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Page added on January 28, 2011

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Oil: into new frontiers

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Massive new reserves have been identified, proven up, and brought to production – whilst reserves previously considered impossible to reach are now no more than a horizontal drilling or steam injection technique away. All this should help ensure supply can meet global demand for far longer than was expected just a few years ago – pushing back the oft-cited “peak oil” date by decades.

Critically most of this newly-discovered potential avoids the above-ground risks and cartel policies that constrain oil production in most of the world’s largest proven deposits – the bulk of which lie in Organisation of Petroleum Exporting Countries (OPEC), or are controlled by national oil companies in central Asia and Russia. It is the technical expertise and project management skills of the most dynamic multinational and independent oil companies that hold the key to these new hard-to-get-at reserves, rather than the whims of Arab dictators or the level of OPEC budget deficits. A similar, but even more dramatic change has taken place with gas, where new techniques mean huge “tight” gas deposits present in many rocks are now recoverable. The International Energy Agency (IEA) recently estimated that natural gas reserves could last twice as long as previously expected – up to 250 years.

All this should be good news for oil consumers – including power producers – because, although high oil prices are as important to oil companies as they are to OPEC budgets, these companies operate in a competitive market rather than as a cartel – ensuring market mechanisms work to respond to high prices and increased demand. What’s more, the strategic concerns of relying too heavily on an unstable Middle East are eased and more of the money spent by developed and developing nations on oil will be re-circulated within productive economies, rather than ending up building swimming pools in the desert. This should moderate the dampening effect high that oil prices have on global economic growth.

James Burkhard, a managing director at energy consultancy IHS CERA, says the recent upstream developments mean oil and gas will continue to be pillars of global energy supply for decades to come. “The competitiveness of oil and gas and the scale at which they are produced mean that there are no readily available substitutes in either one year or 20 years,” he added. Oil demand is forecast to grow to 99Mbpd in 2035, up from 84Mbpd in 2009, according to the IEA. Based on its global database of oil fields IHS CERA expects productive capacity for oil and natural gas liquids to reach 112Mbpd in 2030 (including 2.75Mbpd in biofuels), from 92.6Mbpd in 2010, which will provide the world with a substantial supply cushion.

Figure 1: Some recent global oil production forecasts, illustrating the push back of peak oil production

“The estimates for how much oil there is in the world continue to increase,” according to William M Colton, Exxon Mobil’s vice president for corporate strategic planning. “There’s enough oil to supply the world’s needs as far as anyone can see.” Just as prices rose sharply and peak oil concerns re-emerged, huge deep water oil fields were found off the coasts of Brazil and Africa. Higher prices also stimulated “unconventional” oil production from massive Canadian oil sands projects, which now provide North America with more oil than Saudi Arabia. In 2009, the United States increased domestic oil production for the first time in decades. The longer “life horizon” and drop in natural gas prices make it a particularly attractive choice to power producers now, given its relatively low carbon emissions and flexibility as a generating fuel.

Nevertheless, the price of moving oil supply up to meet surging global demand is getting higher. It has taken a long-term price outlook of US$75/bbl or so to enable the development of the technology required to make these frontier reserves economic. And high exploration and production costs in many of these areas mean that, should the price outlook fall much lower than this, margins will be squeezed and the capital currently available for production will dry up. A more disciplined OPEC, combined with strong demand from China and other rapidly developing economies are likely to prevent any dramatic drop in prices together with the recent news from the IEA that conventional oil production peaked in 2006. The latter means that the role of unconventional oil will continue to increase and with it, the necessity that oil prices remain in a sweet spot: high enough to  promote further investment, but low enough to maintain demand.

As can  be seen from Figure 2, technology’s ability to prove, once again, that it can rise to the challenge of bringing fresh supply to market – or to moderate demand by improving efficiency – bodes well for the future of the oil industry. With further improvements in technical know-how and the greater usage of advanced drilling techniques such as extended-reach drilling, the absolute peak in total oil production is likely to be extended well beyond initial projections.

Figure 2: The impact of technology on oil production from the Weyburn field in Canada. Source: PRTC Weyburn-Middle/IEA WEO2008

At the same time, the failure of climate change negotiations over recent years and the realisation that there may be easier ways to tackle rising carbon dioxide levels than fundamentally changing the behaviour of billions of energy consumers (such as carbon sequestration or other technical solutions), means companies are rather more comfortable sinking large sums into exploration than they were 5-10 years ago.

