Last month, OPEC received another warning that the battle for market share in the global oil market was not over. “It’s not beneficial for OPEC to deepen their cuts because prices will go up and shale oil producers and others will take OPEC’s market share,” Abdullah al-Attiyad, the former oil minister of Qatar, said in an interview with the Bloomberg news agency. “The problem is that there is someone waiting in the dark corner for OPEC—it’s shale oil producers and whenever prices rise, they raise production.”
Al-Attiyad’s remarks came after the International Energy Agency reported that the oil market was not balancing as quickly this year as some had predicted. OPEC output rose to its highest level of the year in June and its compliance with production cuts slumped to 68%. Meanwhile, oil prices meander in the USD 45–50/bbl range and remain under pressure as US production remains strong.
The oil market has historically been an interplay between supply and demand. But a new book by a consultant and former top energy adviser to US President George W. Bush argues that oil boom-and-bust cycles are here to stay and will likely be more volatile than those in the past. Periods such as from 2004 to 2008—when oil rose to USD 147/bbl and then dropped to USD 33/bbl—or what has happened between June 2014 and the present—prices falling from USD 107/bbl to USD 26/bbl and then back to around USD 50/bbl—could be the new norm. “Recent oil fluctuations mark the return of a new and unfettered market for crude oil and, as a consequence, boom-bust oil prices are making a return after 8 decades,” Robert McNally, who is also a fellow at the Columbia University Center on Global Energy Policy, writes in his new book Crude Volatility.
Contradicting the current general consensus that US shale producers have replaced Saudi Arabia as the market’s swing producer—increasing supply as the market tightens and prices rise, and decreasing production as the market dictates—McNally argues that Saudi Arabia abandoned that stabilizing role in the mid-1980s, except for some occasional tinkering with global oil supplies in the 1990s, and shale producers are not cohesive enough to fill that role. The lack of a true swing producer explains the dramatic ups and downs of oil prices since 1998.
McNally divides oil price history into 5 eras: the severe boom-bust cycles after oil’s discovery in Pennsylvania in the late 1800s; John D. Rockefeller’s Standard Oil monopoly that enriched him but stabilized prices; the return of volatility after the Standard Oil breakup and the discovery of huge quantities of oil in Texas, Venezuela, California, and Mexico beginning in the 1920s; price stabilization by the Texas Railroad Commission from the mid-1930s to 1972; and OPEC’s attempts to control the market. But OPEC has never had sufficient spare production capacity to truly control prices, McNally believes, and non-OPEC discoveries from Alaska to the Gulf of Mexico and elsewhere have undercut the cartel’s attempts.
McNally believes that price swings in the range of USD 30/bbl to USD 100/bbl may be likely, playing havoc with governments that depend on oil revenues and companies trying to plan expensive projects. Oil cycle volatility is caused by basic economics—imbalance in supply and demand, which fuels price swings, which causes further sup-ply fluctuations. And because the industry is often surprised—whether it be the sharp growth in Asian demand in the early 2000s or the recent incredible growth in shale production in the US—it will be impossible to stabilize prices in the short term.
Public and government concern over unconventional oil and gas production continues. Hardly a month goes by before another study into the potential health effects of shale production is launched or a public hearing is conducted regarding the impact of a project on the local landscape.
For example, last month the Southwest Pennsylvania Environmental Health Project opened a public health registry to track and analyze the impact of shale gas development on people living near wells, pipelines, and other infrastructure. That followed the release of a Duke University study that concluded that hydraulic fracturing in the Marcellus Shale did not pollute groundwater in West Virginia but that wastewater spillage contaminated some surface water. Many of the reports and studies are drawing similar conclusions—that hydraulic fracturing poses little or no risk but that contamination can occur during the transportation or treatment process.
Shale oil and gas development has certainly changed the world order in these commodities, from OPEC strategy and commodity prices to global import/export patterns. The US, with abundant gas still depressing prices, is becoming an exporter of liquefied natural gas rather than an importer. Shale oil is largely responsible for the low oil prices of the past 2 years, turning the US into the world’s “swing” producer, a position Saudi Arabia once held. Industry resiliency amid low oil prices led to slashing of service company costs, operational efficiencies, and high-grading of properties. As service costs now begin to rise, profitable production in a world of USD 40–60/bbl oil will require further innovation.
