Peak Silver & Peak Mining by a Falling EROI

EROI = Energy Returned on Energy Isnvested, Part 1

by Steve St. Angelo. November 5, 2009

The Peak of World Silver Production may be just around the corner due to a falling EROI (energy returned on energy invested). This will also be true for most industrial metals. I may go as far as to say, if the Global Economy does not make a full recovery shortly (which I doubt), 2008 could be the all time peak for world silver production. At least, the world production of silver will be in a plateau as unconventional oil supplies start to peak and decline.

We have two problems concerning the mining industry. First we have the numerous Black Swans ready to take down the Global Financial System in the immediate future, and secondly, the falling EROI ratio that will provide less net energy for mining into the not so distant future. One deals with the evaporation of credit to fund new and existing mining projects in a Global Financial Meltdown, and the other limits the production of future mines to those companies who have the best quality high grade ores.

I was inspired to write this article by reading “Mexican Silver” by Bob Moriarty. Mr. Moriarty stated that Mexico has so much silver, the country has barely been scratched. Even though it is true that Mexico has plenty of silver, it takes a great deal of energy to explore, develop, mine and produce this silver for market. Very few, if any analysts understand the falling EROI ratio and its impact on the future of the mining industry. To understand the EROI ratio, I would direct the reader to check my previous article: THE MOST IMPORTANT ASPECT MOST ECONOMISTS AND ANALYSTS FAIL TO RECOGNIZE. You can find the article HERE.

Basically, the EROI is the net energy remaining after exploration, development and extraction has been factored in. When we just consider the energy coming out of the ground, this is called the EROI from wellhead. We also must factor in the refining, distribution and energy cost to maintain the infrastructure system to get a more complete EROI ratio. This will be discussed in a later article. But, if we just go by the basic EROI from the wellhead, Cutler Cleveland of Boston University reported that the EROI of oil and gas extraction in the United States has declined from 100:1 in 1930, to 30:1 in 1970, down to 11:1 in 2000. [1]

Plot of three estimations of EROI for U.S. oil and gas (Source)

The reason for the falling EROI ratio is due to the increasing energy investment and technology to extract the more difficult and harder to get oil. Back in the 1930’s the great oil boom in the United States produced 100 barrels of oil for only 1 barrel of oil invested. Those were the good ‘ole days when lakes of oil were just sitting there for the taking. Today, we find oil companies like BP and Exxon building and putting into service THUNDERHORSE, the largest offshore oil rig in the world at an expense of $5 billion to tap into deep water oil to feed the insatiable energy demand of the USA.

It still amazes me to this day just how many people believe that there is a GRAND CONSPIRACY to cap wells in the United States and exploit cheaper foreign oil. It never fails, when I meet someone for the first time and the discussion of peak oil comes up, a good percentage have this knee jerk reaction that they know someone in the oil industry who told them we are capping our oil wells to use up foreign supply first. Now If I feel up to it (which normally I don’t), I ask this Einstein why on earth would U.S oil companies build billion dollar off shore oil platforms, deal with hurricane force winds and waves, salt water corrosion, sea floor pipelines and highly paid technicians if they can do the same thing at a fraction of the cost on land in the states?

Normally, the reaction I get is this glazed over stare as their brain tissue tries to come up with something to counter that argument. If I notice they are having difficulty understanding that example I give them another. I say, what farmer would pump water from a distant state to irrigate his crops, if he could pay a fraction for the water which he could access near his own property? Maybe then, some of these people finally understand just how silly the notion of capped U.S. oil wells really sounds.

Reverse Alchemy and Analyst Hype

Before I get into some interesting facts and data about EROI and the Mining Industry, I have to discuss what I call as REVERSE ALCHEMY and ANALYST HYPE. During the Middle Ages, those who performed Alchemy tried to turn lead into gold. It was never successful, but many poor slobs wasted the better part of their lives trying to make it rich. Today, we have the opposite. Thus, grown men are now slapping each other on the back because they have learned the great secret of turning gold into lead. A perfect example of this in work is the Canadian Oil Sands Operations.

The Oil Sands Operations in Alberta, Canada have found that by using huge amounts of natural gas and excellent quality fresh water from the Athabasca river, they can take sand mixed with tar molasses and produce oil for the market. Just think about that for a minute. At one time in the past, high quality light sweet crude was so easy to extract, it just came out of the ground under pressure all by itself. Today, a falling EROI has turned the oil gushers of the past into huge strip mining operations. Vast amounts of potable water and natural gas are necessary in modern day Reverse Alchemy to transform oil sands into oil for the market. Basically turning gold into lead. What in the world will we think of next to top that one? Well, what do you know, the present day alchemists have come up with another example. It’s called the wonderful world of Shale Gas.

