE = NF + NPOF + REV + EXT /  Dd + De

where YPE is measured in barrels per foot. This is the identical ratio used in Davis' (1958) original YPE analysis. In a sense this ratio overestimates the effort used to find petroleum because some of that effort was solely for production and not for discovery, but it does give a running average of the total effort used to bring new petroleum to society.

    Figure 7.18b shows the relation of yield per effort for oil, and oil plus gas, for the years 1946-1978. Periods when the finding rates were high relative to the historical trend (the mid-1960s) were also periods of relatively low drilling effort for both oil alone and oil plus gas. Conversely, less oil was found per drilling effort during periods of high drilling (Figure 7.18a, b). The inverse relation between yield and effort is shown more clearly by connecting points in Figure 7.18b for all years with high (about 220 million ft/yr), all years with medium (about 180 million ft/yr -- not plotted for clarity), and all years with low (about 130 million ft/yr) drilling effort as they have occurred at various times since 1946. These results indicate an approximately parallel decline in YPE for high, medium, and low rates of effort. The actual yield per effort for any one year is an inverse function of both the year (and hence the amount of reserves left to be found) and the drilling effort for that year. The important trends of the year-to-year yield per effort for both oil and oil plus gas can be explained as a secular decrease of about 2%/yr in the rate of petroleum added to reserves per foot of drilling effort and about 5% increase or decrease for each 10 million fi of effort, i.e., effort had little effect on total yield.

    Why should yield per effort be related to effort? This makes sense for fish, for the fish can recover through reproduction and growth when not fished. Petroleum obviously cannot, at least on time scales of interest to our species. One possible explanation is that when drilling rates are low, the petroleum industry drills at locations where present information suggests that success is most likely. During years of high drilling rates, drilling is done there plus at other, less promising locations. Presumably the development of exploration theory, as well as seismic charting and interpretation, occurs at a more constant rate than drilling effort, so that when drilling effort (i.e., economic incentive) is low, it is concentrated in areas where success appears more likely. When drilling effort (and economic incentive) is high, much of that effort is directed at targets less likely to produce a large find. In a sense it is promising but untested geologic information that is depleted as wells are drilled and that accumulates in the absence of drilling.

    The decrease in drilling rates after 1956 is associated with government taxation and regulatory policies that decreased profitability of finding new domestic oil and encouraged the importation of foreign oil. Had that not occurred, our present finding rates probably would be considerably lower than they are now. Since 1974 much of the increased effort has been concentrated in mature, well-known fields where chances of some success are great but where the chances of large new discoveries (and hence large additions to proved reserves) are very low. Another factor is that less efficient drilling companies contribute a higher percentage of all drilling when economic incentives are high.


    There are two ways in which Hall and Cleveland's analysis fails. First, when the previously excluded Prudhoe Bay find (the largest field ever found in the United States and a very atypical find) was included in the analysis, the yield per effort for oil and oil plus gas jumped to, respectively, 80 and 120 bbl/ft for 1968. Although exploratory drilling in Alaska in the 17 years since the discovery of Prudhoe Bay has been one expensive disappointment after another, Alaska overall still has an average yield per effort since 1965 of some 1580 bbl of oil per foot due to the importance of the Prudhoe Bay field.

    The second way in which their analysis fails is that estimates of YPE for 1979, based on the 19461978 data and the linear time and effort components used for the initial analysis, were low, predicting less oil than was actually found. There are three possible reasons beyond a statistical quirk. First, we may be becoming suddenly more clever at finding oil. Second, we may be exploring new provinces more rapidly than in the past. Third, because of the increased value of oil relative to the cost of finding it, there are economic incentives for upgrading previously known, but previously uneconomic, fields to the status of reserves. A decline over time in developed reserves due to the depletion of higher quality deposits stimulates the development of safe regions already known to contain some petroleum. This in fact happened in 1979 with a portion of the Kern River field (discovered in 1888) whose revision in 1979 was a large contributor to new reserves attributed to 1979.

