This seminar is the most popular SPE program. The course is designed as non-technical audio-visual guided tour through the oil patch, illustrating the basic equipment and techniques used in the discovery, development and production of petroleum.
Marty Stetzer Presents Developments and Opportunities in Oil and Gas
Listen to Audio from the SPE session below:
In this section today, I’m (Marty Stetzer) going to first focus on oil, the supply/demand outlook. The second thing I’m going to look at is the new oil game in North America. If you’re new to the industry, you’ll start to see the term NAMER. That is not some weird combination, it’s just the abbreviation that everyone seems to use for North America.
There’s two types of real challenges and real opportunities. One is what we’ll call conventional developments. There’s some game changing developments that we’ll talk about in a minute. Specifically Gulf of Mexico deep water, and deep high pressure, high temperature wells.
— EKT Interactive (@EKTinteractive) April 17, 2014
Then we’re going to talk about the success of these unconventional technologies, the oil shale, the gas shale that you’ve been reading about or hearing about.
We’re going to spend most of my presentation on oil because it’s had a huge impact on the global supply/demand balance. We will talk a little bit about natural gas.
Finally, the fact that this is not only going to affect just the normal drilling and production assets, but it’s going to change the refining assets. It’s going to change the midstream assets because of the tremendous volumes of material that we have available.
Oil Demand Outlook – Think Like An Economist
Let’s start with the oil demand outlook. This chart is really busy, so I’ll take a minute and go through it.
The way folks look at demand is the way economists look at it.
They start with population. Here is the population in 2012 starting from India, China, Brazil, Mexico and I put USA at the bottom. The big population centers around the world.
The second column is the oil demand. You’ll start to see some secret codes as we go through the presentation. Then BD is barrels a day. A barrel is 42 gallons. If you see MBD, that’s thousands of barrels a day. If you see MMBD that’s millions of barrels a day. If you’re in the UK it’s KBD, per thousands of barrels a day. I’m not exactly sure how they show millions but it’s not KK.
Oil Demand Growth
Here’s the oil demand. This is how much oil is used in India, China and millions of barrels a day down this column. The most important column on this slide is the growth. From 2010 to 2012 India grew almost 10%. China grew 13%. Brazil grew 8%. Mexico grew 7.5%.
The US is in a decline growth-mode in oil because of fuel economy, because of gas substitution and a few other things. We grew at a -3%.
Oil Demand Per Capita
When an economists looks at total demand, they said, “How much demand is there per person in barrels per year?” In India every person is using 1.1 barrels per person per year. A barrel is 42 gallons. They’re using about 46 gallons a year per person.
We use more than that to fill up our trucks every time. They only use that every year.
China 2.8, Brazil 5.2. Here’s the US, 21.6 barrels per person per year, about 1,000 gallons per person per year. That includes all our manufacturing. That’s not just the SUVs. That’s everything that oil is used for.
You can see the disparity in the numbers. The highest growth countries are using the lowest consumption per person. We know they’re some of the fastest growing economies in the world.
What if China and India Just Reach Mexico’s Oil Consumption?
If China and India just get to Mexico’s consumption, nowhere near the US, there’s another 50 million barrels a day of oil demand needed. Where is that going to come from? That’s one of the huge challenges that we have in the industry.
Total Global Energy Demand
The second thing that is happening that we look at … This is from the National Petroleum Council, NPC.org. You’ll notice when you access my slides that we have on the SPE website, I put the references on there. This study was done in about 2011. It was a total energy study, so they talk about quadrillion BTUs.
It’s not worth it to worry about the conversion, but in 1980 the world used 288 quadrillion. It’s going to go to 678 by 2030. The pie chart shows, here’s the oil component, here’s the natural gas component, here’s the coal component. The same is true on these other slides. Down here it was the first time that the National Petroleum Council started considering the impact of wind, solar, geothermal, hydro, nuclear on the total demand.
Back here in 2004, oil and natural gas were about 60% of demand. Looking out to 2030, it’s about 50%, but look how much bigger the pie is. That’s the important point. By the way, this was assuming everything worked in every other alternative.
