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[Episode #7] – EROI

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All about EROI (Energy Return on Investment), the state of biophysical economics, the relationship between energy and ecology, and what EROI could and should tell us about the outlook for a fuel -- for example, can we run a society on renewables? And in the news segment: LNG's troubled future, how low oil prices are causing surging gasoline consumption, and the risk of the next oil price spike.

Geek rating: 6

Guest: Dave Murphy, Assistant Professor, St. Lawrence University

On Twitter: @djmurphy04
On the web: https://www.stlawu.edu/people/david-murphy

Taping date: November 15, 2015

Chris Nelder: Welcome Dave to the Energy Transition Show.

Dave Murphy: Thanks for having me. Chris I'm really happy to be here.

Chris Nelder: So before we dive into the hard questions here, maybe you could just give listeners a bit more context about where net energy and EROI studies fit into the body of knowledge about energy. While this area of inquiry borrows from the language of finance and economics it actually emerged from the field of ecology and the intellectual giants in that field, researchers like Howard Odum and Herman Daly and Charles Hall were all originally ecologists I believe. So briefly what's the connection between ecology and energy especially the economics of energy.

Dave Murphy: Yeah. So ecology developed, you think of ecology as being this kind of established discipline but the reality is ecology developed from biology in really the 20th century and really hit its stride in the mid 20th century. You're talking like 1940s and 50s. And one of the big researchers is this guy Howard Odom and his brother Eugene Odom has a school named after him in Georgia. And Howard Odom was big in Florida and North Carolina. So really good brother pair of academics there. But Howard Odom focused on systems ecology and what he kind of studied and what his passion was, was was figuring out how energy flowed through natural ecosystems from the solar energy that would hit the ecosystem and how that kind of was transferred to the different trophic levels from the phytoplankton the primary producers to the primary consumer and so on and so forth and then he started to study the human dominated systems in the economy and seeing how energy would flow through that and drawing parallels between the two. And one of his students was Charlie Hall and Charlie Hall wrote a thesis in 1970 that looked at energy flow in a stream in North Carolina and what he compared was the energy cost of migration of these fish within the stream to the energy that they kind of gained by migrating in accessing new food resources either upstream and downstream, or whatever the case may be, and that was really the first energy return on investment analysis that was published in ecology right because the energy return would be the new food source that the fish access and the energy cost would be the actual cost of migrations. So you put that in a ratio and you get an energy return on investment number - the energy gained divided by the energy cost. Then Charlie Hall who was my Ph.D. adviser started in the 70s started to look at human dominated systems with EROI. And the first published value I think it was like in the late 1970s and then there was a paper in 1981 in science where it really came into kind of the general public's eye. And the idea is very simple: how much energy does it cost to produce energy out of the ground. And I think they focused mainly in the beginning on fossil fuels, predominantly oil and seeing that you know when we search for oil, we get a lot of profit energy. You know you get 40, 50, 60 barrels of oil out for every barrel of oil invested and those are the kind of returns that make Wall Street kind of jealous right. So that's really how it hit its stride and where it kind of evolved from in ecology.

Chris Nelder: Huh, that's interesting I actually didn't know a lot of that. It's interesting how those fields have tied together that way. So the kind of work that you've been doing is now beginning to coalesce under headings like ecological economics or biophysical economics. What is the state of these new fields and what do these new approaches hope to accomplish.

Dave Murphy: That's the yeah I don't know, I mean I'm a young academic so to me sky's the limit. If you talk with some of the older academics that have been in the game a little longer they're...

Chris Nelder: Give you a little more jaded answer.

Dave Murphy: Yeah exactly. There might be some asterisks involved or something. But I think ecological economics was founded, and actually this is a really kind of poignant question because I just came back from the United States, the meeting of the United States Society for Ecological Economics which was merged with the Canadian Society out in Vancouver like a month ago. And as I was on a plane ride out there I was reading all of the original papers in Ecological Economics from the 1980s and the journal was of Ecological Economics started in the early 90s and I was reading these because we're now in the kind of the beginning stages of forming biophysical economics and by we I mean Charlie Hall who I was speaking about earlier who was my advisor and I and some other people are doing this thing called biophysical economics. In the early papers in ecological economics were really kind of searching for the answer to what is ecological economics. And you know they were basically discussing how it's a systems based science and things. It's not ecology, it's not economics it's ecological economics which I thought was just as vague as saying it's either those two separately I didn't really understand that but in the beginning it was about, if you read the first Costanza paper that says like Robert Costanza published in the journal, it says what is ecological economics, the entire paper is about limits. And it's not as kind of stark as the Limits to Growth. It's not a hugely pessimistic kind of paper in the sense that Limits to Growth kind of spelled like you know ecological disaster and you know was very Malthusian in that sense but it did discuss limits and said that natural systems have limits right, have built in checks that don't allow them to grow forever. And this is kind of one of the fundamental tenets of ecological economics and the way we believe the economic system must also be limited at some level. And so that was what is it that's 20 years ago, 25 years ago now, and over the past 10 years, 15 years Ecological Economics has really grown in popularity a lot due to the advancing of ecosystem service analysis which is basically putting, I'm generalizing here, but what seems to be the strongest kind of vein of analysis within ecological economics right now is putting dollars on ecosystem services, and that is something that is fraught with danger I think and that's kind of led to some fractioning within the Ecological Economics kind of world, and some of the bigger people that are involved, that were involved in the beginning aren't so involved anymore because of that, and biophysical economics was not so much an answer to that trend within ecological economics. But I guess in some ways it was, but that wasn't the intention. The intention was really just to use science in systems analysis to study economics in economies as they are, right, to just look at data and see how these things are related rather than come up with theories on how they might be.

