Tight Oil and Shale Gas Production To Have Impact on the Kingdom

by Fahad Alturki | Apr 03, 2014

Oil and gas are produced from underground reservoirs, at rates which greatly depend upon the porosity and permeability of the host rock. Over the years, as energy prices have gone up, oil and gas “reserves” have also gone up since higher prices justified the development and use of more expensive technologies to recover harder-to-get molecules. Recent technological advances, in particular 3D seismic, horizontal drilling and hydraulic fracturing (“fracking”), have spurred the exploitation of large tight oil and shale gas formations in the US. In the US, production of tight oil and shale gas will increase as fast and as much in the medium and long term as most observers suggest.

In all thus, analysts doubt that tight oil production will significantly impact the world’s oil industry over the long term. In particular, one cannot see it affecting Saudi Arabia’s situation.  With large volumes of cheap Natural Gas Liquids, market believe that US shale gas production will mainly impact the world’s petrochemical industry and may induce Saudi producers to expand production there.

The Basics of Oil & Gas Production

Oil and gas are extracted from underground rocky structures called “reservoirs”, in which small pores and micro-fractures entrap minuscule droplets of oil, together with water and natural gas. When such a reservoir is drilled, and depending upon the rock’s porosity and permeability, the reservoir’s internal pressure pushes the oil to the surface. This goes on, depending upon the reservoir’s geometry, pressure, porosity, permeability and oil composition, until the outflow peters out, usually after several years. Since the late XIXth century when oil extraction began, repeated technical advances have allowed us to recover much more than the 10 percent-15 percent of the in-situ oil & gas which natural pressure would normally allow.

Over the years, through technical advances, the oil & gas industry has exploited previously unreachable resources, and exploited them profitably. Looking forward, it is this interplay between (i) physical resources in the deposits, (ii) new technologies which allow their profitable recovery at a given price, and thus (iii) new increases in economically recoverable reserves, which will drive how the global oil & gas industry evolves, including the developments of unconventional, more expensive, sources of oil & gas. As energy demand grows and oil & gas prices rise, technologies are developed to extract more oil & gas from previously unreachable resources, and extract them at a profit. In summary, The outlook for tight oil and shale gas developments does not solely depend upon the physical presence of oil and gas molecules in specific geological formations. It critically rests on the comparative economics of extracting these molecules (given likely technological advances) versus the economics of producing oil and gas from other sources, be they conventional or unconventional.

The Global Reserves of Oil & Gas

When discussing oil & gas reserves, it is critical to differentiate between (i) the physical presence of hydrocarbon molecules in a geologic formation, and (ii) that portion of those molecules which can be economically recovered.

The industry uses the following terminology:

  1. Proven Reserves: the discovered volumes having a 90 percent probability to be extracted profitably.
  2. Remaining Recoverable Resources: these are the proven reserves, reserves growth (the projected increase in reserves in known fields) and as-yet-undiscovered resources that are judged likely to be ultimately producible using current technology.

Four critical factors impact our understanding and confidence of how much oil & gas we will be able to extract to power our economies’ future growth:

  1. Geology: the actual physical presence of oil & gas molecules in rock formations.
  2. Technology: the equipment, materials, systems and procedures which allow us to find and extract oil & gas from those rock formations, and how much.
  3. Price: the key benchmark against which field development and oil & gas production costs must be justified.
  4. Above Ground Constraints: the permitting, environmental regulations, water and infrastructure availability which will allow for the profitable development of the field and disposal of its production.
Over the years, as energy prices have gone up, “reserves” have also gone up because higher prices justified the development and use of more expensive technologies to recover harder-to-get molecules, either from existing reservoirs or from hitherto unreachable or un-exploitable formations.

Recent Technological Developments

Over time, four major technological developments have enabled the finding and extracting of more and more oil & gas.

Injection: Originally, the key innovation to extract more oil from the reservoirs was to inject gas under pressure to restore the pressure lost during the primary recovery, or to inject water to raise the oil up towards the well. As time passed, this evolved into more and more powerful and sophisticated processes to inject steam to push the oil to the well and to inject chemicals to facilitate the migration of the oil droplets through the host rock by lowering their viscosity.