Trends in Energy Return on Investment

Since the principal use of petroleum is as a fuel, the point at which domestic petroleum will no longer, on average, be a fuel for the nation is not when the wells run dry but rather when the average energy cost of drilling a foot of petroleum well and delivering that petroleum to society equals the energy value of the petroleum found by that drilling. Aggregate statistics on the energy use and the economic activity of the petroleum exploration and development industry are available (U.S. Census of Mineral Industries and Annual Survey of Manufacturers) from which estimates of the direct and indirect energy cost of drilling and extraction can be made. A quantity of energy equivalent to about 1 1/2 bbl of petroleum was used per foot of drilling by the petroleum exploration and development industry in 1977, a bit more than half directly as fuel and a bit less than half as fuel to produce the equipment and services used. This quantity has been increasing in recent years (Figure 7.18b) as the petroleum industry has increasingly drilled deeper, offshore, and in hostile environments such as Alaska and as a larger percentage of petroleum is produced using energy-intensive secondary and tertiary recovery. An additional 0.6 bbl equivalent per mean foot was used in 1977 for refining petroleum, The energy investments, yields, and their ratio (EROI) are given in Figure 7.19.

    Hall and Cleveland used a linear extrapolation of the trends in energy cost and energy gained to project the energy break-even point for domestic petroleum exploration and extraction (Figure 7.20). Based on this extrapolation, if we were to decrease drilling rates to a low level of 130 million ft/yr, the lines would intersect in 2004. If we continue to drill at 1978 levels of about 220 million ft/yr, the linear extrapolations intersect in 2000. Oil alone could reach the break-even point within about a decade. These estimates, however, are probably overly pessimistic because some of the energy included in the denominator of the EROI ratio is used solely for oil production and not exploration, and the numerator represents only the energy in annual additions to reserves and does not include the energy in oil produced in that year. Including the energy content of oil production from old fields would increase the EROI ratio as well as postpone the intersection of the energy cost and energy return curves in Figure 7.20 by about 10-15 years (see Figure 4.5).

    Hall and Cleveland's analysis assumes that the rate of technical improvements in the petroleum industry's exploratory and development methods remains constant. There also could be significant deviations from the projections of Figure 7.20 if, for example, new provinces (such as the Bering or Chukchi Sea, or overthrust belts) were explored more rapidly or more effectively than in the past. Most remaining new frontier provinces will be very energy intensive to develop, so intensive new province drilling could work either to increase or decrease the time until intersection of the energy costs and gains. But it is only from such unexplored areas that we reasonably can expect to find the very large oil fields which are necessary if a change in the sharply downward trend of the yield per effort in Figure 7.20 is to occur. One possible conclusion of this analysis is that it might be advisable relatively soon to do most exploration only in new provinces. A somewhat similar conclusion was reached by Menard and Sharman.

    Most oil (and presumably gas) that is now produced in the United States comes from fields discovered before 1940 as the petroleum industry tries to compensate for declining discovery rates by developing mature regions more intensively. The preceding analysis and those of Davis, Hubbert, Nehring, and Menard and Sharman give little hope for changing this picture significantly through increased conventional drilling effort. In fact large increases in such effort could decrease the total energy delivered to society by the petroleum industry by lowering the efficiency of that energy-intensive industry. Integrating the extrapolated regions of Figure 7.20 for the period 1980 to the intersection of the energy cost and gain lines gives a projected ultimate additional net yield of 29 billion bbl equivalent for a low drilling effort and 27 billion bbl equivalent for a high drilling rate. Thus, developing our remaining reserves slowly could increase somewhat our projected ultimate net yield. Concentrating new drilling effort in new provinces might change the trend. On the other hand, after the energy gained from petroleum drilling decreases below the energy cost, petroleum could still be pumped at a monetary profit for feedstocks, or lower quality fuels such as coal could be used to pump the more valuable liquid fuels even at a net energy loss.