But the industry also continues to face regulatory challenges based on environmental concerns. Maryland has recently followed New York in legislating against hydraulic fracturing. A new book, Sustainable Shale Oil and Gas: Analytical Chemistry, Geochemistry, and Biochemistry Methods by Vikram Rao and Rob Knight argues that this type of policymaking is hampered by inadequate data, which in turn is caused by shortcomings in analytical techniques. The authors describe new cost-effective analytical methods for detecting fugitive methane as well as particulate matter and volatile organic chemicals, including a portable shoe-box-sized mass spectrometer with performance approaching that of a laboratory machine.
The last line of the book states, “That which cannot be measured, cannot be regulated or otherwise controlled or exploited.” They apply this reasoning to improving the economics of recovery as well. The book discusses analytical methods to illuminate the unconventional reservoir, including a fascinating method using DNA sequencing to characterize reservoir rock through examination of microbial populations.
The book lays out how analytical chemistry, geochemistry, and biochemistry play prominent roles in hydraulic fracturing and that they are central to the three tenets of sustainable production: protecting the environment, protecting the well-being of local communities, and profitability.
Innovation has been a necessity for survival in the low oil and gas price market, and continued innovation will result in an industry resilient to future unexpected challenges. And the authors contend that that innovation and production is achievable in environmentally responsible fashion.
Momentum is building for what is being called the “peak demand” theory—that before too long global oil demand will begin to fall as transportation efficiency, innovations such as electric cars, and government climate change policies will quell the rising consumption of hydrocarbons that has marked the past several decades. What is getting attention is that this sentiment is no longer coming from what could be termed anti-oil interests but is coming from the likes of Shell’s chief executive officer (CEO) and such organizations as the World Energy Council (WEC).
Speaking at an energy conference in Houston in March, Shell CEO Ben van Beurden predicted that world oil demand could peak in the late 2020s because of the growth of renewable energy sources and natural gas. He noted that his company is moving toward a lower-carbon, long-term strategy. Shell recently divested most of its Canadian oil sands position and is increasing its position in natural gas. Last year, it bought the BG Group, which built up its natural gas portfolio. Van Beurden emphasized that the industry must reduce carbon dioxide emissions to help countries meet the recent Paris climate change accord goals.
The WEC has predicted that global energy consumption will begin declining in a little over a decade, and its eighth annual survey of energy executives around the world showed that growth in renewables and energy efficiency is requiring firms to revise their medium- and long-term outlooks.
The peak demand theory undercuts the prevailing industry notion that a rising middle class in developing countries will propel oil demand much higher. Just a few years ago, the industry and many economists were fretting about a shortage of energy supplies to meet this growing consumption. At the same conference where Shell’s CEO spoke, the head of the International Energy Agency (IEA), Fatih Birol, said that global demand is not peaking and in fact will grow by 7.3 million B/D through 2022. He pleaded with oil companies to invest more, otherwise the world would face an oil shortage in the future and the prospect of huge price spikes. He noted that even though sales of electric cars had risen to a record number of more than 1 million, this was still less than 1% of total global auto sales. The trucking, airline, and chemical sectors will continue to drive oil growth, he said.
In general, the oil industry is not good at predicting the future. The oil price decline in the late 1990s, the huge run-up in prices led by surging Chinese and Indian demand in the early 2000s, the strength of the price collapse of the past 2 years, and the resilience of the US shale sector all seemed to catch much of the industry flat-footed. The growth in unconventional production has only made supply/demand forecasts tougher.
The argument might not be so much about peak demand, but about timing. The industry as well as organizations such as the IEA have predicted that global hydrocarbon use would decline this century and that natural gas would be the “bridge to the future” of economies built more around renewable energy sources. The question is whether that will come in 15 years, 30 years, or even longer.