For impermeable formations such as shale rock, oil producers today inject water, sand and special chemicals to crack the rock and to facilitate the migration of hydrocarbons towards the wells. 3D Seismic. By sending acoustic waves from near the surface and listening for echoes from deeper boundaries between layers of different rocks, engineers are able to get a good picture of where hydrocarbon-rich formations are located. With increased knowledge on how best to interpret the sub-surface images, and with massively more powerful computing power, engineers define increasingly precisely the geometry and the geologic characteristics of the “payable zones”.

Horizontal Drilling: The industry has known for many years how to change the direction of a well from vertical to another angle, including horizontal. Starting in the 1980s, operators have learned how to control, in three dimensions, at exactly which new angle the drill would turn, in rocks of different geophysical properties, to direct the well with great precision over long distances to the target zones. This has reduced the number of wells needed to extract oil from a reservoir and allowed the reaching of sections which would otherwise not be reachable or economic, when hydrocarbons are in thin horizontal layers for instance. Further, multilateral wells - wells with multiple branches radiating from one main borehole - now allow operators to access various zones of deep under sea reservoirs from one single surface facility.

Mining and Refining of Oil Sands: Oil sands are deposits of sand or loose sandstone and clay saturated with bitumen, a heavy, dense and viscous form of petroleum. The mining and purification of oil sands is expensive, and the bitumen produced is a particularly heavy type of crude. Bitumen from Canada (the only producer of oil sands to date) is either diluted with gas condensates or light oil for export to US Gulf Coast refineries, or it is processed near the mine into light crude.

Three technological developments have enabled the economic mining and refining of oil sands. First, mining itself has experienced massive productivity improvements and cost decreases (digging a tons of ore cost about 40 percent less now than 40 years ago). Second, bitumen can now be extracted from some zones by melting it with steam and having it flow into horizontal wells at the bottom of the formation. And third, progress in refining technology has significantly cheapened the recovery of oil from the sand and the upgrading of the bitumen into lighter crude. The mining and refining of oil sands is considered by most as expensive, in particular since it produces heavy lower-value crude. As the marginal source of oil to the US refineries, it has flourished to date in Canada thanks to continued improvement in mining and bitumen processing technologies.

Global Demand Outlook for Energy

Numerous institutions analyze and comment on the status and outlook of the global energy industry. For the outlook for global energy demand, we have elected to use ExxonMobil’s data, analyses and projections, as they present in their 2013 publication “The Outlook for Energy: A View to 2040”.

These are broadly in line with the energy demand projections published by the International Energy Agency, the US Energy Information Administration and other industry participants such as British Petroleum. All key trends and conclusions are similar. History has shown a strong correlation between economic growth and energy consumption growth.

The two key assumptions in forecasting global energy demand are (i) the rate of growth of the world’s various regions, and (ii) the levels and changes in the energy intensity of these regions’ economies. On the basis of (i) a world GDP growing at 2.8 percent p.a. in average between 2010 and 2040, and of (ii) 35 percent energy savings through efficiency gains, global energy demand is to grow 35 percent from 13.2 billion tonnes of oil equivalent (toe) in 2010 to 17.8 billion toe in 2040, an average of 1.0 percent p.a. Energy demand will grow most in Asia where 45 percent of all energy will be used in 2040. Of all the uses of energy, electricity will grow the most. Demand for electricity will grow by 54 percent and will represent 41 percent of global energy use in 2040 (from 36 percent in 2010).

Transportation, another major use of energy, will grow by 37 percent, in line with global energy demand, and will keep representing 18 percent of global energy use. Oil & gas will represent, by far, the major sources of energy for the world. They will represent 59 percent of all energy used in 2040, up from 56 percent in 2010. The major growth will be for gas. It will grow by 65 percent, whilst demand for oil will grow more modestly by 25 percent. Demand for coal will decrease by 2 percent.

Global Demand Outlook for Oil & Gas

Oil & Liquids:  Oil will continue to be used mainly for the transportation and industrial sectors. Oil demand will grow from 4.5 billion toe in 2010 to 5.6 billion toe in 2040, a growth of 0.8 percent p.a. on average. This will be propelled by a significant increase in global transportation needs and industrial activities.

Gas: Gas will continue to be used mainly for the electricity and industrial sectors. Gas demand will grow fast, from 2.9 billion toe in 2010 to 4.7 billion toe in 2040, a growth of 1.7 percent p.a. on average. This 1.8 billion toe increase will result from a significant increase in gas use for electricity generation (1 billion toe) and for industrial activities (0.6 billion toe).

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