Chris Nelder: So more of a kind of a pure science of study or observation rather than an application for policy purposes.

Dave Murphy: Yeah, yeah absolutely. And it very much would... I'm trying to write this paper right now on what are like the theoretical foundations of biophysical economics. One of them for sure are the kind of the laws of thermodynamics which are you know energy can't be created nor destroyed and that we lose energy every time we convert it. And it needs to kind of just spell limits. You talk about the energy system right and energy kind of powering the economy. We can't create it right, and this is especially important with fossil fuels. What some people tend to forget is that they're non-renewable, and once we burn them they're gone. We're using that, we're turning it into waste heat, and that energy is gone forever. So that's kind of at the macro level, at th,e micro level we're doing some interesting things trying to relate like energy return on investment to profitability. And that would be kind of the biophysical economics version of ecosystem service analysis and that like ecosystem services is a microeconomic analysis within ecological economics, in biophysical economics we're not doing that type of work. What we're doing is trying to relate like energy return on investment in biophysical analyses and just try to come up with correlations with you know does that actually like correlate to firm profitability. And that research is like very nascent. I can't really say any trends have emerged but I think it's a really interesting area nonetheless.

Chris Nelder: Yeah, no I do too, and it's one of the main reasons I want to get into that. I want to address EROI in this podcast because I think it's an important question with respect to energy transition as to where the profitability really is. So many of our listeners might be familiar with lifecycle assessment, which is an approach that tries to assess the environmental impacts of a product's cradle to grave impacts. How is net energy analysis similar to, or different from lifecycle assessment.

Dave Murphy: You know lifecycle analysis is a methodology, and net energy analysis is a methodology as well. I would say that biophysical economics is something that could have like a theoretical foundation. Net energy analysis is just determining what the net energy profitability is, or something like that of some sort of system. So its just a method of accumulating costs and looking at the energy profits. Lifecycle analysis emerged you know 20, 30 years ago, and what basically happened was that a bunch of engineers wanted to codify and really solidify a methodology for figuring out what the environmental impacts of producing stuff actually is. Without just saying like, oh if we burn a gallon of gasoline we get X amount of greenhouse gases out, right. So thats part of it. But the gasoline doesnt just exist there and its not just ready for you to burn, right it has to be extracted from the ground and then transported to a refinery, refined and then it's transported again to the place where it's finally consumed. So there's all these other upstream costs that are an environmental impact that aren't necessarily accounted for, or weren't early on. So lifecycle analysis emerged as this kind of like way to look at this called cradle to grave. Right. So what are the costs starting with the product in the ground right. So starting with the original resource of just like oil in the ground, and that's just one example. Companies use lifecycle analysis now for anything, you know they look at their product design and product manufacturing in their supply chain and they look at where the greenhouse gases are being consumed the most, or where the water is being consumed the most. So lifecycle analysis now emerged into this like huge discipline, there's huge conferences every year, there's a bunch of different softwares that are used to do this. But the interesting thing when they're doing these lifecycle analyses you can imagine that accumulating all of those costs upstream is incredibly tiring right. In terms of workload, and you have to get so much data and you have to catalog all this stuff that they started doing it in a very formal way so that there's now these enormous databases out there of just what the costs are of different things in terms of dollars, in terms of kilograms in terms of greenhouse gases, they're called lifecycle inventories, and this is particularly useful for the net energy community because the way we learned how to do energy return on investment is to go out there into the literature find the cost of something like, oh I see that they do X amount of truck trips for a shale gas well. OK well if they do X amount of truck trips and we assume 50 miles per truck trip we can figure out the energy cost that way. Right. And we just kind of build it in Excel and it's like it's messy and very kind of data intensive. So we still have to do some of that now but we can also utilize these huge databases so that we don't have to go out and search for the energy costs of refining crude oil into gasoline. We can go to a database and find not only that cost but a regionally specific one. Right. So what does it cost in like Texas to do that versus you know Germany or something like that, and you could just utilize these resources and then build your model so that's the kind of a long way of saying that the net energy analysis world is in many ways now merging at least methodologically with life cycle analysis because we can do all of the net energy analyses within their framework and utilize all their big data. So that's kind of the way it's emerging right now.

Chris Nelder: Interesting. So let's get into some of the hard questions. So based on the research of people like Cutler Cleveland and Robert Costanza and Charlie Hall and you, we know that fossil fuels used to have much higher EROIs than they do today and that the project of energy transition imagines replacing some of those high EROI fuels with low EROI renewable fuels. So just to put a few stakes in the ground then let's put some numbers out there. What is the average EROI of conventional oil and gas right now.

Dave Murphy: The most recent numbers put it probably in the mid teens. All these numbers have ranges or at least should be published with ranges and the range would go from about 11 to 20 for conventional oil and gas with error bars that exceed that of course but that would be where the mean would probably lie for conventional.

Chris Nelder: So 11 would be what like a deepwater project and 20 would be...

Dave Murphy: No, deepwater would definitely be in the 9, 10, 11 range. And I wasn't thinking to deepwater or even as conventional. You know in in Saudi Arabia of course would be on the other end of the spectrum, at 20, 30 something like that. So those are the bounds of that.

Chris Nelder: OK. So what about unconventional oil and gas like using fracking. What kind of EROIs are we getting from that.

