PC 6 Y ‘/~~

~:u~i’
LAMS OF CONSERVAT
10N OF CAPITAL N THE PETROLEUMINDUSTRY
/’

Capital is Energy = Capital is Money = Capitalof the !lorld-Remains

Con!tant= Capitai

ce Trade Cycle = Long Term BusinessCyclesand GNP =

Nor Destroyed= Supply-Oemand-Pri

of Capital in the PetroleumIndustry

E. Ospina-Racines
hlember: AIME AAPG ACS SCI

EconomicdynamiCS, ecodynamicsfor short, is a new term to designatethe SCIence of economicsfounded

I

on the princiPIe of conservationof capitalby observingthe laws of physicson the conservationof energy.

Capital is money in tts variousforms.Capitalis economicenergy and as such it can be neither creatednor

destroyedbut transformedfrom one form to anotheror stored in an economicsystem.Capitalis the fundamental

factorof productionof all economicgoods and servlces worldwide. Capitalflows in al1 economicsystemsof

a country,industry,firm or of an individualeconomyand is harnessedby the multiplevariablefactorsof

production,accordingto the trade and exchangecyclesdevelopedby the law of supply-demand-price

and the 1aws

on the conservationof capital.These in turn shape the price curve which descrlbes the well-knownlong term

businesscycleswith their rythmicperiodsof booms and depressionswhich developworldwideduring long term

time periods.Accordingto the 1aws of physicsal1 technicalsystemsof a country,industry,firm or individual

must mak~ use of energy in a reversiblecycle for utmost conservationof energy.The conservationof energy

resultsinexorablyin the conservationof capital. The two laws of conservationof capitalwi11 be Interpreted

and analyzedfor the petroleumindustry.

The 1aws of conservationof capitalin ecodynami

CS are foundedon two wel1 known principlesin

physics:I) in flow phenomenaof any type, fluids,heat, mass, energy in al1 its forms, some WantitY is

conserved,i.e. it can be neithercreatednor destroyed,it can be transformedfrom one form to another,

and it can be stored in a system. 2) In any industrialsystem which convertsenergy into work the entropy

of the system increasesn a functionof the work performed;but accordingto Planck,“ in the limit, i.e. for

reversibleprocesses,the entropyof the systemremainsunchanged.“ ~.

,le5ettiopr~n~~p!~~ ~pp! y ~0 the petroleum

industry.inthe productionof oil only the first has been appliedin the use of the materialbalance

in producingan oi1 and gas reservoir,

whi1e the second,which conservesenergy,hence conservescapital,has

been neglectedaltogetherwith the consequentresultsof minimumoi1 and gas reservesand high productioncosts.

By producingoi1 and observingthe 2nd 1aw, reservoirenergy is conserved,oi? and gas reservesincrease

severalfold and oi1 productioncosts diminishas an inversefunctionof the offtake rate which can be established

at wil1 as a functionof the energy injection. The future techniqueof producingoi1 must observethe statement

of Ill
anck in order to conserveenergyof the reservoir,hence capital,by flowingthe oi1 from the reservoirto

the surfaceby a reversibleenergy cycle which resultsin maintainingthe entrcpyof the reservoirsystem unchanged

This can be accomp]ished by completingoi1 producingwel1s accordingto U.S. Patent3,291,069wel1 campletion method.

S1iepcevich deft.nes
energy: “ The capacityfor doing work. In realityit is a developmentor conceptof

of the human mind; in,theIbroad sen6e it is that which accompaniesor causes a change in state or condition.”This

definitionapplies 1ikewiseto’capitalwhich is also a conceptof the human mind. Capitalis the fundamental

factorof production,which flows in al1 economicsystemsin a cycle and 1ike energy it is what accompanl
es or

brings about changesof state or conditionin the multiplevariablefactorsof productionof economicgoods and
,___
 --
2
Energy has variedforms, sourcesas wel1 as uses. The same can be said of capitalwhich is economic

energy.Energy is identifiedas heat energy,which is the most preponderantform obtainedfrom fuels, parti-

cular y the hydrocarbonfuels;kinetic energy’(motion);potentialenergy (positi

on, pressure);electromagnetic,

etc. Al1 types of energymay be equatedinasmuchas they are dimensional

Iy the same and equal to work. The

conceptof work is the resultof harnessingenergy.The populationof lfvingorganisins,man, beasts,fishes,

germs
insects,
~ is a principalf~ctorof production1inked to the harnessingof economicenergy,which is capitalor

money in its various forms, which resultsin performingwork.