This was before Fukushima. This was before the Spanish decided that solar was too expensive. This was assuming that everything worked. The point being, if you’re new to the industry and you’re saying, “Look, I got into an industry and it’s waning hours,” you’re still going to need hydrocarbons for over 50% of your demand to satisfy the growth in these other economies and to satisfy the move to more and more electrical kind of opportunities.
The other thing that’s important that you’ll learn today … Here’s another view of this. This is the BP outlook. BP publishes an annual outlook. The references, again, will be on the slide when I put it in. In 2010 this is only crude demand, was 87 million barrels a day. MMBD, this is worldwide and it’s only oil. It was growing to 106 million barrels a day in 2030. Demand was increasing at 0.8% a year.
I’ve been doing this slide since 2007. The old demand growth for oil was double this. This demand growth already recognizes the impact of solar, the impact of wind, the impact of fuel conservation that I mentioned earlier. Even if it only grows at 0.8% a year, we need to go from 87 million barrels a day in 2010 to 106 million barrels a day by 2030.
Production Decline and Enhanced Oil Recovery (EOR)
The other thing that’s happening, you’ll learn today, is your best days in our oil well are your first days. Your production starts declining right after you have your initial production. You’ll cover this during the day in your production section. Your decline rate is almost 5% a year.
What’s happening is you’re going up at 0.8, but you’re going down at 4.8. It doesn’t take a genius to figure out that the further you go out, the wider that gap is going to be. Everybody is using 2030 as their target year, because the investment cycle in oil and gas is enormous.
Some of the production that is coming on stream in the Gulf of Mexico today, has been under development for 15 to 20 years. The oil companies have to have this really long term perspective as they’re looking out. They pick this 2030 as their horizon year.
The important note on this slide is 53. Less than half of the oil we need in 2030 is available from our current perspective. We’re constantly investing to try to reduce the decline curve and find new sources of oil to help meet this demand.
Any questions so far, supply/demand? Any observations? If I ask a couple of quick quiz questions, you’re going to all get 100 right? Is this straightforward? Is it clear?
Conventional vs. Unconventional
Let’s talk about how are we going to find all of this oil. The first thing that I want to discuss is what do we mean by conventional? Ron Hinn is going to talk geology later today. This is a seismic shot of a field in Louisiana.
Here’s a salt dome and here is fault lines. Here’s oil and water and gas. That’s about all I’m going to say about that because Ron’s the geologist and he knows a lot more about that.
A conventional well means that you’re going to do a vertical or deviated well drilled to a trap, which is where you suspect there is oil, with a conventional set of production facilities. He’ll talk about wildcat wells and exploratory wells later today.
If you’ve traveled around Texas and you’ve been over San Antonio, and you passed Luling, and some of these places that really smell weird, by the way that’s the smell of money. That is not the smell of anything else. Most of those oil fields were developed with conventional drilling rigs.
The conventional game is not over.
One of the biggest operations, it is still going on, is in the Gulf of Mexico in deep water. Terry Gardner is going to talk about deep water developments later this afternoon and offshore, but here’s a map of the Gulf of Mexico.
These are all the drilling locations and platforms. The important ones are out here. Here’s Jack and here’s some of the others that are in enormous depths of water.
Jack is in 7,000-8,000 feet of water. We’re now drilling in between 10 and 12,000 feet of water. The important thing about the Gulf of Mexico is it is vital to the US. 25% of our oil production comes from offshore deep water Gulf of Mexico.
Over 3800 platforms. 72% of those wells are in water deeper than 1000 feet. Again, you’re going to hear a little a bit about offshore today, and a lot about deep water today. To talk about how do I take that simple drilling rig from Luling and put it out in 7,000 feet of water in the Gulf of Mexico.
Believe me, that is not a simple task to pull off.
The second conventional well that I’m going to show you in a moment is by McMoRan. It’s on the next slide. It’s only in 20 feet of water, but it was drilled to 28,263 feet. It has over 200 feet of net pay. That’s enormous.
Again, Ron will talk about gross pay and net pay today. You’ll have some idea of what that means. That’s 200 feet of play that has potential oil or gas. In four zones, and again Ron will explain the zones to you.
