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

A report on the world’s oil depletion problem published several years ago by an obscure association of anonymous consulting engineers and professional project managers is suddenly coming under fierce criticism. 
In December 2013, an ‘association of consulting engineers and professional project managers’ calling themselves ‘The Hill’s Group‘ published a report titled ‘Depletion: A determination for the world’s petroleum reserve’. Depletion, as is well known, is the inevitable consequence of non-renewable resource extraction, and determining how this depletion will affect petroleum production has been a key focus of energy analysts and researchers for a long time.Arriving at an estimate for the remaining extractable petroleum reserve is usually attempted by adding together the quantity of petroleum believed to be present in each field, a method which is error-prone and imprecise. The Hill’s Group’s study proposed an alternative model of oil extraction and depletion, rooted in thermodynamics – i.e. the branch of physical science that deals with the relations between all forms of energy. This model, called ‘ETP’ (Total Production Energy), is allegedly derived from the fundamental physical properties of petroleum, the first and second laws of thermodynamics, and the production history of petroleum.The methodology used by The Hill’s Group is based on ‘exergy analysis’. Exergy in thermodynamics means ‘the maximum amount of work that can be extracted from a system’. The system being considered, in this case, is a unit of petroleum. The Hill’s Group’s study calculates the maximum amount of work that can be extracted from a unit of petroleum, using the physical properties of the crude oil in question, equations derived from studies of the First and Second Laws of thermodynamics, and the cumulative production history of petroleum. It then uses these these values to construct a mathematical model that it claims can predict the status of the world’s petroleum reserve with a much smaller margin of error than can be provided by the quantity measurement approach.

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

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

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

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

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

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

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

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

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

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