The classifcal economistsdown to our day have concludedthat there are three fundamentalfactorsof

productionof economicgoods and services,namely:1and, labor, capital.Volumeshave been writtenon the nature

of capitalcf which the most notableone is the one of Marx. Upon reviewingthe history of economicthoughtwe

find these definitionson the natureof capital:it is a fund; a stock of wealth existingat an instantof time;

capitalis wealth which yields revenue;capitalis tools of production;capitalis food; capitalis al} material

goods; it 1s al1 immaterialgoods which produceprofit,includinglabor;capitalis a means of supportinglaborers

by a wage fund; and Marx in his Das Capitaldefinesit: a means of humiliatingand exploitinglabor and denies

that capitalis productive!These definitionson the n~ttire

of capitalare more confusingthan enlightening

becausecapitalis identifiedwith the effectsof its use ratherthan as the principalcause which accompaniesor

bringsabout these economiceffects. Fundamental

ly capitalis economicenergy and as such it flows in the numerous

factorsof productionidentifiedwith 1and, labor and others and is the cause which accompaniesor brings about

changesof state or conditionsin al1 the factorsof production.Capitalwhich is money in al1 its varied forms

is economicenergy whi& ,...-..J,,.-

Ulllyto tbe !a~ ~,
flcm in a eyclc d~~u[ { ~upw,,-w,,,r=i”
ci,nnlu rt~manr/-nri ~,-------
CQ and d~riq ~ given time

period,day, month or year its quantityremainsconstant.

Assumingthat the hvoothesis:

...
r...- Capitaiis economicenergy- is valid, then the two laws on the use of

energy and its transformationinto one form or anotherand its conservation,deducedby scientistssince Carnot

1824 are applicableto the flow of capitalcyclicallyand its performanceof work in a given economicsystem

of a country,industry,firm or individual.The two laws on the flow of energy have been epitomizedby the noted

physicistClausiusand their ecodynami

cs equiva!ence may be stated thus:

” which in ecodynamics:“ The capitalof the world

Ist Law: n The energyof the world remainsconstant.

remainsconstant,it can be neithercreatednor destroyed,it can be transformedfrom one form to another, it can

be stored in a system,but it is always conserved.” If capitalcould be createdthen energy CCU1d also be

created.Such inventionhas not been announcedyet and unlikelyto be anytimein the future. Devaluationof

currenciesis the politician’smethod of dilutingthe value of money and convey the impressionof creating~apital !

This has been practicedin human historyfrom time immemorial,

2nd Law: “ The entropyof the world is developingto a maximum !“ This conceptof Clausiusdescribes

the greaterdiffusionof energy in its flow from a higherto a 1ower temperature,avai1able energy which can

performwork becomesunavai1able when there is no longera differenceof temperdure and reachesa dead state.

In ecodynami
cs this conceptis a functionof price.Only when there is a differentialprice when goods are traded

or exchanged will capitalflow accordingto the law cf supply-dermd-price.The greaterentropywhich is developing

in the world also connotesgreater prob;bi1ity, hence it applies to capital$hich is money in al1 of its various

forms, the risk of investmentis being spread over a wider economicfront. In ecodynamicsthe statement of

Clausiusis paraphrased:IIThe capitalof the world being investedtc produceeconomicgoods and SWviCW
 -
“ Accordingto the 2nd Law energy is identifiedas “avai1able” which
is increasingcontinuouslyworldwide.

means it can be harnessedto performuseful work and “unavailable“ which has reacheda dead state. Entropy

of a system is the availab]e energywhich has bmn expendedand convertedinto unavai1able energy,whether it

has performeduseful work or not. This same classificationappliesto capitalwhich is economicenergy.Avail

capital accordingto the 2nd Law is being diffused among al1 the suppliersof the factorsof production,it

probabi
1ity by dispersionis increasingto a maximum.Avai1able capital is money in tts variousforms: cash,

~av~~g~, ~p~~i~j ..-----

~m~~tization funds$ dividends! profits,interests,wages,salaries,taxes, devaluationof

currencies.It is money incomeand money outgo whose flow in any economicsystem createddemand for goods

and services. >.

