Oil Left in the Ground

High prices still haven't prompted companies to use advanced extraction methods.

Even with record-high oil prices, about two-thirds of the oil in known oil fields is being left in the ground. That's because existing technologies that could extract far more oil--as much as about 75 percent of the oil in some oil fields--aren't being widely used, according to experts in the petroleum industry.

Several well-established technologies, including "smart oil fields," exist that could significantly boost the supply of petroleum from oil reservoirs. But a lack of investment in such technologies, particularly by the national oil companies that control the vast majority of the world's oil reserves, is holding back implementation.

When oil is drawn from a field too quickly, or from a bad location, or with the wrong kind of well, large amounts of oil can be left behind, says Richard Sears, a visiting scientist at MIT who has served as a vice president for exploration at Royal Dutch Shell, based in the Netherlands. But the best technologies for managing an oil field require up-front investment--when an oil field is mapped and characterized and the first wells are drilled--and the payoff can take decades.

In most oil reservoirs, the oil resides in porous rock in geologic layers that are tens of meters thick but stretch for miles. A conventional oil well is a vertical shaft, so it is in contact with only a narrow cross section of the reservoir. Such a well depends on oil percolating through microscopic pores over long distances. That can slow production, and often oil can be stranded inside the irregular geometry of the oil field.

For 15 to 20 years, however, it's been possible to drill horizontal wells. These follow along the length of an oil field, so that the well is in contact with oil for miles, rather than for just several meters. What's more, advanced imaging technologies and new drilling rigs have made it possible in recent years to drill to an accuracy of one or two meters, Sears says. The increased precision in drilling allows oil companies to stay close to the top of the reservoir, where the oil is, and away from the water that can exist in the reservoir.

It has also become possible to make "smart wells" that include sensors that can survive the extreme temperatures and pressures found deep underground. These allow oil companies to detect, for example, when water, instead of oil, is being pulled into the well, and to quickly shut off production from that area, while continuing to produce from other sections of the well.

Such smart oil fields have started to become more common for international oil companies such as Shell, Exxon-Mobil, and BP. But they still aren't used in most oil fields. And their use is particularly low in fields run by national oil companies, says Larry Schwartz, a longtime researcher and scientific advisor for Schlumberger, a Houston-based company that provides various services to oil companies.

Schlumberger historically focused on providing services at the "front end," he says, which includes taking measurements, such as of the amount of oil and how easy the oil will be to produce, and "drilling sophisticated wells." But since oil prices have been high, the company's biggest revenue stream has come from projects related to improving existing wells, such as by fracturing rock underground to try to improve oil production at conventional wells that have stopped producing as much as they used to.

Steven Koonin, BP's chief scientist, says that cutting-edge research could lead to automated oil rigs on the sea floor, ultra-deep-water ocean drilling, and arctic exploration and production, as well as to technology for extracting oil from unconventional sources, such as shale. But although oil prices have been higher than $60 a barrel for almost three years, Koonin says that for the most advanced technologies, "oil prices will have to stay high for a couple of years longer before companies think they can make big investments."

to the source

The 'Peak Oil' Theory: Will Oil Reserves Run Dry?

Oil's recent slide and the slackening demand that an economic slowdown's expected to bring have stimulated hopes that crude could soon safely stabilize below the $100 range.

But beneath seesawing supply and demand lies the deeper question of just how much oil the planet has in the first place — and how much it will have in the future.

The answer to that question supports — or undermines — the theory that we are in the midst of an ever-tightening supply that will lock prices into a permanent, rising arc. That, in nutshell, is what's meant by the term "peak oil".

It’s an issue that matters, especially to major energy players who are in a race to disprove the theory and trying to bring on-stream more oil fields than are currently being depleted.

John Hofmeister, president of Royal Dutch Shell's US operations, shared his thoughts on the supply issue on CNBC’s Squawk Box on Thursday. He took aim at the peak oil theory as popularized by Matthew Simmons, the author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy." (See the Hofmeister interview at left.)

