Oil and Gas Industry Sees Challenges, Opportunities Ahead
By Dennis Wamsted
In a little-noticed report released last spring, the U.S. Geological Survey (USGS) revised its ten-year-old estimate of the amount of undiscovered, technically recoverable crude oil in the Bakken Formation that sprawls across much of North Dakota and Montana. The USGS said it now believes the formation contains at least 3 billion barrels of crude — a 25-fold increase from its earlier projection of 151 million barrels.
The announcement underscores a point made frequently by the American Petroleum Institute (API) and others in the U.S. oil industry: Technology has played a major role in the development of the U.S. oil and gas industry — from where it searches for oil and natural gas to what and how much it is able to produce — and will continue to do so for the foreseeable future.
The oil clearly was in the Bakken Formation when the USGS’s previous survey was completed, but it is the government’s practice to count reserves as “technically recoverable” only if they can be produced “using currently available technology and industry practices.” Using those criteria, the USGS 1995 estimate was realistic for the time.
Technology Changes Everything
An explosion in new technology — significantly better computer-aided geologic modeling and major advances in drilling, particularly through the advent of horizontal drilling — during the past ten years has changed the landscape at Bakken and elsewhere. Already, one field in the formation, Montana’s Elm Coulee, which was only discovered in 2000, has produced about 65 million barrels of crude, pushing the total amount of oil pumped from the formation to more than 105 million barrels by year-end 2007.
Oil, like a food crop or any other commodity, helps meet future demand
through the incremental addition of new volume from multiple sources.
Technological advances have changed the outlook elsewhere as well. Exxon began exporting oil from its massive Sakhalin-1 project in Russia’s Far East in October 2006, some 30 years after the reserves were first discovered. But as Exxon Chairman and Chief Executive Officer Rex Tillerson stated during an energy conference last year, “These resources … had to wait for advanced technology to make them viable as sources of supply.”
Similarly, offshore in the Gulf of Mexico, oil companies are pushing the envelope and developing ever-deeper resources, thanks to the evolution of advanced drilling and production technologies. In late 2006, for example, Chevron completed Jack 2, a record-setting well in the Gulf that reached a total depth of 28,175 feet, with the first 7,000 feet in water. This continued a long-running push to drill in increasingly deep water, a trend that has been particularly pronounced in the last 20 years, with the record moving from 1,760 feet in 1989 to 5,376 feet in 1997 to today’s 7,000 feet-plus.
Time for a New Approach
Industry critics frequently discount these advances, arguing that this one field won’t solve the U.S.’s oil needs or that particular discovery won’t add much to the nation’s proved reserves. But to Red Cavaney, API’s outgoing president and chief executive officer, that totally misses the point. In a speech this summer, Cavaney, who will be stepping down November 1, stated: “All too often, we hear the argument that ‘we cannot drill our way out of our current energy problems.’ It is said that opening ANWR [the Arctic National Wildlife Refuge in Alaska] would produce only a six-month supply of oil — even though the USGS’s mean estimate is that it holds 7.7 billion barrels of technically recoverable oil. Such a claim uses faulty logic, like telling a farmer: ‘You cannot plant your 400 acres because the crops you grow would not meet the total food crop needs of our nation this year.’ Oil, like a food crop or any other commodity, helps meet future demand through the incremental addition of new volumes from multiple sources.
“Similarly, it is said that the OCS [Outer Continental Shelf] contains only a two-and-a-half-year supply of crude oil. In fact, the OCS could provide an additional 1 million barrels per day in crude oil production for 50 years. What’s missed here is that energy supply is cumulative. Seemingly marginal increments add to that supply — and, taken together, can add up to the supply needed to meet demand. So all additions to supply are important.”
Horizontal drilling has been a key component of the industry’s environmental performance.
Going forward, every bit of supply is going to be crucial. According to the Energy Information Administration’s (EIA) latest forecast, the International Energy Outlook 2008, total global energy demand is expected to climb by 50% through 2030, rising from 462 quadrillion British thermal units (Btus) in 2005 to 695. The increase will be driven largely by sharply higher demand in the developing world and will occur despite projected persistently high global oil prices, according to the EIA, the independent statistical arm of the U.S. Department of Energy.
