Bishop Hill Moore's law for the oil industry
Mar 9, 2015 Energy: gas Energy: oil Oilprice.com has an interesting and extremely optimistic take on the future of the unconventional oil and gas industry. The pace of technological advances in hydraulic fracturing technology is, it seems, absolutely breathtaking, with people are even invoking Moore's Law:
In the case of the Eagle Ford region, one of the most prolific in North America, rigs are producing at a rate 18 times more efficiently than they were in 2008, and 65 percent more efficiently than they were in 2013.
Technology is whitewashing old school rules. In many ways, Moore's Law has finally arrived in the oil patch.
If this is right then the oil price is not going to shift upwards any time soon. Good news for consumers, but if your livelihood is based on oil production in the North Sea it may be time to think about moving on.
Reader Comments (32)
More than a whiff of market hysteria about this - they'll soon be saying that traditional economics doesn't apply - this is a new , fresh paradigm - a la dotcom boom....
Doubtless things have been changing but the hyperbole seems inflated to desperate proportions....
Seems to me that oil price is independent of cost of production, pretty much. If production can be made to cost less, then investments will be made (creating demand for oil and gas production professionals). If oil price remains low, then there will be less investment than when the price is higher, and that is what will reduce demand for oil and gas production professions.
Overall this should keep the price low but not necessarily where it is now, there are political as well as logistical and economic issues in play. I will tell my friend, he thinks the oil market is bottoming out and that he should BUY NOW :-)
Andrew, I don't think low price of oil is as critical for the North Sea industry as many make out - many of the existing rigs were commissioned when oil was $50 dollars or less per barrel, so even if they are not making the margins they were in the last few years they are still profitable today. I was speaking to a oil worker yesterday, he said while new projects are being put on hold or being slowed down, but there are still rich pickings to be had; his company's new rig cost £200 million and is about to go into production, where it will make about £1.2 million a day.
Remember when doing your calculations that the largest single oil deposit ever found has yet to be touched and that the UK has incredible shale oil reserves that 'they' do not want us to touch or even discover the extent of.
The Green River Shale Formation in Colorado/Wyoming has more oil than all the currently known oil deposits in the rest of the world. Obarmy has managed to block any work to retrieve this but work is now starting. Apparently this is a really problematic site from which to extract the oil; fracking will not release the oil so they have to find other methods.
Basically the shale has to be heated to 5000 Deg F in order to release the oil (bit difficult at the bottom of a bloody huge hole hehe) however it is only technology and it will happen :)
The real long term demand for oil in the west is being artificially dampened by green policies so the whole market is skewiff right now.
The eco-loons are already ahead of this curve with their demand that it all be left in the ground.
The "Peak Oil" meme will have to be cleaned, polished and wrapped in an oily rag and put away in a cupboard until such time as it will be needed again...as it inevitably will.
It all gets tiresome after a while...
Desperate times for the Greens when all they need is a good apocalypse and one just won't turn up.
Moore's "law" is an observation not a law of nature. If it were a law it would apply at all times and in all places. And it is no longer apposite anyway - if it ever was.
Colorado shale: 5000 degrees is the temperature of the surface of the sun. Don't think it needs to be that hot to extract oil from shale? What stopped the Colorado oil shale boom of the 1980s was lack of water. In Canada to extract from the oil sands they need lots of water, but they have it.
Dung, the Green River 'Oil shale' contains no oil. It contains kerogen that never reached the 'oil window' of temperature and pressure for catagenesis. It can be mined and retorted to produce some some syncrude, but consuming 3-5 barrels of water per barrel syncrude. The place is semidesert. The Green River is a major Colorado trubutary. All the water is bespoke by the Colorado compact. The river is running well below what the compact assumed, which is whynthere are bathtub rings on lakes Mead and Powell. Water to produce meaningful oil from the Green River fomation would essentially require abandoning Las Vegas, LA, and Pheonix. Not going to happen. Details in Gaia's Limits.
Then wait for the commercialisation of methane hydrate extraction. Japan is already on to it. It will take some years of course but it will take off. Moore's law will kick in like a bomb.
http://www.offshoreenergytoday.com/inpex-invest-methane-hydrate-development-offshore-japan/
http://www.rigzone.com/news/oil_gas/a/125998/Ice_Gas_A_Step_Closer_to_Commercial_Production
... somewhere I had read that there's enough of it to power humanity for 1000 years.
