The Cost of Corrosion

Corrosion engineers are not always popular in the oil and gas industry as they are usually requesting money for additional maintenance, or to take something offline for inspection or have something else shut down if it has really deteriorated. But ageing infrastructure (as well as an ageing workforce) is one important aspect of the peak oil problem.

There have been several attempts to put numbers to this problem, most notably by NACE (formerly the National Association of Corrosion Engineers). Their major study on 'The Cost of Corrosion' was published in 2002, but based primarily on 1998 data.

1998 Cost of Corrosion: $276 billion per year in USA across all industries

  • $48 billion for utilities
  • $23 billion for infrastructure
  • $30 billion for transportation

The following elements were included in these costs:

  • Cost of additional or more expensive material used to prevent corrosion damage.
  • Cost of labor attributed to corrosion management activities.
  • Cost of the equipment required because of corrosion-related activities.
  • Loss of revenue due to disruption in supply of product.
  • Cost of loss of reliability.
  • Cost of lost capital due to corrosion deterioration.

Gas & Liquid Transmission Pipelines

From the study on the NACE website:

There are over 528,000 km (328,000 mi) of natural gas transmission and gathering pipelines, 119,000 km (74,000 mi) of crude oil transmission and gathering pipelines, and 132,000 km (82,000 mi) of hazardous liquid transmission pipelines. For all natural gas pipeline companies, the total investment in 1998 was $63.1 billion, from which total revenue of $13.6 billion was generated. For liquid pipeline companies, the investment was $30.2 billion, from which revenue of $6.9 billion was generated. At an estimated replacement cost of $643,800 per km ($1,117,000 per mi), the asset replacement value of the transmission pipeline system in the United States is $541 billion; therefore a significant investment is at risk with corrosion being the primary factor in controlling the life of the asset. The average annual corrosion-related cost is estimated at $7.0 billion, which can be divided into the cost of capital (38 percent), operation and maintenance (52 percent), and failures (10 percent).

Significant maintenance costs for pipeline operation is associated with corrosion control and integrity management. The driving force for maintenance expenditures is to preserve the asset of the pipeline and to ensure safe operation without failures that may jeopardize public safety, result in product loss, or cause property and environmental damage. The majority of general maintenance is associated with monitoring and repairing problems, whereas integrity management focuses on condition assessment, corrosion mitigation, life assessment, and risk modeling. With a range of corrosion operation and maintenance cost of $3,100 to $6,200 per km ($5,000 to $10,000 per mi), the total corrosion operation and maintenance cost ranges from $2.42 billion to $4.84 billion.

Perhaps the most useful summary of the NACE study is that the cost of corrosion represented around 3% of US GDP at the time. This allows us to very roughly estimate the current cost of corrosion, ten years on.

2008 Cost of Corrosion

3% of $14.2 trillion US GDP in 2008 = $430 billion, the current cost of corrosion in the U.S, compared to $276 billion in 1998.

3% of World GDP of ~$55-60 trillion tells us that the global annual cost of corrosion is now ~1.5-2 trillion US dollars.

It looks like others are making the same extrapolation, like Rolf Gubner at a recent Materials Australia presentation:

At AU$2.8 trillion, the annual cost of corrosion worldwide is over 3% of the world's GDP. Yet, governments and industries pay little attention to corrosion except in high-risk areas like aircraft and pipelines. Now is the time for corrosion professionals to join together to educate industry, governments, and the public. Now is the time to work together to harmonize standards and practices around the world and to communicate and share corrosion mitigation technologies. We are at a unique point, when the tools and resources are all in place to match our needs and help us meet our goals.

Now is the time to make government agencies, industry, and the public aware of the high cost of corrosion – to our environment, our resources, and humankind. Corrosion has a profound effect on the quality of life of our children and grandchildren and the inhabitability of our planet. Now is the time to make a major impact to protect the environment, preserve resources, and protect our fellow human beings.

Matt Simmons has regularly talked about the ageing workforce and ageing infrastructure in his peak oil presentations. In recent presentations, he has started putting a figure on it as well:

The Oil And Gas System Is Sick

  • Total cost might exceed $100 trillion.
  • Manpower needs probably require millions of engineers and far more construction workers.
  • Could the world run out of iron ore and steel in getting the task done?

Renewals, upgrades and other major maintenance activities over a period of time are the norm for many major facilities, such as refineries, rather than wholesale replacement. Elsewhere, offshore oil and gas platforms in many areas will be decommisioned as they reach the end of their economic life, with several such plans under way for exhausted fields in the North Sea. But other infrastructure, including buried gas and water mains in congested city areas, can be much harder to maintain or renew. While they may last 50 or even 100 years, they can be a serious headache when they need to be replaced.

At $2 trillion per year (the earlier rough estimate for the current cost of corrosion) it would take fifty years to rebuild 100 trillion dollars of infrastructure (across all industries). Since much of our infrastructure is 20, 50 or even 100 years old, renewing it over a period of half a century seems reasonable.