The important thing about this picture is this well is deeper than Mount Everest is high. When you get down to that depth, the temperatures are 400 to 600 degrees. The pressures are 20-25,000 pounds per square inch. It’s much more complex than those shallow wells in Luling.
Those are the two major events in conventional. It says that the industry is really a high tech industry.
Oil and Gas – A High Tech Growth Industry
I saw a great article again in the New York Times by a hedge fund manager. He was not an oil industry guy, saying, “The fastest growing most innovative industry over the last 5 years, number of start-ups, number of professionals hired, has been oil and gas.” Not Google. Not Microsoft.
The growth in our industry for the last 4 or 5 years has just been enormous. I’m a mechanical engineer, so this iron is just awesome when I see the stuff that goes on.
Offshore Technology Conference
One more thing as part of your education, I don’t know what your schedule is like, but the offshore technology conference is coming, first and second week in May. If there is any chance that any of you can get over to see some of the equipment, it’s the world’s biggest science fair.
It’s another good way of getting exposure. There are demonstrations. There’s a lot of video stuff. Everybody has moved to big screens. It’s a really good way to learn more about the industry.
Let’s talk about unconventional. I don’t know why we call it unconventional anymore. The original fracking operation by George Mitchell was done in, I don’t know, 1952? 1949? Whatever it is, the unconventional has really turned out to be important.
This is another slide from the National Petroleum Council. It shows in 2010 where the North America oil is, just oil. North America includes Canada. The top is natural gas liquids, which comes out of the oil wells and can be converted to propane, butane and gasoline for your cars.
Tight oil, which is a sandstone, tight, low permeability type of play, and again Ron Henn will give you more detail on that. Here’s the oil sands in Canada. Here’s the arctic. That’s primarily the Alaska operation in the arctic. Then offshore and onshore conventional, which we just spent a lot of time talking about. That’s in 2010.
The National Petroleum Council said, “Look, we’ve started to see all these shale plays. We’ve started to see all this unconventional stuff. What’s going to happen going forward?” The first thing they said was if we have limited access to resources and we have strong regulation, not much is going to happen, but already we’ve seen that we have really good regulation.
We have terrific opportunities. Most of them are unconventional. Here’s the oil shale play. Here’s recovery from tight oil like we’re seeing in the Permian Basin, and here’s the other place in oil sands that’s happening in Canada.
I want to put these numbers in perspective. At 10 million barrels a day, this is millions of barrels a day along the column. 10 million barrels a day is what Saudi Arabia produces, and that’s the biggest oil producer in the world.
Geopolitical Effect of Unconventional Production
You’re starting to see headlines, “US to be an oil export power.” We, in North America, provided we get all the development opportunities in place, could be double what Saudi Arabia is producing.
This is having a tremendous impact on the global power plays that are going on around the world, which is another 45-50 minute discussion, which I won’t go into.
So What Makes in Unconventional?
What do we mean by unconventional? First we’re not looking for a trap. The reserves are there. We know they are. Think of a coal field, only full of oil or gas. They’re not discreet like a trap, but they’re continuous. They’re all over the place. We know it’s there. How do we recover it? How do we economically recover it?
Manufacturing Style Development
It takes hundreds or thousands of wells to make this work, as you’ll see in a minute.
You need manufacturing style development. If you’re a supply chain person, it’s one of the highest paid jobs currently in the oil industry because to do these sizes of wells you need pipe, you need trucks, you need mud, you need sand, you need everything.
All of it, the way you bring it to the location, is almost as important as the way the location is developed. That’s what the term unconventional really refers to. Not that it’s new, but it’s kind of the way that it’s going to be developed.
Four Key Unconventional Oil Plays
I’m going to spend a little time on four unconventional plays.
As I said earlier, at the risk of repeating myself, I’m going to talk about a high level introduction, the commercial considerations, and some of the key items that can drive the play. The other speakers today will go into some of the technical stuff.
Canadian Oil Sands
Let’s start with the Canadian oil sands. This pink section shown in Alberta, is the extent of the Canadian oil sands. Here’s Fort McMurray up here, that little dot right there. Highest housing cost in the entire planet and a good friend who has been going up there, and I said, “Well how did it go last winter?” He said, “Well it was okay at 10 below but going outside at 20 below with the wind blowing was a little more than I could handle.”