Albert, methane hydrate is an interesting topic, with much misleading/incomplete MSM reporting. Japan's Nankai trough is one of just three places in the world (yet discovered) where production might someday be feasible. Yhe one week Nankai experiment was ten years in development. Geophysical pessimism has to do with mud verus sand matrix, and concentrations. Nankai is relatively shallow ('only' 200 meters below a seafloor 'only' 900 meters deep), sand matrix, and 65 feet thick continuous. Don't count on methane hydrate for much useful energy, ever. A survey primer is essay Ice that Burns in ebook Blowing Smoke.
Bit of Computational Truth, here: regardless of increases in "efficiency", whatever that really means, it still costs $65US/bbl to run a shale-oil operation in the US with minimum profit. And the notion of efficiency in the oil patch requires an accounting of how much oil will be ultimately recovered vs the cost of recovery. Both of these numbers are still in the "modeled" stage - the math works (Computational Truth) but time will still tell about how much energy it took in reality.
On thing to keep in mind when you hear of American costs is that they are very particular about what costs are considered. They don't consider land acquisition costs, infrastructure costs over overhead costs. They may not even include fracking costs! The US business plays a lot of games with their numbers that even Canadian operators can't do by law. Thus American finding costs always sound low. In Britain the true costs will be higher than in the US simply for the Securities rules.
Moore's Law doesn't apply and hasn't applied. A simple minimum cost consideration shows that. Again, the math they use may work, but common sense says it doesn't. The devil is in the space between the words, you might say.
Hence the next Green Blob scare is the total amount of hydrocarbons THAT MUST BE LEFT IN THE GROUND COS WE WILL ALL FRY.
Peak oil didn't work, so all scares about that can be conveniently forgotten.
I am sure there was recent TV programme that featured something to do with a big scary number, linked to the number of trillions of tons of hydrocarbons that must be left in the ground.
Not sure what 18 times more efficient means when compared with 65% more efficient, though undoubtedly technology advances at an astonishing rate.
Bishop sorry but bang off topic
Check out the boozy Nigel Farrage Brendan O Neal interview on the latest Spiked.Classic
Nigel on Climate Change and everything else absolutely spot on.
Personally i think Farrage is a bit of a clown but by far and away he is certainly the best of a very very bad bunch
Basically we want the Tories in Charge but with Ukip policies and repeal the Climate Change Act and save our Economy and save Fuel Poverty.
Deepwater is another source that has barely scratched the surface of what's possible. The current slump will reduce the likely day rates of some of the new generation Ultra DW rigs being built so could make DW E&P more attractive when the oil price starts to pick up.
As they say, the cure for high oil prices is high oil prices, and so for low oil prices.
High prices stimulate tech development and commitment to formerly risky investments; low prices stimulate demand.
The noted article is 'extremely' optimistic', true. Also devoid of facts except for two anecdotes, one from EOG and one from WSJ, not a primary reference. Here are some additional facts. US has five major (Bakken, Barnett, Eagle Ford, Niobrara, Monterey) and several minor (Cline) shale oil formations. Most recent estimates (EIA, USGS) for technically recoverable fracked reserves (at any price) based on 2013 recovery rates is about 13-14 bbbl. Put this in context. The US consumes about 6.8 bbbl/year. The entire US 'new technology moores law' thing amounts to two years consumption. And then it is gone. In the past 50 years, conventional reservoir recovery factors have improved on average about 25 percent. Suppose that applies to shale oil in just 10. Then it could supply 2.5 years. The US EIA figure 97 ( ever optomistic) estimates total shale oil production in the US will peak and start to fall around 2020. This willmprobably now be delayed a couple of years as the Saudi plan to use price to curtail US drilling is working. Nothing like a (1.5/93 mbpd) 1.6% temporary oversupply in a price inelastic commodity to cause drastic price swings. Look for oil to be back around $100/bbl in about 18 months as as the drastic decline curves hit existing fracked wells, and with (so far) 1/3 fewer replacements being drilled. It does not matter how fast these get drilled. It matters how many, since fracked well output declines on average about 80-90% in just 3 years. That is inherent in the geophysics of shale. See essays Reserve Reservations and Matryoshka Reserves for the petroleum engineering basics.