    The results of this analysis indicate that increasing conventional exploration effort by the oil industry may not be in the best interest of the nation as a whole due to the lower efficiency with which the industry will deliver petroleum to society at these higher rates of drilling and also because such efforts appear to offer a "solution" to the decline in domestic conventional production. In fact it appears that no genuine long-term solution exists unless there is a dramatic change in the way that we go about finding petroleum.

Ultimate Recovery of Hydrocarbons in Louisiana: A Net Energy Approach

The state of Louisiana, including its offshore waters, has been the leading state in terms of petroleum production, supplying about 17% of all the oil and gas discovered through 1979 (Nehring, 1981). Louisiana has been the most important state as a source of natural gas and the fourth leading producer of crude oil. Since the state's petroleum resources were developed relatively early, it's production history might be considered as a model for the U.S. petroleum industry. When plotted as a function of either time or cumulative extraction, petroleum resources in Louisiana follow very closely the production growth cycle trend described by Hubbert (1956) (Figure 7.5). Crude oil and natural gas extraction both peaked in 1970 but have declined precipitously since then (Figure 7.21a, b).

    Cleveland and Costanza (1983) developed a model to assess and compare historic trends in total energy use and total hydrocarbon energy extracted in Louisiana from 1953 to 1981. The authors' goal was to project the time at which petroleum extraction reached the energy break-even point, in a manner similar to that of Hall and Cleveland (1981). Note that Cleveland and Costanza were concerned with the extraction phase of the industry, not the exploration phase. The EROI in this case was the ratio of oil or gas produced to the direct and indirect fuel used in drilling, pumping, and so forth. To calculate the indirect energy cost of drilling, the authors used data on the dollar costs of all wells drilled in Louisiana published by the Joint Association Survey. Dollar costs of drilling were converted to energy costs using energy-intensity factors ($/ kcal) for goods and services calculated by Hannon et al. (1981).

    Figure 7.22 shows the EROI for total hydrocarbon (oil plus gas) extraction in Louisiana as a function of cumulative hydrocarbon extraction (and time), as calculated by Cleveland and Costanza. Note that the trend in the EROI has the same general shape of the production growth cycle curve itself (Figure 7.5). The EROI for total hydrocarbon extraction in Louisiana peaked at about 42:1 in 1970 and declined rapidly to about 8:1 in 1981. Extrapolation of the model used by Cleveland and Costanza to analyze the historic behavior of the EROI predicts that the energy break-even point will be reached when about 210 quads of energy have been produced. To estimate the year in which this would occur, cumulative extraction (plotted along the xaxis in Figure 7.22) was plotted as a function of time (Figure 7.23). A logistic model similar to the one used by Hubbert (1962) which was described earlier (Figure 7.5) was applied to the existing data on cumulative extraction of hydrocarbons. Extrapolation of this model predicts that 210 quads of energy will be produced by the mid-1990s, when the energy break-even point as predicted by the EROI model will be reached. Based on these models, Cleveland and Costanza concluded that total hydrocarbon extraction in Louisiana could cease to be a net source of fuel within the next 12-15 years.

    In a regional breakdown the authors found that natural gas extraction in southern Louisiana had an EROI of over 100:1 in the late 1960s, although it too has declined precipitously since then. Petroleum extracted in offshore waters had the lowest EROI because it required five to seven times as much energy to produce a barrel offshore compared to onshore. Constructing and operating an offshore platform is extremely energy and material intensive relative to onshore oil and gas operations, and its EROI never exceeded 13: 1.

    The predictions of the model used by Cleveland and Costanza are probably overly pessimistic for at least one important reason. The rapid increases in drilling effort from 1979 to 1981 created shortages of drilling equipment in many regions of the country, thus driving its price up. If the use in nominal dollar costs of drilling due to short-term supply and demand interactions was greater than the general inflation rate, then Cleveland and Costanza's model would overestimate energy costs and underestimate the EROI for those years. Regardless of the magnitude of this error, if in fact it does exist, their analyses clearly document a rapidly declining EROI for oil and gas extraction in Louisiana, a principal supplier of the nation's petroleum.

