December 2018 /// Vol 239 No. 12

Features

What industry leaders expect for 2019

By all measures, most of 2018 has been an improvement on 2017, which was markedly better than 2016.

Kurt Abraham, World Oil

By all measures, most of 2018 has been an improvement on 2017, which was markedly better than 2016. And yet, it hasn’t taken much to remind industry professionals of how tenuous the global oil market can be. After sailing along an upward trajectory into the $60s/bbl and up above $70/bbl, WTI crude lost steam in early November and plummeted rapidly, barely settling above $51/bbl, as of Dec. 6. Factors contributing to the slide include record Saudi output; U.S. President Trump’s granting of waivers to eight nations for importing Iranian oil; and Trump’s jawboning of the market to force prices lower.

Indeed, what had been shaping up to be an even-better year in 2019 for the worldwide E&P market has now been thrown into some doubt. The price slide occurred right when operators were finalizing their budget plans for next year. And, if prices fail to recover back to $60 and stay there, this will delay the highly anticipated offshore market turnaround, particularly in the Gulf of Mexico. We can only hope that the price slippage is temporary.

Meanwhile, the six most senior members of World Oil’s Editorial Advisory Board have been looking at various industry trends, such as data transformation, manpower, taxes and rethinking of old plays. Representing various segments of E&P expertise, we invite you to examine their analyses and predictions. wo-box_blue.gif

DOUGLAS N. VALLEAU, President, Strategia Innovation and Technology Advisors, LLC, and Chairman, World Oil Editorial Advisory Board
DOUGLAS N. VALLEAU, President, Strategia Innovation and Technology Advisors, LLC, and Chairman, World Oil Editorial Advisory Board

Why I’m not worried about the Great Crew Change

The lower-for-longer price collapse that started in late 2014 gave rise to layoffs and early retirement of many experienced mentors. But it also brought efficiency gains, advances in technology, and people exhibiting entrepreneurial grit that propelled the U.S. to become an energy leader on the global stage by 2018.

The darling of 2018 was the surging Permian basin. With the stacked pay potential and application of new technology, the Permian has become the world’s fastest-growing oil-producing area, with output over 3.3 MMbpd and growing. Therein lies the challenge for the Permian. Current pipeline capacity is 3.6 MMbopd. Thus, until more capacity to transport product is built, growth will be curtailed.

With this potential bottleneck in export capacity in the Permian, drilling contractors and frac crews are looking at other areas, such as the old Powder River basin in Wyoming. With announced unconventional potential in the Powder’s Turner, Mowry and Niobrara formations, companies are set to expand activity in 2019 while waiting on midstream operators to build out more export capacity in the Permian.

For technology, a deeper understanding of hydraulic fracture geometry was investigated in the Permian via collaboration between several oil companies, academia, and the Department of Energy. At this hydraulic fracturing test site, a slant-hole whole core was acquired through a previous hydraulic fracture treatment section. The core provided direct observation of hydraulic fractures as they appear in the subsurface, including details of their occurrence, orientation and propagation direction. The evaluation of the core allowed better understanding of proppant placement and the interaction between induced and natural fractures.

The results were surprising and are leading to improved hydraulic fracture modeling. The program was so successful that a second site has already been picked for the Delaware basin in 2019. Another notable technological advance in 2018 was in reservoir characterization. The University of Wyoming Center for Flow Through Porous Media now provides commercially, full-reservoir condition three-phase core floods, while simultaneously imaging the pore network at the macro, micro, nano and even atomic levels. This allows the industry to physically test various IOR/EOR processes in both conventional and unconventional reservoirs.

Looking forward to 2019. The Energy Information Administration estimates that U.S. crude output will average 12 MMbpd in 2019. If this happens, the U.S. will become the world leader in oil production. Indeed, the U.S. is likely to become a net exporter of energy by 2022. Much of the increase in productivity comes from unconventional resource plays. So, what technology will support this growth? I would anticipate data analytics, artificial intelligence sensors and automation to dominate much of 2019’s continued improvement. Breakthrough innovation will likely come from development of lightweight materials, high-salinity completion fluids, wettability control of proppant packs, next-generation drilling bits, and EOR applications for unconventional reservoirs.

The future is bright… The United Nations reports that world population is around 7.6 billion people. By 2050, global population is expected to exceed 9.7 billion people. This growth will precipitate higher energy demand. Renewables will only fill about 30% of world need.