Yes, as you say Rud, it matters how many.
That has been the major success of modern tight shale exploitation: working out how to drill these "many" wells ever more cost & time efficiently. Then what matters is not the life of the well but the life of the reserve, and not just in the USA but worldwide as long as oil is bought and sold on the open market.
Kellydown, yup.
As long as we are on the subject of shale potential, there are a couple of important general details about known oil/gas shales (and by now most major potentials are generally well known even if their 'sweet spots' are not yet, as in the UK). Largest in the world is Russia's Bahzenov. But because of the basin geology, it probably contains less technically recoverable oil/gas potential than North Dakota's Bakken in the Williston Basin, where my grandfather was developing overlying stratigraphic reservoir traps in the 1960's. The geophysics are illustrated in essay Matryoshka Reserves. (If you perchance read it, the metaphor will become apt. Uses geology partly translated from the original Russian.) The largest potential in China, the Sichuan basin, suffers the same problem as the Monterey in California. Essay Reserve Reservations. It is rather fundamental that for 'horizontal' drilling, one needs 'horizontal' strata. Folding and faulting won't do. Look where Sichuan is relative to the Himalayas and where devastating Chinese earthquakes occur. QED. Regards.
Green River can not be fracked, it is the wrong kind of rock :)
Yes one answer is to take it up and use retorts but at the moment they are putting 'heaters' at the bottom of the wells to get the rock up to 5000 Deg F NOT C so forget the sun hehe
Short well lifespan also means the financing of new wells becomes easier when the price rises again, because it is possible to hedge over shorter periods. Or so I read in the interesting comments at a recent FT article. And presumably all those drilling rigs don't go rusty immediately?
Rud,
Thanks for the knowledge transfer. Opinions vary, mostly depending on how much faith and optimism one has in the potential of science and technology. How many politicians and economists had faith in the resurgence of oil and gas due to shale fracturing? Mostly none. Where I live politicians hedged their future on a continuous unabated rise in the price of energy, believing that wind power and solar buckets were our solution, only to eat humble pie. OTOH I had been saying for years to family, friends and work colleagues that the price of oil will soon crash. Most of them just considered me as a crank of sorts even though they have a very good opinion of me on most other matters. Today they agree that I was on the right track. It did not take me much to get to the correct prediction. All it needed was to just keep myself updated on the emerging technologies and the oil and gas discoveries.
Methane hydrates extraction has already been declared as technically feasible. Economically? I don't think so yet, but maybe that day will come. It is all a question of economics. When the price of oil hit the roof in 2008, fracking became viable, technology improved making it cheaper to extract. Then came the recent oil/gas price crash which hit the frackers badly. They will react by economising and making the technology cheaper. They will not just close down. The gas and oil is there and up it will go. When the time comes for methane hydrates, it will take off unless scientists and engineers do not come up with a cheap, safe fusion reactor or some other paradigm-changing discoveries. Then the time for hydro carbons as fuels will be up and their use will be re-routed as feed stock for various industries such as fertilisers and plastics. But then I may be wrong.
This is really terrible news for the Greens,the Scottish Nationalist party, DECC, the Solar industry, wind farms and all of the rest of the great pantheon of those who want us to invest in extortionately priced renewable energy and desperately want fracking to fail.
It won't work, whatever the problem- too costly, too much water,too much seismicity, too much anything. Whatever the problem, the technology advance will deal with it.The longer we hold back from it, the longer we will fail to prosper.
Opposition to fracking is ultimately not sustainable.
Mar 9, 2015 at 6:48 PM | jamspid
You'll never be able to trust the Tories again ... the entire "leadership" needs to be exorcised and replace with true Conservatives. The current "Tories" are indistinguishable from the rest of the socialist rabble.
Say the unthinkable happens UKIP Tory coalition in May
Definite in out EU referendum .Given
Has the UK Skeptic movement made any representations or negotiations with UKIP or the Tories or even any back bench dissenters in Labour or the other Parties. We will have to set revised achievable and realistic emissions Targets that don't impact on the Economy Welfare and Energy Security
The Skeptic movement finally has a chance political power in Australia Canada India and emerging in the US with the Tea Party and now UKIP and rest of Europe.