Dave Murphy: Oh man well that is a sticky wicket rope there. So the research is just coming out on this right now. And I'm not sure it's published so I can't quote the reference or anything but the numbers that are going to be published show that it is pretty high. But there's a lot more to these numbers than just looking at them and taking them at face value right.

Chris Nelder: I mean that's actually kind of a surprising finding because you know we all know that it's a high cost source of oil and that's because it requires all this additional effort and inputs of energy it requires all this water and sand to be trucked in and all this fracking energy spent fracturing the rock and so on. It's kind of surprising that if you have to do all that extra stuff which is expensive that it would not translate to a lower EROI.

Dave Murphy: You know I think it will. I think of the shale plays. That's what I'm talking about when you talk about like unconventional oil. I'm just talking about shale oil right now. The tar sands and bitumen developed in northern Canada has very low EROI. That's like way below 10. I think the published numbers are three to six. So that's an incredibly capital intensive infratructure laden industry, and you can see they are kind of like the marginal producer today right. You know as soon as the oil prices drop below 80 dollars a barrel they just shut in production as quickly as possible, much like the shale plays have actually or at least tried to. So anyway that would be the tar sands. You know if you look at the Bakken which is kind of the poster child for shale oil now. So the numbers are pretty high. But it's really kind of like the conventional oil industry just in hyperdrive. The depletion rates are so fast right. And you have to keep putting in so many new wells to maintain production levels. It is capital intensive. But you're exploiting the best resources right and you're getting some decent returns. I mean they wouldn't be doing it if they weren't making money on it right. So it's obviously financially profitable. And I think in the beginning these wells are just good enough where they're getting a lot of oil out. The question that I don't have any answer to, and I'm not sure the literature has addressed yet is how quickly those decline, not just like a year after year decline per well changes but like how quickly are the initial production rates that they're getting going to change over time. In other words how big are the sweet spots in these plays and, or small are they. Right. And because if that declines all the energy return, and this is our shale gas analysis has shown this ninety nine percent at least in gas 99 percent of the energy is coming out is out of that well in five, six years. So if you cut the production, the initial production levels, if you, if that starts to decline by half, you're getting an exponential decrease in the amount of production of oil or gas right. So the energy return on investment numbers are pretty high right now but they could change much more quickly than you'd expect in conventional oil where the wells actually will last for 20, 30 years so...

Chris Nelder: Right exactly. So the EROI numbers if we had them from say three years ago when wells were coming on with initial production rates of twelve hundred barrels a day or whatever would have been considerably higher maybe than the EROI numbers for those, for that same territory would be two years from now probably higher than it is even today. Even though with the decline of oil prices and the shale producers really focusing on the sweet spots, at so-called high grading their efforts to really avoid having to totally shut down production and just keep it flowing from the very most productive wells. Even there, even in the sweet spots we're now seeing IPs in the range of like you know 600 barrels a day. So we're already well below the IPs that we were getting a couple of years ago.

Dave Murphy: Yeah I mean listen I teach this to my students. Well there's a couple of things. The data you'll see a bit of a learning curve with these plays right. So the initial productions will creep up for the first year, two or three years or four years or whatever as they figure out what they're doing.

Chris Nelder: So right so there's the counter-trend is that you know there's a learning curve and the numbers would actually go up.

Dave Murphy: Yeah but once they peak out and they start to decline that's not because they need to learn anything else right. That's because they're just getting worse plays.

Chris Nelder: Exactly. The way I like to put it is that technology wins over geology for a while but geology always wins in the end.

Dave Murphy: That's right. And you know what a lot of people don't understand about the shale, and I told my students this is that it is such an impermeable rock that the oil and gas is literally trapped in there. That's why we have to crack it to get any of that stuff out, and you can't produce from an area that isn't fracked right. If you don't get the crack in the fissure in there the oil cannot migrate, whereas in a conventional play you can drill down into the rock and you know it's like a really like oil soaked brick or something and there's this huge holes in it in the oil and gas can flow through that. You don't have any of that in shale. So that's why the geographic implications I think are even more impressive when you look at shale gas because you can assume that where that well is is only draining this exact spot given the horizontal leg, you know, and then that's why they have all these legs radiating out from each well so it really is like a best first example of like we're going to hit this area because we have the best results and once we're done we have to move elsewhere. And as soon as those initial production numbers start going down, it'll be because of geography and the fact that they're just running out of the best resource.

Chris Nelder: So studies switching away from oil and gas now, studies on the EROI of solar and wind are much newer. But what have those early studies shown?

Dave Murphy: Well they've advanced in the past few years. Well let me answer the question first, that PV and wind, wind for sure has an energy return on investment up probably at 20 or above, that's for just you know standard commercial scale wind projects. And I'm not talking about micro-wind or anything like that but your standard two megawatt turbine or something like that is easily at 20 to 1 right now, so that'd be one unit of energy invested for 20 out which is you know on par with the oil and gas.

Chris Nelder: With the good conventional oil.

Dave Murphy: The good stuff. Exactly. And PV is creeping up around 10 right now. That's the most recent estimates from some of the other academics in the literature.

Chris Nelder: Such as?

Dave Murphy: Marco Raugei has been doing a lot of the work on this, and he had a paper published in, I hope I'm pronouncing his last name correctly.

Chris Nelder: I can't help you there.

