What's happened with Peak Oil - evolution of an idea!

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 2^nd 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.