Unavai1able capitalis identifiedwith al1 the endowmentsof nature,naturalresourcesand sourceso

energy whereinmoney has been investedin a given economicsystem in the correspondng factorsof production

Unavailab]e capitalcreatesSUpply of consumerand/or producergoods.Unavailablecapitalis identifiedwith

the money investedin the factorsof production:I) populationof 1iving organiSIIIS,

man, beasts~fishes~ inse

their birth, growth,health and welfare.2) energy in al1 its forms, actualand potential:sun, geothermal,hy
,,. ,,, l.. =..,....
nuclear,fuels:oi1, gas , coal, wood, vegetation ana me heat enginesto Hdl Iluaa +ke. o ana I-IVJ “w-.
L1lGOC~,,wry cntlrroc
..--= -,‘1) na
.._

resources,plants,minerals,materials.4) technologyand tools 5) inventoriesaf consumerand/ar producergo

6) maintenanceand conservationof energy,naturalresources,goods and services.

Thus we see that the three factorsof productionof the classicaleconomists land, labor and capit

are reducedto avaiIable capitalwhich is maney in its variousforms cited and unavailab)e capital,which is

money investedin the variousfactorsaf productionof a given economicsystem. Capitalwhich is economicen

or money in its variousforms and investmentis the fundamentalfactorof productionof goods and services.T

flow of capitalfrom ava\lab{e to unavailab~e by investmentand vice versa by sel1ing the good or serviceat

given price is the supply-demand-price

trade and exchangeCYC1e whose resultantprice 1evel develOPS dai1y,mo

yearly and describesthe long term businesscycles.These well-knownbusinessCYC1es which develOP rythmical
l

an
with booms and depressionshave their origin therefore in the operationof the 1aw of supply-demand-price

in the laws of conservationof capital.

Ist Law of Conservati

an of Capital

The st Law of Conservationof Capitalwhich states the principlethat the capitalof any given eco

systemremains constant,that it can be neithercreatednor destroyed,that it can be transformedfrom one fo

another,, that it can be stored in currencyor other form of money and that it is always conservedin its fl

can be describedby the followingsimple equation:

d ( AvaiIable Capital-Money in all its forms) + d (UnavailableCapital-Moneyinvestedin the )

factorsof praducti
on of a given economic
system.)
where ‘id “ is eithera positiveor negativeincrement,daily, monthlyor yearly.

values for the ecanomyof a country,industry,firm or

This equationcan be reduced to quantit.itive

an individual. For the U.S. economythe sum total of availableand unavai1able capitalfor a given year, time

period,is referredto as the Gross NationalProductand is reportedby the U.S. Departmentof Commerce.For

the value of the U.S. output of goods and servicesamountedto $747.6 bi1lion and for 1967 the value had

registeredan increment1’d 1!ot the above equationand amountedto $789.7 bi1lian.The incrementamountedt
IIJ? I h:llinn np 6 ii? q inrrpoco ovor +hp 1%6 GI!P. !!hilp this incrementis Dositivethe U.S. economyis in
., -4-

the expansionphase or boom periodand when it 1s negativeit is in the recessionphase;while no increment;

. ..i+iuo
Y“-, .P
.,.” “, nona+iue
,,”Y-... 2 i! ~~~n~ ~h~t the ~conomvis
.------....... in the contractionperiod: after which fol10WS a new expansion

or recessionphase of the long term businesscycle.

