The Oil Drum

I recently visited BP America's tight gas facility in Wamsutter, Wyoming on a trip paid for by the American Petroleum Institute. I was the only representative of internet media on the trip. The other reporters on the trip were from AP-Cheyenne, Casper Star-Tribune, and Natural Gas Weekly. On the trip, we spent a day and a half listening to presentations and touring facilities. We also stayed overnight at the facility BP built for visiting workers.

Figure 1 - Two natural gas wells plus solar panel - Click for larger picture

In this post, I will tell a little about what I learned. I will also look at prospects for the future -- both in terms of being able to expand operations and threats to maintaining current production levels.

A year ago the perception of a problem with oil supply was much less evident than today.  While Saudi Arabia had a plan to increase production, it was using only some 30-odd drilling rigs, and the debate over its capabilities was not being widely discussed.  Now that Aramco has committed to an increased level of production, they have also had to increase their drilling fleet to a target of around 100 rigs.  (From Baker Hughes it is currently about 46 onshore and 6 offshore ). Because drilling rigs are made of special steels and require some sophistication in manufacture they are built in only a few places, and there is a growing lead-time on getting a new one.  Thus demand for existing rigs is high, and rental costs are going up.  This is impacting the US supply.  Platts has just noted that since other places are now offering longer-term rentals, the US market is beginning to lose out.

"It's a very serious problem," said McNease, adding that he expected 15-20 Gulf of Mexico jack-ups to move elsewhere by the end of next year, based on contract negotiations already under way.  Of those on his migration list, McNease said seven would likely depart by this summer.

     "Rigs will continue to leave the Gulf of Mexico unless people offer longer contracts," said McNease, noting that jack-ups could now command terms of two to five years in the Middle East. "The national oil companies are offering longer terms to lure these rigs there," he said.

Following on from Stuart's piece on Saudi oil, I'd like to interweave some thoughts.  From his third plot you can see that Aramco rig numbers have been fairly steady with about 15 -20 of the 30-odd total working on producing oil at any one time, until fairly recently.  Now if one takes Matt Simmons' number that these each drill around 5 wells a year (despite the OPEC claim that they do 10) then you get somewhere in the region of 75 - 100 new wells per year.  If each produced (as they did up until around 1998), say 6,000 bd, then the increase in volume per year would be around 600,000 bd, which is a reasonable number to use to offset the declines that they would be seeing in production. And so overall achievable output would likely remain somewhat constant.

Since then they have switched, increasingly, to maximum reservoir contact wells, with concurrent water flood, so that production rates are sustained, without decline, until close to the end of the well life.  In the older fields such a change is probably too late, since you have the odd thousand wells in place and producing and any significant change in drawdown pattern would likely have consequences beyond the immediate vicinity.  And at the same time world demand for their product is rising fast.  So they have two problems.

Jerome a Paris has an excellent summary article on natural Gas, with some impressive, though discouraging, graphs of production.  He cites two sources that are worth following up in their own right.  There is a pdf on California by David Maul, which has, in slide 10, the grim picture of the declining life of annual gas discoveries.

He also cites a paper on Texas production that covers much of the story from that part of the world.  Put together they emphasize how hard folks are having to scramble to keep us afloat in natural gas.  With decline rates of up to 45% the supply is critically dependant on new drilling and with smaller and smaller fields being tapped and lasting shorter periods of time, this is not a game with a foreseeable happy ending. (Thanks for the pointer jkissing)

What is, in blogistan, I imagine a long time ago(last May not long after we started this site) I commented on the apparent good news that the International Energy Forum had a Joint Oil Data Initiative (JODI) which would provide more transparent reporting of oil market data.  Since then there have been some complaints about the quality of the data that was being furbished, but I see that Platts is now carrying a story that the database will go live this weekend.

At least 15 oil and gas ministers from major producing and consuming nations will be present for the inauguration of the IEF's permanent home by King Abdullah bin Abdulaziz, who offered in 2000 to create a permanent IEF secretariat and base it in Riyadh.

     The launch of data under JODI will mark a major development in relations between producers and consumers while going a long way towards easing fears by consuming nations about the reliability of reserves data, particularly in Saudi Arabia, home to a quarter of the world's crude oil reserves.

