The energy kaleidoscope

With a kaleidoscope of issues, today’s E&P leaders have to learn how to change wings in mid-flight.

“How is it going in the oil and gas business”, my barber asked. I answered, “It is going like a volatile kaleidoscope of paradoxes, challenges, opportunities, uncertainties, conundrums, contradictions, risks and innovation. To succeed, today’s oilmen have had to learn how to change wings while in mid-flight”.

Over the past decade the US industry has transformed itself from a natural gas dominant period of tight supplies and high prices through the shale gale and subsequently into a period of excess gas supplies and low prices. It also transitioned from a period of waning oil potential and supplies into a tight oil boom with high prices and subsequently into a period of excess oil supplies and low prices. Billions invested in expectations of importing LNG have shifted to exporting LNG. The US has led the world in oil supply growth since 2008 and more recently Saudi Arabia decided that it no longer will serve as the swing producer for oil. As a result of an incredible burst of innovation, key factors such as US energy security and economic health are in the best shape since the 2009 recession and world oil and gas markets have relaxed from an extended period of tight supplies.

Today it looks and feels like the oil and gas industry is a victim of its own success. US gas production has continued to rise even with fewer than 250 gas rigs and <$3.00 US gas prices. US oil production growth has abated but only after oil directed drilling dropped by more than 50% in response to a 60% plunge in oil prices. Among the paradoxes, returns on capital employed decreased for several company peer groups along with a substantial slump in global conventional oil discoveries while oil prices averaged almost $100 per barrel. In the US, core sweet spots in the successful unconventional oil and gas plays are tightly held and many new play candidates have been tested without much success.

Understanding the next phase in the evolution of the upstream sector begs three key questions:

1. Does the US offer sufficient additional opportunities to sustain success over the next decade?
2. Can the strategies and tactics that drove the successful US unconventional oil and gas revolution be exported?
3. Can the dramatic slump in global conventional discoveries be reversed?

With reduced capital budgets and activity it is a good time to consider how to reshape strategies and portfolios to sustain company growth objectives in the new business environment. Fundamentals provide a foundation to consider the foregoing questions.

• North American and global resource bases are the largest ever through the addition of unconventional oil and gas resources.
• The industry has developed and proved new drilling and completion technologies and efficient operating practices to produce from an expanded array of tight and difficult to produce reservoirs. (See also, Unconventional techniques in conventional plays – outside North America, Unconventional techniques in conventional plays, North America, New Oil & Gas Boom Paradigm: Reviving the Conventional)
• Best ever geophysical and marine technologies also are available to identify and produce from more challenging conventional fairways.

Looking forward, it is estimated that 30 MMb/d of new liquids supplies will be needed to offset declining historic production and to meet global demand in 2040. To meet this objective an estimated 130 billion boe of new liquids resources must be brought on stream – but from where? IHS identified and evaluated 100 top plays (with bias toward liquids) in four domains to determine if these plays held adequate resource and supply potential to meet the 2040 objective. The four play domains included conventional, unconventional, not-so-tight reservoirs and heavy oil. The study identified total recoverable resources of more than 1,300 billion boe of which almost 60%, or 789 billion boe, are liquids that could be accessed over the next 30 years (Figure 1). Fifty-four conventional plays – mostly deep water - hold almost 750 billion boe of the resource. The Americas, with a strong mix of upside potential in conventional deep water, unconventional shale gas and tight oil, heavy oil (mostly in South America) and legacy not-so-tight reservoirs harbor almost half of the identified resource. While no clear winners within domain or country emerged, the study revealed several play arrays that might appeal to a broad spectrum of companies. There is a group of low to medium risk plays with 5 to 15 Bboe of potential resources. The study also revealed a mix of plays (mostly onshore) that could target up to 10 billion boe of resource with access costs of $300 million or less. Latest cost reductions would make some of these plays even more attractive.

There are no silver bullets but the study indicated that the not-so-tight domain might be a sleeper with some low hanging fruit in sub-commercial parts of legacy conventional fields. Not-so-tight reservoirs are those with permeabilities in the 1-20 md range that have tended to be sub-commercial so far in the conventional domain. In the US more than 400 individual liquids reservoirs have been tested with horizontal wells and 81 of these tested with at least 10 horizontal wells report average initial test rates greater than 500 bpd. The majority of these are targeted to carbonate or clastic reservoirs that fit in the not-so-tight category. In addition, there are about 40 additional not-so-tight reservoirs with fewer than 10 horizontal tests that merit watching for commercial potential. Internationally, IHS identified not-so-tight fields with 141 billion boe of estimated recoverable resources. Opportunities to apply unconventional technologies to recover oil and gas from not-so-tight reservoirs offer intriguing potential.

But there are significant challenges. The study also found that many of the resources are difficult to access due to political (above ground) risks, technological or cost factors or are located in unproven basins. Evolving political situations, new technologies, cost management, fiscal terms and the trajectory oil and gas prices will be critical to access many of these opportunities over time.

Pending considerations to lift Iranian sanctions are an example of challenging above ground risks. IHS estimates that Iran oil production could increase by about 500,000 b/d within a year after sanctions are lifted. Adding several hundred thousand b/d to already oversupplied oil markets would further disrupt the process to rebalance supplies with demand and prolong the pain of low prices for US oil producers. Moreover, the IHS study found that the Iran Zagros province has the largest identified onshore yet to find potential of more than 110 billion boe. Opening access to develop this giant potential also could undermine producer expectations for oil prices to recover to $90 per barrel or more by the end of this decade.

The petroleum industry is well armed with technologies and know-how to capitalize on boosting oil and gas supplies from the huge but challenging global resource base. Understanding the uncertainties of above ground risks is critical to frame new strategies to develop global resources.

For more information on the Replacement Imperative Multi Client Study referenced above, please email Hill.Vaden@ihs.com or contact us.

Pete Stark, IHS Senior Research Director and Advisor
Posted 25 August 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.