“The peak oil theory has really swamped the world — God bless Matt Simmons,” Hofmeister told CNBC.

Simmons is mistaken, said Hofmeister, because he is overly focused on a single country: Saudi Arabia, the world's largest exporter and OPEC swing producer.

Although Saudi Arabia is a dominant player, the Shell executive said focusing solely on Saudi Arabia leaves out the all other places around the globe where Big Oil and national oil companies are busy exploring for untapped oil reservoirs.

Those reservoirs could include the vast — but currently restricted — reserves of the US Outer Continental Shelf, which holds an estimated 100 billion barrels of oil and natural gas. Tapping into such a large supply would slash the $500 billion US sends overseas for each year for oil imports.

As things stands, however, only 15 percent of those reserves are currently exploitable, a good part of that off the coasts of Louisiana, Alabama, Mississippi and Texas.

Simmons is also off the mark, Hofmeister contends, because he excludes unconventional sources of oil such as the oil sands of Canada, where Shell is already active.

The Canadian oil sands — a natural combination of sand, water and oil found largely in Alberta — is believed to contain 1 trillion barrels of oil. Another 1 trillion barrels are also trapped in rocks in Colorado, Utah and Wyoming.

Given all that, we asked Simmons, who is chairman of Simmons & Co. International, a specialized energy investment-banking firm based in Houston, to respond to Hofmeister's comments and explain how his peak oil scenario can be avoided.

CNBC: What's your response to critics like Hofmeister?

Simmons: There is a kind of schizophrenia within the likes of Shell where the chairman basically says, "We think by 2012 global demand will exceed conventional supply" and yet Hofmeister basically says the idea that we are ever going to have peak oil is ridiculous.

CNBC: But he's suggesting you are leaving out unconventional sources of energy in your calculations.

Simmons: They make the distinction [between conventional and unconventional], but they don’t seem to make the connection about the vast difference of flow. They are so hung up on the total estimated volume. Once they start in a project they say, "Well, the reserves last forever so we can book a million barrels of reserves."The energy that is consumed to get oil out of the oil sands of Canada — in massive amounts of potable water and natural gas — is so vast you are really turning gold into lead. What you get out is a very low quality amount of oil that has to be upgraded and diluted with high quality oil to get synthetic crude. What I can’t figure out is why the executives of these oil companies don’t understand that.

CNBC: And what about the reserves on the Outer Continental Shelf?

Simmons: That’s sort of irrelevant because we have such an unbelievable shortage of deep-water rigs. We are totally out of deep-water drilling rigs. There are about 100 that are struggling to get built. Four will ready by the end of next year.

And none of that deep-water stuff they are talking about has been properly tested to know if it is even commercial. It’s in such remote areas that we just don’t have the tool kit to realistically bring it on stream before maybe ten years from now — maybe 6-7 years from now.

CNBC: What about other major finds such as the major off-shore discovery Brazil has made that is estimated could be the third largest oil field in the world?

Simmons: There have only been five wildcat wells drilled there. That’s like me saying I have drilled a well in Kansas, and another in Colorado and in New Mexico and in the panhandle of Texas and if they are all part of one giant oilfield, it is the biggest oil field ever in the Western Hemisphere. That’s an enormous "if."

You can claim that, but the proof of that would only be after you drill about 100 wells and flow test them all. And what we know is that 99 percent of those types of reservoirs never connect.

CNBC: You still think there are production difficulties in Saudi Arabia, but what do you expect will be the impact on production worldwide?

Simmons: Yes, and it’s why we have such a hard time growing production any more, and unfortunately demand doesn’t understand that. We are basically having to run faster and faster to stay in place as too many areas go into steady and steep decline. You look at the North Sea … the last 7-8 years, Norway and the UK have been declining a rate of about 17-18 percent per year. And once you get a field down to its last 10 percent, then it levels out and goes into a long steady state of gentle decline — that is the state of Prudhoe Bay today.

CNBC: So, what is your prognosis for prices?

