Today’s Energy Update
(Because Energy Fuels Our Lives)
There are many ways to tell the story of any oil boom, one of which is to view them through the spectrum of the various bottlenecks they create. By any measure, the ongoing boom in the Permian Basin has created more than its share of such traffic jams already, and at least one more is likely on the way.
The reasons for this are many: The unprecedented magnitude of this particular oil boom in modern times has much to do with it. The fact that the play area is in a sparsely-populated, mainly-rural part of the world also plays a role. The nature of the oil being produced – the light, sweet variety – and the play area’s immense geographic sprawl also have also been major factors in the creation of a variety of bottlenecks.
Some of the bottlenecks the Permian has experienced come about in any significant oil or gas boom: The ongoing challenges of training and hiring qualified workers is a classic. The shortage of natural-gas-gathering infrastructure that resulted in a high volume of flaring is another that was also a feature of booms in places like the Eagle Ford and Bakken and Marcellus shale plays. Roads and other limitations in preexisting regional infrastructure inevitably resulted in bottlenecks in traffic as the counties and states struggle with funding major new improvement projects.
This new capacity is desperately needed, as the U.S. Energy Information Agency projects that Permian crude production will double over the next four years, from the current 4 million bopd to as much as 8 million bopd. Given that virtually all Permian Basin natural gas is associated production from wells classified as oil wells, we can expect similar increases in natural gas and NGL production during that time frame.
Today’s Energy Update
(Because Energy Fuels Our Lives)
The exploration for oil and natural gas has always been among the most risky propositions in the business world. The major risk today, in the new age of shale, revolves around raising capital and satisfying investors, but throughout the 19th and 20th centuries, the bigger risk centered on finding the pockets of oil and gas contained within conventional sand and limestone formations.
This was often a very tricky proposition, and the drilling of dry holes outnumbered the successful wells in many major play areas. The tales are legion of the independent producers who went flat dead broke before ever managing to drill a producing well. “Dad” Joiner, the promoter and ultimate driller of the Daisy Bradford No. 3 – the first successful well completed in the mammoth East Texas Field on October 3, 1930 – famously went broke half a dozen times and required an influx of capital from H.L. Hunt before finally bringing in his gushing discovery well.
That dynamic all began to change in the late 1980s with the discovery and development of unconventional formations like the Fruitland Coal in the San Juan Basin of New Mexico. Operators like Burlington Resources, Amoco and Devon Energy (DVN) soon realized that, once the geographic extents of the formation had been fully delineated, the risk of drilling dry holes soon diminished to near-zero. Once that determination had been made, you drilled a vertical well, conducted a smallish hydraulic frac job and de-watered the surrounding rock to cause the methane gas to be released from the coal.
At that point, the main considerations became how to re-use, dispose of or sell the largely-potable water that came up out of the wells, and building out the necessary transportation and processing infrastructure needed to get it to market. Once those concerns had been addressed, these companies and many others found themselves in what was essentially a true manufacturing environment
A true manufacturing environment is one that is highly-predictable, consistently repeatable, requires known raw materials (i.e., sand, pumps and frac water), deploys specific infrastructure, and involves the disposition of waste materials. The Fruitland Coal fit every aspect of that definition: Many other unconventional plays soon followed.
Shale plays, once fully delineated, all end up incorporating the same features of true manufacturing operations. Thus, when both ExxonMobil (XOM) and Chevron (CHV) issued this week’s announcements that their companies would deploy a high percentage of their respective capital budgets in the coming years in efforts to dramatically increase their production from their Permian Basin operations, it did not represent a new concept for the U.S. oil industry. It’s just that these two major, fully-integrated companies have the ability to conduct such operations on a far grander scale.
For those who may have missed those announcements, Chevron said it plans to produce 600,000 barrels of oil equivalent (boe) from its Permian operations by 2020, ramping that up to 900,000 boe by 2023. ExxonMobil anticipates being able to increase production from its 1.6 Permian position from roughly 200,000 boe today to 1 million boe by 2024. Both numbers are truly astonishing.
One of the big concerns during the depths of the oil price bust of 2014-2016 was the fact that so many big, integrated and state-run oil companies were delaying or taking a full pass on investing in major and highly-costly international projects. During the financial retrenchment of this dark period, exploration for major new resources consistently took a back seat to finding ways to pay the bills and service the company’s debt.