SUMMARY

The purpose of this chapter was to describe the factors that affect the supply of petroleum for human economic purposes. The important points are summarized as follows:

1. The vast majority of petroleum is contained in a relatively few large deposits. These deposits are discovered early in the exploration history of the industry.

2. As exploration and development continues, more drilling effort is required to find many small fields. The result is a decline in returns to drilling effort, commonly measured as yield per effort.

3. The net effect of items 1 and 2 is a decline in the EROI for petroleum as the large, high-quality fields are discovered.

4. In the United States it appears that intensive exploration of frontier regions is the only means by which the decline in YPE and EROI could be stabilized or reversed.

    The widespread economic problems resulting from petroleum supply shortfalls in the 1970s awoke the oil-importing nations to their precarious dependence on petroleum resources for economic and social well-being. In the United States, Project Independence and other programs were initiated to stimulate development of domestic fuel resources (both fossil and alternative technologies) as a means of decreasing dependence on foreign sources. Such policies have had modest success. By 1982 the United States was still importing 30% of its liquid hydrocarbon requirements. By March 1984, however, our dependence had increased again to about 36% of our liquid fuel budget. As the nation pulled itself out of the 1980-81 recession, rising economic activity spurred demand for fuel, a demamt that our depleted domestic supplies could not meet.

    Many of the policies aimed at reducing our import dependence have relied principally on economic incentives to the domestic petroleum industry to overcome the physical limitations of petroleum supply described in this chapter. These policies have so far proved to be unrealistic in their expectations. Singer (1974), for example, stated that the goal of total energy self-sufficiency by 1985 was entirely plausible given higher real oil prices and less government intervention in the petroleum industry. Simon (1981) states that domestic energy supply is very sensitive to price--the higher the price for energy, the more of it will be delivered to consumers. These scenarios and many others place complete faith in free-market mechanisms to overcome any physical constraints. The popular scenario is as follows: higher oil prices due in part to deregulation will increase oil company revenues. Increased revenues will provide both the incentive and means to invest in more exploration and development, resulting in more petroleum discoveries.

    A review of industry behavior since 1973 provides a means of evaluating this hypothesis. Between 1973 and 1980 the real wellhead price of domestically produced oil quadrupled. Expenditures on exploration and development increased by at least 500%. Total drilling effort increased by 280% between 1972 and 1981. So far, so good. The largest increase ever in domestic drilling even produced an increased success rate in finding new deposits, as the percentage of new field wildcat wells that were productive of some oil or gas increased from 10% in 1970 to 20% in the early 1980s (AAPG, 1981). At first glance these figures appear to substantiate the ability of free market incentives to overcome our energy problems. The bottom line, however, has remained essentially unchanged. The amount of new petroleum discovered by the increased drilling and increased success rate has continued its overall downward trend because the new fields are smaller. Proven reserves continue to decline, although the rate of decline in gas reserves has apparently slowed somewhat.* Domestic production from the lower 48 states has continued to decline through 1984. The overall decline for the nation has been mitigated somewhat by production from Prudhoe Bay which is now being pumped at the maximum rate possible, and by the increased use of energyintensive secondary recovery (Figure 7.1). More important, YPE for oil has continued to decline. After a modest reversal in 1979, YPE declined again in 1980 and 1981, years that saw the two largest percentage increases in drilling effort in the history of the industry. By 1982 we were finding only 3.5 bbl of oil per foot drilled, or 10.8 if gas is included. Energy costs per foot are not available yet but clearly are very high.

    These simple facts demonstrate the inappropriateness of economic theories that do not include the physical and energetic limits to the development of natural resources. Sharp increases in working capital and drilling have not produced the results predicted by these theories because those predictions considered economic availability only. Certainly those who were listening to the analyses of Hubbert (1956) and Davis (1958) were not shocked by the events of the 1970s, nor by the inability of market mechanisms to alleviate domestic petroleum supply problems. Unfortunately for the users of petroleum products the economic and political leaders in the United States were not among those heeding the economic implications of the analyses conducted by Hubbert and others.