Dave Murphy: Yeah. There's a lot of vowels... makes it difficult. But he's a good guy and he published in Energy Policy in 2012. I think was his... That was even a few years ago now. But there's a lot of advancement in the renewable energy world right now as you know. What's really interesting about watching it is it's not so much what the static number is, like that just gives you a snapshot, but looking at the trends in where we expect the trends what are the limits on the EROI and how do we expect that to change and therefore change the EROI in the future, and if you look at PV and wind, well wind is already kind of successful right that technology works as long as you're in a good spot for it. You have the wind speed and we're not at a point right now where we're running out of those spots. With PV it's really technology right. So with PV the values are coming up to about 10 to one right now, was that Raugei number I was quoting. And what's limiting that technology, or what has been in the past was you know the efficiency of panels in the manufacturing of panels and as you get economies of scale, more people producing them those all come down. So these are all things that I guess there's a long way of saying that we expect the costs for renewable energy to decrease which is the opposite trend you see in the fossil fuel industry. Coal, natural gas, oil they're not finding East Texas again right. That's just off the table.

Chris Nelder: Right. Those numbers are not going back up again.

Dave Murphy: No they're not. And even shale oil, gas if they're high right now let's look at 'em again in five years you know. This is as high as they're going to get right, there is only a downward trajectory to all and the question is how quickly are we going down that path. So you have opposite trends. And you know if 10 years ago we were at the point where the numbers for renewables didn't match up very well with that of fossil fuels. They were still going up but they're still pretty low at least PV was, but there's been a lot of change. Now, you know they're not exactly perfect comparisons intermittency being a big kind of factor. It's not exactly the same type of energy source. It's totally different if you think of oil coming out of the ground. But even if you burn that and create electricity with it, in theory you can do that kind of constantly whereas wind and PV are intermittent and therefore you have the question of do we have to include battery backup in the grid to make these numbers actually, actually work because not a lot of that has been done in the literature.

Chris Nelder: Well there's certainly been some papers I've seen that have insisted that it is necessary to include all of that. And I violently take issue with that and I feel like that's one of those points sort of a methodological issue that really needs a lot more investigation and a lot more explication and discussion before we just assume that that's going to be part of it.

Dave Murphy: Is your objection due to the fact that we're not sure how much battery backup we would need if any if we rejig the grid correctly or.

Chris Nelder: Absolutely. And also because there... storage is not just batteries right. All different kinds of storage. And then in addition to storage you have other technologies you have demand response you have load shifting and you have all these other things. So what these studies that I've seen really tried to do where they tried to include batteries as the only storage mechanism and include that to basically 100 percent of the load is absolutely a worst case analysis and I could come up with a different construction of that same problem where maybe the battery quotient that needed to be priced in to this whole equation was maybe 10 percent of what they're assuming.

Dave Murphy: I agree completely with you just call it a forecast you know or at least cast it that way so that it's not assumed to be the, an actual number of like an existing system right where you know you can compare oil and natural gas and catalog all the values. But we're doing that based on values we collect in situ right from these producers or from the EIA or whatever. It's another thing completely to adopt a cost metric for a battery that could conceivably be used as grid storage and then backing it up to 100 percent is kind of totally crazy I don't think anybody's ever really considered that as it has a future.

Chris Nelder: Right. So where this is all heading of course is we're trying to ultimately compare the EROI of different fuels as a clue to what they can tell us about the future of energy transition right, how much energy transition we can really hope to achieve. How much renewables we can really hope to displace fossil fuels I mean that's that's where this is all going. But when you get into these comparisons there's just a minefield of issues out there. So let's talk about some of those methodological issues around comparing the net energy of different fuels, so in reviewing academic papers on EROI some years ago I often objected that they were doing apples and oranges comparisons because the boundaries of analysis were different for different fuels so for the EROI for coal at the mine mouth for example can't be directly compared to the EROI of a solar module which is putting electricity directly into the grid. It's a totally different place than a mine mouth. And the EROI of coal at the mine mouth is totally different from the EROI of coal after it's burned in a power plant. And the theoretical EROI of a generic solar panel fresh out of the manufacturing plant is different than the actual EROI of a specific kind of solar module. After 40 years in the Arizona desert you know a very specific place and time and then how are we to compare all these different numbers on an equal basis. So now it seems the academic community is beginning to address those issues. How are they doing it?

Dave Murphy: Well the net energy world is as I said before was kind of an amalgamation of people that are environmental scientists or engineers that kind of developed their methods their own way. And by adopting this kind of rigid LCA framework there's been a lot more consistency recently in the analyses of energy return on investment that have been published. The issue that you just described right. This whole kind of apples and oranges thing and all the different permutations and different kinds of apples and oranges that you could compare. That was one of the kind of major reasons that the LCA world kind of got started right was to make sure that these kind of comparisons between different production chains were comparing apples to apples and different same boundaries in the system and all of that. And I think it was just kind of due to the fact that the net energy world didn't.. it emerged out of ecology right. It didn't emerge out of the engineering or life cycle analysis community that we didn't have kind of a rigid framework for this but as I said a lot of the analyses are going in that direction and one of the important things there is that you have this something called a functional unit and you have to state your boundaries, you have to scope the analysis. So in actual lifecycle analysis paper that calculates energy return on investment, if they use the LCA framework, all of that important information will be in the paper. You're never going to get all the values to be exactly the same with all the same boundaries. What's important is that they're published with the boundaries stated clearly so that you know what they're talking about. And the big problem we had was that this is a very data intensive process so when we're producing numbers of like coal energy return on investment at the mine mouth we're scraping to find all the data to get this done. A lot of the times, almost all the time, it's data limited. Right, well we didn't assume that, we didn't include that clause because frankly we couldn't find any data for it, or the data we found was suspect, for this reason or that right. So the LCA world is kind of fixing two things, or helping at least fix two things. One is the rigid methodological framework. The other is this huge lifecycle inventory that I was talking about has like all of these databases in it that we can now access, or at least pay to access as the case is. And I think that's allowing for more detailed an apples to apples comparison. So the analysis we're producing right now for shale gas produces three different energy return on investment values one is at the well gate. So what is the energy return at the well, what is the energy return after processing the gas and what is the energy return after you've burned it and created electricity with it is that third one that I think is particularly important because that's a megawatt hour into the grid is our functional unit right so we're doing the analysis all the way to the boundary of getting a megawatt or kilowatt hour or whatever into a grid and that number can be compared against PV which is the only output of PV can be a megawatt hour into the grid. We can't compare that number, comparing a PV megawatt hour into the grid to a megajoule of shale gas coming out of the wellpad is incomplete, and that's the apples to oranges mistake that we can't make anymore.

