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AIPG Position Statement - Domestic Energy: Oil and Gas

AIPG Position Statement - Domestic Energy: Oil and Gas
(October 2009)

John L. Berry, CPG 04032 – Chairman, David Hite, CPG-08506, Caron Koll, CPG-10887, and Michael Root, CPG-06386

Fundamental Concepts

Resources of oil or gas are the total amount that can be inferred to exist on reasonable geological grounds. Reserves are the amount that can be produced right now at a profit.
Reserves are calculated very conservatively, because a company's value and its reputation depend on their reliability.  Thus they never amount to more than a few years of production, a fact that is often misunderstood.  Similarly, much of what is counted as Resources may only be producible at astronomical prices.

Resources are converted to reserves by (i) exploration, which defines their location and extent, (ii) by technology, which converts unprofitable resources to profitable ones; and (ii) by changes in price and price outlook.

Conventional oil and gas is that which is found in definable accumulations (fields) that can be produced by drilling. Unconventional oil and gas ranges from Coal Bed Methane to tar sands to oil shale, and in general is produced only with the aid of sophisticated new technologies.

Table 1 shows world energy consumption broken down by region and by fuel type.

World Energy Consumption in 2000

 

World
Mtoe

USA
%

EU-15
%

Japan
%

Russia
%

China*
%

India
%

All Fuels

9977.7

23.1

14.9

5.3

6.2

11.4

5.2

Solid fuels

2336.0

23.2

9.4

4.1

4.7

28.1

7.5

Oil

3482.7

25.6

17.2

7.5

3.7

6.4

3.2

Natural gas

2112.4

26.0

16.3

3.1

15.1

1.3

1.1

Nuclear

680.4

30.6

33.8

12.3

5.1

0.6

0.6

Renewables

1367.1

8.0

6.7

1.2

1.5

17.1

15.2

Hydro

227.4

9.6

12.8

3.3

6.2

8.4

2.8

Geothermal

43.5

30.1

7.9

6.6

0.1

0.0

0.0

Wind/Solar

7.2

27.4

37.8

12.6

0.0

0.0

1.9

Biomass

1089.0

6.7

5.2

0.5

0.6

19.7

18.5

Source: Commission services, Organization for Economic Co-operation and Development

* Includes Hong Kong

Table 1:  Energy Consumption by region and energy source. Mtoe (million ton oil equivalent).

Current Situation, Conventional Oil

World-wide, about half – the easy half - of the original oil Resource has been produced.  Considerable exploration has taken place in all but the most inaccessible basins, and so the potential for huge new discoveries is extremely limited (Fig.1).  Further, the average size of new fields decreases as a basin matures(US DoE, 1990), so we need to find larger and larger numbers of small fields as time goes on, and the cost of finding and producing a field increases as its size decreases (Fig.2).  Much of the remaining resource is in very challenging and/or very environmentally sensitive areas such as the Arctic: this further drastically increases costs. Importantly, 90% of the remaining resource (actually, production, Cheney & Hawkes, 2007) is controlled by governments through "National" oil companies (Fig.3).  These companies are often starved of capital and technical expertise, which can mean inefficient, costly and even lost production.  There is also, of course, the possibility that conflict can deny access to oil from these and other areas.

Major oil discoveries


Figure 1:  This figure shows that the major oil discoveries were made between 1945 and 1980.  In every year since 1984 we have used more oil than was discovered.   We are, in fact, living on the "savings account" built up by the excess of discovery over production before 1984. http://www.inforse.dk/europe/dieret/WHY/why.html)
From:  7. A. A. Bartlett, Math. Geol. 32, 1 (2000)

Cost of finding oil


Figure 2:  As the easy discoveries are made, the cost of finding each barrel of oil rises.  This graph shows that in 2001 and 2002 the major oil companies spent more on exploration than the value of the oil they found.  Continuing to explore under these circumstances eventually leads to "Gambler's ruin" and bankruptcy. http://www.inforse.dk/europe/dieret/WHY/why.html

Future supply of oil

Figure 3:  A pessimistic view of the future supply of oil.  Notice that all producing regions of the world are already in decline, except for the Middle East.  Most oil in Russia, the Middle East, and "Other" is owned by the state and controlled by state-owned oil companies.  Without "unconventional oil (heavy oil, deepwater, polar and natural gas liquids (NGL)) production, world output in 2009 was less than in 1979. Unconventional production is still growing, but in this view the total level of production drops steeply after 2011.  The shortfall must be taken care of by increased generation of energy from natural gas, nuclear fission, geothermal, wind and solar installations. (Source: http://www.inforse.dk/europe/dieret/WHY/why.html)