*Comparison of post-1979 data on discoveries and reserves to the historic trend is made difficult by the fact that prior to 1979, the American Petroleum Institute published the only such data. APl discontinued its series in 1979, and the Energy Information Administration of the USDOE replaced it with their own series. Comparisons of reserve-discovery data for the 4 years in which the two series overlap (1976-1979) showed the EIA estimates to be about 10% higher than API. Nehring (1984) attempted to reconcile the differences between the two series. His analysis suggests that for oil the higher discovery rates reported by the EIA are due primarily to revisions of previous estimates rather than to a significant increase in the actual discovery of new oil deposits. Thus part of the slowing of the decline in finding rates of oil and of U.S. oil reserves in the late 1970's was definitional.

[ pp. 343-349 ]

OIL AND GAS AVAILABILITY: A HISTORY OF FEDERAL GOVERNMENT OVERESTIMATION

The citizens of a democratic nation require relevant information to guide business investments, make political choices, and understand other economic and social processes. One function of government is to supply the citizenry and its political representatives with information necessary to make informed decisions, and a certain proportion of tax revenues is diverted toward that end. Generally, relatively little concern is expressed about the accuracy of the data collected and published by the U.S. government and the vast majority of economic and natural resource-related data are supplied by government agencies. Presumably most of these data are reasonably accurate. Various branches of the government also routinely provide us with predictions of economic conditions and resource supplies -- for example, predictions of GNP, inflation rates, and energy availability. We would like to examine in detail what we believe is a very important subset of government predictions -- those of the future availability of liquid and gaseous petroleum.

    Predictions of future petroleum availability have been, and still are, very important with respect to influencing government policies toward energy pricing, energy imports and exports, conservation, synthetic fuel development, and other energy-related programs. Yet we believe that until very recently official government estimates of the future availability of petroleum have been grossly in error and, more important, have been received extremely uncritically despite the ongoing availability of much more explicit and more accurate alternative methods of assessment. We do not know why this state of affairs has existed beyond the observation that it is the desire of governmental entities to appear effective, and hence optimistic, although one might argue that for at least the first two-thirds of this century resource optimists have been more or less on target. The following is a more specific history of the official and unofficial estimates of U.S. petroleum reserves and the procedures used to make them.

METHODS OF ESTIMATING UNDISCOVERED PETROLEUM RESOURCES

There are three general methods for estimating yet to be discovered petroleum resources, although each method has many variations: First are extrapolations of historic discovery rates or performance patterns. Davis' (1958) discovery rate curve and Hubbert's (1962) growth curve projections and discovery rate curves (1967) are examples of this type of analysis. Second are volumetric yield methods which have been the most popular and widely used methods of assessment, particularly by the U.S. Geological Survey (USGS). Examples of this type of approach are the pioneering work by Weeks (1948) and various official USGS estimates (Zapp, 1962; Hendricks, I965; Miller et al., 1975). Third are combined methods that incorporate both subjective geological evaluations and statistical models. Hubbert (1974) and the most recent USGS estimate (Dolton et al., 1981) are examples of this method.

    The two primary methods, extrapolation of past discovery rates and volumetric yield, often produce different estimates even when applied to the same region because different assumptions are employed by each. The discovery rate approach is based on the existing data and behavior of the industry and on the statistical extrapolation of past performances into the future. As such, this approach is most appropriate in mature areas of development and not in frontier areas where geology and economic conditions may be distinctly different from past experience. The volumetric yield approach is more subjectively based in that it involves extrapolating average yields (barrels of oil per cubic volume of sedimentary rock) from known areas to frontier areas that have been determined to be similar to the original area. Obviously, when using this method, there is often a range of opinions of not only what yield ratio is appropriate but also what constitutes a geologically similar region.

