Thursday, March 9, 2017

Peak Oil and Gas is back

Oil and Gas exploration and exploitation, in particular of ‘unconventional reservoirs’ has been breathtaking over the last ten or so years. Multi-stage hydraulic fracturing or ‘fracking’ of horizontal wells has been truly revolutionary.  But now stories of depletion are going around lately in plays such as the Bakken of Montana. Now this may be premature but the fact is that the more things change, the more they stay the same. The oil and gas industry is somewhat ‘testosterone driven’ and currently that means, you produce more when you can frack bigger than your neighbors. Not much different from keeping up with the Joneses. But that is, as always with technology, about to change.

My company worked in many tight oil and gas plays and what you are not being told is that many of those ‘revolutionary plays’ have been producing for decades and that the old verticals often produced more over their lifespan than newer horizontals do. There is clearly an ‘end of the road’ scenario developing. Neither has the fracking revolution changed the fundamental laws of physics although many industry concepts have lost their meaning and are in dire need to be redefined. My company is in the forefront of this redefinition, although our financial means are very limited. But the key message is that there is a limit to how much these pools can deliver although the extend of their reserves is mind-blowing.
The question though is economics and the employment of capital to find new plays. So, there is a base price at which oil and gas are uneconomic to produce. Costs have been driven down and some companies can produce at amazingly low prices while still making some money. That is what we are seeing today with oil around $50 per barrel and gas at around $2.8 per mcf. But this is for drilling at rock bottom prices; prices undoubtedly will increase when the number of new drills increase. Then the breakeven price will increase as well.  This is for drilling out known and partially developed plays. But, as said, those existing plays will decrease in output over the coming years.  Individual wells decline typically 60 to 70% in the first year and ‘stabilize’ after a few years around a decline rate of 10 to 20%. To keep on producing at the same level year-in-year-out will require a staggering amount of new-drills.
To offset these costs, industry will try old and new techniques to extend the lives of their wells. I am sure that even the ‘tightest’ oil and gas pools will be revisited over the coming decade to see if fluids or gases can be injected after all to maintain reservoir pressure (the energy that moves the hydrocarbons first to the wellbore and then to the wellhead and pipelines). This will increase the breakeven price even further. Investment capital to finance innovations and exploration for new reserves has dried up to virtually nothing. This is the most expensive portion of oil patch operations and this requires a lot more brain power than just apply ever bigger fracks. Fracks that are now shown, when applied to the maximum, can indeed trigger earthquakes – mild ones but over the long term, who knows…  Speaking in terms of economics and liability, this will likely increase breakeven costs even further.

So will the price of brainpower, especially since we have lost and are about to lose so many baby boomer brains. Yes the young millennium brains bring in new views but also a lot of learning mistakes. From my experience, an experienced baby boomer can evaluate a play two or three times as fast as a millennium(er?) and... do it better. Yes the old brains will possibly deteriorate and the young ones will become more experienced but there is, due to past ‘industry busts’ an enormous age gap between those two generations of oil men and women. So I foresee over the coming 5 to 10 years society will pay dearly for all this in the form of higher oil and gas prices.  It is easy to predict oil and gas prices in straight, inflation adjusted, lines. But that is not reality. To a large degree, our recovery from 2008 financial crises has been financed by cheap energy prices and based on the testosterone of the ‘cowboys’ in the oil patch. Soon this will prove unsustainable and then brain power and expertise will be needed – by then a lot of this expertise has been discarded and lost in the pursuit of cheaper and cheaper drills. Let’s pray that by that time renewables and new energy sources can take up the slack, but somehow, I doubt that very much.
So yes, we will probably never run out of oil and gas, same as for coal – look how much is still in the ground. But there is an economic and practical limit that we can produce at. I would say, there is not only peak oil demand but much more likely there is peak oil supply and it is, once again, just around the corner.

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