Some experts claim enhanced oil recovery (EOR) could potentially double the amount of oil that can be extracted globally. Most fields only recover just over a half of the original oil in place and sometimes less than a third. With modern techniques field development should be able to extract a far higher proportion of the oil, while more and more oil can be made recoverable from existing wells.

The three main types of EOR are gas injection, steam (both cyclic stimulation and flooding), and chemical injection. They have been around for a long time, but are increasingly viable economically and nimble technologically. For example, in the US, the Kern River Oil Field has seen its production dramatically increased since the 1960s using such techniques. It was discovered in 1899, and as production slowed steam-flooding was introduced. The results have been dramatic – in 1961 production was about 19,000bpd, but by 1966 it had risen to 53,000bpd. Production reached its peak at 141,000bpd in 1985, and continues today at around 80,000bpd.

Figure 3: Basic illustration of gas injection enhanced recovery

Natural gas injection is also an improving technique used to maintain reservoir pressures, especially where it is difficult to bring the gas to market, and where gas is produced alongside oil. Other gases, such as nitrogen and carbon dioxide, can also be used. In the case of carbon dioxide, it not only increases recoverable oil reserves, but also acts to “capture” the main global warming gas produced when fossil fuels are burnt. So any increase in carbon emission penalties will make this an increasingly attractive option.

The newest of the major EOR techniques involves inoculating reservoirs with microbes that will make the oil flow more freely. Such developing techniques may create a new jump in recoverable reserve estimates for many fields in the near future. Above all, EOR extends the life of oil fields – many North Sea fields were expected to have run dry by now, but continue to produce often in the hands of specialist oil producers that focus on enhanced recovery.

Offshore and Arctic frontier hot spots

A recent forecast produced by Shell suggests that Arctic production from North America, Europe, and western Russia – much of which will be deep offshore – could make up a quarter of global production within 20 years, provided that remaining  technical, political and environmental challenges are met.

Norway, Russia, the US, Denmark (Greenland) and Canada border the Arctic, and are all eagerly asserting territorial claims – so far largely on a frictionless and cooperative basis. Last April, for example, Norway and Russia resolved a 40-year dispute over a strip of the Barents Sea – thought to hold 10-50bnbbl boe  (up to one-and-a-half year’s global oil supply). Greenland alone could have another 50bnbbl of recoverable oil, according to IHS CERA. Norwegian state oil company Statoil says large anticipated deposits mean it would be economic to develop fields even in the harsh Greenland environment, as long as prices do not drop below US$75/bbl for any length of time.

Other areas of interest include the US east coast offshore, where drilling has been proscribed for 30 years for environmental reasons, although recent plans to open up this and other areas to drilling are currently on hold following the Deep Water Horizon accident off the US Gulf coast (see below). Pete Stark, Vice President of IHS CERA, points out that the east coast area has similar geology to the US Gulf of Mexico and also in the south Atlantic offshore Brazil, where large finds have recently been made.

Analysts with DI International, an exploration and production information business, note that frontier exploration is not confined to deep water and the Arctic, but extends to all areas that were previously considered inaccessible, including complex and deep geological structures. “Offshore drilling depths have increased, but so have drilling depths and accuracy through the crust itself,” said one DI International analyst.

Advances in directional drilling allow well operators to steer and carve through hard shale to expose more and hard-to-reach rock, and it also makes possible drilling under cities or into environmentally-sensitive areas. For example, BP has accessed oil deposits off the English Channel coast, from onshore drilling facilities at Wytch Farm – making it the UK’s largest onshore field.

Faced with falling reserves and barred from acquiring fresh production in areas such as the Middle East, international oil majors began to search for new large deposits in the deep waters of the Gulf of Mexico in the 1990s – on the back of a proven drilling record in shallower Gulf areas, and in the North Sea. Exploration and drilling below 10,000ft of water and through miles of hard rock, thick salt and tightly-packed sands required the development of supercomputers and three-dimensional imaging techniques as well as equipment that could withstand the heat and pressures common at such depths, not to mention submarine robots to make repairs.

That technology is now available to drill in other areas such as the Arctic and elsewhere, while it continues to produce results in the US Gulf where oil production has increased by more than 12% since 2000, to 1.7Mbpd.