Shale Gas wells are such LOSERS, only 28% of them return a reasonable profit.[2] The only way it can be sold to the public is by ANALYST HYPE. There is this grand illusion that because we now have a huge glut of natural gas in the United States, it is time to export the surplus and sell it for peanuts. Not only are energy analysts guilty of propagating this nonsense, many energy companies have joined the bandwagon. Prices of energy are traded in such an incredibly insane system, it behaves as if humans have a lifespan of a gnat. This is the same kind of lunacy the grand oil gurus were stating back in 1999 when oil was $10 a barrel. The oil analysts back then were saying, because there was such a glut of oil on the market, oil would drop to $5 a barrel a stay there for a decade. Silly forecasts from silly people. Today we find, nothing has changed.

The Barnett Shale Gas Field in Texas was the only field of its kind exploited to a large degree due to the higher price of natural gas in the past. It was this high price of natural gas that allowed these energy companies surplus assets to invest in the high cost of long extended horizontal drilling and hydraulic fracturing to exploit the Barnett Shale Field: 60-70% depletion rates are normal for first year drilling in these shale gas fields.

First year decline rate of Texas natural gas wells (Swindell)
(Source: Heading Out – TheOilDrum.com)

The Canadian Oil Sands Operations and the Shale Gas Plays are great examples of Reverse Alchemy by a falling EROI. These analysts and energy companies hyping the shale gas fields as the next savior to our energy needs, are in a sense, destroying future production by giving away the present for a song. They are behaving like flesh eating bacteria devouring the patient from the inside out. If oil and gas prices do not head higher, future supply will be destroyed like never seen before.

CERA estimate of full cost of production of various oil sources, at time when
Oil was about $90 a barrel, so blue line represented then high-cost of new
Production justified by $90 price, from Horizon Oil presentation.
(Source: Heading Out – TheOilDrum.com)

Deflation of energy prices were possible in the 1930’s due to the high EROI of about 100:1. Because of the much lower EROI today, if we had deflation of energy prices (and they remained low), production would be destroyed from the top down. By looking at the chart above, if oil fell and remained at $20 a barrel as some deflationary analysts forecast, we would have more than 50% world oil supply destruction. And by that, I mean the companies that have the highest cost per barrel like the Canadian Oil Sands would be one of the first to cut production. The higher the cost of production the lower the EROI. To understand how a falling EROI will affect the mining industry, we need to take a look back in history.

A Brief History of Ancient Mining

I am amazed at the lack of understanding of the declining ore grades worldwide by the analysts who are so called specialists in this field. In acquiring the research for this article, I had email correspondence with several analysts who seemed quite surprised at some of the graphs I had found. Some even asked where I had found this information and who was the source. I then began to understand most of these analysts really didn’t have a clue on how a falling EROI would affect the mining industry and its declining ore grades.

If we go back to ancient Greece, we find they mined silver and lead from the Laurium (Laurion) massive sulphide ore district southeast of Athens from the 7th to the 1st century BC. For 600 years the ancient Greeks mined 13 Mt (million tonnes) of ore with an average grade of 20% lead (Pb) and 400 g/t silver (Ag); the extracted metal was estimated to be about 1.4 Mt lead and 3,500 tonnes of silver. More recently, between the years of 1865-1977, the same district produced 30 Mt with an average ore grade of 3% lead and 140 g/t silver; the extracted metal was approximately 0.9 Mt lead and 4,200 tonnes of silver.[3]

The next great silver and lead miners were the Romans. When Rome took control of the mines in Iberia (Spain), they were able to build their economic wealth to expand their empire. According to the work of the late Professor Claire C. Patterson of Caltech:

Although man began to mine silver on a small scale in about 2500 B.C., Patterson says that it was not until Rome took control of the silver mines in Iberia that it was able to attain the economic strength necessary for the rapid expansion of the empire. Silver production, mainly in Iberia, peaked between 50 B.C. and 100 A.D., when some 30,000 tons were extracted; Roman legions were furnishing 30,000 fresh slaves a year then to maintain the ranks of miners at 150,000.[4]