On the other hand, it could be reasonably argued that the condition of our infrastructure is getting worse on average and that the rate of spending needs to increase. But there is a limit to how much a $60 trillion world economy can spend on renewing infrastructure, especially as the economy itself declines. The alternative to increasing spending is to accept that the level of service will decline and that the number of failures may increase.

Whatever the actual cost is, engineers everywhere have plenty of work ahead; managing ageing infrastructure and delivering new projects, while meeting sustainability challenges and protecting scarce resources. So I'm not too worried about my job just yet.

What do you think?

Great article. Good to see some more info out there about this. One of the least talked pieces in the peak oil pie. The amount of infrastructure out there that is going to have to be replaced in the next 20 years is huge. (That is if this monster that we are travelling can still be maintained for that long)

Either way it is simply another nail in the coffin for this out of control society.

But there is a limit to how much a $60 trillion world economy can spend on renewing infrastructure, especially as the economy itself declines.

Very well said and comes to the heart of the problem.

Great article.
Thanks.

I have seen Matt simmons on several occasions discuss the problem of corrosion, something he thinks is primarily missed. I think we really need to quantify this in real numbers where ever possible. You can see Matt's latest at World Energy, also Tom Fry of Noia gets into some of this in his latest on the offshore industry. http://www.worldenergysource.com/wes/stores/1/Where-Do-We-Go-from-Here-T...

Aging workforce, aging infrastructure, and outdated laws, can we ever get a handle on our energy future?

Good work Phil - I think you are right there is no shortage of jobs for engineers, keeping the existing infrastructure functioning while delivering new (clean energy, hopefully) projects to replace our current energy systems.

A couple of years ago I read that Titanium refining had a big breakthrough and so Titanium was about to become as "cheap" as stainless steel. Has anyone got an update?

Let me offer a view of the common economic analysis of maintenance investments. It actually serves to describe analysis for essentially all oil patch investments such as drilling, refinery modifications (such as to handle heavy/sour crude), pipeline expansions, etc. In particular, this has been, and will continue to be, the driving metric of the decision making process for public companies. This is not just a mundane discussion of investment economics: it is, IMHO, one of our biggest impediments to preparation for PO.

It is “net present value” economics. For those not familiar it’s the method which allows for the value of future cash flows to be adjusted for the time factor. It’s easy to visualize: just think of it as a reverse interest rate. The discount factor (interest rate) is typically 10% to 15%. A simple example: you invest $1 million and recover $150,000 per year from the investment (15% per year) FOR EVER. The net present value of that investment (with a 15% discount rate) is ZERO. Yes…you add absolutely nothing to your bottom line. The cumulative net present value is zero and thus you have lost the company $1 million of asset value even though you just generated $15 million of cash flow for the next century. Wall Street’s primary valuation of companies (as well as most capital sources) is based upon increased asset value over time. Cash flow isn’t completely ignored but that’s not where growth is typically measured. Some may be aware of what poor condition the North Slope Oil Pipeline has fallen into under the management of BP. Metal erosion due to poor maintenance has thinned the steel to dangerous levels along many sections. Of course, I haven’t been privy to internal discussions at BP but I have listened to the same conversations with other operators: “we can’t afford to spend today’s capital on projects with little or no NPV”. I suspect BP decided long ago that there was a limited future for the p/l as they expected little new development of the North Slope reserves. Thus why maintain a system which has little to no NPV beyond the immediate future. Today, one of the arguments against expanding NS production is the question of the future utility of the p/l without additional billions of $’s invested in it. Not an invalid argument by any means IMO.

How does infrastructure maintenance fit into such analysis? Spend $X million this year to maintain (or even increase cash flow) in the next 5 years = a likely attractive increase in NPV. Spend the same $X to enhance future cash flows 10 to 15 years down the road and you’ll probably calculate a negative NPV…yes…on paper you’ve lost money. This valuation method also explains why we’ve seen such a drastic decrease in the unconventional NG plays. With most of the revenue coming in the first 5 years they have great NPV and thus attractive rates of return…if NG prices are high initially. When prices fall (as they just have) the NPV goes to zero or less. Even though many of these wells will produce 15 to 20 years the NPV of those reserves add nothing to NPV and are thus completely ignored. Many UNG projects are still profitable(5% to 10% rate of return) at current prices but not when discounted at 15%.

We’re all aware of the geopolitical and recessionary factors adding to the volatility of PO. Now add to the mix the free market approach to infrastructure maintenance as well as all other oil patch investments. As a result, it appears we are destined to even greater volatility making any efforts to adjust to PO in advance nearly impossible. Even today we’re seeing earlier efforts to expand the alternatives being hit had by NPV economic analysis. Perhaps gov’t intervention could be an approach but I would have little hope that any would work. That isn’t so much a condemnation of the government’s inability as it is recognition of the complexity of the system. Perhaps there is only one gov’t that has overcome the drag of NPV economics: China. They have been investing for more than a decade in oil reserves around the globe which might actually look rather poor from a NPV valuation. But they are looking at securing oil production 15 to 25 years down the road. Being a communist gov’t they are not encumbered by NPV. They have no board of directors demanding a y-o-y increase in asset value. IMO, they are simply looking at the greatest single source of societal strength in the future decades: access to energy. Today they have the financial strength to secure those assets. And the weapons to prevent those assets from being usurped in the future. Short of internal disruption I have little doubt they will win this game.