Figure 4: Projection of incremental oil production by selected country under the IEA’s new policy scenario, 2009-2030. Given that the IEA expects significant new oil production to come from Brazil, Canada and Venezuela, the role of unconventional and deepwater projects can also be expected to increase. Source: WEO 2010

Similar advances in technology have opened up huge unconventional oil shale resources in Canada. This is moving to the US, where the Bakken shale field is now the country’s fastest-growing major oil field. Production has reached about 350,000bpd, from 100,000bpd a decade ago. In a recent report, consultancy firm PFC Energy projected production would climb to 450,000bpd by 2013. “The technology producing these resources has absolutely made the difference,” Mr Marvin E Odum, President of Shell Oil, said. “It’s the same with the Arctic, with the shale oil, all over the world. Technology is the key.”

A spanner in the works?

The impact of the Deep Water Horizon disaster gained extensive negative worldwide press coverage. In the US, it has had a dramatic short-term impact on offshore exploration, with the imposition of a temporary offshore drilling ban. But reaction elsewhere has been largely restricted to a review of safety procedures. Most experts believe that once the US investigation is complete, things should slowly return to normal even there. Leta Smith, director of upstream supply at IHS CERA, notes that drilling, especially in the US, is likely to become more expensive as a result, as insurance premiums rise and costs of additional safety procedures are added.

Figure 5: It is expected that once the US investigation is completed, the situation regarding deepwater drilling to return to normal.

Deep water drilling programmes that have been put on hold include Shell’s plans in the Alaskan Arctic and BP’s in the Beaufort Sea, although Shell says it is trying to get a permit to drill as soon as this summer. There have also been calls to slow offshore development in the European Union and Norway, until the cause of the Deep Water Horizon accident is fully explained.

Meanwhile, BP has signed a deal with Russian state giant Rosneft, giving it access to some of the most attractive unexplored Arctic basins located off the north coast of Russia. This is an area roughly equivalent in size and reserve potential to the UK North Sea, according to BP. Ironically, BP, the leading deep water producer in the Gulf of Mexico, is widely considered the front runner in frontier deep water exploration and production, not least because of what it went through as a result of its own accident.

ifandp.com



6 Comments on "Oil: into new frontiers"

  1. Kenz300 on Fri, 28th Jan 2011 6:37 am 

    For what BP will spend on the Gulf “accident” that same amount of money invested in Wind and Solar power in the US could have been producing clan, safe alternative energy for decades.

    It is time that “energy” companies also move to diversify their energy sources.

  2. James A. Hellams on Fri, 28th Jan 2011 7:38 am 

    What is conspicuously absent from this article that claims we have all this oil, is the actual hard count of the number of barrels of oil to back up what is claimed in this article.

    At the peak of oil production in the above graph, the oil production is over 120 million barrels per day. At this rate of production, this would equal more than 44 billion barrels of oil annually!

    Where is the actual hard count of the number of barrels of oil that make such a claim possible?

  3. DC on Fri, 28th Jan 2011 11:07 am 

    Another dont worry be happy! article. Keep driveing your gas-burning moble trash bin to wall-mart! Keep consuming, build more strip malls!, more poorly built clap-board houses, more Ijunks!

    We have seen the future and the future is….get ready for it, more oil!(and coal too). Seriously these ‘reserves’ that largely exist on paper are something to be happy about is beyond comprehension. Tar-sands is a disaster, and ultra-deep drilling is just another disaster waiting to happen. We have allready trashed the oceans so badly, the oil companies are just chomping the bit to kill the oceans once and for all…

  4. SilentRunning on Fri, 28th Jan 2011 1:01 pm 

    Thank goodness “Peak Oil” turned out to be just a bunch of raving lunatics howling at the moon. Since I read this article I noticed that oil prices have collapsed to under $10 a barrel (all those new discoveries and pumping has driven prices into the ground, even as the oil gushes up.)

    Also, all this shiny new technology has disproved that imbecile M. King Hubbert , and now US oil production far exceeds US demand and we once again are the leading oil exporter on planet earth.

    Oil, you must understand, can never EVER run out. Every oil well can produce an infinite amount of the stuff, and there are an infinite number of potential drilling sites out there waiting to be explored!

  5. RR on Fri, 28th Jan 2011 7:42 pm 

    Even the Odell curve in Figure 1 is already on a decelerating path, far away from the exponential growth that is needed to keep the financial system working in its current structure. Consumption growth is highly constrained and the prices are developing accordingly. The timing of the actual peak is of minor significance.

  6. Gandolf on Sat, 29th Jan 2011 11:04 am 

    Well
    Oil
    Beef
    Hooked

    Read it out loud then add an irish accent…. LOL

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