Earlier this year, JPT debuted a new website. Unlike the previous rendition of the magazine’s website, which was only a replica of the print magazine, the new one contains up-to-date information on the latest upstream technology news, trends, and events as well as the full contents of each print issue (www.spe.org/jpt). And last month, JPT debuted a bimonthly e-newsletter, with links to the latest stories posted on the website.
It is important to note that JPT’s mission, and its monthly print magazine, will not change. We view this as a “value add” for members, who are now accustomed to receiving news and information in a variety of ways, from print to digital. Surveys of the SPE membership reveal that members highly value the monthly print edition of JPT and its contents but are also interested in receiving more digital offerings. These latest moves hope to satisfy both needs. The contents of the print JPT will remain the same, while the website will contain both the print magazine’s contents and additional stories not found in the print issue.
Since JPT was launched in 1949, it has sought to help achieve SPE’s mission of disseminating and exchanging the highest quality upstream technical information valuable to the oil and gas industry and to SPE members. The magazine has gone through several evolutions—from publishing only full-length technical papers to covering more than four dozen technical topics in depth through summaries of the best SPE papers and through staff-written feature articles. The current changes are just another step in this evolution.
We hope you will take a look at the new website and, as always, we welcome your suggestions and comments.
The 2-year downturn in oil prices has been a challenge for operators and service companies alike, but operators appear to have turned a corner, going by the most recent fourth-quarter earnings. For the larger service providers, it may take longer to gain solid financial footing, but the chief executives of these firms are sounding more optimistic.
After months of cost cutting and reassessment of projects, earnings for the larger majors were positive. More stable oil prices and OPEC’s recent production agreement point to a brighter year in 2017. Total boasted a USD 548 million profit for the quarter, compared with a USD 1.6 billion loss in the fourth quarter of 2016. The company announced that it was ready to embark on new projects, possible acquisition, and increased production. BP eked out a USD 72 million profit compared with a USD 2.2 billion loss in the year-ago period. Shell also reported profits, although net revenue was down from the previous year’s quarter. Shell said it had “turned a corner” after paying down debt and absorbing BG. Chevron posted its second straight quarterly profit and sees production growth this year amid cautious spending and cost control. ExxonMobil, meanwhile, recorded its lowest earnings in 2 decades and took a huge writedown on the value of some of its upstream assets.
Smaller operators, particularly those involved in shale plays in west Texas, New Mexico, and other promising areas, plan more aggressive upstream spending this year. While many larger international plays still seem risky, activity in places such as the Permian Basin is soaring.Service companies are also seeing a better year compared with the previous two, particularly for those involved in North American operations, but still face some challenges. Many service providers have begun renegotiating prices with clients, after slashing prices the past 2 years because of the steep fall in oil prices. “The direction [service companies] all need to go is that we need to recover some of the pricing concessions that we’ve given,” Schlumberger Chief Executive Officer Paal Kibsgaard told the Wall Street Journal during an earnings presentation.
Numerous reports suggest that the worst of the oil industry downturn is decidedly over, and that the outlook for renewed capital spending this year is positive. Some firms are even hiring again. But production is also rising, which will moderate oil price increases.
Industry E&P spending is on the upswing but remains well short of spending levels reached 2-3 years ago. Oil and gas USD 450 billion, reversing 2 years of steep decline, according to Wood Mackenzie’s latest global upstream outlook. Spending this year, however, will still be roughly 40% below 2014 expenditures.
Most of the spending increase this year will be in US shale, according to Wood Mackenzie, because that resource is less expensive to produce and wells can quickly come on line. US shale has emerged as the global market’s “swing producer” in the past couple of years, as output quickly ramped up or declined based on oil prices. That role was formerly held by Saudi Arabia, which would increase or decrease oil flows into the market to moderate prices.
The consultancy forecasts that oil prices will average USD 57/bbl this year, gradually rising to USD 85/bbl in 2020. If oil prices stay higher than USD 50/bbl, independents could increase spending by as much as 25% this year, Wood Mackenzie says, but spending by larger operators will be more conservative.
It also sees new life in new projects, predicting that more than 20 major developments will go forward this year, a third of them in deep waters. Several independents have already signaled higher capital budgets this year, including Pioneer Natural Resources and Diamondback Energy.