Chris Nelder: Or a megajoule of coal sitting in the ground.

Dave Murphy: Yeah. No, no you can't do that.

Chris Nelder: So you feel like this functional unit insistence is starting to clear up some of those problems or at least provide a basis that things can be more accurately compared to each other.

Dave Murphy: Yeah it certainly is. We can utilize it now right. I mean, I spent years doing these energy return on investment analyses and now I spent the past year and a half learning a lifecycle analysis software just because that's the way all of these analyses are done. If you do a greenhouse gas analysis for any product you have all of the data needed to produce the energy return on investment. They're just more interested in greenhouse gases. So there's this incredible resource out there where we can put these numbers together more consistently than we have in the past and we have to take advantage of that, and following the framework is doing this kind of functional unit analysis right. So that doesn't mean that everybody that does a shale gas EROI will produce megawatt hour into the grid maybe they'll do megajoule of gas off of the well pad. But the point is it will be stated there. And then you know at some point there is a user competence that has to factor in like you know whoever's reading these articles has to be like, 'Okay well thats the well-pad and this one's into the grid. These numbers are incompatible. Right. But yeah I think at this point we have to stop writing papers that might compare coal and gas and oil if they're not talking about the same unit at least the same kind of functional unit let alone the same boundaries.

Chris Nelder: So how does your new study help us to compare shale gas to wind or solar?

Dave Murphy: Well, just by doing that I mean there's been a couple of shale gas estimates that are out there and one of them was like they all provided a range. I think it was like 70 or 80-to-1 was one of the values, I think that was the Aucott, Melillo paper and then there's another paper that had had it in the teens or maybe 20-to-one. Those are basically the two papers that were out there, but both of them measured at different boundaries and didn't take it to actually produce electricity right. The first one was I think just at the wellpad, the second one I think did processing which is why the numbers are lower so they added in costs but didn't add any gas out obviously. So you add more cost and the EROI goes down. You could just kind of picture it, their just expanding the boundaries right, the first paper had the tightest boundaries on the well pad. The second one had processing. So we've taken that step further now, taking that gas into a pipeline and put it into a natural gas combined cycle electricity producing facility and produce the electricity and then we looked at the electricity megawatt hour into the grid. So that was the final boundary of our analysis and we compare that to all the costs to getting it there and our values. You know we have three different numbers depending on the amount of gas thats produced from the well. Its about 10 is what it is. So its about equal to PV right now which is kind of interesting.

Chris Nelder: I just want to clarify. So in this paper you and your co-author Devin Moeller. You know you've looked at the EROI or shale gas from the Marcellus play in Pennsylvania specifically.

Dave Murphy: Right. Yes specifically the Marcellus.

Okay. And so this EROI value of 10 that you found roughly, is that the final EROI when the gas is actually converted to electricity at the power plant in a combined cycle turbine.

Dave Murphy: That's right. That's right. So you know it's funny too if you look at the other values that we calculated, we, as I said before we calculate 3 on at the well gate, one at the processing gate, one at...

Chris Nelder: The power plant.

Dave Murphy: At the power plant. The first number mirrors the Aucott and Mellilo number which is the number that they calculate at the wellgate. So we got a really high EROI.

Chris Nelder: Which was like what?

Dave Murphy: 60, 70-to-one I mean like at the wellpad that's that gas coming out. But we have to understand here is first of all there's two things. One is that gas has even sharper decline rates in the Bakken right. And so all of the stuff that we talked earlier about about the Bakken and how those numbers may change very quickly. All of that just applies in maybe even more extreme way to the Marcellus and the gas plays. But secondly and this is the problem right if you look at if you just report that first number you're like oh my gosh like shale gas is so much better than PV because we get an energy return of 70 to one when PV we get 10 to 1 why wouldn't you go with that right. But they're fundamentally different products. Nobody is consuming the gas at the well pad. Right it's supposed to go through all this de-watering and then it has to be processed even further, then it has to be pressurized put in the pipelines can be shipped however many miles, and then it's got to be finally burned and that's the thing right. Burning of fuel to produce electricity is incredibly inefficient. You're lopping off...

Chris Nelder: Your best power turbines are what 40 percent efficient?

Dave Murphy: Yeah I mean forget it. So you can manage up the efficiency of some of these if you do combined heat and power to utilize some of the heat. But the reality is burning gas to produce electricity is 30 40 percent efficient. So that megajoule that's coming off of the well pad that gave us that 70-to-1, you know two thirds of those are gone up the chimney at at a power plant you know as waste heat. So you are only getting a third of that and that's why the EROIs can decrease so quickly when you go to the grid level because for any fossil fuel coal is even less efficient than gas. Two thirds of the energy content of whatever gets to the power plant is gone before you get it into the grid. So it makes a big difference.