The petroleumindustryis now in its third long term businesscycle;the first developed1875-1915;

the second 1915-1

945; the third has been in the expansionphase or boom periodsince 1945 to date. Following

ware the boom periodalWQYS develops.Predictionsare that the value of the GNP for 1968 wi11 be $861 and 1969
q
v Q7h hil linn
--- “.. ..-!0 which st.ra inriica+inn~
“!. .”.. u.” . .!” . ””......” Hta+the
. .. . . ...- 11.S-
---- fymnornv
-- ..-.., j ghich means also the oi1 economy: is sti11 in the

expansionphase of the third long term business cycle.This analysisof the Ist Law revealsthat this Is a tool

to orient the economyof a nation,industry,firm or an individualby regulsting the flow of availablecapital

which is money in al1 of its variousforms. Governmentofficialsin regulatingthe economy 1imlt themselvesto

controlling credit,devaluationand overlookthe fact that availablecapitalcan be transformedfrom one form to

anotherand that it is possibleto achieve economiceffectsby regulatingwages, incomes,taxes, rather than

creditand devaluation.Since availablecapitalcreatesdemand for goods and servicesthen to create’greater

demand,taxes should be diminishedand wages shouldbe increasedS1ightly and centinuously to maintainthe boom
overnments
7 is to grant more credit and increasethe public
phase.But currentpracticethe world over of’;punpprjnin~:’by

debt, which is furtherdevaluation.The latter practiceoffsets any economicbenefitsarisingfrom loweringtaxes

becausedevaluationis the universaitax which fal1s on th~ country~sentireeconomy.Al1 taxes withdrawavailable

capitalfrom the privateeconomyin favor of the fiSC, thus diminishingthe flow of capitalwhich is economicenergy.

The beneficialor detrimentaleffectsof regulsting the flow of availablecapitalare witnessedin the price curve

of the long term businesscycles and is the cause of the bock and depressionp~riodswhich affectal1 economies.

2nd Law of Conservationof Capital

The 2nd Law of Conservationof Capitalis foundedon the statementof Clausius,the noted physicist

who conceivedthe term “entropy” in 1850 which he used to describethe flow of heat energy from a higher tem-

peratureto a 1ower one which is taking place continuousy the world over. His statementon this phenomenais:

~lTheentropy n
of the world is developingto a maximum. ~hiCh can be interpretedfor the eCOnOlny
cf a country)

industry,firm or of an individual.The significanceof this statementhas been anaiyzed in generaland is

essential
1y the greaterdiffusionof energy,hence of capital,making it becomeunavailable. The statementof

Clausiusappliesin the petroleumindustry.Currentoi1 productionpracticethe world over makes use of the original

inherentreservoirenergy to flow the oi1 from the reservoirto the surface,which is referredto as primaryoi1

productionby the depletiondrive. In some oilfields energy is injectedinto the reservoirby variousmethods,with

water, gas, steam injectionand by in situ combustionwhich is referredto as secondaryoi1 recovery.This oi1

productionpracticeis one which Clausiuswould describe:“ In the oi1 producingindustrythe entropyof the oi1 and

gas reservoirsis developingto a maximum.” which means tha~ oii productionworidw~de is being carriedout by

making use of the originalreservoirenergy to flow the oi1 from the reservoirto the surface.The reservoir’s

availableenergy is being expendedcontinuousy and the entrcpyof the reservoiris developingto a maximum.

IVhenthis maximum is reachedoi1 flow ceasesand only up to 20 % of the oi1 in place discovered,
has been produced

thus 1caving80 ~ of the oi1 discoverodsti11 in place and devoid of energy to move it in the pay formationand
. ..-. -L.-.J L... -...! L-., -A A- .o.-:,.4-; . ,,:1
up the productiontubing. Another virgin oii and gas rese~voir imisttIes~arwtw ibr arm Iuullu Lu llla 111Lcllll UI 1

production supplyingcurrentde~and.The currentworldwideei1 expiration effort is essenti

aily one in search

of reservoirenergy ratherthan the search for oil. Accordingto a reportof the 1.O.C.C.in the U.S. and since 1859
 -5-

400 billion barrelsof oil have been discoveredto /966, close to 100 years of oi1 industrydevelopments.Of these