There is general agreement that the production of conventional oil will reach a peak between 2010 and 2025, and then decline sharply (Fig.3 and 4).  Demand, however, is expected to keep increasing: it is expected that the growing gap between demand and supply will be filled by natural gas, unconventional oil and gas, coal, nuclear, wind, geothermal and solar, and biofuels (Fig. 4).  However, the expense will be huge, the cost of energy will increase sharply, and there are environmental and technical problems associated with each alternative energy source.  Figure 5, demonstrates that, on a per head of world population basis, peak oil actually occurred thirty years ago. 

World energy resources


Figure 4:  Another view of world energy resources, focused this time on the future fuel mix.
  In this optimistic view oil does not peak until 2025, and the decline of conventional oil is completely counterbalanced by increases in unconventional oil, natural gas, coal, nuclear, geothermal and wind energy production. Many people feel that production increases in the last four of these on the scale needed would be financially impossible or environmentally disastrous or both.  (From: World oil and gas resources: status and outlook – A rational attempt at an emotional issue Peter Burri,  Bull. angew. Geol. Vol. 13/1, 2008 S. 3-26)

World oil production

Figure 5:  This graph is taken from an apocalyptic paper by Richard C. Duncan.   Note that, if the production of oil is calculated per person of the global population, oil "Peaked" in 1979. 
Notes: (1) World average oil production per capita grew exponentially from 1920 to 1973. (2) Next, the average growth rate was near zero from 1973 to the all-time peak in 1979. (3) Then from its peak in 1979 to 1999, it decreased strongly by an average of 1.20 %/year.  Thus, when the growth of the earth's population is taken into account, Peak Oil was passed in 1979. (from Duncan, Richard C., 2000: The Peak Of World Oil Production And The Road To The Olduvai Gorge. Pardee Keynote Symposia Geological Society of America Summit 2000 Reno, Nevada November 13, 2000)

Some important reserves in OPEC countries may be overstated for political reasons.  On the other hand, due to the conservative way in which reserves are calculated, the ultimate reserve of a field often grows during its production (Fig.6):  new drilling and imaging techniques lead to discovery of new reservoirs, and secondary and tertiary recovery techniques lead to better flushing of the oil from the reservoir.

North Sea oil production

Figure 6:   North Sea oil production. Forecasts and actual production. Delay of peak.

Notice how the conservative initial prediction is increased by new drilling and imaging technologies.   (Sources: Schweizerische Erdölvereinigung and BP 2008, adapted with data from HIS. From: Burri, Peter, 2008:  World oil and gas resources: status and outlook – A rational attempt at an emotional issue, Bull. angew. Geol. Vol. 13/1, 2008 S. 3-26)

Current Situation, Conventional Gas

The situation with gas is much the same as with oil, except that, viewed as a proportion of the ultimate resource, gas consumption is several decades behind that of oil.   There are also, perhaps, more types of potentially large unconventional gas plays. The global infrastructure for gas is much less developed than that for oil, so there are vast gas reserves available overseas for export as LNG.  As an example, the US imports 71% of its oil, but only 16% of its gas.  However, the investment required to develop the infrastructure for gas is huge, and the lag times are long.  There are safety concerns about gas decompression plants and, in most parts of the country, vociferous opposition to locating them near communities.

Current and Future Unconventional Oil Plays:

The main unconventional oil plays are tar sands in Canada and Venezuela, and oil shales in the western USA.  Most tar sand production is currently by mining, but the environmental limits to this may be reached fairly quickly.  Oil shale mining in the western USA has been essentially ruled out because it requires more water than is available and leads to a 50% increase in the volume of the rock, which could not thus be re-buried in the pits from which it was mined. Therefore, for both types of resource, methods of in situ production are being considered: the rock is heated to drive the oil out, followed by production of the expelled oil from wells.  These methods have not yet been proven commercial on a large scale, and there are environmental problems.