It seems to me that long-term, these NPV calculations will more and more put an end to investment.

The problem is that NPV calculations normally assume a fairly long life for investments (30 or 40 years). Admittedly, the last part of this life is not worth much in NPV calculations, but the long term value of at least some investments becomes even worse, and our ability to keep networked systems going unravels. If this happens, I would argue one needs a much shorter amortization period.

Suppose one has a farm of wind turbines, that one expects to operate for 30 years. If those turbines need to be maintained every five years, and after ten or fifteen years, you can no longer obtain the parts made overseas (or your roads are no longer adequately maintained so that the big equipment can make the trip), the wind turbines may become inoperable after only 10 or 15 years. Thus, the proper amortization period is the length of time you really expect to be able to use the investment--much less than 30 years.

With oil, the problem may not be quite as bad, if there is little maintenance required on the new infrastructure. It could still be a problem, though, to the extent the new infrastructure is part of a networked system, and some other part of the system (electricity ?) fails early on.

ROCKMAN -

I have some familiarity with NPV analyses and am inclined to think that the fundamental weakness of this approach lies in the discount rate and how it is set. In most cases it is some arbitrary figure arrived at as an expression of what level of profitability is or is not acceptable to a company's management. You can make the NPV be almost anything you want merely by selecting a given discount rate.

Theoretically, the discount rate is determined by considering whether an equivalent return could be obtained by doing something else with the money. (Perhaps such as investing in credit default swaps and the like?) But therein lies the rub. In times like these how realistically is it to expect a 15% return on capital over a long time span?

This impinges on the question of whether there is something fundamentally flawed in our concept of the time value of money, but this is a subject that has been already covered by people such as Nate Hagens who are far more knowledgeable about the matter than I.

Since the interest rate on borrowed money is still very low, a discound rate of 10-15% would be ridiculous. Four percent is more reasonable. And when your do these analyses, you should be able to argue that the future value of the energy you are bringing in will be extremely high. (You can cite a few sources from this site, including Simmons.) That will help your bottom line.

sf -- OTOneH, you're right. OTOtherH, we can argue all we want but the companies will still use 10% or 15% DR. And as far as future price expectations don't expect much relief there. Last year when oil was bouncing around $130/bbl+ most companies were still using $70-80/bbl future prices. And many companies were actually using lower prices (by 10% or so) for Years 2 and 3 with rather modest increasing expectations for the remaining years. Turns out even at that they were a tad optimistic, weren't they? Trust me: no one but an utter idiot in the oil patch expected those prices to hold any length of time. And don't imagine there are many CEO's pounding the board room tables demanding that such optimistic price expectations as you suggest be used in the current decision making process. And that's not to argue Simmons is wrong. But future pricing optimism has always been viewed in the oil patch as the crutch of a poor manager.
We tend to leave such arm-waving theatrics to the stock brokers. Also, consider this: I deal with companies that drill in Federal waters and they are starting to discount those numbers even harder. They're anticipating, as deficets rise, the gov't will be getting greedier when it comes to revenue sharing and are thus scaling back expectations (and budgets) accordingly.

But I think you get my original point: the prevalent decision making process will be of little value dealing with our long term energy needs. The “free market” Wall Street view controls the process whether it serves the country’s long term needs or not. Really no different then how the gov’t policy of pushing sub prime home loans helped the economic short term and has now crippled us long term.

The discount rate used in a project evaluation does not have a direct connection to the fed interest rate. It's actually referred to as an IRR (internal rate of return) and has more to do with what the company regards as an acceptable number. As ROCKMAN says, it's been 15-20% for some time. Up until very recently any company could waltz out, find a hedge fund, and do that well.

Pick a lower number, and more long-term investments become possible. The problem is that everybody gotten used to gigantic ROIs and doesn't want to go back.

I agree with you joule. But to be exact, it's not so much an expectation of a 15% return on capital. A 15% return discounted at 15% = 0% return. Thus the current crunch is even worse then you describe. The 15% isn't so much arbitrary but has been accepted as the right value (more or less) for as long as I’ve been in the oil patch (33 years). It supposedly takes into account the borrowing cost of capital. Often it's also used as a ranking mechanism when there are more projects then capital.

Gail -- as far as future maintenance costs of wind turbines including decommissioning, the oil patch does handle such matters fairly well. The cost to decommission infrastructure, such as removing platforms and plugging wells, is always used in the economic analysis (future negative cash flow). And for public companies those same forward expenses are also part of the valuation. Some fudging occurs, of course, but the SEC and capital sources typically require certified estimators to generate these numbers. Your point does make me wonder how inclusive some of the cost estimates for the various alts take into account (or don't) those future deducts from cash flow.