Simmons: I think prices have to go way higher. The sooner people get used to the fact that we are still living in a fool’s paradise, the better ... you just can not argue that $100 a barrel is expensive when you realize it is 15 cents a cup — do you know anything other than crude oil that sells for 15 cents a cup? I know wine doesn’t, bottled water doesn’t.

Source - CNBC

Picture - Mike Eliason

Shell Oil Exec Ponders Impending Energy Crossroads

By Jeroen van der Veer

By 2100, the world’s energy system will be radically different from today’s. Renewable energy like solar, wind, hydroelectricity, and biofuels will make up a large share of the energy mix, and nuclear energy, too, will have a place.

Humans will have found ways of dealing with air pollution and greenhouse gas emissions. New technologies will have reduced the amount of energy needed to power buildings and vehicles.

Indeed, the distant future looks bright, but much depends on how we get there. There are two possible routes. Let’s call the first scenario Scramble. Like an off-road rally through a mountainous desert, it promises excitement and fierce competition. However, the unintended consequence of “more haste” will often be “less speed,” and many will crash along the way.

The alternative scenario can be called Blueprints, which resembles a cautious ride, with some false starts, on a road that is still under construction. Whether we arrive safely at our destination depends on the discipline of the drivers and the ingenuity of all those involved in the construction effort. Technological innovation provides the excitement.

Regardless of which route we choose, the world’s current predicament limits our room to maneuver. We are experiencing a step-change in the growth rate of energy demand due to rising population and economic development. After 2015, easily accessible supplies of oil and gas probably will no longer keep up with demand.

As a result, we will have no choice but to add other sources of energy – renewables, yes, but also more nuclear power and unconventional fossil fuels such as oil sands. Using more energy inevitably means emitting more CO2 at a time when climate change has become a critical global issue.

In the Scramble scenario, nations rush to secure energy resources for themselves, fearing that energy security is a zero-sum game, with clear winners and losers. The use of local coal and homegrown biofuels increases fast. Taking the path of least resistance, policymakers pay little attention to curbing energy consumption – until supplies run short. Likewise, despite much rhetoric, greenhouse gas emissions are not seriously addressed until major shocks trigger political reactions. Since these responses are overdue, they are severe and lead to energy price spikes and volatility.

The Blueprints scenario is less painful, even if the start is more disorderly. Numerous coalitions emerge to take on the challenges of economic development, energy security, and environmental pollution through cross-border cooperation. Much innovation occurs at the local level, as major cities develop links with industry to reduce local emissions. National governments introduce efficiency standards, taxes, and other policy instruments to improve the environmental performance of buildings, vehicles, and transport fuels.

Moreover, as calls for harmonization increase, policies converge across the globe. Cap-and-trade mechanisms that put a price on industrial CO2 emissions gain international acceptance. Rising CO2 prices in turn accelerate innovation, spawning breakthroughs. A growing number of cars are powered by electricity and hydrogen, while industrial facilities are fitted with technology to capture CO2 and store it underground.

Against the backdrop of these two equally plausible scenarios, we will know only in a few years whether December’s Bali declaration on climate change was just rhetoric or the start of a global effort to counter it. Much will depend on how attitudes evolve in China, the European Union, India, and the United States.

Shell traditionally uses its scenarios to prepare for the future without expressing a preference for one over another. But, faced with the need to manage climate risk for our investors and our descendants, we believe the Blueprints outcomes provide the best balance between economy, energy, and environment. For a second opinion, we appealed to climate change calculations made at the Massachusetts Institute of Technology. These calculations indicate that a Blueprints world with CO2 capture and storage results in the least amount of climate change, provided emissions of other major manmade greenhouse gases are similarly reduced.

But the Blueprints scenario will be realized only if policymakers agree on a global approach to emissions trading and actively promote energy efficiency and new technology in four sectors: heat and power generation, industry, transport, and buildings.

This will require hard work, and time is short. For example, Blueprints assumes CO2 is captured at 90% of all coal- and gas-fired power plants in developed countries by 2050, plus at least 50% of those in non-OECD countries. Today, none capture CO2. Because CO2 capture and storage adds costs and yields no revenues, government support is needed to make it happen quickly on a scale large enough to affect global emissions. At the least, companies should earn carbon credits for the CO2 they capture and store.

