Peak Oil is not a lie, but it is an idea attempting to
describe how things are. The idea of peak oil has evolved. It is true that the
world is not likely to run out of energy any time soon. Heck, the energy
revolution of multistage fracking in horizontal wells has ensured that. But at
what price?
Financial forecasters and newsletter writers tell us that the
U.S. may become self-sufficient in oil supply. Wouldn’t that be wonderful! No
more worrying about Middle Eastern instability; no longer will the U.S. need to
support dictatorships; more control regarding the environment and… a
significant reduction of the U.S. trade deficit and possibly even its debt.
The land locked position of this new oil and natural gas
will also help to keep prices down, because pipeline capacity and limited
refining capacity will force those greedy produces into low-profitable oil
sales. Right? Maybe… but what about
frac-spreads for refineries and government taxes? Did you notice that gasoline prices
haven’t really moved down?
I work in the oil industry, I am a professional geologist.
So let me tell you that the oil patch is exceedingly complex with numerous
sources of supply, ways of transportation and even more ways to consume oil. It is very
difficult to get a proper view on the natural gas and oil situation and it is
extremely difficult to forecast and survive this capital intensive,
hyper-competitive industry. Anyone who is telling you that oil and gas prices
are fixed by big fat nasty oil barons should think twice before actual
believing this nonsense.
Anyone who truly believes that the U.S. will become self-sufficient
in its hydrocarbon supply should ask themselves critically whether they’re
serious in that believe. Because if so, then why has the price of oil not crashed
during these so-called weak economic times?
Yes, today, new horizontal wells have increased North
American oil production to close to all-time highs. The question is for how
long and how expensive? You see those new oil wells start production
fabulously. A single well may produce 30,000 barrels in a year – nearly 50% of
what older vertical wells produced over their 40 year or longer productive life. But most of that production comes only from
the first 3 to 6 months. A year later, production has fallen from initially 300
barrels or so per day to barely 10 barrels. The technical lingo states that
these wells have a high decline rate. Yeah, Duuh! These horizontal wells may
decline nearly 90% in production rate over the first year and if the capital
invested has not been earned back over that first year, the company that owns
the well may never make a profit on its investment.
Thus, say in year 1, a company drills 100 wells and sees its
production skyrocket by 300x100 = 30,000 barrels a day. It must replace 90% of that
'new' production in year 2. With a 90% decline rate, the company has to drill the
following year 90 similar wells, just to keep production constant. If it wants
to grow production by another 30,000 barrels it will not only have to drill 90
wells; instead it must drill 190 wells. Considering that each well costs
approximately $3 million to drill, complete and tie-into the pipeline system, the company needs to
invest close to $600 million dollars in that 2nd year. Do the math
for year three if you want to experience shock! You think that can be done at
an oil price of $40 per barrel?
Just think, after operating costs and royalties in Alberta
of $15 to $20, each barrel brings in $20 to $25 dollars in cash (called
net-back). How many barrels do we have to produce to pay for a well costing $3
million? Right: 120,000 barrels – oh but the well does only 30,000 barrels in
the first year. So at what oil price do we break-even, let alone make profit?
$90?
Let’s see: Royalties go up with the oil price. So at $90,
our operating costs (including royalties) is $40 per barrel and net-back is thus $50.
To make back our $3 million, we have to produce: 3 million divided by 50 equals
60,000 barrels in one year! These are just rough numbers but I am sure that have
gotten the idea.
Peak Oil may not be correctly describing current production,
but if oil prices would fall below $70 per barrel, we would not have many
companies drilling in what is euphemistically called the ‘oil resource plays’
of the Bakken and Cardium in Alberta or, for that matter, in the resource plays
of North Dakota or Texas.
Multistage fracking and horizontal well technology give us
economically viable projects in reservoirs that are literally as porous as
concrete. Such reservoir rocks have the capability to flow oil to a nearby
wellbore that is less than the aforementioned concrete. The old conventional
pools are no more. If you want to see such a pool close-up then go to the
outcrops along Grassi Lakes in Canmore, Alberta where the rocks have holes
(pores) so large that you can put a fist in it. That is what the first wells in
Alberta’s 1947 LeDuc were like. Today, in resource plays the size of a pore is
typically 0.5 micrometers (that is one half of 1/1000 millimeters) in diameter.
Only today’s oil pricing and technology allow the oil
industry to keep our car tanks filled and our houses heated, and our factories
running. Next time, you step in your car; think about this new reality and
about what your lifestyle costs in terms of environment. Maybe don’t blame the
oil companies that try to keep on providing energy at the most competitive prices
so that you can keep forgetting to turn the lights off in your house.
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