Chris Nelder: Yeah absolutely. So the approach that you've taken here comparing megawatt hour to megawatt hour for power for shale gas or wind or solar or whatever that's absolutely seems like the right idea to me because that's an apples and apples comparison of end uses rather than sources. That makes sense. So this is on a somewhat related but different subject. This is similar to the energy returned on capital invested, the EROCI metric that Mark Lewis has been working on which we discussed in the previous episode of this podcast. With that metric Mark is comparing not just grid power but mobility and looking at the financial investment required to run transportation as well as the energy input. So he's saying you know if you take a certain amount of petroleum and you turn that into gasoline and you use that to power a car and you get so many miles out of that, what would be the financial investment required to obtain that many miles versus the investment that you would need to make in say a wind farm or a solar system that would produce electricity and drive an electric vehicle to give you the same mobility. And what would be the financial investment required to do that on both sides. You know I think both examples are the right way to compare the fuels it's by the energy they deliver at the end user really. In this case maybe more accurately not just the energy but the actual utility, not by the primary fuel consumed because the energy is useless until it gets used. And in a natural gas fired power plant or an internal combustion engine you're dealing with a very inefficient device that is throwing away most of the original energy as heat as we just discussed, whereas with wind and solar you're not - you're able to use nearly all of the original energy at the wall socket or to push a vehicle down the road. So as you and I have discussed for years there's always this boundary problem you know what did you count, what did you leave out. At what point in the value chain of a fuel do you start counting its EROI. And even just looking at a single fuel, let's say natural gas, you can get a very different EROI depending on the ultimate use, so you could you have one EROI of natural gas were burned in a 40 percent efficient power plant and another EROI if that same natural gas were burned in and nearly 90 percent efficient furnace to heat a home or a combined heat and power unit. And then another EROI if the natural gas were reformed in a fuel cell and used to send a car down the road. So this is where I think it's really so important to compare things at the final use. But anyway I've kind of rambled on a little bit here but I wondered if you had any thoughts about Mark Lewis's approach here with the energy return on capital invested.

Dave Murphy: I think it's a really good idea. I mean I think in some ways it could be more useful because getting financial investment data is generally easier than getting the energy equivalent of that.

Chris Nelder: Yeah. No argument there.

Dave Murphy: Yeah. So if you can find a way to make a meaningful analysis using that data because it's easier to acquire, it would really just elevate the robustness of the analysis because you just have better data. He's going to run into the same issues that the EROI and the LCA community run with boundaries and all of that stuff and you just have to be consistent. Make sure that you're using the same, the same boundaries when you're making comparisons between fuels and state your assumptions and things like that. So I think it's really interesting. I don't know - the end user comment you made is interesting in that you know I think it is valuable that you have the same functional unit whether or not that functional unit is the end user or not is not necessarily the most important thing in my book because I think it's really important. You know as I said that biophysical economic community is kind of looking at this energy return on investment and profitability of firms and things like that. And one of the things that's really interesting about that is comparing the EROIs at different boundaries. Right. So let's look at shale gas for instance right. We have super high energy returns at the wellhead. But by the time you put that into the grid it's decreased a lot. Is there any knowledge to be gained by comparing the energetic profitability of the actual production process the transportation, like how that changes as you do the production and as you include transportation, as you include kind of the combustion of that fuel. And how does that relate to different corporations whether they're producers or whether they're involved in pipelines, in transportation or whether they're actually utilities burning the fuel right. So I think as long as you're making kind of similar comparisons it's ok as long as you have the same boundaries and things we've been talking about this whole time but I think there's value to be gained in using tighter boundaries sometimes. Kind of depends. But I think his ideas to go back to Mark's ideas is phenomenal. I can't wait to see more of that stuff being produced.

Chris Nelder: You and me too. I mean I guess the reason why I'm trying to emphasize the end-use aspect is because I think I think it gives us a way to make EROI more policy relevant, you know because if we can bring these ideas together both the end-use EROI data and the EROCI metric that Mark has been developing to help policymakers and long term investors identify the most energy and capital efficient paths to energy transition. I mean I think that's what we're really after here because at some point all of this information needs to inform policy and that's always been the sticky wicket for EROI studies hasn't it. I mean it shouldn't have been as I wrote it as I wrote in my aforementioned piece. Anyone who understood the EROI of corn ethanol could have known a decade ago that it would be a money loser. Before we poured 20 billion tax dollars into it. The writing was on the wall in the EROI data. But the policymakers haven't yet used these kinds of metrics to form policy. So can you make a case for using EROI as a useful and relevant metric for policy. I think that's what we're trying to do here.

Dave Murphy: Absolutely. I think corn based ethanol is a perfect example right. I mean if we had some sort of like EROI threshold that had to have been met by you know our energy technology we never would have invested in corn based ethanol. It was a loser from the beginning energetically. And I think it stems from this at some level for something to be profitable without subsidies and without financial machinations right. Let's just say something to just be straight up profitable it has to be energetically profitable right. You have to get some sort of energy benefit or energy profit to get the monetary profit.

Chris Nelder: Yeah at minimum.