Blueprints will not be easy. But it offers the world the best chance of reaching a sustainable energy future unscathed, so we should explore this route with the same ingenuity and persistence that put humans on the moon and created the digital age.

The world faces a long voyage before it reaches a low-carbon energy system. Companies can suggest possible routes to get there, but governments are in the driver’s seat. And governments will determine whether we should prepare for bitter competition or a true team effort.

* Jeroen van der Veer, Chief Executive of Royal Dutch Shell plc, is Energy Community leader of the World Economic Forum energy industry partnership in 2007-2008 and chaired this year’s Energy Summit in Davos. He also chairs the Energy and Climate Change working group of the European Round Table of Industrialists.

The Peak Oil Crisis: The Times Drops The First Shoe

Peak Oil started as a story about geology. It was once relatively simple. After 150 years of pumping up oil, the easy-to-find kind was gone and from here on out it was going to be much more difficult to find and eventually prohibitively expensive.

In recent years, however, the peak oil story took on new facets such as rapidly increasing consumption of oil in Asia and producing countries, concentration of most production in the hands of a few governments, unstable world finances, rapidly increasing cost of production and a growing inability or unwillingness to export oil to other countries.

Of all the reasons that gas prices are going up, only the geologic constraint – “supplies are running out” – has an air of finality. There is nothing anybody can do about it.

Other constraints on unlimited oil flows sometimes called “above ground factors” carry with them the subtle implication that there is something that can and just might be done to set things right. A war on top of your oilfield? Stop it! Getting too expensive to produce the necessary oil? Invest more. Government failing to step up production? Change the government! You get the idea. Peaking of world oil production by definition implies that the oil age is on the way out. Almost any other reason for restricted oil flows implies there is a “fix” which will allow us to continue on for awhile without any great disruption.

For over 25 years now, nobody in America has had to think much about oil. It was cheap, hardly taxed at all (by European standards), and available in unlimited quantities. In the last few years, this has started to change with gasoline circa $3 a gallon, oil in the $90s and, thanks to the ethanol craze, food prices going through the roof. Our newspapers are starting to take notice.

The problem has become too big to ignore.

Three weeks ago the Wall Street Journal took a stab at explaining what was happening and came up with the notion that world oil production was only “plateauing,” not peaking. Plateauing carries the implication that life as we know it can go on for awhile. All the oil we import today will continue to be available and, if only the Chinese economy would stop growing so fast, all will be well.

Last Sunday, the New York Times came at the high gas price problem from a different direction – availability of imports. Drawing on the combined wisdom of no less than seven of their reporters strung out around the earth, the Times boldly concluded that “The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad.”

The Times then told its readers some very scary stuff. “Experts say the sharp growth, if it continues, means several of the world’s most important suppliers may need to start importing oil within a decade to power all the new cars, houses and businesses they are buying and creating with their oil wealth.” I particularly like the “if it continues” clause which suggests that the Russians, Mexicans, Venezuelans, Iranians and all those incredibly rich Persian Gulf Arabs might just stop buying new cars, building themselves places to live, and buying flat screen TV’s so they can export their oil to their good friends in America instead.

After more scary talk about world oil exports dropping by 2.5 million barrels a day in the next three years and how a drop of this size could lead to major economic problems, the Times switches to a reassuring mode. “The trend, though increasingly important, does not necessarily mean there will be oil shortages. More likely, experts say, it will mean big market shifts, with the number of exporting countries shrinking and unconventional sources like Canadian tar sands becoming more important, especially for the United States. And there is likely to be more pressure to open areas now closed to oil production.”