The EIA expects demand to climb for every energy source during its forecast period, with liquid fuels continuing to supply the largest share of global energy demand at an estimated 33% of the total. An additional 24% of global energy demand will be supplied by clean-burning natural gas.
In barrel terms, the EIA projects that global consumption of liquids and other petroleum sources will climb from 83.6 million barrels of oil equivalent a day in 2005 to 112.5 million barrels per day in 2030. This increase — a projected 28.9 million barrels per day — is only slightly less than the total daily production from the Organization of Petroleum Exporting Countries (OPEC) in 2007. For that year, OPEC produced some 30.9 million barrels of crude a day, meaning the world needs to find the equivalent of another OPEC, plus replace declining production from existing reserves to keep up with rising demand.
That is not going to be easy. But it will be a lot easier if the U.S. takes a more realistic approach to oil and gas development in the U.S., API and other industry officials say. For starters, policymakers and the public alike need to recognize that what we do in the U.S. matters. The U.S. is the third-largest crude oil producer in the world, and every bit of additional domestic production helps both to reduce imports and lower upward price pressures.
Off-Limits for Too Long
Unfortunately, the cards currently are stacked against the oil and natural gas industry’s efforts to explore for additional resources. According to API, some 85% of the OCS off the lower 48 states is off-limits to oil and gas development. But, according to estimates prepared by the U.S. Minerals Management Service — which is part of the federal Department of the Interior — these areas contain an estimated 18 billion barrels of crude oil and upward of 76 trillion cubic feet (tcf) of natural gas.
Similarly, less than 20% of the non-park, non-wilderness lands administered by the federal government is open to energy development under conventional leasing terms, according to API. But the Bureau of Land Management, another Interior unit, estimates that this land may contain upward of 19 billion barrels of oil and 94 tcf of natural gas.
One of the key environmental improvements in the
oil and gas industry has been in the shrinking size
of the equipment and structures required to explore
for and produce the resources.
The story is the same in Alaska, where the amount of technically recoverable crude oil currently off-limits to exploration (including both onshore and offshore areas) amounts to an estimated 45 billion barrels.
All told, API says, there is an estimated 116 billion barrels of crude oil off-limits to development, enough to power some 65 million cars for 60 years. The story is similar on the natural gas side, where API estimates that some 650 tcf of recoverable natural gas is off-limits to traditional development. This would be enough to heat the roughly 60 million homes now using natural gas for another 160 years.
Oil’s Improving Environmental Performance
Environmental concerns were a key reason behind the initial moves to put the aforementioned lands off limits, but API and industry officials contend these fears are outdated. Hurricanes Katrina and Rita devastated New Orleans and a wide swath of the Gulf Coast in 2005, but during their journey through the Gulf of Mexico they did little damage to the oil and gas wells in the area, and no significant spills were reported from offshore facilities despite the high winds and heavy seas.
The industry’s environmental improvements are not confined to spill prevention — far from it, in fact.
One of the key environmental improvements in the oil and gas industry has been in the shrinking size of the equipment and structures required to explore for and produce the resources. Statistics provided by API show that if the Prudhoe Bay, Alaska, oil field — the nation’s largest field, containing an estimated 10 billion barrels of oil and 27 trillion cubic feet of natural gas — were developed today using current technology, its footprint would be almost two-thirds smaller than the roughly 1,000 square miles covered by the existing production area.
The downsizing of exploration and production facilities is clearly evident in Alaska’s Alpine Field, which came on line in 2000. The production area there totals just 97 acres — only 0.2% of the 40,000-acre field, which is one of the largest onshore resources discovered in the U.S. in the past 20 years. Alpine Field and a couple of satellites are now producing roughly 110,000 barrels daily with minimal environmental impact.
Horizontal drilling has been a key component of the industry’s environmental performance, frequently allowing fields to be produced from one central facility, thereby greatly reducing the overall footprint of the development. In the Bakken Formation, for example, producers are tapping the crude using one to two wells per square mile, compared to the four or more that had previously been required.
