By Steve Andrews;
Peak Oil Review—July 29, 2013
Q: The industry deserves major kudos for the largest year-over-year increase in US oil production during 2012. What’s your sense for how long that type of gain might continue?
A: Both the Bakken and Eagle Ford
are wonderful and economic shale oil plays. It doesn’t mean they don’t have
uneconomic wells that may be drilled on their peripheries or in areas that
aren’t sweet spots. But the rate of production increases in the Bakken has
already slowed somewhat. And the exploration and development efforts look
like they’re slowing a little bit, as well. The Permian is the third
major shale oil play, but it’s more of a margin play in many cases.
Meanwhile over the last two years
oil production from the Eagle Ford increased by 600,000 barrels a day while
roughly half of that was eaten up by declines in the Gulf of Mexico. So it’s a
forest and trees situation where you have to look at both. Former CEO of
EOG Mark Papa said those three plays are likely it for the US, in terms of
major black oil plays. So we’ve got to keep things in perspective.
In terms of the forest and the trees, the Bakken and Eagle Ford are trees;
they’re big trees, but they’re not the forest. The forest is the world oil
supply situation; on a world-wide basis, how do the trees scale in to
everything else in the world?
Q: Yet for the most part the
discussion at the national level makes little or no note of that
slowdown. It’s all about covering the boom. And don’t we all
hear that the boom is just going to keep growing.
It’s hard
not to get caught up in the
boom. In Houston and Midland and South Texas and North Dakota, the boom
is real, people are doing well, and it’s floating a lot of boats. But you
have to go back and look at the big picture, look at the scale of these
plays. These are "trees" — blessings in a way — and they give
us a temporary reprieve from what Bob Hirsch called the severe consequences of
not taking enough action proactively with respect to peak oil. The
question is will these plays “fix” peak oil? The answer is no.
Q: So, in your opinion, M. King Hubbert more or less had it right,
at least in the big picture, not down at the granular level?
A: Some have mentioned that,
“well Hubbert….back in the 1950s and 1960s he didn’t have access to the concept
of unconventional oil or shale oil plays. He did good work, but it was
only applicable to the conventional oil he knew about.” I would propose
that it doesn’t really matter and that in hindsight, after a couple of more years,
it will be more evident that effectively he did take unconventional oil into
account because the unconventional oils are not easy oils.
Conventional oil--which was found in
huge quantities, in giant fields in the 40's and 50's - well those giant fields
had huge reserves and high
porosities and permeabilities - meaning they would flow at very high rates for
decades. This is in contrast to a relative few shale oil plays which have
very low porosity and perm and which must be hydraulically fractured to flow.
Conventional oil is just a different animal than unconventional oil; some
unconventional oil wells have high initial rates of production, but all of
these wells have high decline rates. Yet it’s essential that we produce
this oil. Without unconventional oil, what we wind up with is essentially
Hubbert’s cliff instead of a Hubbert’s rounded peak.
I think Hubbert anticipated a lot of
incremental efforts by the industry to make the right-hand or decline side of
his curve a more gradual curve rather than a sharp drop. He was thinking
about secondary recovery, though perhaps it was too early for him to think
about tertiary recovery, but those are the types of incremental efforts that he
would have anticipated. Likewise, I would say that unconventional oil is
another incremental type of recovery, at least compared to conventional oil.
Q: So the peak oil problem isn’t dead yet, as has been shouted in
a few headlines?
A: Our bottom-line problem here is
that if we ignore peak oil as a result of these plays, we ignore it at our
peril. This is no time for complacency.
Peak oil is still a looming
transportation problem—a huge one. I would suggest that we’ve made some
progress…some things have been done. We’ve made several years worth of
efforts collectively, whether it is more movement towards electric cars, mass
transit, scaling down our vehicle purchases, or driving less due to price
signals. But we’ve only just begun and we have a long ways to go in order
to deal with the still-looming Hubbert’s peak, in order to not deal with the
severe consequences that Bob Hirsch wrote about in his 2005 research for DOE.
The big problem is that it’s hard to
be proactive when there’s no current crisis. We’re a country of
optimists. That’s helped us do what we do, including the development of
new technologies to create, innovate and develop better than anyone else in the
world. I think it’s imperative to maintain a positive outlook. At
the same time, peak oil is something unique. Peak Oil is not reflective
of optimism or pessimism, or positive or negative; it’s just the result of the
finite volume of oil the Earth was endowed with, and the rate at which that oil
can be produced. Some way or another we’ve got to get to where we can be
proactive, and we’ve got to work together.
Q: What about the notion we hear that the US will be energy independent
by roughly the end of the decade?
A: There are some, not many,
who promulgate the idea that we’re going to be energy independent. Bob
Tippee, editor of the Oil & Gas
Journal, wrote an editorial about that, criticizing the boosters. “Energy independence is an appealing
idea. So is perpetual youth. The problem in both cases is
achievability.” For me, it’s really hard to understand how the
independence crowd could possibly be right; so it’s just not the right message
to convey. We need to press on with conservation and efficiency
improvements, natural gas vehicles, development of a better way to store
electricity for use in a vehicle. We don’t need to slow down any of those
efforts.
Just as it might be better if the
industry folks touting energy independence toned that down, likewise those who
nitpick every shale oil or shale gas play should perhaps let the people who
spend the money—or their shareholders—worry about the economics and just be
glad that we have these plays to develop in order to create some more
time. There has been a bit of a war between the folks who do things, in
terms of discovery and development, and then the folks who review that—the
doers vs. the reviewers. The reviewers have been pooh-poohing these shale
oil and gas plays, which actually represent a lot of oil and gas…but not enough
to solve the long-term problem.