Huge reserves in Canada. The reserves in Canada are as big as the reserves in Saudi Arabia, which has again the largest reserves, not only the largest reserves, and the largest production.
The development of the oil sands depends on the price. Same with the development of any other type of reserve. If they need $70-80 a barrel for a return on new projects.
So right now there’s a lot of investment going on in the oil sands. Suncor, which is one of the biggest and long term operators. If you’re interested in oil sands, the Suncor website is just awesome.
Talking not only about the development, but everything they’re doing to manage the environmental impact of the oil sands development. Multiple pipeline projects underway. You’ve heard of the Keystone XL pipeline.
We’re supposed to have a decision on that in May of this year. We were supposed to have a decision May of last year. I don’t think we’re going to have a decision on that pipeline until honestly after the next election. That’s just Marty Stetzer for what it’s worth.
The other thing that’s been happening, when the folks in Canada saw that they may not be able to export to the US market, other people have swooped in to start buying up reserves, especially the Chinese.
Some of their reserves buying has been challenged by the government of Canada. Lately there has been a lot of deals. Conoco Philips sold their old sands project in Canada to the Chinese.
I mentioned the supply chain impact. These are the trucks that you see on TV that move the oil sands around. The oil is actually in sand. You have to move it to an operation to remove the oil from the sand. It’s a very heavy oil, very high sulfur oil, so it has to be cut with a [inaudible 21:58] to move into a pipeline.
These trucks go 24 hours a day. In fact, there’s a new set of robotic trucks that they’re trying out now because they’re going to the same place all the time. It’s like a gigantic train with no tracks.
At one time, a year-and-a-half ago, talking about supply chain, the limit on the amount of production in the oil sands was the tires for those trucks. The manufacturers just couldn’t make the tires as fast as they were wearing them out.
That’s what’s going on in Canada. If you ever go up there, you better start following hockey. There’s no two ways about it. “Eh’s” kind of fit in.
The Bakken Shale
The next one is the Bakken shale. Here is the bakken shale. This is Montana, South Dakota, North Dakota, Williston is up in here. Wyoming.
Here’s the old Williston Basin and here’s the Bakken shale, which does go up into Canada. Major hydrocarbon formation in the Williston basin.
Bakken Shale Oil Characteristics
The USGS, U.S. Geological Service, estimates 7.5 billion barrels of oil in the Bakken shale. Very deep, tight. It’s a shale oil formation, but the oil is really good stuff.
Unlike the oil sands that I talked about, which is heavy in sulfur, this is really good stuff. This is perfect for making gasoline in a refinery. High quality and they call it light sweet, meaning it has very low sulfur.
Bakken Oil Production & Infrastructure
The Bakken is now producing almost a million barrels a day, up from almost nothing 4 years ago.
This has had a tremendous impact on the infrastructure. Over 70% of it is moved by rail to refineries or pipeline centers, so there’s now a million barrels a day of rail capacity in the bakken.
To go back to my New York Times picture, Bakken crude, over half of it goes through Albany, New York by this set of train lines. It comes down the Hudson River and then goes up to the refineries in the East Coast, handle light sweet crude, and then it goes all the way up into a Canadian refinery.
Pipelines moving crude oil in Texas, Oklahoma, Louisiana, now we have a huge rail operation going on in the US that affects cities like Albany and New York.
The Eagle Ford Shale
The second play, right here in Texas, is the Eagle Ford.
Major new title basin. Here it is. Here’s Austin, San Antonio, Corpus. The green is oil. The yellow is liquids, propane, butane, again natural gasoline, and the red is gas. You can go on to search Eagle Ford shale permits on a website, and there is a blizzard of red dots up here going on.
Production is currently between 4,000-14,000 feet, and as I mentioned, oil is in the shallower part of the field. Production is now almost 500,000 barrels a day from the Eagle Ford shale, all brand new stuff.
By 2022, there could be 24,000 wells in this region, if the current production plans and the current volumes continue to happen. If you drive along I-10 or you’re ever ridden out to San Antonio, or go down 59 to Warten, and you don’t get passed a truck hauling pipe, I don’t know what road you’re on.