Goes back to an old Texas saying: sometimes the cheapest part of owning a horse is what you paid initially. Such matters quickly come to mind as just last week I paid a vet another $200 for my "free” dog I rescued.

Nobody depreciates equipment over 30 year time periods, either. Most is usually front-loaded into the first few years.

yes, I think especially within US corporations the discount rate has too often been set unrealistically high which essentially devalues the future to the point where it is not really being considered after about a decade or two. I believe this has been because of their unrealistically high growth rate assumptions which in today's economy look pretty much unsustainable. By now, many people's expectations have been reset and I'll bet that future discount rates will drop.

Most companies do not use their cost of debt to determine the discount rate but instead use the "after tax weighted average cost of capital" (WACC). This takes into account what they believe is their long term optimal capital mix of debt and equity as well as the cost of each component of capitalization.

WACC = (Cost of equity capital) x (% of equity capital) + (after tax cost of debt capital) x (% of debt capital)

Publicly owned entities often use a much lower discount rate than private corporations to reflect the longer term life of their assets. There has been much debate about which discount rate to use in valuing the future costs of climage change and several economists have argued for a very low discount rate... just above 1% to take into account the impacts on future generations.

I am all for lower discount rates which are much more realistic in the way they take the distant future into account.

RE: Alaska pipeline

The observation that the oilcos are apparently unwilling to do what it takes to keep the pipeline operational indefinitely leads me to wonder if we shouldn't go ahead and try to get what we can out of ANWR, while we can. "Get while the getting is good" is about the only convincing argument that I can consider.

This also leads me to conclude that it doesn't matter how much oil there is theoretically recoverable in the ground, it is now likely that ALL of it WILL NOT be recovered. There will be oil that we know about, but that we'll never be able to get to, because the resources to maintain the necessary infrastructure will not have been allocated, and that infrastructure will have been abandoned before the last of the oil is extracted, leaving it stranded. We will then lack the resources to rebuild the infrastructure necessary. If there are fatal flaws in the analyses of organizations like CERA or the IEA, this is likely one of them.

Interesting observation. I happened to be in Alaska during the construction of the pipeline. At the time I voiced concern regarding the life expectancy of the line and how it would be dismantled and removed at the end of its service. No one seemed to have satisfactory answers to my questions. Since its completion there have been a number of serious maintenance problems, including significant leaks. I question the soundness of the TAPS to transport an increase in oil flow possibly resulting from ANWR reserves. Chances are that it would require a major overhaul of the entire pipeline.

WNC,

I work for an oil company, I am actually at work on the North Slope of Alaska as I write this, I have worked up here for 28 years, and I am a corrosion supervisor for the Kuparuk and Alpine Oilfields, a few km west of Prudhoe Bay where the transit line leaks ocurred in 2006. So... I think I am as qualified as anyone to describe the situation up here.

I beg to differ about the oil companies being unwilling to do what it takes to keep the "pipeline" operational indefinitely. The industry is spending millions of $ inspecting and repairing the infrastructure here. It is a constant battle but I think we are doing a pretty good job. I believe where the industry got into trouble was we underestimated the life of these assets, especially when oil prices were low back in the late 80's and throughout the 90's. We thought we would be shutting down soon after 2000, but that didn't happen and now we think we will be here until 2040 or later. This was a worldwide problem not unique to Alaska- it happened in the North Sea too. There is certainly some embedded damage (corrosion)from those days, but we have been catching up over the last decade with an agressive repair program, and I have not much trouble getting the budget I need to keep doing this.

As far as the Trans-Alaska Pipeline which (I think) you are refering to (this is NOT the transit lines that leaked in 2006), that is operated by a different company (Alyeska) but they are taking good care of it too. It probably won't last indefinitely (what will?) but it will certainly last for decades longer. We have a much larger problem finding the oil to keep it operational as the big fields (mostly Prudhoe and Kuparuk) are in steep decline and the smaller fields aren't making up for it. There is still a fair amount of oil up here, but not the huge fields. So... Peak Oil is alive and well here in Alaska too.

Our biggest problem of all is the high cost of doing business here, particularly taxation from the State of Alaska and environmental regulations, but those are another issue entirely.

regards,

AlaskaMark

NPV economics and the ruthlessness of the market in seeking short-term gains is definitely a big issue. We are not going to achieve sustainability in any sense just by tinkering with rules around the edges. The monetary system itself is what drives this kind of thinking and so we need a new kind of monetary/financial system. That has been my view for several years, but the current crisis brings the debate much further forward. I recommend reading "The Future of Money" by Bernard Lietaer.

It's also one of the reasons why many renewable energy technologies struggle economically - the costs are all upfront with very low operating costs. Even if they have better Energy Return ratios over their lifetime, their economic valuation looks worse. If we had a different financial system that actually valued the future properly, then many types renewable energy would be much more viable.

Incidentally, in my experience Discount Rate is 5-10% rather than 15%, but it makes little difference.

A couple of years ago I read that Titanium refining had a big breakthrough and so Titanium was about to become as "cheap" as stainless steel. Has anyone got an update?

I wouldn't hold your breath!