    In 1956 Hubbert published an estimate that the ultimate recovery of crude oil from the lower 48 states would be about 150 billion bbl (Figure III.5). In 1962 Hubbert estimated about 170 billion bbl of oil, based on the extrapolation of past relations between production, discoveries, and proven reserves, a technique discussed in detail in Chapter 7. Hubbert's analyses were based on the available data for the oil industry and were selected partly on the belief that the domestic oil and gas industry was in a more or less mature stage of development so that the extrapolation of past trends was a reasonable way to approach the problem of resource assessment.

    During the same time period that Hubbert was publishing his 1962 and 1967 analyses, a series of official government estimates of future petroleum availability were released, primarily by the USGS (Zapp, 1961, 1962; Hendrick, 1965), which were many times higher than Hubbert's projections (Figure III.5). The USGS method of assessment throughout the 1960s and early 1970s was primarily a form of a volumetric yield model developed by Zapp (1962). The so-called Zapp hypothesis is based on the assumption that since oil is discovered only through drilling, exploration for oil would not be complete until all potential oil-bearing regions had been drilled intensively enough to reach a well density that would leave virtually no fields undiscovered. Zapp and his colleagues estimated that this would require an overall density of one well per 2 mi2, drilled to either the basement of the sedimentary rock or 20,000 ft. Implicit in this approach is the important assumption that oil would continue to be found at a constant rate of about 118 bbl per foot of exploratory drilling, the mean rate up to that time. Hence, the validity of Zapp's and the USGS estimates is dependent on the validity of the hypothesis that, on the average, the finding rate for oil would continue to remain relatively constant over time. Based on this model, Zapp estimated that about 590 billion bbl of crude oil would be produced in the United States. It is possible, however, that this high value should not be attributed to Zapp for he died at about the time these estimates were released and hence had no chance to revise or update his original analysis. Thus Zapp, a serious and scholarly scientist, may have been treated poorly by history because of the actions of others-something we may never know because of his untimely death. The Zapp hypothesis, with slight modifications, was the primary theoretical basis for all USGS estimates until the mid-1970s. The then assistant chief geologist (and later chief) for the USGS, Vincent E. McKelvey, stated in 1962 that "those who have studied Zapp's method are much impressed with it, and we in the Geological Survey have much confidence in his estimates."

    A test of the validity of the Zapp hypothesis is to see if in fact oil is found at a constant rate of success per unit of drilling. This test is readily performed with the existing data base of the oil and gas industry. As we have seen already, Davis (1958), Hubbert (1967), and Hall and Cleveland (1981) clearly documented that oil is not discovered at a constant rate per unit drilling through time but rather exhibits a trend over time of decreasing returns per drilling effort (Figure 7.19). This undeniable fact illustrates clearly how the Zapp hypothesis was not even a reasonably good approximation of reality and led to unwarranted optimism for any resource estimate based on it (Figure III.6). The Zapp hypothesis does not take into account the important and inescapable trends in oil and gas exploration described in detail in Chapter 7, namely that the few very large fields that contain most of the recoverable petroleum are discovered first with relatively little drilling effort. As drilling effort accumulates, increasing levels of drilling are required to locate similar volumes of oil because the fields that are found are smaller.

    Despite the undeniable observation that oil was being found at much less than the 118 bbl per foot implicit in Zapp's analysis, and even the quite startling fact that Hubbert's original 1956 prediction that U.S. production would peak around 1970 occurred as predicted, the Zapp-type method or other variations of the volumetric yield approach prevailed as the official U.S. estimate of petroleum reserves throughout the 1960s and early 1970s. In 1961 a USGS estimate based on Zapp's methodology put the ultimate recovery of crude oil in the United States at almost 600 billion bbl (Figure III.5). Thirteen years later the USGS still estimated a minimum of about 310 billion bbl of ultimately producible crude oil. As recently as 1975, the USGS estimated between 250 and 300 billion bbl of oil (Miller et al., 1975). The irreconcilability of the estimate made in this Circular 725 with the existing data of the industry was noted by, among others, Hubbert (1978) and Nehring (1981)· At the conclusion of the most exhaustive empirical analysis of U.S. petroleum resources to date, Nehring (1981) stated:

"... we do not believe that anyone could develop a plausible list of geologic prospects.., in the lower 48 onshore containing an amount of petroleum even approaching the estimates of Circular 725 ...."