The amount of silver and lead the Romans exploited from the Rio Tinto mining region in Iberia (Spain) was so large, they left an estimated 6.6 million tons of slag from their smelting operations. French and Australian scientists using ice-core analysis estimated that between 366 B.C. and 36 A.D., when Rome was at its peak, 70% of the total global lead pollution came from the Roman mining operations from the Rio Tinto. After the collapse of the Roman Empire, global lead pollution declined and did not reach the same level again until 1523, during the period of the Renaissance.[5]

Modern Mining and Falling Ore Grades

If we fast forward to the 19th and 20th century, we find an interesting trend. A trend of steep declining ore grades. From the time of the Greeks, Romans and up to the industrial revolution, most of the mining was done by human and animal labor. This pre-industrial physical labor seemed to work fine as the ore grades were extremely high and condensed in a relatively small area of veins. As the low hanging fruit of high quality ore grades were exploited, the mining industry had to reinvent new ways of making declining ore grades economical.

It was both the invention of new machines and technology as well as the tapping of high EROI coal and oil of the late 19th and 20th century did the mining industry solve its problem of declining ore grades. You might say, the discovery of the vast reserves of coal and oil in the world came at the perfect time to help transition the mining industry into the modern era.

Gavin Mudd, from the Department of Civil Engineering in Monash University, Australia has done some very detailed work on the history of the mining industry in Australia as well as global trends in gold mining. We can see from the graph below just how much the ore grades have fallen in the Australian continent.

Declining ore grades in the Australian Mining Industry

(Source: Research Report 5-Gavin Mudd)

We can see from the graph above how much the ore grades have fallen from the middle of the 19th century to present. Putting some actual numbers to the declines, the picture becomes even more apparent:

Metal 1880-1900 avg. 1950-1960 Present

Gold 22-23 g/t 5 g/t 1.94 g/t
Silver 1,175 g/t 154 g/t 98.4 g/t
Copper 7.60 % 1.35 % 0.95 %
Lead 14.42 % 10.41 % 3.50 %
Zinc 15.68 %* 10.42 % 7.77 %

(average for zinc was figured from 1900-1905 due to a lack of beginning numbers)

The figures above clearly demonstrate how ore grades have fallen in modern times. Gold and silver ore grades in Australia have fallen more than ten times their original values whereas the base metals of copper, lead and zinc have fallen 8, 4 and 2 times respectively. The important thing note is the degree of decline from the figures in the 1880-1900’s to 1950-60’s compared to the slower declines from the 1950-60’s to present.

The author of this article did not go into detail in providing declining ore grades in all the countries of the world as the information is not readily available in a condensed fashion. But, certain assumptions can be made. We know that ore grades declined first in Europe as this was the epicenter of advancing civilizations who needed gold, silver and base metals. The next great area of the world to suffer declining ore grades was the United States. This can be shown neatly in the graph below.

(Source: Dr. A.M. Diederen Presentation posted on TheOilDrum: Europe)

As a percentage of global mining, Europe peaked in the 1860’s, the United States peaked between 1930-1950, and the former Soviet Union peaked in late 1980’s. It is interesting an coincidence that the former Soviet Union peaked at the same time their country and economic system collapsed. As for Australia, it maybe in the peak plateau currently, but China and the 6 resource rich developing countries are still in their upward trend.

Declining Global Gold Ore Grades

The good ole days of finding bonanza gold deposits as well as locating elephant oil fields like Ghawar of Saudi Arabia, are gone. Today, the world is exploring for minute quantities of gold in tons of ore. Basically, we are left to mining gold dust. Sure, there are the occasional Aurelian finds, but they are becoming more rare each passing day. Below we can see how 5 different countries gold ore grades have declined over a period of time.

Declining Global Gold Ore Grades

(Source: Gold Mining and Sustainability: a critical reflection)

In looking at the chart above, you don’t need to be an engineer to understand what is happening to the global gold mining industry. It is safe to say that 4 of the 5 countries listed above are now mining gold below 5 g/t, while United States, Canada, and Australia are below 3 g/t. Even though there are only a few countries represented in this graph, it signifies what is taking place in the global mining industry itself. As the ore grades fall, the amount of rock that needs to be mined increases proportionately. The increase of waste rock in mining low quality gold ore grades can be seen in the next graph.

Waste Rock from Gold Mining

(Source: Gold Mining and Sustainability: a critical reflection)

Falling Ore Grades need Exponentially more Energy to Mine

The higher amount of waste rock comes from the method of open pit mining. This is by far the choice of most mine developers when the ore is situated close to the surface. The removal of the vast amounts of ore and waste rock are done by large earth moving machines and trucks. Most of these machines and trucks are powered by diesel. As long as diesel remains relatively cheap and abundant, this type of operation can continue economically. Unfortunately, as the world peaks in oil production and the effects of EROI are felt, this type of mining will become increasingly prohibited.