Pity. It ranks just below silver on the Galvanic series.

Platinum (most noble)
then
Graphite and carbon
Mercury (suprise)
Gold
Silver and
Titanium

All other metals are sacrificed to it.

On second thoughts lets go with Carbon/Carbon (carbon fibre with carbon matrix.)
If we extract the carbon from the air, even better!

That was a decade ago. It'll never be as cheap as steel, but it might be comperable with aluminium. The problem is there are large supply chain issues that need to churn before it gets there. Maybe 20 years.

The Oil And Gas System Is Sick

* Total cost might exceed $100 trillion.
* Manpower needs probably require millions of engineers and far more construction workers.
* Could the world run out of iron ore and steel in getting the task done?

Should we really spend this amount on the oil industry over the next 20-30 years? Given what we know about the diminishing output and/or EROEI of future oil.

Or should we spend that amount on renewable energy, like wind and solar? I wonder what $100 trillion would do to those industries....

This is a pertinent question in my mind as well. To a close approximation, we are starting over on energy. What should we invest in next?

On oil infrastructure, you could take a sort of BAU view that goes like this: as demand declines, the pressure on the infrastructure eases (less volume moving through) and certain investments can be deferred, allowing the spend to stay at the constant 3%. The gross level floats with the size of the economy.

OTOH, if we have deferred upkeep investment all we can per Simmons, and need to make big new investments, the feedback on oil could be devastating. Absolute oil decreases per Peak Oil, oil for export decreases even faster per ELM, and quality of oil declines, meaning the price of (increasingly poor quality) oil will have to skyrocket to cover the new investment. If the price can't rise above $125/bbl without crushing the economy, we have a scenario where continued reliance on oil is going to break our hearts no matter what.

Despite the massive infrastructure and highly dependent value chain for oil, we are starting over. What should we invest in next?

Steve -- I agree with you and Ben as to the need to expand alternatives. But that will take energy and an economy to finance such efforts. Yep...we need to start over for sure. But, IMO, limited energy sources will hurt the alts as much (or more) as the increase in energy costs. As you've outlined, it seems as we're in a race we've lost even before the starting gun went off.

Rock

Your note upthread regarding NPV analysis comports with my comments. Your note may take an even stronger position, in that it implies that zero credit is given to 'preserved volumes' attributable to infrastructure investment. The short term focus of 'Dow Jones capitalism' demands evidence that volumes will decline immediately without investment (i.e., leaking pipes and collapsing platforms).

But, IMO, limited energy sources will hurt the alts as much (or more) as the increase in energy costs. As you've outlined, it seems as we're in a race we've lost even before the starting gun went off.

Agree here as well. Alt energy is not a silver bullet, and we face an upstream swim to access these sources and optimize our use of them.

Yes, Rocks excellent comment "we're in a race we've lost even before the starting gun went off" deserves repetition.

But let's keep in mind that the vast majority of energy society uses is wasted or used on non-essential pursuits.

If all investments were made in century-long time frames or longer, we would perhaps quickly allocate these rapidly vanishing resources away from waste and frivolity toward securing future viability on a number of fronts. But we are exceedingly short-term in our horizons. To say we are careless of the future is a vast understatement. We have treated the future as an enormous liquidation sale.

We are starting to live in this liquidated future.

Interesting posting and a topic I would love to see more on. Since this is a less common topic, I am assuming that there are a lot of others out there that know very little about this but if not, please excuse the dumb questions.

System and service failures are an obvious result of not being able to do the necessary maintenance in time, and given the number of dollars and projects assumably this wouldn't happen even in a BAU situation. But the environmental impacts aren’t as obvious, so could you tell us what the likely environmental impacts from failed maintenance are and what type of dollars will be required for clean up of these impacts?

I was watching the movie Crude Awakening this weekend and noticed that the equipment that is decommission is often (if not always) left were it was used. Do you know what the environmental impact of doing this is and can we reclaim this equipment to at least reuse its metal, etc.? Would this be an option to deal with the level of required resources to complete the maintenance? Given the supply and demand ratio that we are currently experiencing is there even enough extra oil supply to manage this without causing large financial problems or collapse (i.e. an oil shock)?

Many areas of the resource industry are required to mitigate the damage/impact such as forestry replanting trees and the aggregate industry (at least in theory) is suppose to rehabilitate the site as they move through the project (renaturalized or back to farm land). Is there any regulation or requirements for the oil industry to rehabilitate a site after the end of a project?

CRM -- I offer some answers re: oil production infrastructure only. Two parts: offshore and state waters vs. onshore. Not as big a problem offshore: huge bonding/insurance requirements to be an OCS operator. Even if an Exxon sells an OCS field to a small player who goes belly up, Exxon is liable forever, as the original lessor, for clean up. In fact, such decommissioning is a very big part of the industry. The hurricanes created billions of $’s of such clean up costs. Those storms have actually pushed the industry to get rid of existing structures offshore even faster the originally planned. After the insurance industry took a big hit out there the last 5 years they have greatly reduced coverage. Companies are quickly getting rid of those under insured liabilities. In fact, the vast majority of environmental oil damage comes from the transportation side and not the drilling/production side. Onshore isn't as clean. Small operators can leave a mess and leave little recourse by the state/land owner, if that company files bankruptcy. The state of Texas has a clean up fund that all oprerators here contribute to thru permit fees but, sadly, the fund usually runs out of money every year before all the damage can be repaired. The best defense for a land owner (I’ve worked for just a few over the years) is to sue the operator just as soon as a problem develops when the operator is still making a profit.