Well it will be interesting to see what exactly is new about the data that will be made available.  Bear in mind that there are really two issues that should be addressed in such a data base, the first being the exact nature and size of the reserves, on an individual field basis; and second the actual production rates from those individual fields.

It is the latter point that concerns me more than the former, although there are a lot of concerns about that too.  The reason for this goes back to the presentation that first got Matt Simmons into a discussion with Saudi Arabia about their situation.  And he returned to it last week in his comments in Denver.

This site generally focuses on the world situation in regard to oil production.  However, given the concerns that are beginning to arise about the supplies of natural gas this winter, it is important to also keep an eye on the situation there.  The NYT has just drawn a worrying, but sadly not unexpected, picture of the growing problems that industry and the country will face as natural gas supply and demand entangle. The tenor of the article relates to the costs pointing out that the United States now has the highest prices of any industrialized country. More than half the homes in the country are heated by natural gas, and because of potential shortages, industry may face shut-down since dwellings have priority in times of shortage.  This is not new, the impact of higher prices has already driven some industries abroad.

We need to declare a national crisis," Andrew N. Liveris, the chief executive of the  Dow Chemical Company, said in recent testimony before the Senate. Dow, the nation's largest chemical maker, has shut 23 plants in the United States in the last three years in places like Somerset, N.J.; South Charleston, W.Va.; and Elizabethtown, Ky., as it shifted production to Kuwait, Argentina, Malaysia and Germany, where natural gas is cheaper.

"Call it demand destruction," Mr. Liveris said. "Dozens of plants around the country have closed their doors and gone away, and are never coming back."

And while the article suggests that some of the problem arises from the loss of production in the Gulf, there are other causes.

In the past week or so there have been a number of posts relating to the growing shortage of oil drilling rigs.  This problem has been made worse by the losses in the Gulf, following the Hurricanes.

But it is also influenced by the declining production that comes as oilfields lose driving power.  This means that, to sustain production, an increasing number of wells must be drilled each year, since, in a given reservoir, the production from each will be less.   In addition smaller fields decline in production faster, since they do not have as much volume.  

But it is also in the largest fields that we see the problem.  Yesterday we talked a little of Ghawar, today consider Cantarell

Tropical Storm Alpha has now been identified by the National Hurricane Center

..ALPHA BECOMES THE TWENTY-SECOND NAMED STORM OF THE SEASON AND
BREAKS THE ALL-TIME RECORD FOR THE MOST ACTIVE SEASON ON RECORD...

While neither Wilma nor Alpha currently threaten immediate oil production it is a concern that if this level of activity prevails, then we could be moving into a significantly more serious condition.  If more hurricanes can be anticipated and the National Geographic, in their Katrina Special Edition shows how much hurricane intensity has increased over the past decade, compared with the one preceding it, then putting valuable investments in harm's way is not the path to easy insurance.  We have already heard from folks in the industry that this problem is arising.  Simply put owners must prove, with an acceptable computer model, that the platform/rig can withstand a storm of a given intensity.

This may well change the pattern of drilling in the GOMEX, and possibly elsewhere where hurricanes or typhoons can be anticipated.  It will therefore  act to delay production as this exercise is completed, and when needed structures are strengthened. So, first the insurance industry has to identify where it expects storms and at what intensity in what areas, and then the production industry has to prove that their structures can withstand those storms.  

I knew there was a reason why we were graduating all those lawyers.  Now if only we were graduating enough engineers to give credibility to all those models (grin).

I noticed, over the past week, that there is some increasingly technical talk about the various ways that we get oil out from underwater in the Gulf of Mexico. And while I suspect that most of those who comment on this site are vary familiar with all the terms, some of the more general readership may not be. Since this is going to be a fairly hot topic in the near term, as the impact (spelled out in earlier posts and comments) spreads from the oilfields to the refineries and then up the pipelines to the local distributors and gas stations let me therefore explain just a bit about some of the different words that are being used here - with reference, where I can find them - to pictures of the different types of structures that are being used. And if I miss some, please chip in either to ask or answer. This is replacing a chat I was going to have about Horizontal Drilling, but that will be along at some time in the future. Earlier technical posts are listed at the end of this one (with a comment on the levee question).