Other reports also are optimistic about an oil industry rebound. Rystad Energy predicts that new offshore production capacity of 15 billion bbl will be approved this year, tripling last year’s total. And a Barclay’s survey of more than 100 E&P companies shows upstream capital spending could rise by an average of 7% this year.The US Energy Information Administration (EIA), which earlier predicted a slight decline in US production this year, reversed its forecast last month. It now predicts an increase in total US output from 8.9 million B/D in 2016 to 9 million B/D this year and 9.3 million B/D in 2018. The increase will come from increases in tight oil production, drilling efficiency, and better well productivity. The EIA predicts that WTI prices will average USD 52/bbl this year and USD 55/bbl in 2018, as the increased production keeps the global supply/demand in balance.
Hot Permian Play Gets Panel Focus
Oil prices, fracturing fleet, staffing, and technology among topics aired.
Joel Parshall, JPT Features Editor
The successes and challenges of producers in the United States’ most active oil play received a wide-ranging discussion by three panelists recently at an SPE Gulf Coast Section meeting in Houston on the state of the Permian Basin.
Exclusively following a question-and-answer format, the nearly hour-long program last month covered oil prices, the fracturing fleet, staffing, technology, reservoir issues, and other topics related to the basin that covers west Texas and southeastern New Mexico.
“It’s exciting to see the Permian come around and actually be the hottest play and the hottest area probably in the world,” said Billy Smith, technology director for North America at Halliburton. “The encouraging thing about the Permian, at least with the operators I’ve spoken with, is that at USD 50[/bbl] oil, a lot of the play is very valid and very economic.” Some Permian plays are economic for their operators at USD 40/bbl oil, he said.
Oklahoma Official: Progress Being Made, but Induced Seismicity Will Not Stop Anytime Soon
Trent Jacobs, JPT Senior Technology Writer
One of Oklahoma’s top government officials announced recently that it could be many more months before the full scope of the state’s regulatory response plan for induced seismicity is proven effective.
Oklahoma is a top-five oil and gas producing state in the US that has also seen a nearly 4,000% spike in earthquakes since 2009, making it among the most seismically active regions in the country. Scientists and industry experts have concluded that the earthquakes are instances of induced seismicity brought about by the injection of produced wastewater into a fault-connected layer of rock called the Arbuckle formation.
Michael Teague, secretary of energy and environment for Oklahoma, explained that even though the state has ordered hundreds of disposal wells to cease operations or cut back their injection volumes, the earthquakes are slowing down but growing in strength. He suggested that it will take quite a bit of time for the built-up pressures inside the Arbuckle thought to be triggering the quakes to dissipate.
Beware of Bottlenecks
Stephen Rassenfoss, JPT Emerging Technology Senior Editor
Oil companies that have slashed the break-even cost of producing oil from shale plays now must figure out how to hold on to those hard-won gains.
US producers can profitably produce oil from these difficult formations at prices that are 50% lower than they were during the boom, according to Rystad Energy. But roughly half of those gains are at risk as drilling activity rises.
“Lower unit prices of service companies are a major reason for the drop,” said Jon Duesund, senior project manager for Rystad, during a recent briefing in Houston.
Discounts squeezed out of suppliers are considered “nonsustainable” because prices will rise as demand rises, allowing service companies to raise prices.
UK Geomechanical Firm Targeting US Shale; Addressing Frac Hits
Trent Jacobs, JPT Senior Technology Writer
One of the oldest names in geomechanical modeling has learned some new tricks, and like so many recent advances in the oil and gas industry, it has everything to do with the North American shale revolution.
Founded nearly 30 years ago, UK-based Rockfield was among the first to develop a hydraulic fracture model for conventional reservoirs, and remained one of the few names in specializing in this field for much of that time.
But the market opportunity presented by the complex geomechanics involved with fracturing tight rock and shale reservoirs has spurred more competition and forced legacy modeling companies such as Rockfield to revamp their existing codes and develop new software products.