Outside my area but I think some of the worst abuse has happened on gov’t leases out west where the rules weren’t quit as tough. I suspect someone in the group here has more knowledge of such problems.

Hello Phil,

Thxs for this keypost as it clearly shows the daunting obstacles ahead on the maintenance and replacement of existing infrastructure, much less any further expansion to meet the growing population need.

IMO, the perfect example of ignoring infrastructure problems is Mugabe's disaster in Zimbabwe. Broken down water & sewage facilities has lead to cholera. Lack of spare, specialized parts has led to many powerplant shutdowns and power transmission problems. The rail and public transit system is in a terrible state of disrepair. Farm tractors, if you can find parts or diesel, probably has way too few trained mechanics to keep these operating fully during the planting and harvesting timeslots; just when they are needed most. The list goes on from hospitals with non-functioning equipment, to bridges down and roads not being resurfaced...

The examples are everywhere if one can more often focus on this corrosion and maintenance/replacement cycle. About two years ago in my Phoenix,Az [from memory]: a big 110-ton transformer blew up/caught fire during the summer A/C overload season. The only replacement had to come from the Seattle area by ship/barge, then overland from LA-->Phx on a special design, multi-dozen wheel trailer pulled by big semi-trucks [probably with special design, extra low/slow gearboxes]. I think it was about a 3-month process before the new transformer was finally turned on.

Then, just a year or so before that: the fuel pipeline from Texas to Phx ruptured down by Tucson. They were running every fuel tanker rig they could get their hands during this period where they had to replace some miles of dangerous pipe.

As mentioned in your article, and to reinforce the point: much of our critical infrastructure is reliant upon these special designs; you just don't waltz into Home Depot/Wal-Mart to order bridge-girders, giant sewage maceration pumps, hi-voltage power switches, etc. There could be lots and lots of potential 'Liebig Limits' as we go postPeak, with each one doing it best to cause further cascading blowbacks wherever it can.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

"Could the world run out of iron ore and steel in getting the task done?" is wrong question. There are enough iron ores for over 100 years - and if they'll be depleted less rich ores can be used too. The real question is: "will be run out of fuel to produce steel"? Stell-smelting is quite energy-intensive process and highly polluting one, so it's the real question...

Good point, Khimru. It is always useful to point out that it is the actual Affordable flowrate of some finished product, not the size of the raw resource.

Since I talk I-NPK & O-NPK flowrates nearly all the time: lots of these three Key Elements [N in air, P & K in the ore plus compostable material], but a one-in-seven ratio of one billion [source: UN FAO] are now insufficiently nourished because the global dispersive flowrate to the final topsoil square foot is woefully lacking.

Job specialization is only possible when a food surplus exists.

This might surprise you but we are already down to exploiting the low grade iron ore, if energy was infinite the grade of ore would not matter but it's not.

Not a chance. Steel just needs a deoxidizing agent. Theres enough coal for that to keep going like its going for at least another century and after that you can use nuclear hydrogen or recycle the carbon with high temperature electrolysis.

Things rust, run down, wear out, break down. That's life in a universe where the 2nd law of thermodynamics reigns supreme.

In the world of finance and accounting, we recognize this reality by charging an allowance for depreciation against tangible assets other than land. (Given the way we tend to treat our land, maybe we should have been charging a depreciation allowance on that, too.) That was all well and good as far as it goes. The logic of that, though, is that the money charged as depreciation should be accumulated as a reserve to fund future repairs and replacements when the depreciable asset inevitably wears down. This is not commonly done. Thus, we see over and over again scenarios like governments building bridges, and these then falling down decades later because of lack of funding for proper maintenance, repairs and replacements. Evidently, we are also seeing the same thing in the oil industry, where equipment now needs to be replaced but there is no money for it.

We talk from time to time here on TOD about sustainable economies and how they might be structured. This seems to me to be one essential element in a sustainable economy: an institutionalized closed loop in financial accounting between the charging of capital depreciation and the accumulation of a capital repair and replacement reserve. Any society that doesn't practice this rigorously surely cannot possibly be sustainable on a long term basis, IMHO.

The logic of that, though, is that the money charged as depreciation should be accumulated as a reserve to fund future repairs and replacements when the depreciable asset inevitably wears down. This is not commonly done.

This is a good observation, and may tie back to the idea that in a rapidly expanding economy, the investor in the asset can expect new and better sources of funding 'when the time comes' to repair or replace the asset. It is a bit of a corollary to Gail's slides regarding debt service in an expanding economy. In this case the debt is buried in the form of deferred investment.