This lack of investment in new exploration and infrastructure projects led to concerns among many energy analysts that we could be facing a shortage of global supply early in the next decade as decline rates caused existing reserves to play out without the needed new production coming on line to replace them. The surge in new supply from U.S. shale plays has served to alleviate those concerns for the near-term, and a new report issued by the Norwegian research firm Rystad Energy documents a similar surge in new international investments that should help avoid supply shortages further down the road.
“We expect global FID volumes in 2019 to triple over last year, and 2019’s megaproject awards could lead to billions of subcontracting dollars in coming years,” said Rystad Energy upstream research analyst Readul Islam, “The only supply segment likely to shrink this year is the oil sands, whereas deepwater, offshore shelf and other conventional onshore developments are all poised to show substantial growth. From a geographical perspective, all regions are headed for robust growth except Europe and North America, still bearing in mind that shale plays are not included in these numbers.”
That last point – that shale plays are not included in this report – is key. As I pointed out last week, the Permian Basin has become a focal point for major development not just for big independents like Pioneer Natural Resources, Noble Energy, Apache Corporation and others, but also for major, integrated companies like ExxonMobil, BP, Shell and Chevron. These U.S. shale plays are likely to sustain significant production growth for years to come, giving the big investments documented by Rystad in its report the running room they need to move from final investment decisions to first production, which can easily consume five-to-seven years.
So, if you’ve been wondering why all those stories about concerns of a looming supply crunch on the horizon have disappeared from your daily news clips, this is the reason.
Today’s Energy Update
(Because Energy Fuels Our Lives)
The energy media has recently featured headlines that seem at odds with one another and that, when taken together, portend the possibility of a coming train wreck somewhere down the road where crude oil supply and prices are concerned. Let’s look at some of the more recent headlines as examples:
That Investor’s Business Daily story begins by stating “The U.S. shale oil boom is about to get a whole lot bigger. The reason: Giant oil companies like Exxon Mobil (XOM) are leveraging their massive scale to unleash more production from the top-producing shale oil formation.”
Meanwhile, the theme of the Gulf Times story is that pretty much all of the big Permian Basin producers are exercising budgetary discipline, cutting back on their drilling budgets in response to pressure from Wall Street, and focusing instead on maximizing investor returns after the recent drop in prices. Yet, despite this exercise of “restraint,” despite a slightly lower regional rig count, despite the temporary constraints on pipeline takeaway capacity, the U.S. Energy Information Administration (EIA) tells us that the pace of increase in overall U.S. shale production is continuing to accelerate over the first quarter of this year.
Today’s Energy Update
(Because Energy Fuels Our Lives)
#GodBlessTexas. – Last week at Shale Magazine, I put up a piece detailing some “Fun Facts” about the state of the oil and gas industry in Texas. That piece began with the following statement:
“Here’s a fun fact: If Texas were an independent country, it would now stand as the 5th-largest oil-producing nation on Planet Earth, behind only the rest of the U.S., Russia, Saudi Arabia and Iraq. According to projections by the U.S. Energy Information Administration (EIA), Texas will pass Iraq in this measure of economic might later this year.”
Boy, things sure do escalate quickly in the oil industry. Here we are, barely a week later, and the truth about that little factoid has already changed again, at least if the U.S. Energy Information Administration (EIA) has its numbers right. EIA now says that the U.S. averaged 12 million barrels of oil per day (bopd) in January, the first time it has ever reached level. The agency further projects that the Permian Basin alone will produce 4 million bopd in March, roughly 1/3rd of total U.S. production.
So, before we get to some new amazing facts about all of this, let’s do a little math. First, roughly 85% of total Permian Basin production comes from Texas, which in March would come to about 3.4 million bopd. Next, add in EIA’s estimate that the other behemoth Texas shale play, the Eagle Ford, will produce about 1.3 million bopd, and you are at a stunning 4.7 million. Oh, and there’s also all that oil coming out of deep south Texas, east Texas and the Texas panhandle, and all of a sudden you find Texas producing in excess of 5 million bopd.
All of which means that as of today, the great State of Texas, all by itself, would now rank 4th globally in crude oil production if it were an independent country, having now blown past Iraq. Oh, and if the EIA’s projected trend for Permian production growth holds true, Texas will in all likelihood surpass the rest of the United States in total production at some point in either late 2021 or early 2022, and become the third-largest producer in the world.
But that’s not all.
EIA’s March projection of 4 million bopd coming out of the Permian Basin alone means that single basin, were it to secede from the union, would suddenly rank as the 5th-largest oil producing nation on earth, behind Iraq as well as the other countries mentioned above. The other amazing but little known fact about the Permian is that it ranks as one of the largest natural gas plays on earth, second in the U.S. only to the mammoth Marcellus Shale play in the northeast.