    As Hubbert (1978) notes, the publication in 1975 of USGS Circular 725 was a "significant historical event," despite the fact that it was still considerably higher than Hubbert's estimate· Circular 725 marked the end of a 14-year period during which the succession of USGS estimates of the ultimate amounts of oil were two to three times higher than could be justified based on existing petroleum industry data on drilling, production, and discoveries. One reason for the dramatic downward revision was the increasing pressure being brought to bear on the unwarranted high USGS estimates of the 1950s, 1960s, and early 1970s brought about in part by the realities of poor drilling success of the 1970s. The new revised USGS estimates were part of the basis for President Carter's new emphasis on the energy problem in general and the need for conservation in particular· Some cynics have suggested that the new low estimates followed Carter's political needs for a national rallying point -- an energy crisis -- but we believe that reality had finally achieved political respectability and that President Carter had correctly assessed the situation·

    In its most recent estimate the USGS's 95 percent probability estimate (meaning there was 95% chance of the amount actually being greater) was 218 billion bbl of ultimately recoverable crude oil (Dolton et al., 1981; Table III.l). The 5% probability, or highest, estimate of the USGS group would lead to about 280 billion bbl of oil, whereas the mean estimate was about 260 billion bbl. The lower figure corresponds rather closely with Hubbert's latest estimate of 213 billion bbl of oil from the lower 48 states, Alaska, and bordering continental shelves, and is consistent with what he has been saying since 1956 (Figure III.5). It is interesting to note that the approach used by Dolton et al. was a combination of exploration history, finding rate studies, petroleum geology, and volumetric yield procedures, and it was the first time that statistical finding rate methods were used explicitly in the USGS methodology, some 25 years after Hubbert had made his initial resource estimates. Meanwhile history continues to substantiate Hubbert's analysis as one of the single most accurate and consistent major economic predictions ever made (Figure III.7).

    The use of volumetric yield methods by USGS for its petroleum resource assessments isreally not surprising for they are consistent with the attitude that many resource analysts and politicians have held for many years -- namely that human ingenuity, both technical and political, has no imaginable limits and that our ever-increasing technical cleverness at performing economic tasks will overcome any implications of increasing resource scarcity, even by providing more and more oil. This attitude is typified by the following statement made by V. E. McKelvey, former director of the USGS, in 1972 (italics added):

"Personally, I am confident that for millennia to come we can continue to develop the mineral supplies needed to maintain a high level of living for those who enjoy it now and to raise it for the impoverished people of our country and the world. My reasons for thinking so are that there is visible undeveloped potential of substantial proportions in each of the process by which we create resources and that our experience justifies the belief that these processes have dimensions beyond our knowledge and even beyond our imagination at any given time."

Dr. McKelvey reiterated his cornucopian outlook toward future resource availability in a 1977 speech in Boston where he stated that natural gas reserves were so large that they amounted to "about 10 times the energy value of all previous oil, gas and coal reserves in the United States combined." No one knows of course how much gas we will eventually find, but this attitude appears to us to be inconsistent with the peaking of gas production in 1973 and the fact that in 1985 proven natural gas reserves are but 12 years of current rates of use. As was described in Chapter 8, the outlook for future domestic gas availability is somewhat more promising than it is for crude oil. It is known that large amounts of gas exist in unconventional formations such as deep gas and geopressured gas. But the energy costs of developing these deeply buried and/or dilute natural gas sources must be evaluated before we include them in our estimates of future energy supplies. In the case of geopressured gas in the U.S. Gulf Coast region, preliminary evidence indicates that the average geopressured reservoir may have only a modest EROI, much less than conventional natural gas (Cleveland and Costanza, 1984).