Dave Murphy: At minimum right. So corn based ethanol as I published in 2011 if you actually look at the data and you aggregate all of it and you aggregate the error along with all the data going into it the values we came up with were indistinguishable from 1-to-1. Basically we couldn't even assert that it was one, greater than 1, or less than 1. That's how narrow the range is and that's why the industry has floundered right. They were stuck between oil prices and corn prices it was like they were... it was a loser from the beginning, and then they came out with the renewables fuels standard where they say were going to convert all this to miscanthus and all this, all these cellulosic fuels that have even lower EROIs. There's no way in heck you're going to transition any of this to cellulosic. Those goals haven't... Obviously missed targets by all by a long shot. I give that to my students as basically one of the worst energy policies we've ever kind of come up with. And you know that's not to say that corn ethanol can't work for anybody that's listening. You know at a very small scale if you're Iowa and you want to go for it go nuts on a local level. But as a renewable nationwide fuel policy its kind of insane. But that's kind of the thing. Energy return on investment is very much a blunt tool. It can show you that something is profitable. It could show you that something is not very profitable. And I think you can discern from those numbers whether it's a good idea or bad idea and the threshold, and this kind of gets into the weeds a little bit about net energy analysis. But there's this thing called the net energy cliff that Burns was the first one to put this actually in a figure published on The Oil Drum a bunch of years ago but I've since published it in my papers in academia, and it's basically shows that as energy return on investment declines, the net energy you get out. Right. That the profit energy, what you want, declines as well but it declines exponentially. So what that means is that if a fuel like let's say oil declines the energy return on investment of oil declines from 100 to 50 the nrt energy delivered to society only declines by a couple percent. Right. Same thing from 50 to 20 and same thing from 20 to 10. But as we get below 10, the net energy delivered drops off dramatically, exponentially in fact. So that when you get fuels that differ from 10 to 5 that's a huge difference in the amount of net energy delivered to society when compared to a fuel that is different from 30 to 25. So what's the policy relevance? The policy relevance is that corn ethanol at one-to-one should not get any government support. But PV at ten-to-one probably should.

Chris Nelder: Especially when you look at that chart and you see that when the EROI falls below 5, that's the cliff, you know the EROI just totally falls off the cliff and it's not worth producing at all. And that's where those cellulosic and corn ethanol fuels are. It's that under-five.

Dave Murphy: Yeah they're under five. But you look at tar sands, tar sands are right there right. And that's another fuel that we shouldn't be going after. And you know, it's really interesting when you get at this because when you look at these fuel, right all these low EROI fuels, they have all these other things, they all tend to be much more environmentally damaging. You know I'm not talking about corn ethanol but you look at look at the capital intensiveness of tar sands. Right. I mean the amount of work that has to go in to get a barrel of oil produced from syncrude, it's an insane amount of environmental damage. And as you have higher EROI fuels you tend to get it out with less impact. So there's a lot of other knock on kind of analyses that can be done and correlations can be made that follow this kind of trend rate of like declining EROI and that's really the policy relevance right for us for whomever's like ala is your fuels, if the energy return on investment is below 5 or below 8 you have to reassess and you have to look at what's holding it back. So PV was there 10 years ago and say OK we have to up the efficiency of panels and we have to make sure that they're strong and they last for 20 years and things like that. And that's really worked on. And they get them to the point where they are better and the costs of production have gone down so that they can produce them at higher profitabilities. You know with the oil industry. I don't know, it's them it's it's a technology geology fight right so they're trying to produce technologies to beat the geological depletions.

Chris Nelder: Yeah. From a policy standpoint there certainly ought to be some recognition. I mean you know when when we go to spend taxpayer dollars on pretty much anything, unless it's strictly research and development budget and we don't care what the return is there's always some calculation. You know there's always a CBO estimate that says well we think based on this information that the taxpayer is going to get a reasonable return for their investment when we spend this federal money on this thing. You know that's very standard. But we don't do that when it comes to energy, and we should. If we're looking at solar, a new solar project delivering an EROI of 10 and we're looking at new, I don't know unconventional project or a tar sands project delivering an EROI of five, or a biofuel project delivering an EROI of two. It should be pretty clear that that's not something that you want to invest federal money in or if you have a choice you should be investing it in the solar that's going to get you an EROI of 10. You know that's just such a simple thing.

Dave Murphy: I could go on for hours about. I'm at the point right now, I've just gotten here now, but it's like I'm literally at the point where I don't think the federal government should, and this may sound extreme but I don't think there's a reason right now for the federal government to spend any money on any fossil fuel ventures, subsidizing any part of the industry because the technology from renewable energy is here, it has high enough energy returns, PV and wind both have high enough energy returns, we haven't even talked about negawatts right. I mean like we can reduce energy consumption by half just by using it more efficiently at the end user. And I'm not just talking about light bulbs here but everything right. Industrial processes and that's Amory Lovins' whole thing, that doesn't get us the whole way right, efficiency improvements don't get us the whole way. But it gets us a lot of the way right. So you know I was ecstatic when Obama shut down Keystone, and I'm not naive about this, I understand that China's going to want the oil and they're going to develop it if they want to pay for it. Yeah, I get that. But I just don't want the United States doing it. I don't want with the country that I grew up in that I consider to be the leading nation right in the world. The world leader here to be investing in that. I think it makes a statement and it's an important one that you know what industrialisation occurred in the last century. We're now in this century and I think it's time to be investing in renewable energy and now is the time that we can do it because the energy returns are there. I think it can work. Of course we have a lot to do with the grid. I get that. But we had a lot to do with the highway system in the 1940s and 50s and we got that done right.