How incredible is that? Look at it this way: Just a decade ago, the Permian Basin was considered to be a “dead” oil play. Downtown Midland was basically a ghost town, and the only real oil business going on out there was a bunch of small companies buying up old, depleted oil fields and going in to rework the wells in order to squeeze a few more barrels per day out of them.
Today, just 10 year later, it is the focal point of the global oil industry, the driver of booming economies of Texas and New Mexico, the main driver of the country’s burgeoning oil and LNG exports businesses. Because industries like chemicals, plastics, fertilizers and many, many more use petroleum products and natural gas as feedstocks, the Permian is also one of the the major facilitators of our country’s manufacturing renaissance over the last few years.
Stunning. And a real blessing.
God Bless Texas, indeed.
That is all.
Follow me on Twitter at @GDBlackmon
Today’s news moves at a faster pace than ever. Whatfinger.com is my go-to source for keeping up with all the latest events in real time.
Examples of the races that have developed in and around the Permian in just the last few years include:
The race to acquire leases and proved reserves that has driven the cost of acquisition in the region to as high as $95,000 per acre;
The race to reserve drilling rigs and frac crews;
The race to hire qualified workers, which continues to grow increasingly fierce over time;
The race to provide frac sand;
The race to develop and install water recycling technologies;
The race to permit and build-out new pipeline capacity as a shortage developed in recent years;
The race among producers to reserve capacity on those new pipelines;
The race among refiners to finance and build new capacity to refine the light, sweet crude coming out of the Permian and other shale basins in ever-rising volumes;
As the competition to accommodate the Permian has moved ever-further downstream, it has now resulted in a growing conflict on the southern Texas Gulf Coast to be the first facility to build out new capacity to land and load the largest classes of oil tankers – so-called Very Large Crude Carriers, or VLCCs – and send them back out to sea.
Despite recent low crude prices and a significant drop in the DrillingInfo rig count during January, the giant Permian Basin of West Texas and Southeast New Mexico continues to expand its role as the main driver of energy growth in North America. In just the past week, we have seen the following significant events that are attributable all or in part to what has become the world’s second most-productive oil and gas resource:
A driver of upstream and midstream profits – Both ExxonMobil and Chevron beat analyst expectations with their 4th quarter earnings announcements, driven mostly by their upstream and midstream developments in the Permian. Exxon beat forecasts by almost one-third, with its full-year 2018 earnings coming in at the highest level since 2014. Driven by its Permian drilling, Chevron’s oil and natural gas production rose to an all-time high as the company produced a record 3 million barrels of oil per day (bopd) during the 4th quarter.
“My story starts in 1956 when I was one year old, and M. King Hubbard made a prediction about ‘peak oil.’ He said somewhere around 1970 U.S. production would peak at about 10 million barrels per day and then it would fall off over the next 25-30 years to about 4 million bpd, and the U.S. would be completely dependent on foreign oil.”
Steve Keenan is, to put it mildly, a high-energy individual. Apache Corporation’s Senior Vice President for Worldwide Exploration, he is a 40-year veteran of the oil and gas industry, a geoscientist who has seen it all and done most of it. As we start our interview last November, he is seated at his desk at the company’s offices on the western edge of San Antonio, trying to describe to this writer the series of events that led to the discovery of the massive Alpine High resource in the Delaware Basin of far West Texas. As we will soon see, it was a discovery that required a “cradle to grave” kind of approach, and true to form, Keenan was starting his explanation at the cradle.
“That’s important because people really believed what Hubbard was saying,” he continues. “And the amazing thing to me is that he was practically correct — oil did peak at 10 million bpd around 1970, and it did fall and we were disproportionally dependent on imports for a long time. But it didn’t fall in the logistic distribution curve that he predicted.” To emphasize this point, Keenan pulls up a line graph of the last 45 years of U.S. oil production onto his computer display. “If you’ll notice, there are changes in the slope of the curve, and it is those changes in slope that are the story of my career.
“Up until about 2005 the industry was involved in what we used to just call ‘exploration’ but which we now refer to as ‘conventional exploration,’ since we now have exploration in ‘unconventional’ or ‘resource’ plays,” he says, describing the different terms used to differentiate the sand and limestone formations from which almost all oil and gas was extracted during the industry’s first 150 years and the tight sands, coal and shale formations that have produced most of it in the U.S. during the course of the 21st century.
“All these changes in slope are important because what they represent are the introduction of new ideas, really creative and adaptive thinking, so that we could slow or arrest that decline. Or some kind of new engineering capability or new technology that didn’t exist previously. But mainly it was creative thinking.”