It’s unbelievable the amount of activity that is going on to develop the Eagle Ford shale.
The Permian Basin
The last play is the Permian basin. Permian basin is in Midland, Texas. Here’s Midland in here.
Very old oil field. They’re finding with some of the new deep horizontal techniques and some of the fracturing techniques, that the amount of oil in the Permian, which is a soft ball, I know this is a little fuzzy, could be twice as much as the Eagle Ford, and three times as much as the Bakken.
Old fields never die. They just find new ways to recover the oil out of these fields. The impact on Texas has been enormous between the Eagle Ford and the Permian.
Our oil production that was declining from 2.4 million barrels a day in the 80s, we brought them back and look where we are again. It’s more than doubled in less than 3 years. Over 300,000 jobs have been added to Texas non-farm payrolls.
One of the lowest unemployment and highest growth in employment states in the union, to the point where developer, are you ready for this? … Is talking $400 million, 58-story mixed use building in beautiful downtown Midland.
Have any of you all been to Midland? What do you think this is going to do to the local landscape? Unbelievable, just unbelievable. He is so enthusiastic about it.
Apartments, bars, restaurants and the whole 9 yards. Watch this space to see if that thing gets built. You can see again the impact of shale is not just on the oil and gas business. It’s on every other piece of the infrastructure.
A quick word about Natural Gas
I’ve spent most of my time on oil because the oil is the most recent and becoming the most developed, and in my opinion currently has the most global impact.
Gas will have an impact later. I don’t spend much time on gas. We’ll talk more about it today.
This started out with shale gas plays. Here’s the Marcellus play. Here’s the Barnett. Here’s the Haynesville that you may have heard of.
Look at the size of the Marcellus.
I was born and raised in Pittsburgh, so Three River Stadium is just about right there.
Marcellus is enormous. We did a project in 2010 with the fireman to help train the fireman in Pennsylvania to handle a well-side incident. That’s when I learned there’s 168 trillion cubic feet of natural gas.
Real quick, that’s 10 to 15 years of the total demand of the US. Just in the Marcellus.
Some of the estimates are high as 516 trillion cubic feet, but these are early, and they will be continuing to revise these reserve estimates as time goes by. This would be half as large as Russia. That’s just in one play.
The gas is another whole story, another whole 40 to 50 minute story. One of the other things that’s caused the slow down in growth in oil is the growth in the use of natural gas. This is not new.
This slide is from I think 2003 when Shell’s long term planning group predicted that we were going to shift. Here’s the oil curve, kind of peaking up and gas increasing.
The Gas and Oil Business
Maybe we should call this the gas and oil business instead of the oil and gas business. We’re continuing to see gas come in for CNG cars, gas come into power plants. The way the portfolio is going to shift over the next 5 to 10 years is hard to anticipate.
Domestic Production Effect on Imports
I want to talk about one or two of the impacts to help answer another question this young man raised. I used to do this presentation. This is the amount, this is millions of barrels a day, this is our oil demand and here the blue is the total imports and the top line is our domestic demand.
If you remember that one slide we’re at about 21 million barrels a day. In 1985 31% of our demand was imported. I used to say 1 gallon out of every 3 that goes in your gas tank was important.
By 2005 2 gallons out of every 3 you put in your gas tank was important.
Since 2005, we now already import only 35% of our demand. There’s been a huge shift.
Back to your global economics. If not only been on the crude side, but also on the product side, which changes your whole way of looking at things. Most of our imports are now from Canada.
That’s because the cars now get much better gas mileage and have to go to 54.5 miles a gallon by 20/25. My 1983 Mercedes diesel with only 275,000 miles on it, just getting broken in, may be history by 2025.
Midstream Infrastructure – A “Super-Cycle” of Investment
We’re substituting natural gas in fleet and power, and conversation is very cool. The other thing that’s happened, again to your question, one of the other limits of growth is the limit on midstream assets.
You need midstream.
You need processing plants to separate natural gas liquids.
You need pipelines.
You need gathering systems.
You need railcars.
A recent study that came out said when you look out 10 or 15 years, it’s a $640 billion investment that’s required in North America just from midstream assets.