They even go so far as to suggest that an era of peace and friendship might just break out in the next few years. ”Greater political stability and increased drilling in some important oil states, notably Iraq, Iran and Venezuela, could help offset the rising demand from other oil exporters.”
After reassuring us that all is not necessarily lost, the Times concludes by reinforcing its basic point by saying “Internal oil consumption by the five biggest oil exporters — Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates — grew 5.9 percent in 2006 over 2005, according to government data. Exports declined more than 3 percent. By contrast, oil demand is essentially flat in the United States. CIBC’s demand projections suggest that for many oil countries, including Saudi Arabia, Kuwait and Libya, internal oil demand will double in a decade.”

The Times and the Journal have taken a major step forward by admitting for essentially the first time in front-page stories that the U.S. is going to face a big problem in the next few years. Neither however has connected the dots.

Nowhere does the Times remind us that the U.S. is now importing two-thirds of its oil consumption each day and that a drop of a few percent in daily flow is likely to cause pandemonium at the pumps as it did back in the 1970’s. Neither paper has as yet mustered the editorial courage to discuss the 800-pound gorilla, oil depletion, which every year quietly eats away 4 or 5 percent of our oil supply – the life blood of modern civilization.

Until our major newspapers begin discussing in a frank and open manner what will soon be the first major crisis of the 21st Century, the U.S. Congress is doomed to empty posturing and debating energy red herrings. It is clear that most have no clue as to what is about to befall us.

Written by Tom Whipple
Thursday, 13 December 2007

Global Oil Output Has Already Peaked, Pickens Says

Oct. 19 (Bloomberg) -- World oil output has already peaked, and prices that have surged to record highs above $90 a barrel are a sign of things to come, said investor Boone Pickens, chairman of Dallas-based BP Capital LLC.

Global production has peaked at 85 million barrels a day, Pickens, 79, said in an interview today at a Houston conference sponsored by the Association for the Study of Peak Oil & Gas, a non-profit think tank. Oil will rise to $100 a barrel before falling to $80 again, he said. Earlier this week, he said crude would reach $100 by year's end.

``As this unfolds, you're going to have to find alternatives that are going to do the job that oil is doing,'' Pickens said.

``Everyone is going to have to come to grips with this in the next two or three years. People are going to have to figure it out.''

Peak oil is the theory that world production has reached or is about to reach its zenith, after which it will begin an unstoppable decline. Critics say it's impossible to know when petroleum output has peaked, given uncertainties estimating global reserves. Previous efforts to peg a date for peak output have been wrong, they say.

Investors such as Pickens and analysts like Matthew Simmons of Houston investment bank Simmons & Co. International support the peak oil theory. Executives from companies such as Exxon Mobil Corp. have downplayed the possibility.

``They talked like $50 was going to be difficult, and $60 and $70. We went through those like a knife through hot butter,'' Pickens said.

Last month, Pickens predicted that oil would reach $100 a barrel after falling to $78. Futures in New York dropped as low as $78.35 on Oct. 8, and touched a record high of $90.07 today.

Dividends, Buybacks

Pickens said the major oil companies should be doubling dividends and cutting buybacks.

``I think the repurchase of stock in the market is telling something,'' he said. ``It's telling the market that we can't grow.''

The companies will be manufacturing operations eventually, he said. ``The reserves will be gone and they're going to be refiners and processors,'' Pickens said.

He also said natural-gas prices may drop to $6.50 per million British thermal units in the spring of 2008 and that with a warm winter, prices could be low next year. They could go back up in 2009, he said.

The Undeclared Oil War

While some debate whether the war in Iraq was or was not "about oil," another war, this one involving little but oil, has broken out between two of the world's most powerful nations.

For months China and Japan have been locked in a diplomatic battle over access to the big oil fields in Siberia. Japan, which depends entirely on imported oil, is desperately lobbying Moscow for a 2,300-mile pipeline from Siberia to coastal Japan. But fast-growing China, now the world's second-largest oil user, after the United States, sees Russian oil as vital for its own "energy security" and is pushing for a 1,400-mile pipeline south to Daqing.

The petro-rivalry has become so intense that Japan has offered to finance the $5 billion pipeline, invest $7 billion in development of Siberian oil fields and throw in an additional $2 billion for Russian "social projects" -- this despite the certainty that if Japan does win Russia's oil, relations between Tokyo and Beijing may sink to their lowest, potentially most dangerous, levels since World War II.