    Government attitudes toward future supplies of our natural resources affects all of us directly. Natural gas regulations from the mid-1950s to the late 1970s kept the price of gas artificially low and encouraged its irresponsible use and depletion. The points made in Chapters 2 and 3 suggest that these optimistic attitudes were adopted during a time of abundance of fossil fuels and other resources and perhaps were appropriate for the conditions that existed at that time. During times of decreasing availability of some important natural resources, however, existing attitudes and policies must be scrutinized closely to determine whether they still yield rational and logical policy relative to changing resource conditions. Government subsidies and price regulations cannot always compe0sate for changing resources realities, and in fact they can exacerbate the problem by giving false promises of future abundance of conventional petroleum.

    Despite the increasing awareness of the trends in the quality of our energy resources, many individuals remain very optimistic about our ability to increase our domestic supply of conventional oil and gas. The attitude of the Reagan administration is that increased financial incentives to the oil industry will lead to more intensive searching for petroleum, and ultimately to substantially more oil and gas being found and produced. While this may prove to be true, it is, we believe, more likely that it will not be true at all. In fact virtually all evidence from the oil and gas industry explicitly contradicts this notion. The facts are that the energy crisis that followed the oil embargo in 1973 occurred when the official USGS estimate of that period was that we still had over 500 billion bbl of oil to be found in the United States. Why have we discovered only 11.8 billion bbl of new oil between 1974 and 1980, the equivalent of a little over two years' use, despite unprecedented drilling? We believe that the reasons for this decline are simple and can be found in the physical nature of the resource itself, and not only in the economics of the industry that extracts it. Although it is true that allowing market prices to rise assists in discouraging consumption (an excellent goal, but not without its price in economic growth and material well-being), its effects on encouraging new discovery and production is a two-edged sword. Any present-day production simply hasten the inevitable point in time when the energy cost of domestic production equals the energy gains.

    It is possible that large new oil reserves may be found in relatively untested provinces, such as off the coast of Alaska or even Iowa, or that large new gas deposits may be found in deep or unconventional beds, but there is little or no empirical evidence that indicates that the last 10 years of substantially greater price incentives and exploratory efforts is substantially increasing annual finds, especially of new oil. In Texas, for example, 90% of the rather modest 6 billion barrels of oil added to reserves from 1973 to 1984 came from existing fields, rather than from new fields (Oil and Gas Journal, July 22, 1985). In the meantime the much larger drilling and other exploration rates are greatly increasing energy costs. Most new provinces that remain will be extremely, perhaps critically, energyexpensive to develop. We should not decrease our search for new petroleum, but neither should we be deluded as to the costs of developing new oil deposits. Alternatively, if future exploratory efforts in frontier regions become more effective, we can reduce our pessimism. At this time we believe such optimism is not warranted, for the fact remains that most of the domestic oil we use in the United States in the 1970s and 1980s is from oil fields discovered before 1940. This reality is catching up with official government estimates. For example, based on the failure of the past 200 offshore wells to find significant quantities of oil the U.S. Dept. of Interior decreased its estimates of oil to be found there from 28 to 12 billion barrels, less than 5 years' use (Norman, 1985).

    Surely those who had been listening to Hubbert and Davis all along were neither shocked by the energy crisis nor by our large dependence on foreign sources of oil. On the other hand, the average citizen was quite unaware of Hubbert's analysis and was dependent on official government estimates that we believe were outrageously optimistic. Reputable, although conservative, estimates from some oil industry analysts were discounted by many because they appeared (and may have been) self-serving to an industry trying to raise its domestic oil prices. Even now there is very little recognition or appreciation by the general populace of the precariousness of our petroleum situation and even less government assistance in understanding this problem or dealing with the inevitable future economic and social repercussions.