How fast we get that stuff on stream is another limit to growth. Right now in the Bakken there is a huge amount of natural gas being flared, burned because you can’t get it to pipelines.
Energy Glutton to Global Powerhouse
In summary, we have moved from what I call the global energy glutton, where 2 out of every 3 gallons was imported, to an energy powerhouse.
Upstream and midstream investments are worth billions, and hundreds of thousands of jobs. If you’re new to the industry, you’ve often heard that this industry is really cyclical and it’s going to be LIFO, Last In, First Out.
I think you’re on a power curve here and it’s going to take you through a 20 year career easily, irrespective of the price because I don’t think we’re going to see the 10, 20, 30 dollar a barrel numbers like we’ve seen in the past.
Reconfiguration of North American Assets
We have to reconfigure the North American pipeline grid.
All of our pipelines start in Texas and Oklahoma, Louisiana and go north.
The Marcellus is now reversing pipelines to move natural gas and ethane south to the refining center.
Rail development is very critical and you’ve all seen the write-ups on the two major disasters. The rail industry is really stepping up to change the way the rail shipments of oil are handled.
Again, this is going to displace crude and product imports. I can’t even imagine the policy discussions that are being taken in Washington to try to figure out how to forecast this.
Thank you very much.
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The decline in conventional oil, how was it … You said in 2007 that increased [inaudible 09:15] was a little higher than right now?
How did the decline slide look in 2007?
The time curve has been for the last 15 to 20 years. That is a long term number. It’s about the same. Any other questions? Yes sir.
Any significant R&D in getting more production out of existing wells.
There is. The significant R&D to reduce the decline is called Enhanced Oil Recovery, EOR. Make sure when Ken Arnold is up here or John is up here, that you ask that question on some of the EOR techniques. I think we’ll cover that later this afternoon. Good question.
We have this debate in our company. I’m just curious what your definition is. Where do you draw the line between deep and ultra deep, at how many thousand feet?
I think you have to ask Terry Gardner that. I asked him that the other day and he hedged, so make sure you pin him down. Deep and ultra deep. Good question. Any others?
What do they do with all that sand when they take the oil out? Can they reuse it for something?
They can’t reuse it. They put it in what they call a tailings pond. It’s quite messy. They then clean everything else out of the sand. It’s full of other metals, and put it back in like the old strip mines in Pennsylvania or Virginia. Are any of you involved with the oil sands projects? Yes sir?
Is this [Canadian Oil Sands] like a mining project?
It’s a mining project. Exactly right. They’re looking for mining engineers to help with this project. It’s a surface strip mining operation. Good question.
What do you think this [production] is going to do to the price? Are we going to get to the point where we’re over-producing and drive it down?
That seems to be what always happens, but remember the US price is tied very closely to the global oil price. Remember demand in the other countries is going up. Our demand is going down.
This is again Marty Stetzer for what it’s worth. I think we’re going to be in the $80-100 range for the next 3 to 5 years, unless there is some sort of a breakthrough, which does make the shale plays economic. If we stop dropping below 70 to 80, some of the plays are not going to be economic.
What are some of the metrics in place that we have to look at in the next few years. Is the biggest challenge to keep up with growth going to be capacity? Is it going to be bringing educated people on to work in the industry? Is it going to be access to capital for growth? We’re growing so fast. I’ve gone to Midland and it’s impossible to get a rental car. It’s so expensive.
There’s a ton of challenges. You might get into it today. There’s obviously regulation challenges. Is there such a thing as growing too fast?
We should start our own franchise business huh? That’s a great question.
From a commercial standpoint, access to capital is no issue
The biggest, I think is access to skilled staff and a continuous process. I know Conoco Philips, over 45% of their technical staff are going to retire in the next 4 years.
You talk about the big crew change. I know specifically for Conoco Philips because I work with them. I personally think that is going to be the limit to growth.
The technical folks later today can talk about some of the other pieces.
I think we have a good regulatory environment in the areas where the big plays are currently, so that we’re going to be able to develop the reserves.
Are you going to see leadership in foreign policy part of this?
I think you’re already seen a shift in foreign policy, in the way we’re handling the relationship with Saudi Arabia.