He points to a specific spot on the graph. “This is where I come in. I actually first got hired in 1978, after the Arab oil embargo and the discovery at Prudhoe Bay. Like a lot of people my age with my credentials (he has an MS degree, undergrad in geology with a master’s thesis topic pertaining to spectral analysis of seismic signals – most of his contemporary MS colleagues studying Geophysics were writing about the evaluation of gravity or magnetic data) I began my career working in frontier areas where all the big hopes were. The main suspects at that time were in Alaska and California.”
Indeed, the progression of Keenan’s career, which, before coming to Apache Corp. in June 2014 included stops at Cities Service Oil Company, SOHIO Petroleum, BP, Marathon and EOG Resources, reads basically as compendium of some of the largest major oil discoveries of the last 40 years.
As Keenan notes, the early years of his career, spent at Cities Service, were spent exploring for oil on the North Slope of Alaska and in California, where he worked on the huge Milne Point field 35 miles west of Prudhoe Bay, and also on the Point Arguello field in the Pacific Ocean waters offshore California, just north of Santa Barbara.
While working as Regional Project Manager and as Chief Geophysicist at a domestic independent oil company from 1985 through 1997, Keenan gained a wealth of international experience, exploring for oil faraway places like Norway, Oman, Spain, Argentina and Egypt. Keenan moved over to Marathon Oil in 1997, and spent the next five years working on assets in the deep waters of the Gulf of Mexico and Angola.
Keenan next moved to become Division Exploration Manager of the South Texas operations for EOG Resources. There, he led the company’s highly-successful development of the Middle Wilcox tight sands assets in South Texas. Then, in 2008, his team made a major new discovery when it drilled, hydraulically fractured and completed the first successful horizontal well in the giant Eagle Ford Shale formation.
Wait, you’re thinking, didn’t Petrohawk drill that first successful Eagle Ford well? That is the common story, and, to be fair, Petrohawk was the first company to publicly announce a successful Eagle Ford completion, in October of 2008.
In 2008, EOG made a strategic decision to add more liquids to its portfolio of assets as the natural gas market in the U.S. began to become over-supplied. Keenan and his team were directed by then-EOG CEO Mark Papa at that time to go find more oil, even though it had been highly successful in drilling for the natural gas in the Wilcox formation for many years by then.
In the summer of that year, Keenan’s team which included current Apache employees Chester Pieprzica, Roberto Alaniz and Navneet Behl, drilled the Tully C. Gardner #94H, a 4,200’ lateral well in Webb County, Texas, which is in the wet gas window of the Eagle Ford Shale, and brought it online in August. So, why does the Petrohawk well continue to get the credit? Because EOG made the strategic decision to not make an announcement of its new discovery.
“At EOG, we decided that there was no value to us in telling people that,” Keenan says with a chuckle. “We convinced our management to move over to Karnes County (to the east) [to start up an expanded leasing program]. We then moved our rig over into Karnes County and drilled what was the first crude oil well in the Eagle Ford Shale.
“If you think about it, what business advantage would we [EOG] have to tell anybody about that first well?” Keenan says, noting that doing so would only serve to bring new competitors into the play area. “When we drilled that first well, we had about 15,000 acres under lease in the Eagle Ford,” he notes. In the coming months, EOG’s acreage position ultimately grew to more than 575,000 acres, and the company became one of the handful of biggest players in the Eagle Ford drilling boom that lasted through 2014, and is now seeing something of a revival today.
During the course of a radio appearance I made on January 29 (BYU Radio’s “Top of Mind” program hosted by Julie Rose) I was reminded of just how little most Americans really understand about oil and gas in general, and how the gasoline or diesel they use in their cars is manufactured and delivered to their local gas stations.
That’s not a criticism of ordinary Americans, because 98% of them have no real need to understand such things in the course of their lives, and our system of education does almost nothing to educate them about this particular topic. Nor is it a criticism of Ms. Rose, who herself is extremely knowledgeable, but poses questions she knows most of her listeners are wondering about.
Given all of that, I have endeavored here to put together seven key things to know about oil and gasoline that might help the average person better understand this key element in their daily lives:
Where does Gasoline come from? – Gasoline is one of many products derived from crude oil at oil refineries. One good way to think of crude oil is as a complex soup with all kinds of ingredients floating around in it. The refining process basically takes the crude oil soup that comes up out of the ground through oil wells and separates all those ingredients out of it. Gasoline is like the noodles in your chicken vegetable soup.