Current and Future Unconventional Gas Plays:

There are several spectacularly successful unconventional gas plays within the US: for example, in the Barnett (TX), Haynesville (TX/LA), Bakken (ND) and Marcellus (PA, NY, OH, VA, WV,) shales, the Powder River Basin Coal Bed Methane (CBM) play of Wyoming (see Fig. 7).  It is estimated that unconventional shale gas plays in the US contain over 1,744 trillion cubic feet (TCF), more than a 30 year supply (Dar, 2009; Dawson, 2009).  A recent analysis suggests that in some of these plays only 25% of wells are commercially successful at present prices, so drilling may decline when it is realized that they are more risky than had been thought (Berman, 2009). 

Shale Gas Plays

Figure 7:   USGS Map showing shale gas plays in the USA.

A July 2008 study (Burri, 2008) estimated that for the seven main US shale-gas plays, ultimate sustainable production will be at least 27billion cubic feet/day (BCFD) over the next 10-15 years – around 50% of existing US Lower-48 production.  Timing of development over the next decade will depend on the rate of regional demand growth.

The Future

Most prognosticators see not a sudden "Oil Peak" and rapid decline, but a fairly long plateau (perhaps already begun (Tinker, 2007), during which oil production remains more or less constant, and declining conventional production is replaced by increasing unconventional production with much higher and less flexible fixed costs.  Investment of $3 trillion in oil infrastructure between now and 2030 will be needed to meet anticipated demand (Economist, 2004), implying that steadily rising prices will be needed.

We cannot, particularly as a single country, "drill our way out" of this situation, as the average size of a newly-discovered field (1,000,000 BBO) in the USA is insignificant in comparison with our annual imports of 4.4 Gb (i.e. 4,400 times the average discovery, each year)(Cheney & Hawkes, 2007).

Recommendations

  • Improve policies that encourage and allow gas infrastructure development, including intensive public education by credible organizations.
  • Put in place policies that encourage research into improved production techniques that allow further "reserve growth" in existing oil and gas fields.
  • Allow fuel prices to find their own level (i.e. don't mess with the market) as a means to encourage society to reorganize itself in more fuel-efficient ways. 
  • Do not try to "drill our way out", since it would be impossible.
  • Shift to the use of Natural Gas as a transportation fuel because of its greater domestic availability and cleaner nature.

REFERENCES:

BARTLETT, A. A., Math. Geol. 32, 1 (2000)

BERMAN, Arthur, 2009, Shale Plays: Risk Analysis and Other Perils of Conventional Thinking, HGS North American Dinner, Houston Geological Society, March 30, 2009.

BURRI, Peter. 2008:  World oil and gas resources: status and outlook – A rational attempt at an emotional issue Bull. angew. Geol. Vol. 13/1, 2008 S. 3-26)

CHENEY, E. S., and M. W. HAWKES, 2007, The Future of Hydrocarbons: Hubbert’s Peak or a Plateau?, GSA TODAY, June 2007.

CLEVELAND, Cutler J. 2005: Net Energy From Oil and Gas Extraction in the United States, 1954-1997. Working Paper 0101, Center for Energy and Environmental Studies and Department of Geography, Energy, 30: 769-782.

DAR, 2009, Natural Gas Reserves are Rising Thanks to Technology, Risk Capital, Seeking Alpha, May 13, 2009.

DUNCAN, Richard C.,  2000: The Peak Of World Oil Production And The Road To The Olduvai Gorge. Pardee Keynote Symposia Geological Society of America Summit 2000 Reno, Nevada November 13, 2000)

(Economist, 2004)

ENERGY INFORMATION ADMINISTRATION, 2009. Major Changes in Natural Gas Pipeline Transportation Capacity, http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html , November 2008

LYONS, W. Donald, Shale gas could move U.S. toward energy independence, The Herald-Dispatch, March 12, 2009.

National Petroleum Council, 2007: Facing the Hard Truths about Energy: A comprehensive view to 2030 of global oil and natural gas.

NEHRING Richard. 2009.  “The Disruptive Shales”. Oil and Gas Investor January, 2009

(TINKER, 2007)

UNITED STATES DEPARTMENT OF ENERGY, 1990: U.S. Oil and Gas Reserves by Year of Discovery, DOE/EIA-0534

UNITED STATE GEOLOGICAL SURVEY (USGS),  Map Of Shale Gas Basins In North America)

WOOD, J.H., G.R.LONG & D.F. MOREHOUSE, 2004: Long-term World oil Supply Scenarios.  US Energy Information Administration.  EIA_Oil_peak_itwos04.pdf

The American Institute of Professional Geologists (AIPG) was founded in 1963 to certify the credentials
of practicing geologists and to advocate on behalf of the profession.

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