What's Ahead in 2006

Many ideas remain, but they require more work

Dr. D. Nathan Meehan, President, CMG Petroleum Consulting Ltd., Houston

“Where I come from, we believe all kinds of things that aren’t true ... we call it history.” (from the movie, “The Wizard of Oz”). 

Once I believed the old apothegm, “The solution for high oil prices is high oil prices.” This thinking was based on the responses to high oil prices, including conservation, demand destruction, increased exploration, and commercialization of oil and gas development projects that were marginal in a lower-priced environment.

It made so much sense. After the natural response to a prolonged price increase had occurred, prices would drop back to “normal” levels. At least, that is the lesson of history. Maybe it is still true. But just what level is normal? Of course there is a new breed of pessimist today, naysayers who will surely be correct eventually. Maybe this time, all of what worked in the past will not repeat itself. After all, we are doing a “sampling without replacement” project every time we drill for oil; ultimately, it won’t matter how much money we throw at adding capacity, it just won’t be effective.

Saudi Arabia has far to go. At the heart of the global supply and demand curve are the remaining reserves in the largest fields of the great oil producers. With his book, Twilight in the Desert, Houston oil and gas investment banker Matt Simmons has raised red flags about the potential of declining reserves and production capacities in Saudi Arabia, coupled with aging infrastructure in Venezuela and Mexico, and Canada’s conventional oil. I had the chance to spend some time at Saudi Aramco and observe the technology being used to expand capacity first-hand. It is impressive. The oil potential in Saudi Arabia remains vast, and the effort to optimize it is easy to underestimate. But I am convinced there is a vast resource remaining.

But long before these vast resources are realized, Saudi Arabia will not only become the largest oil producer, but will be the world’s largest water producer and will develop smaller projects than the ones that now fill their very active plans. The opportunities there are so great, that I am decidedly optimistic about their future. This same feeling of confidence is harder to generate elsewhere.

Easy pickings are gone. Field studies that my colleagues and I have completed in the last few years are yielding somewhat different results as we reevaluate mature fields. We routinely integrate 3D seismic, integrated petrophysics, fracture and fault modeling, well testing, reservoir simulation, etc., to identify ways to increase recovery and production rates in mature fields. These studies are our bread and butter, and the forecasts we used to make generally had increased oil and gas rates in our look ahead, as we recommended additional drilling, pattern realignment, expanded flooding, etc.

More and more, our forecasts show only decreased decline rates and “dragging out the tail,” as increasingly detailed analyses integrate real-time monitoring, intelligent wells and other advanced technology in place in the fields. The easy pickings are long past, and almost all of what once were marginal projects have been completed. We are helping not only independents, but majors and NOCs, pursue projects with ever-climbing costs per barrel and increased risks.

Sometimes, it is easy to believe that we are running out of good ideas. When I moved to a field 25 years ago, my boss told me that he thought that the largest asset in the district was just about as developed as it could be, and he was “out of ideas.” I was surprised at that, because for the next few years, we were as busy as we could be with workovers and drilling new wells. A steady stream of new earth scientists and engineers with fresh ideas kept activity levels up for another decade, until the field was sold to a smaller independent.

Eventually, the projects died out for them, and the inevitable field decline resumed. But with today’s hydrocarbon prices, activity has picked up again. Projects are smaller and more difficult to implement. Results for each dollar spent are less than in the past. In times of high activity levels, the field production rate has flattened; more and more work is left for smaller and smaller results.

“Normal” results require greater effort. While it is not clear to me what “normal prices” are going to be, it is clear to me that normal efforts are not going to generate normal results. Extraordinary creativity and detailed engineering efforts are going to be required to generate “normal results.” By normal results, I don’t mean attractive rates of return. Extraordinary financial results have been obtained by essentially every operator with a pulse. Making record profits with today’s hydrocarbon prices shouldn’t make an operator feel like a genius.

Only exceptional operators have generated attractive organic increases in production or reserve additions that make sense under historical prices. Higher operating costs, pursuing smaller targets with costlier day rates and accepting greater risks will continue to make sense, as long as normal prices continue to look like they are more than twice as high as they were just a few years ago.

Doing our best will help. We may not be able to change the big picture of supply and demand, but we can, and must, do the best job we can with our fields. This requires far more effort and study for small fields than ever before. And we need to do it with fewer experienced people for the workload than ever before. We’ve been given “one more oil boom,” and we promised not to screw this one up. Whether it is Saudi Aramco having to place complex multilateral wells in super-giant fields to increase production, or a small independent conducting its first EOR project, we have a long way to go before we are out of ideas.

THE AUTHOR
	D. Nathan Meehan is President of CMG Petroleum Consulting, Ltd., a Houston based petroleum engineering consultancy (www.reservoirengineering.com). He holds a Ph.D. in Petroleum Engineering from Stanford and is a licensed PE in Texas, Louisiana and Oklahoma. A past SPE Distinguished Lecturer, Dr. Meehan is the recipient of numerous awards, including the Lester C. Uren Award for Outstanding Contributions to Petroleum Engineering Technology. He has authored scores of articles and a book, and has served as a director for service companies, oil companies and SPE. Dr. Meehan worked for 24 years at Union Pacific Resources and was VP, Engineering, at Occidental Petroleum. While best known for work in horizontal wells and hydraulic fracturing, his consulting has focused primarily on field redevelopment and optimization.