This seems to me to be one essential element in a sustainable economy: an institutionalized closed loop in financial accounting between the charging of capital depreciation and the accumulation of a capital repair and replacement reserve.

Build a monetary endowment as reserve against the decline in our capital endowment. It just makes sense.

Build a monetary endowment as reserve against the decline in our capital endowment. It just makes sense.

Good luck with that! Depreciation writeoffs are seen as a free lunch, particularly among the property investing crowd. Asking the investors to set aside cash equal to depreciation would make them choke. Maintenance of any capital asset is always done grudgingly by investors and their level of enthusiams for the investmetn tends to drop off as maintenance costs rise. Typically by the time much of the new maintenance investmetn is required, there are fresh investors, full of optimism of ROI, wash rinse and repeat.

I was under the impression that a real property investment owner has to recoup depreciation when the property is sold. Or, defer the gain by reinvesting, such as with a 1031 Exchange. Even if the property is left as inheritance, the new cost basis (the fair market value at time of inheritance) begins the depreciation cycle again. That is, if the new owner elects to continue using it as such.

I was under the impression that a real property investment owner has to recoup depreciation when the property is sold. Or, defer the gain by reinvesting, such as with a 1031 Exchange. Even if the property is left as inheritance, the new cost basis (the fair market value at time of inheritance) begins the depreciation cycle again. That is, if the new owner elects to continue using it as such.

I'm not sure what a 1031 Exchange is but I understand the concept. In Australia your capital gain is based on the depreciated cost base however only half the gain is taxed if you are an individual. You can write the cost of a building off over 40 years but there are plenty of fine buildings much older than that that don't have any depreciation tax benefits attached but are still functionally useful and have a market value much higer than their written down value, mainly due to their location in desirable neighbourhoods.

Entry levels into the property market have become so high that many investors (specualtors/gamblers) needed the depreciation tax deductions to offset other income to be able to make a property investment work for them. The net cashflow from these investmentz was close to $0 or or less so there is no way these people were putting anything away for maintenance to protect or enhance the investment. Most thought they would flip it well before any maintenance issues came up.

My guess is that most investors, regardless of the asset, will always view revenues as good and expenses as bad. They will reward a management that minimises expenses to boost short term profits, even if that comes at the expense of long term viability of the asset. Perhaps what is needed to overcome this sort of mentality is to place a trading limit on shares in companies to say 12 months between buying and selling the same shares to ensure that only serious investors rather than gamblers are permitted to paly on the stock market. More Warren Buffets and less Masters of the Universe.

I do not think we could fix it all even if we wanted too. What is going to happen is a on going triage operation every few years when some things are fixed while others are left to deteriorate.

As non-renewable resources become harder to obtain in Scenario 1, capital is diverted to producing more of them. That leaves less industrial output to invest in sustaining the high agricultural output and further industrial growth. And finally, around 2020, investment in industrial capital no longer keeps up with depreciation. (This is physical investment and depreciation; in other words, wear and tear and obsolescence, not monetary depreciation in accounting books.) The result is industrial decline, which is hard to avoid in this situation, since the economy cannot stop putting capital into the resource sector. If it did, the scarcity of materials and fuels would restrict industrial production even more quickly.

Source: chapter 4 of the book "Limits to Growth:
A 30-Year Update," (http://www.amazon.com/Limits-Growth-Donella-H-Meadows/dp/193149858X)
(pages 170-171) of their Scenario 1 (or baseline) model run.

Wow, this article was really good. Short but good, we really need more corrosion related articles on TOD. With the severe financial crisis and a looming depression, will the money to replace the current infrastructure be there? Or will companies simply wait till the problem gets to the point where they must fix it at great expense.

If we assume a depression scenario of a 20-25% cut in global GDP, how would that affect spending on infrastructure replacement? I would assume we are royally screwed.

Maybe I missed it -- did you factor in the increased costs due to resource depletion, energy and metals? Once that's done, I think it's no longer a matter of expense, but of sheer possibility. IMO, a lot of the current infrastructure will have to be abandoned and cannibalized.

Marx formulated the law of the tendency toward a declining rate of profit. This was a direct corollary of the tendency to ever increasing capital-intensity. This is internal to the dynamics of capitalism. What he did not foresee was that resource depletion would ultimately put limits on that ever-increasing capital intensity, quite aside from the dynamics of capitalism. Capital-intensity will decline (on average) going forward because of resource depletion and rust.

did you factor in the increased costs due to resource depletion, energy and metals? Once that's done, I think it's no longer a matter of expense, but of sheer possibility. IMO, a lot of the current infrastructure will have to be abandoned and cannibalized.

The numbers from NACE don't make any allowance for that. But I think that is one of Matt Simmons' point.

The question is, will we spend more to try and maintain the same outcome, or we will spend the same as usual (or a even less) and accept a lesser outcome (in terms of both production and asset condition etc)?

Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else — if you run very fast for a long time, as we've been doing."

