The Oil Industry is Finding Growth in Old Oilfields Through EOR

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It is easy to live your life and not think too far upstream as to where it all comes from. For example, when you go to the grocer, you buy produce. Do you really think about the truck driver who delivered the produce? Or the rail cars or transport ships that brought that produce to your region of the country? Or the processing centers that packed and shipped the produce? Or the pickers in the field who lifted the produce off the ground and put it on the flatbed tucks that hauled it to the processing center? Or the farmer who planted the field? Or the water engineer who maintained the irrigation system? Or the people at the seed bank who developed the seeds that the farmer planted and the water engineer made sure received the irrigation? You get the picture, I am sure. We live in a world of complex social and economic relationships.

It is the same thing with oil and petrol. When you go to the petrol station to fill the tank of your car, do you really think about how it all happens? Do you mentally picture the tanker trucks, the storage terminals, the long-distance pipelines, the refineries, the gathering system that brought the oil ashore or the tankers that hauled the oil from some overseas loading terminal? Do you have a mental image of some oil well somewhere, lifting oil from the depths of the Earth? Do you appreciate that some geologist came up with a prospect and laid his or her reputation on the line to convince a financial backer to fund the drilling of an oil well? The crust of the Earth is, I assure you, pockmarked with the dry holes of failed oil exploration efforts. Like many things in this world, it only looks easy.

In my opinion, admittedly biased by my own background, what makes the oil and petrol systems of the world work are, at root, the geologists who have the knowledge to tell the drillers and everybody elsewhere to make the hole. And this is not to slight the engineers, the technical staff and everybody else who is part of the industry, to include the fry cook in the kitchen trailer and the guys who sign the checks down at the bank. Everybody has to work together and respect the contribution that every other soul makes to the whole. It gets back to that “division of labor” thing. It is just to say that finding and extracting oil and petrol is not an “easy” thing to do in that “division,” and a lot of people who thought otherwise have lost their shirts.

Recently, I attended the American Association of Petroleum Geologists (AAPG) convention in Long Beach, California. As I walked among the poster presentations and sat in on the technical discussions, I was struck by the high scientific quality of the work coming out of what you might call the “nontraditional” locales. There were geologists from Russia, China, Indonesia, Nigeria, Egypt, Algeria, Brazil, Mexico, Venezuela and many more nations of the world. Really, it seemed to me that every one of them had one or more areas of technical competence in which he or she was building a true reputation. This has a lot of implications for both the present and the future, but what it says in a big way is that knowledge and technical competence in the field of geoscience is not solely resident in the United States or Western Europe. The oil industry is truly a “global” industry, for as much as that expression is overused.

AAPG has about 30,000 members now, about half the number that it had back in the early 1980s. This is another way of saying that things were booming in the oil biz back then. But many people who worked in the geology business were laid off during the mid- to late-1980s and throughout the 1990s, due to what we look back and call the “oil bust.” From its high price of about $50 per barrel back in 1980 (using the dollars of that era, and it would be over $100 per barrel today), oil crashed in price to near $5 per barrel by the mid-1980s, a 90% fall in price.

With that fall in price came massive layoffs in the industry. The layoffs totaled well over 1 million jobs in all (geologists, engineers, support staff and many other job classifications, according to the U.S. Department of Labor). This number of layoffs actually exceeds the combined job losses of the U.S. steel and auto industries over the past 25 years. So the long-term crash of the U.S. oil patch claimed and ended many promising careers. This matters quite a bit right now because, as the oil industry is booming again, there is a severe shortage of skilled personnel.

Costs for everything in and around the oil patch are rising. Many projects are on hold due simply to the fact that there are not enough experienced personnel available to do the work. The only way for a person to get experience in the oil industry is to work in the oil industry, but the ranks are missing an entire generation that either was laid off in the 1980s and 1990s or was never hired in the first place. It will take many more years to rebuild the critical cadre of human skills that the world’s energy industry will need over the next decades. By some counts, well over 50% of the world’s skilled geoscience work force will be retiring in the next 15 years. And the age cadre just behind these retirees is missing, for reasons that I explained above. Who will be left to do the work? The younger folks, by default, but there are not nearly enough of them out there.

Let’s discuss that oil bust. There were a lot of reasons for that oil price crash of the 1980s. Among them were that the high oil prices of the late 1970s, caused by the loss of oil output from Iran after the fall of the Shah and the Iranian Revolution, led to a worldwide recession. The recession reduced demand for oil and allowed prices to fall. Also, a number of then new oil provinces of the world were coming on line, and oil output grew rapidly from nontraditional locales such as Alaska, the North Sea and Mexico. And one critical reason for the fall in the price of oil was purely geopolitical, in that the Saudis maximized oil production to drive the price down and hurt the economic interests of the Soviet Union, which had invaded Afghanistan in 1979. By reducing the price of oil, the Saudis indirectly deprived the Soviets of a key source of hard currency, from the sale of Soviet oil for U.S. dollars. As the Mogambo Guru likes to say, “Everything is connected to everything else.”

But as I mentioned above, the falling price of oil severely harmed the world oil patch. Only the “best” prospects were drilled, and the low-cost oil was extracted and sold at relatively low prices (in retrospect, the prices were ridiculously low). The more high-priced oil was uneconomic to extract, and hundreds of thousands of oil wells across the world, particularly in the United States and Canada, were plugged and abandoned. Perhaps it made economic sense to plug the marginal wells when oil was selling for $10 or $15 per barrel. But today, when oil is selling for $60 or more per barrel, don’t we wish that we still had many of these old wells, even producing just a few barrels per day? And many elements of the vendor base went out of business as well. From drilling companies to equipment makers to service providers, there was a severe contraction within the oil and gas industry. But with oil appearing “cheap” based on its nominal price, no one was calculating the long-term price to be paid. The bill, however, is now coming due.

Over the past 25 years, the “growth” in oil reserves estimated to be in existing oil fields has actually exceeded the additions to reserves from new discoveries. The implication is that the existing oil fields of the world are as important, and maybe even more important, than the prospective new discoveries out in wildcat country. The challenge for the industry is to recover more of the oil that is down in the reservoir, but which has traditionally been too expensive, or beyond the technical means to recover.

Briefly, by “growth,” I mean the tendency for the estimates of the resource base to increase over time, and with those estimates, the “reserve” estimate increases as well. That is, when a well is first drilled, there is an estimate of how much oil in place (OIP) is down there. This estimate for OIP may or may not be highly accurate, but it is based on the best knowledge when the well is drilled. Over time, however, the well develops a production history, and each well is cumulated to obtain production statistics for a given field or set of fields. Hence the OIP reserve estimates become more and more refined over time, as actual oil is extracted and lifted to the surface.

Looking at the broad picture, out of about 35,000 known oil fields across the Earth, only about 11% are currently subject to “enhanced oil recovery” (EOR) methods, which tend to increase recovery of OIP, sometimes by quite a bit. Some estimates place more than 50% of the world’s oil fields as candidates for EOR applications, which could lead to dramatically higher reserve estimates, or “reserve growth,” in the future. But are there enough experienced personnel to do the work? Is the vendor base sufficient to supply the equipment and services? Will world oil supply remain stable over a long enough period of time to allow these scenarios to play out, and the “old” oil fields and their OIP to be accessed?

Byron W. King
for The Daily Reckoning Australia

Byron King
Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments.
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