Chris Nelder: And we built a lot of pipelines to deliver oil and gas and we built a lot of wires to you know a ship around power that was being generated by coal fired power plants. And you know...

Dave Murphy: None of this is insurmountable. It's incredible. So I think there's added benefits to, I mean like what are you talking about when you make a comparison between s shale gas well, a PV facility, where is that PV facility because if it's on someone's rooftop right there's minimal environmental impact involved even if it's on the land and...

Chris Nelder: And almost no additional infrastructure required.

Dave Murphy: Right. And I mean it's crazy. That's basically where I'm at right now. You know shale gas, yeah I understand that we use gas, I understand that you know getting us out of the last recession was benefited largely by lower commodity prices that were due to extraction of fossil fuels. I understand all those things and I'm glad that we survived the recession the way we did which is arguably better than most other nations in the world. And I do think that lower oil prices have helped a lot in that. But I think going forward from here we need to kind of change our focus.

Chris Nelder: Well Dave if you were Energy Secretary of the United States and you had the ability to make a recommendation to the President or to the Congress and say here's the threshold that I don't think we should invest anything in below this threshold, and EROI threshold, what do you think that threshold would be?

Dave Murphy: Probably be 8.

Chris Nelder: 8.

Dave Murphy: That's my gut feeling yeah. Because you have to think about, you know society requires an energy return right. We only survive off of profit energy from the energy industry right. And the bigger our society gets the more complex it gets the higher that EROI must be. We have to receive so much energy. So I think that you know at a minimum right now we'd want to look at something that has an eight. But you know that doesn't mean if the technology is at one that we shouldn't maybe invest in R&D to get that technology going right because everything...

Chris Nelder: As long as there's a prospect of it going up.

Dave Murphy: Right right right right. Yeah exactly like PV. We knew that it was like efficiency in panels and manufacturing, wind too. You know we can design better when blades just need to do this over time. Fusion, you know not so much.

Chris Nelder: Well eight seems a little low to me frankly. I mean could we run a society that has sort of an endless supply of iPhone fart apps and Kardashian entertainment on an EROI of eight.

Dave Murphy: You know maybe... I don't know I mean it depends. I don't know how many apps there are. But listen I can tell you this, if we continue developing the way we are right now thinking that we're in industrializing world right at least in the developed nations like the U.S. right now. No. Because when you're burning energy like that and your goal is growth, growth, growth, by growth I mean growth in products of gross domestic product. That's our goal long term. We've just got to keep producing more and more and more stuff. Well you know you need really high energy returns for that. But if you want to change the game a little bit and say you know what listen let's focus on Smart Growth. And I'm saying that to be politically correct because I know like I don't want to get too radical with the ideas of steady state economics and things like that that I think are totally valid. But..

Chris Nelder: Dude I want to do an entire episode on that with you later on.

Dave Murphy: I'll be happy to. I was just teaching about E.F. Schumacher in my class and he is that guy it just knocks me out of my chair every time I read his book.

Chris Nelder: No doubt, No doubt.

Dave Murphy: Yeah you know I mean it depends what kind of society you want a society like China right now, they need extremely high energy returns because they're all they're doing they're focused on growth so much and growth requires energy returns and this is where the ecology comes in, right. Because energy return on investment comes from ecology where that fish that's migrating upstream to access new resources, if it doesn't get more resources from that migration than it got in then the energy expended in getting there that it doesn't survive. Right. So that's the idea with society is that we have to get high energy returns to pay for our own kind of society metabolism which is basically just supporting all the houses and people we have already.

Chris Nelder: Right. But to put it all into context what we have now is this massive society, this enormously complicated society extremely complex with all sorts of dependencies between different systems. It's very difficult and slow to change, and it's all been built and predicated on fuels that get EROIs of twenty to 100 right. And those numbers are falling rapidly across the board in the fossil fuel segment that it was built on. And we're trying to replace those with renewables that have valid and useful and sustainable but low EROIs compared to you know the hundred to one that we were getting out of oil 100 years ago.

Dave Murphy: But they're lower EROIs. But again because that energy cliff, because of that exponential curve, it doesn't matter as much as we think we need the fuels to be high enough.

Chris Nelder: As long as it's over five.

Dave Murphy: Well yeah I mean as long as its... that's why I said eight. I think five is still maybe a little low but I mean the reality is once we get away from corn based ethanol and tar sands and these really kind of scary low EROI fuels I think we'll be kind of in the clear.

Chris Nelder: I mean sometimes I wonder what kind of society could we run on fuels with an EROI of five. I mean it is possible we could run some sort of society on low EROIs. I mean I don't think an EROI of five would automatically condemn us to a zombie apocalypse.

Dave Murphy: No, no, no, no it doesn't. And that's the thing you can't be too pessimistic. But we don't know what it...

Chris Nelder: It'd be leaner and meaner that's for sure.

Dave Murphy: Yeah right. You know certainly it doesn't mean anything bad. I mean agrarian societies had EROIs of 2, 3, 5-to-1. People weren't necessarily unhappy right. Anyway.

Chris Nelder: I think that wraps it up. You know...

Dave Murphy: But I am on board for our steady-state economics one man whenever you want to talk about it. I'm happy to dish.

Chris Nelder: Great man. I definitely want to talk about that and Dave I really appreciate you taking the time to join us today its always a pleasure to chat with you.

Dave Murphy: Any time man, seriously.

Chris Nelder: Super. All right thanks a bunch.

Dave Murphy: Bye now.