"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Lewis Carroll, Through the Looking-Glass

Whatever the actual cost is, engineers everywhere have plenty of work ahead; managing ageing infrastructure and delivering new projects, while meeting sustainability challenges and protecting scarce resources.

Probably wishful thinking, at least for now. If you're after 15-20% IRR, you really don't care what happens to the project after about 5 years. And you spend zero dollars to insure it runs any longer.

And ideally you only replace something after it fails.

* Cost of additional or more expensive material used to prevent corrosion damage.
* Cost of labor attributed to corrosion management activities.
* Cost of the equipment required because of corrosion-related activities.
* Loss of revenue due to disruption in supply of product.
* Cost of loss of reliability.
* Cost of lost capital due to corrosion deterioration.

The first item on that list appears to be of a different type to the others, as it is an once-off expense, where the other items need to be done each year on each existing object.
This is quite a significant item, as http://www.corrosioncost.com/methods/protective/index.htm lists about 100 billion being spent on protective coatings.

The question I would like to pose is : is it fair to count once off costs alongside the ongoing costs?
If you stop the first then the cost of the latter increase in later years, but if you stop the second all existing infrastructure stops working.

The study was an attempt by the industry body to show how important the corrosion industry is, using the simple metric of how much money is spent on corrosion in different areas.

I think the question you are asking is a broader one. There is always a balance between increased capital costs and decreased operating costs. Because of Net Present Value assessments (see discussion upthread), that balance can easily tilt too far in favour of lower capital investment and reduced maintenance expenditure. The optimum balance in terms of energy return and sustainability may well involve greater upfront expenditure.

I don't think the energy gain figures from oil include the worldwide infrastructure, just the finding, development and refining costs. "Fresh EROI" is thus dramatically overstated. If the entire system is moderately dependent on liquid fuels, the wells in operation where majority of costs outlays have already occurred will exaggerate aggregate energy gain from oil. How difficult would it be to do an analysis, assuming no infrastructure, to determine costs (energy or $) for the 80+mbpd in 2009 from scratch? I suspect we will see that oil is acting like ball and chain - we are reliant on what has already been found at cheap prices, and oiur market system extrapolates that into the future assuming low marginal barrel costs. If we had a 30 year horizon instead of 18 month one, energy decisions would be much different.

Thanks Phil, good too see you getting a few "main page" spots. Saw you on tv months ago. A pleasant trustworthy sorta bloke that got the message across well. Maybe you'd like to have a crack at fixing the corrosion in our society one day.

Money for monies sake. If it does not fall it will be our downfall, so good riddance to the global economy.

Oils on it's way up again, wonder how many times we will cycle through this bull till someone decides to set up a well damped financial system based upon need rather than greed.

I read a comment on TOD a couple days ago about some bridges or highways being built out in Minnesota I think, whereas the old ones were wearing out, the politicians being focused on growth projects, maintenace being unsexy. This has been previously stated on TOD I believe but is worth repeating on this thread as it seems appropriate.

So if we have a growth economy, say suburbs to exurbs, etc. with a decaying inner city, or any similar example then it is just a throw away culture. Suburbs are now turning into slums like inner city earlier in USA. Just walking around in Hamburg here OTOH, older buildings are constantly being torn down for new ones, due to profitability and zoning and lack of space.

Has America hit its geopgraphical limits, especially with expensive transport to travel constantly so far out of and around town? If people stay put physically and "stuff" is generally expensive (metal, etc.) then it will be made to last (classical Singer sewing machine, etc. made for the ages) and good areas with water, soil will be rebuilt again and again with good material (not cheap Mcmansion style) and taken good care of - TLC style.

So there might not be much repair being done if people are only looking to the next sexy project. So forced societal growth adds to the problem of the discount rate as alternative more profitable investments will be available and taken. Cash cows will be maintained minimally until they die. 3M and such companies always having X% of revenue from new inventions annually as company policy for example. This sort of idea works as long as geographic and technical new worlds are left to be conquered but maintenace of status quo is a bigger deal in older countries. Of course just trashing Americans and Australians ain't right. Even saying it's anglosaxon capitalism with high discount rates (greed and short term thinking) isn't fair if you look at the mess Ex-soviet infrastructure is in, in East Bloc(investment ignored in basics).

Like for instance internet/telecoms was built out and all investments in 90s were in that direction while energy projects were totally uninteresting, to say the least.

But in each generation a new cool technology takes over, leaving a rotting or neglected older infrastructure behind (canals=>railroads=>highways land line telephones=> internet=> mobile hotspots, oil/gas pipelines=alt energy, old farm towns => inner cities=>burbs=>exurbs).

So given my last thought I would guess that the whole energy paradigm will switch and investmetn will move from Detroit/oil fields over to electrical infrastructure based on alt energy/electrical transport with the FFs infrastructure left to rot or be torn up for other uses. This of course might not fit if we see that this is like the end of civilization and we cannot make it on low alt EROEI but it might be how it happens. Old collieries full of water and offshore/far north abandoned, all too expensive to maintain without a long enough future payback and with too low EROEI for high rates orf return, etc.

I-35W Minneapolis