We should consider some sort of Climate Skeptic Charter
Dream on. On May 8 Miliband will be PM either with a solid 30+ majority (my prediction) or as leader of the unholy alliance of Lab/Lib/SNP/Green socialists (if the polls are correct). The Tories stand no chance. Economic collapse is guaranteed.
The Moore's Law analogy is incorrect in this case: it is inappropriate and absurd. So, too, is the claim that fracking sites will only last a couple of years: the reserves are colossal.
When oil closed on $40/barrel I predicted $75 by September. I'm sticking with that. Fracking will remain economically viable as will the North Sea.
The real game changer will be thorium reactors and cold fusion if it ever happens. These will start a chain reaction in which we shall keep ourselves warm and amused with the boiling and exploding heads of watermelons!
Mar 9, 2015 at 3:28 PM | Unregistered CommenterRud Istvan regarding water use.
Your book is interesting and hope you make lots and lots of money promoting it.
However, folks can use other fluids than water for fracking including hydrocarbons. Check an rather old article from Motley Fool:
http://www.fool.com/investing/general/2013/10/21/forget-water-energy-companies-are-now-fracking-wit.aspx
The main point of this blog posting by Hill is innovation almost always beats doom. Except when the Ice Ages return and entire nations begin to die off due to their inability to make food.
Obtw, most everyone knows hydrocarbons can be manufactured. Germany did it nearly 80 years ago (WWII). The boys and girls at Los Alamos have written papers on the using nuclear power to manufacture hydrocarbons. People have even built synfuel plants. Outside of hysteria surrounding things nuclear, the only real barrier to manufacturing hydrocarbons is simply they're more expensive. When the long awaited thorium reactors are developed, you'll have a manufacturing process that will last for a few billion years.
Folks really, really need to work on food and/or population control and/or developing genetic engineered plants to expand "ariable" land, etc., etc.. So far, the food replicators just aren't available. Electirical generation and hydrocarbons we'll always have until humans follow Darwin into extinction.
But if people move out of oil/gas exploration the price of these fuels will skyrocket.
The idea that fracked wells will only last a couple of years is simply not accurate. The fact that recovery efficiencies is increasing is indisputable. Oil and gas reserves are an ensemble, horizontal fracking, CO2 injection, surfactants, vertical drilling, slant drilling, Salt water infusions, redrilling, vertical fracking, multiple sorts of formations, multiple depths. The naive focus on simplistic maths to "prove" that huge reserves are not worth producing is no better than those who think increase CO2 = world climate crisis.
The idea that fracked wells will only last a couple of years is simply not accurate. The fact that recovery efficiencies is increasing is indisputable.
Fracked wells give up about half of the oil that they will produce in total in just over two years. The trouble is that the depreciation schedules only write off around a quarter of the cost of the well and many of the costs are ignored. Eventually, all of the accounting will have to reflect the reality and most of the shale operators will become insolvent. We have already seen carnage in the high yield bonds that the shale producers have issued and the cost of borrowing is going up. That is the reason why most of the players have cut drilling outside of the core areas and why once the current wells are done we should see a rapid decline in the shale space. Even if by some miracle the prices go up and the accountants can ignore reality for a while the peak for shale should be with us in two to three years because the core areas are about tapped out and the non-core areas destroy far too much capital for the game to continue much longer.
Note that what I am saying can be seen in the data. As of January 2015 the Bakken had 9052 wells in production showing an average production rate of 125 barrels per day. Three years ago there were 3390 producing wells showing an average production rate of 142 barrels per day. Note that the massive increase in new wells, which have high IP rates in the first few months of operation, has been unable to increase overall yields. Also note that six years ago there were less than 1,000 operating wells in the Bakken. If you do the math you should be able to see rather quickly that the positive stories being told do not hold up to scrutiny. Once you do the proper accounting for the correct depreciation rates, add up the costs of acquisition, general and administrative costs, and the 20% or so in royalties you can understand why the shale industry has been unable to generate positive cash flows even though most of the oil is produced in the first 26 months of operation.
Most shale companies are no more profitable than most wind or solar companies.
@Vanglev do frackers take their own investment risks and receive no subsidies ?