When the system of mining was limited to simple machines along with human and animal labor, the EROI was relatively positive. We know that simple hunter gathers and early farmers were able to produce food at a ratio of about 10:1. That is, it took 1 unit of energy (work) to produce 10 units of energy (food). The Romans were able to produce silver and lead at a relatively higher EROI compared to competitor nations as they had vast numbers of slaves who lived a meager existence. There is no science I have come across that measured the EROI of human and animal labor in the mining industry, but I would imagine it would be much higher than the Energy Devouring Method of Open Pit Mining…..as open pit mining is only allowable when liquid fuels come from a high EROI environment. Remember from what I presented in my first article linked above, high tech farming and modern transportation of food has an EROI of 1:16. A huge net energy loser. We can just imagine what it must be like for open pit mining.

I would like to clarify how I use EROI in the mining industry. EROI is normally used to state the ratio of producing net energy. When we speak of human labor in producing food as an example, the net food remaining thus becomes the energy available for human consumption. In mining, it is difficult to compare an EROI as precious and base metals are used in many stages of production, manufacture and distribution in our labor saving modern economic society. Thus, it is safe to state that the more simple method of human extraction of higher grades ores in underground mines would have at least a positive EROI ratio, whereas open pit mining would show a negative EROI ratio and be a net energy loser. Again, this type of modern mining system will only continue with a relatively high Global EROI Energy Ratio.

If we consider what is happening in the King of base metals, copper, the results are not much better. Copper is the most important base metal when it comes to the modern electronic world of ours. Technology would have not advanced to the degree today, without the increase production and use of copper. Furthermore, a good percentage of gold and silver come as a by-product of copper mining. As the world ore grades of copper have fallen, the increase of waste rock and the energy to mine it have gone up exponentially.

(Source: Dr. A.M. Diederen Presentation posted on TheOilDrum: Europe)

The slide above from Dr. A. M. Diederen’s presentation “Metal minerals scarcity and Elements of Hope” given at the Oil Drum/ASPO Conference in Alcatraz, Italy in June, 2009 shows that even though copper ore grades have leveled off in the 1990’s, the total Ore compared to the Metal mined, has increased substantially. It takes the extraction of 250 tons of solid waste to produce one ton of copper.[6] As it takes more energy to produce the precious and base metals in the future due to declining ore grades, it is important to understand the relationship of energy and mining reserves.

In Part 2, I will explain the peaking of world oil discoveries as it compares to the same trend in major and world class mining deposits. Furthermore, a falling net energy from a declining world EROI will make a good percentage of the USGS statistics of Resources and the Resource Base of many commodities uneconomical. There will be additional information on actual estimates of falling USA and Global EROI as well as evidence supporting the theory that PEAK SILVER will be the Canary in the Coal Mine as it will signify the peak of world industrial mining.

The study of EROI as it pertains to energy is only in its infancy. Unfortunately so much more data needs to be compiled to get a better understanding of what we are facing in the future, answers may be too little and too late for it to matter. This is the real irony. I find that too many economists and analysts are too specialized and few have a clue how significant a declining net energy base will be on the Global economy.

Reference:

[1] Net energy from extraction of oil and gas in the United States, by Cutler J. Cleveland, Energy, Volume 30, Issue 5, April 2005, Pages 769-782

[2] Shale Gas Estimates Perhaps Optimistic: An Interesting and Worrying Talk at ASPO, Heading Out- TheOilDrum.com, Oct 14, 2009

[3] Metallogenic Mineral Provinces and World Class Ore Deposits in Europe, by W. De Vos1, M. J. Batista2, A. Demetriades3, M. Duris4, J. Lexa,5 J. Lis6, K. Marsina5, and P.J. O'Connor7 , Foregs GeoChemical Atlas of Europe-Article, Oct 3, 2006

[4] Science: The Coin of the Realm, Time.com magazine article, Oct 4, 1971

[5] Ice Caps Shows Ancient Mines Polluted the Globe, by Malcolm W. Brown, The New York Times Science, Dec 9, 1997

Gold Mining and Sustainability: a critical reflection, Lead author- Gavin Mudd, The Encyclopedia of Earth, Sept. 12, 2008

Research Report 5 : The Sustainability of Mining in Australia - Key Production Trends and Their Environmental Implications for the Future, by Gavin Mudd, April 2009

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