80 bi11ion were produced and today!s oi1 produciblereservesamount to 31 bi1lion barrels.There remain therefore

some 320 bi!l?onbarrelsof oil in place in the U.S. o-[which 289 billionare wantingin energy to flow to the

surface. The second law as stated by Hanck indicateshow oi1 reservoirsshould be producedto obtainmaximumoi1 fl

Accordingto Planck’sgeneralstatementof the 2nd Law..... “ .. in the limit, i.e. for reversibleenergy

” This means that in the flow of oi1 from a reservoirto the

cycles,the entropyof the systemremainsunchanged.

surfaceand using the originalinherentenergyof the reservoirthe entropyof the reservoirsystemdevelopsto a

r systemramains unchange
maximumbut if such flow developsby a reversibleenergy cycle the entropyof the reservoi

These statementscan be expressedby the simpleequation: dS > 0 which means the entropyof the reservoiris

developingto a maximumwhrm using the stored energyof the reservoirto producethe oil; while d S = O means

the entropyof the reservoirsystem remainsunchangedwhen the flow of oi1 ts carriedout by a reversibleenergy

cycle. In this case reservoirenergy is being conservedhence capitalis being conserved. The conclusionis that

under currentoil productionpractice of using reservoir energyto flow oil from a reservoirto the surface

only up to 20 % of the oi1 in pIace can be produced.By flowingthe oi1 in a reversibleenergycycle up to and more

than 80 j of the oil in place can be producedand the offtake rate can be establishedas a functionof the energy

injection.Oi1 and as reserveswi11 increaseseveralfold because reservoirenergy is conservedwhich is the only

pro1“
uclble
way of increasin~oi1 and gas reserves.Capitalinvestmentper barrelof oi1 produceddiminishes as a functionof

reservoi
r energy conservation. With the aim of establishinga reversibleenergy cycle in the flow of oil,wel1

completionmethod describedin U.S. Patent 3,291,069must be installed in each oil producingwell, whetherit is

ptimaryor secondaryoil production.This well completiondesign permitsthe injectionof energy into an oil and
It
gas producingreservoir,maintainreservoirenergy intact,which means dS =0/ conservesreservoirenergy therefore
..- :“ ,Sfi+m,,
and consequentlyconservescapitalinvestmentin the oil producingbranchof the pe+roleulli
ll!du=.1
Y.

Accordingto Chase-Manhattanclose to half of the total capitalinvestmentof the petroleumindustry

is in the oil producingbranch and amountedto $ 4 billionin 1967.The oil industryhad to borrow$ 9.3 billion

to supplementits capitalrequirementsduring the year. If the 2nd law of conservationof energy,which means

conservationof capital,
had been observedin the productionof oil the petroleumindustryearningswould have been

sufficientto financeits operationsand it would not have had to borrowthe $ 9.3 billion.This is the significan

of completingoil producingwells accordingto 3,291,069and flowingoil by a reversibleenergy cycle- it conserves

capita] becauseof the greaterefficiencyin the flow of oil- capitalinvestmentin oil producingoperationswill

develop to a minimumby havingthe entropyof the reservoirremainunchanged,dS =0 .

In this same study Chase-Manhattanconcludes:“ To providethe energythe U.S. needs in the immediatefuture,the e

industriesmust generatefrom their operationstremendousamountsof capital. The United States can have greater

petroleumselfsufficiency- but not withoutpaying for it- the petroleumindustrycan employ additionalmethodsof
I.,,+
recoveringmore petroleumfrom known reserties-
UUL
+L~,J
L1l GJ
im,j~],j~
,8,. ”s. ”
additinpal
u-- . . . . .-
~O~ts and ]arqeramountsof capita].”

There is developinga greaterdemand for availablecapital-money in all its forms- as a direct functionof the ene

demand. In the petroleumindustrythis greaterdemand forcapitai can be reducedto aminiimumby producingoil ~!th

utmost conservationof originalreservoirenergy.This can be accomplishedonly by completingoii producingwells

accordingto 3,291,069which becomesan inventionfor the conservationof capital.