Prescriptive-Analytics Modeling Technology Captures Reservoir Physics
Chris Carpenter, JPT Technology Editor
Producers face a number of decision-making challenges. Specifically, they must optimize field development and operational decisions in light of the complex interplay of fiscal, market, and reservoir variables.
Data analytics is enabling new and better solutions for handling these problems. Tachyus’ Data Physics technology combines machine learning and reservoir physics to rapidly integrate relevant data sources in real time. The prescriptive analytics of the new technology enables operators to efficiently compare possible decision scenarios to balance short- and long-term tradeoffs, such as ultimate oil recovery vs. production targets. This methodology, combined with a scalable cloud-based computational platform, enables closed-loop reservoir optimization, in which reservoir and surface models are frequently updated and continuously identify new optimal operational decisions.
Total Wins Award for Project Integration
John Donnelly, JPT Editor
Total’s Laggan Tormore project claimed the International Petroleum Technology Conference (IPTC) Excellence in Project Integration Award at the 10th IPTC in Bangkok, Thailand.
The IPTC Excellence in Project Integration Award highlights projects that have demonstrated distinction through-out the entire value chain, and are equivalent in value to at least USD 500 million. Past winners have included both international and national oil companies. Taken into account are projects that exemplify strong teamwork, solid geoscience knowledge, reservoir and production engineering expertise, outstanding facilities engineering practices, a strong commitment to health, safety, and the environment, and advocate innovative and people-oriented human resource policies and community programs. Previous award winners include the Qatar-gas Debottling project by Qatargas, the Independence Hub project by Anadarko Petroleum, Sakhalin-1 by Exxon Neftegas, Qatargas 2 by Qatargas, Parque das Conchas by Shell, Pazflor by Total, Perdido by Shell, RGX2 by RasGas, and CLOV by Total.
As the oil industry begins to emerge from one of the worst downturns in decades, some see a new threat on the horizon: the growing use of electrically powered vehicles, which could cut seriously into future oil consumption.
Automobile manufacturers and oil companies are trying to estimate the growth potential of these vehicles, which currently make up only 1% of the global transportation market but have surprised automakers with a quick uptake in demand over the past 2 years. There are now more than 1 million electric cars on the road, up 70% from 2014, according to the International Energy Agency. Transportation currently accounts for more than half of oil consumption worldwide. The oil recession of the past 2 years underscored the critical importance of the balance between global supply and demand. As oil supplies swamped consumption with US shale output sky-rocketing, Saudi Arabia increased production to try to drive high-cost producers out of business, and demand in places such as China cooled off.
Automakers and many prominent companies in the oil industry apparently see different futures for electric vehicle growth. Both the widely watched ExxonMobil and BP annual energy outlook surveys have paid little attention to potential disruptions from electric vehicles, although both have noted the growing efficiency of the traditional combustion engine as a factor in reduced demand. In a survey of top oil executives attending the Oil and Money Conference in London in November, only 12% saw electric vehicles as a serious threat to the industry, ranking lower than such issues as a potential looming supply shortage, lack of capital investment, and break-even price points for production. “Electric cars, they can grow, but I don’t think that is a problem for us,” ENI Chief Executive Officer Claudio Descalzi said at the conference.
Notably, Statoil and BHP Billiton have a different take. Statoil Chief Executive Eldar Saetre said at the same event that global oil demand could peak in the 2020s as the rising use of electric vehicles will “shrink” the industry. And BHP said in a blog on its website that “2017 could be the year when the electric car revolution really gets started.”
Automakers believe that as batteries become cheaper and can support longer driving ranges, consumption of electric vehicles will soar. They are also banking on the preferences of millennials and the coming prospect of driverless vehicles to enhance electric transport demand. Executives of Mercedes, BMW, and Ford all recently predicted a strong uptake in electric vehicle use over the next decade.
Oil analysts are just starting to put serious research to the question and predictions vary widely. Wood Mackenzie believes that electric vehicle use could take 1–2 mil-lion B/D of oil consumption out of the market within 20 years. IHS Markit is embarking on a major study, predicting that electric vehicles could account for 15% to 35% of all vehicle sales by 2040, which “could bring about the greatest transformation since the dawn of the automotive age.” Others predict that energy efficiency and government regulations pushing a low-carbon future will have the most impact on future demand, but the rapid uptake of technologies that are disrupting long-term business models should bring this issue to the surface in the next couple of years.
