Monday, December 30, 2013

Is the U.S. really becoming oil self-sufficient?

Currently the U.S. consumes around 18.5 million barrels a day while the world consumes around 92 million barrels (yes it is still going up – in 2008 we produced and consumed 86 million barrels). 

How much was the U.S. producing in 2008? Barely 5 million barrels; so yes today’s production increase to around 8 million barrels is nothing short of spectacular. To do so the U.S. drilled 43,000 wells in 2013 (nearly three times as many as the Canadian 'Energy Super Power').  Of those 61% were horizontal wells and 75% of the horizontal wells were oil wells or just around 20,000 wells.
Humongous! But does this make the U.S. energy self-sufficient or even a net exporter as the rumours go?

Figure 1 U.S. Oil production 1080-2012 according to the E.I.A.  Click on image to magnify.
Well that may be a bit of pink colored glass dreaming. So I used this typical decline curve for a horizontal well in Canada (in fact a rather good well). The well initially produced around 350 barrels and then declined 80% in the first half of year 1 to 70 barrels per day and to 28 barrels per day during the remainder of year1. In its second year, it declined by another 60% to 17 barrels/day in its first half and down to 12 barrels by the end of year 2. After that well production declined 10% per year until the end of time or until the economic limit of 5 barrels per well.  This single well decline curve typical for a good ‘resource play well’ is shown below.

And don’t forget that such a well easily costs between $1.5 and $3 million dollars. Assuming that oil prices remain high and that net operating profits, i.e. net backs are $70 per barrel then we calculate a modest profit (unrisked). Did you know that U.S. oil companies have a gross profit margin of around 8.5%?  Compare that to 48% for Microsoft – mind you, there is here a bit of an apples and orange comparison!

Figure 2 shows production of the 'type well' declines 80% in the first 6 months, 60% in the remainder of year one, 40% during the first six month of year two and 30 in the second half of year., The 'type well' declines 10% annually there after.. In fact this is still an optimistic decline curve – believe it or not!  Vertical axis measures oil rate in barrels per day.

With the U.S. drilling close to 20,000 oil wells a year and assuming they’re drilling each year 4% more wells, then they will drill 21,218 wells annually 3 years from now - all declining at frightening rates (see graph above) .  That should bring us around a U.S. oil production rate of approximately 9 million barrels a day which was the 1985 production peak shown in figure 1. To keep that production steady, you would need to drill every year there after another 21,218 wells. If you kept that up for another 16 years, you’d drill around 365,695 wells – typically spaced 200 to 300m apart for a 'mere' 549 billion dollars  and an unrisked rate of return of 14.5% assuming your facilities are costing nothing (NOT SO!).  Right now, the entire U.S. petroleum industry spends around $140 billion per year and that includes pipelines and refineries! So spending of 549 billion just on drilling oil wells is… enormous. And… you will need those high oil prices and you need to reduce your operating and capital costs big time to make GOOD money. Hmmm!
Yes this is nearly a back-of-the-envelope guess, but I did not use an envelope but rather I wasted a day on a darn EXCEL spreadsheet (hopefully with not too many mistakes). So if the U.S. wants to truly become energy self-sufficient and flip the bird to us dumb Canadians with our tar sands then it will have to drill 41,472 horizontal oil wells per year (i.e. increase drilling 20% annually for the next 3 years) and then keep that up indefinitely!  Total drilling expenditures (not counting infrastructure such as pipelines and refineries): 0.9 TRILLION dollars. Eh, another financial stimulus program – who needs tapering? J  I don’t think such an amount of U.S. oil drilling is very likely over the next 16 years or so!  In the meantime, us dumb Canadians will have gained access to world markets (Enbridge thinks it will start building Gateway by 2017). Guess who will be flipping the you-know- what THEN to whom?

As stated before: Thank you Mr. Obama for dithering on Keystone.

Figure 3 Calculated daily production rates of annual drill cycles counting up to 41,472 horizontal oil wells per year.

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