There are also those out there who
believe you have to kill off the old paradigm before you can have a new
paradigm take its place. Unfortunately, killing off the fossil fuel
paradigm is not something anybody wants to do, if they really understand the
ramifications. You can kind of feel their pain, though, as you hear the
energy independence chatter that may persuade us to relax and cease to be
concerned about the finite oil supply. In a sense you can understand
their frustration with shale oil and shale gas plays because the broader public
hears the optimistic news and says “hey, this isn’t any issue any
longer.”
So I can see both sides here.
But we need to work together, not fight one another. Let’s all get
along. These shale oil and gas plays are stop-gaps and blessings and we
need them. We don’t need to be fighting against them, but at the same
time we don’t need to be jumping on the energy independence bandwagon because
the numbers just don’t seem to add up. There’s no way that energy
independence can happen when we’re producing up towards 8 million barrels a day
of crude oil now plus between 2 and 3 million barrels a day of other
liquids and we’re consuming over 18 million barrels of liquid fuels a
day. The idea that we’re going to come up with another 7 or 8 million
barrels of black oil plays doesn’t fit.
There will be other incremental
plays: the Niobrara, maybe the Utica, but we know about the three big ones—the
Eagle Ford, the Bakken and the Permian. I need to study the Cline more.
Devon Energy is going wide open on the Cline, but they quickly saddled up with
major outside capital by joint-venturing with foreign companies to pay for
it. It’s a lot different when somebody else is footing the bill.
We’ve gotten a little negative feedback on the Cline ... I've read where it can
have a high clay content, at least in some areas.
Q: I’ve heard that the Monterey field in California seems to be the one
that’s the least ready to give up its very large oil-in-place resource.
Do you read it that way?
A: The Monterey gets brought
up all the time because it has a huge in-the-ground number. It’s another
question mark. There’s a good chance the clay content may be the
issue. It gets back to the fact that to work, the rock in an
unconventional play needs to break like a piece of glass; it needs to be that
brittle to work really well. The presence of ductile clay in high
percentages prevents that from happening. So with a high clay content you
can’t create the necessary spiderweb network of fractures and microfractures to
provide exit routes for the oil.
I liken it to a highway system: dirt
roads feeding county roads, feeding state highways, feeding interstates that
eventually go into 12-lane freeways when you get to downtown…where downtown is
the wellbore. You can’t create that underground highway network unless
the rock breaks well. I’m pretty sure that’s the problem with the
Monterey.
The Conasauga is a quickly forgotten
example of a shale gas play that didn’t live up to expectations. There
were thousands of feet of low TOC rock, but the bottom line was that due to
clay content there wasn’t a way to fracture and keep the rock sufficiently open
in order to make the play economic. So even though the numbers were huge
on an in-place basis—just like the Monterey, but in gas instead of oil—you
couldn't create the highway system, so it wouldn't work.
Q: How does the nagging high price of oil fit with your
understanding of the viewpoint of the oil optimists?
A: This seems like a
huge no-brainer. So I’m confused: If we’re awash in crude, after being
several years in the big three shale oil fields, why is oil $105 a
barrel? Most people say there is a $10 premium for the turmoil in Egypt
and/or Syria situations—general tension in the Middle East. That’s still
$95 oil. So if we’re going to be energy independent in the foreseeable
future, why is the price so high? One gentleman expressed it as
"unprecedented inelasticity in recent years". In other words,
despite the price increase the world supply hasn't risen to reduce that price
increase - as would the price of an "elastic" commodity or
product. That sums it up. That is peak oil!
Raymond James’ forecast made in 2012
for the oil price this year was $65 a barrel. They were way off.
That’s why a friend of mine wrote that "oil price forecasting is like a
leaky lifeboat". The reason for that is that oil and gas are priced
at the margins. If you have a little bit too much, it may end up getting
dumped on the market because zero is what’s pulling on it. If there’s not
quite enough, and everybody has to have it, then the price is pulled by
infinity. That all helps make predicting oil prices a real dismal
science.
Q: What’s happening to your costs in your areas of operation?
A: Costs may have come down a
little, but not much. The supply of oilfield services has kind of caught
up with the demand, but prices haven’t come down much. Water still
remains in great demand and disposal costs are still high; the good news is
that folks are recycling a lot more and working solutions for using brackish
water. Fuel costs are a large component and they’re high. So costs
just haven’t come down too much. Frac sizes continue to increase in size
and cost.
Q: Is it fair to say that the anti-fracking crowd isn’t having much
impact on drilling in Texas?
A: Some reporting rules have
changed. Some of those folks are genuinely concerned about the scenario
for leaks into clean water tables. I think they might be misinformed as
to the distance between the producing formation and the water formations, and
about the casing and cement isolation that goes on, and that those must be in
place to have successful fracturing jobs. I think some folks are just
looking for the perfect emotional vehicle to advance whatever "anti"
agenda they might have - because who can be against clean drinking water and
preserving our limited supply? An impactful, emotion-inspiring movie can
be the perfect vehicle to use to try to stop the development of shale oil or
shale gas.
Martin Payne has 32
years of experience encompassing most every aspect of the upstream oil and gas
industry, was past chairman, Houston Chapter of the American Petroleum
Institute, and member Society of Petroleum Engineers. He is also a believer in
solar, wind and biomass - and all renewables. In addition to active
conventional and unconventional exploration he operates a small grass-fed beef
business, experiments with wood gasification and sits on the board of the
non-profit Useful Wild Plants Inc. (www.usefulwildplants.org).