The Rise of Horizontal Drilling
Elsewhere, horizontal drilling, in which wells first start down vertically before bending to run roughly parallel to the surface at a given depth, is allowing producers to reach reserves that, in years past, would have been impossible to tap. One area in particular where horizontal drilling has taken off is the Barnett Shale basin in Texas, which may contain as much as 252 tcf of natural gas. While extensive, the resource is dispersed to the point that conventional vertical wells would not be economically feasible. In addition, much of the resource is located beneath the city of Fort Worth and the surrounding metropolitan area.
These two factors virtually guarantee that without horizontal drilling, the natural gas still would be trapped deep underground. But now, with rigs located within the boundaries of the Dallas/Fort Worth airport, inside the Fort Worth city limits and headed toward downtown, natural gas from just one Barnett Shale field accounts for more than 6% of total production from the lower 48 states, outpacing the overall annual output of the state of Louisiana.
Nationally, some 28% of the active natural gas drilling rigs use horizontal techniques, up from just 6% a decade ago. In turn, these horizontal wells account for the recent, rapid rise in the development of unconventional gas resources in the U.S.
Since 1990, the oil and gas industry has spent more than $160 billion to boost its environmental performance and comply with emissions regulations in the Clean Air Act and other legislation.
None of these developments has come without a steep price tag, however. Since 1990, the oil and gas industry has spent more than $160 billion to boost its environmental performance and comply with emissions regulations in the Clean Air Act and other legislation. Current environmental expenditures total more than $12 billion annually. On top of this, the industry is investing huge sums — more than $150 billion annually on average over the past three years — to find and produce the crude and natural gas needed to keep the U.S. economic engine humming.
Looked at in slightly different terms, a 2006 report prepared for API by the Center for Energy Economics and the Institute for Energy Research showed that from 2000 to 2005, the oil and natural gas industry invested $98 billion in emerging energy technologies, including renewables, frontier hydrocarbons such as shale and oil sands, and end-use technologies such as fuel cells. This investment amounted to almost 75% of the $135 billion spent on emerging energy technologies by the entire industry and the federal government combined during this period.
These investments would not be possible without the funds, and herein lies one of the industry’s public perception problems: Industry profits have been large in recent years, but that is more a function of the sheer size of the industry than anything else. In any case, the industry reinvests much of its profits on new projects.
Data from API indicate that the industry as a whole invested $1.2 trillion on long-term energy projects from 1996 to 2007 while notching a net income of $974 billion. Compared with other segments of the economy, oil and gas companies fall squarely in the middle in terms of overall profit margin. In the first quarter of 2008, for example, oil and gas companies earned 7.4 cents for every dollar of sales, compared with 7.6 cents for the manufacturing sector as a whole. Excluding the ailing auto industry, manufacturing earnings were even higher, at 8.6 cents per dollar of sales. And some sectors did substantially better, with the chemical industry, for example, earning more than 15 cents for every dollar in sales.
There will be a new administration in 2009, as well as a reshaped Congress, but the long-term energy issues confronting the country will be largely unchanged from today. Steadily growing demand, particularly in the developing world, underscores the need to adopt rational, forward-looking policies that encourage the development of all our domestic energy resources. We, and the world, are going to need all the energy we can get.
These energy policies need to encourage the development of renewables and efficiency measures that can help reduce our fossil fuel needs, but these policies also need to be realistic. Forecasts across the board show clearly that oil and gas are going to play a central role in meeting U.S. and global energy needs — particularly in the transportation sector — for the foreseeable future, and we need to design policies to address those needs.
The oil and gas industry is ready to make the investments needed to meet the nation’s future energy needs, but it needs the support of policymakers in Washington. Among the necessary first steps that need consideration as soon as the next administration settles in are giving the industry access to promising resource regions; providing support for capital-intensive, long-term investments; backing continued technological development; and swearing off punitive, counterproductive tax policies.
The time to act is growing short.
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