Layoffs have slowed, some companies posted profits in the third quarter, and there is even talk of a coming oil shortage that would cause oil prices to spike. But there is generally no consensus on what the oil market has in store over the next 1–2 years.
At a recent industry gathering in London, Saudi Arabia’s Energy Minister Khalid al-Falih said the market was recovering from its severe 2-year decline, with global supply and demand becoming rebalanced, which will raise oil prices. “We are now at the end of a considerable downturn,” he said.
But whether OPEC can reach, or keep, a production agreement is unclear. Although North American unconventional output has been unprecedented over the past few years, OPEC’s course of action over the next year “will define whether the industry will experience a slow and smooth recovery to a sustainable price equilibrium, or a period of underinvestment leading to a volatile and high oil price,” says consultancy Wood Mackenzie. “Even if the recent provisional deal produces minimal results, OPEC Gulf countries will ultimately need to cut production if operators expect prices to recover in the next 3 years.”
Third-quarter company earnings were mixed, with some service companies and operators finally posting profits after severely cutting costs. Shell and BP reported third-quarter profits after shedding jobs and slashing expenses, rebounding from 2 years of losses. Both companies said they believe supply and demand are coming back into balance and expressed cautious optimism about 2017. But profits at -ExxonMobil, Chevron, Statoil, and other majors were not as positive. Halliburton finally turned the corner on profitability in the quarter but other service companies such as -Schlumberger did not.
Many oil executives are warning that the lack of investment caused by the downturn will lead to a severe oil supply shortfall in just a few years and, with it, a sharp price increase. That also may suggest that they believe that the oil price recovery will be so gradual that it will not spur any rapid rise in upstream spending.
But although upstream investment has fallen sharply, a supply shortage is not necessarily imminent. Much of the upstream spending that has been curtailed, says Amy Myers Jaffe, an energy expert and executive director for energy and sustainability at the University of California at Davis, was from high-cost, frontier projects such as the Arctic. With budgets tight, spending may be directed instead to surer plays such as the Permian Basin in west Texas, with a focus on existing fields, which will lead to first oil production more quickly. Investment continues to flood into the Permian, and the US Geological Survey last month upgraded its reserve estimates for the Wolfcamp shale in the Midland Basin portion of the Permian. If OPEC continues to worry about losing market share and operators become more disciplined in their upstream spending, the shortfall may not materialize.
SPE held its first Annual Technical Conference and Exhibition in the Middle East in September, as 7,500 industry professionals from 94 countries met to discuss topics under the theme of “E&P 2.0: Transforming and Shaping the Future.”
The event took place at the Dubai World Trade Centre under the patronage of the Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum, and drew senior speakers from operators, service companies, and academia.
The conference opened with addresses from the leading executives of two of the region’s oil giants. Amin H. Nasser, president and chief executive officer (CEO) of Saudi Aramco, delivered the conference opening keynote address, and the welcome keynote speech was given by Abdul Munim Saif Al Kindy, director of exploration development and production for Abu Dhabi National Oil Company (ADNOC).
Both Nasser and Al Kindy struck similar themes about the need for both the industry and their respective state oil companies to change strategy in light of the oil and gas sector’s current economic challenges.
Despite growth in alternative energy sources, hydrocarbons will supply the world’s energy needs for years to come, said Nasser. He called the current oil industry in recovery mode but still weak. “Despite recent oil price volatility, the market is reaching balance,” but likely will remain volatile in the near term, he said. Firms with both upstream and downstream businesses will remain in better shape, he added.
Nasser laid out Saudi Aramco’s four-point framework for the future, which has similar applications to the broader industry, he said. The plan focuses on resilience, innovation, managing talent, and collaboration. Noting that many smaller companies have filed for bankruptcy because they were overleveraged, he emphasized that a strong financial position, and diversity beyond just the upstream, will help companies survive in times such as these. It also allows for continued investment in technology and building capable human resources.