Asia's undeclared oil war is but the latest reminder that in a global economy dependent largely on a single fuel -- oil -- "energy security" means far more than hardening refineries and pipelines against terrorist attack. At its most basic level, energy security is the ability to keep the global machine humming -- that is, to produce enough fuels and electricity at affordable prices that every nation can keep its economy running, its people fed and its borders defended.

A failure of energy security means that the momentum of industrialization and modernity grinds to a halt. And by that measure, we are failing.

In the United States and Europe, new demand for electricity is outpacing the new supply of power and natural gas and raising the specter of more rolling blackouts. In the "emerging" economies, such as Brazil, India and especially China, energy demand is rising so fast it may double by 2020. And this only hints at the energy crisis facing the developing world, where nearly 2 billion people -- a third of the world's population -- have almost no access to electricity or liquid fuels and are thus condemned to a medieval existence that breeds despair, resentment and, ultimately, conflict.

In other words, we are on the cusp of a new kind of war -- between those who have enough energy and those who do not but are increasingly willing to go out and get it. While nations have always competed for oil, it seems more and more likely that the race for a piece of the last big reserves of oil and natural gas will be the dominant geopolitical theme of the 21st century.

Already we can see the outlines. China and Japan are scrapping over Siberia. In the Caspian Sea region, European, Russian, Chinese and American governments and oil companies are battling for a stake in the big oil fields of Kazakhstan and Azerbaijan. In Africa, the United States is building a network of military bases and diplomatic missions whose main goal is to protect American access to oilfields in volatile places such as Nigeria, Cameroon, Chad and tiny Sao Tome -- and, as important, to deny that access to China and other thirsty superpowers.

The diplomatic tussles only hint at what we'll see in the Middle East, where most of the world's remaining oil lies. For all the talk of big new oil discoveries in Russia and Africa -- and of how this gush of crude will "free" America and other big importers from the machinations of OPEC -- the geological facts speak otherwise. Even with the new Russian and African oil, worldwide oil production outside the Middle East is barely keeping pace with demand.

In the run-up to the Iraq war, Russia and France clashed noisily with the United States over whose companies would have access to the oil in post-Saddam Hussein Iraq. Less well known is the way China has sought to build up its own oil alliances in the Middle East -- often over Washington's objections. In 2000 Chinese oil officials visited Iran, a country U.S. companies are forbidden to deal with; China also has a major interest in Iraqi oil.

But China's most controversial oil overture has been made to a country America once regarded as its most trusted oil ally: Saudi Arabia. In recent years, Beijing has been lobbying Riyadh for access to Saudi reserves, the largest in the world. In return, the Chinese have offered the Saudis a foothold in what will be the world's biggest energy market -- and, as a bonus, have thrown in offers of sophisticated Chinese weaponry, including ballistic missiles and other hardware, that the United States and Europe have refused to sell to the Saudis.

Granted, the United States, with its vast economic and military power, would probably win any direct "hot" war for oil. The far more worrisome scenario is that an escalating rivalry among other big consumers will spark new conflicts -- conflicts that might require U.S. intervention and could easily destabilize the world economy upon which American power ultimately rests.

As demand for oil becomes sharper, as global oil production continues to lag (and as producers such as Saudi Arabia and Nigeria grow more unstable) the struggle to maintain access to adequate energy supplies, always a critical mission for any nation, will become even more challenging and uncertain and take up even more resources and political attention.

This escalation will not only drive up the risk of conflict but will make it harder for governments to focus on long-term energy challenges, such as avoiding climate change, developing alternative fuels and alleviating Third World energy poverty -- challenges that are themselves critical to long-term energy security but which, ironically, will be seen as distracting from the current campaign to keep the oil flowing.

This, ultimately, is the real energy-security dilemma. The more obvious it becomes that an oil-dominated energy economy is inherently insecure, the harder it becomes to move on to something beyond oil.

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By Paul RobertsWashington Post