Beyond fuel energy, petrochemicals are the foundation of over 6,000 non-fuel products supporting society. How will the U.S. meet this challenge? For the U.S., coal demand will remain flat-to-declining, in favor of an increased demand for natural gas, accompanied by increasing demand for hydrocarbon liquids. Petroleum, particularly tight oil and natural gas, will be a major contributor to U.S. and global energy supplies. Even with greater use of electric automobiles, the electricity to charge the batteries will be from petroleum-based power plants; even wind and solar farms require petroleum products to operate. In the U.S., environmental stewardship will continue to be improved, reducing fugitive emissions and potable water usage.

With these technological hurdles, one might be concerned about the “Great Crew Change” in our industry; one might worry if we will be able to rise to the challenge of meeting our future energy needs. I had the opportunity to visit several universities this year and talk with both engineering and geoscience students. I was very impressed with them, as these students are keenly interested in the petroleum business.

They have a good understanding of economics, are not afraid to work hard for financial stability and security, and are very motivated and technically curious. They prefer face-to-face interaction, despite their addiction to all things digital. They are concerned for the environment, but appreciate that environmental stewardship can coexist with our global need for energy security. Folks, the “Great Crew Change” has happened. After meeting the next generation of petroleum scientists, I am no longer worried. wo-box_blue.gif

DOUGLAS N. VALLEAU is President of The Woodlands, Texas-based Strategia Innovation and Technology Advisors, LLC, working with energy professionals to solve complex geoscience and engineering challenges. Prior to Strategia, he was chief geologist and director of Unconventional Technology at Hess Corporation. Mr. Valleau has held various senior-level management, geoscience and engineering positions with several large E&P firms. While at ConocoPhillips, he was part of the core team that discovered and developed the firm’s Eagle Ford shale play. His professional affiliations include AAPG, SEG, SPE, SPWLA, and the Houston Geological Society. Mr. Valleau is a certified petroleum geologist, registered in the State of Texas, and a certified AAPG petroleum geologist. He has published papers on many topics, and co-developed an analytical protocol for shale gas analysis, which won a U.S. patent. He has served the last three years as the AAPG Technical Program co-chair for URTeC, and is chairman of World Oil’s Editorial Advisory Board. Mr. Valleau also served on the University of Florida Department of Earth and Planetary Sciences Academic Advisory Board. He received an MS degree in geoscience from the University of Florida in 1977.

ROBERT E. “BOB” WARREN, President, Baclenna, Inc.
ROBERT E. “BOB” WARREN, President, Baclenna, Inc.

The Deadliest Catch

“They that are fated to be fools, have one consolation, that they are fated also to be ignorant of it.” Norman MacDonald, Maxims and Moral Reflections, 1910.

“But that’s not enough: To maintain energy security, one needs a supply system that provides a buffer against shocks. It needs large, flexible markets. And it’s important to acknowledge the fact that the entire energy supply chain needs to be protected.” Daniel Yergin

As the 2018 mid-term elections closed, every media outlet, blog, editorial and talking head waxed ad nauseum about the chaotic process, results and future for the course of the Trump Administration. In the weeks preceding Nov. 6, the public discourse from pundits and politicians grew (how was it possible) ever more intense—then everyone weighed in on how Winners won, and Losers lost, with absolute certainty about what now lies ahead.

The what is unanimously agreed to be the toxic political process already underway for power on Nov. 3, 2020, with the expectation that there will be minimum agreement or progress on anything short of an encounter with a national disaster, say EMP (electromagnetic pulse), or World War III. There are, regretfully, few enough elected adults who will work in harmony for the benefit of this nation. From that happy observation, we may expect staged rejection of proposals regarding the immigration crisis, trade solutions, balanced budget/deficit spending, health care, energy policy, economic policy (including continued tax reform), and the list goes on. With the shift of the House majority, plans are already being broadcast for hearings and more hearings into the administration’s dealings. Can’t wait.

Energy policy. From a long list of important national business, energy policy should be a high priority. Pulled into closer focus, how can anyone—whether or not engaged in the oil and gas industry—not be celebrating the remarkable milestones of production, technology, employment, and major benefit to the national economy. And the greatest benefit of all is our national security, so taken for granted. Still, there exist two circles that result in the direct opposition or mindless disregard (or both) toward the production of fossil fuels. The first is an environmental effort that is well-funded, well-organized, and well-messaged, with intent to sacrifice fossil fuels for wind and solar energy—both unsustainable without government subsidies.

The second, perhaps as troubling, is a clueless Me generation, which has no historical sense of this nation’s journey, including a tenuous survival through World War II. We could all be speaking German or Japanese as a national language (see The Man in the High Castle series), and while it might not move many minds, every high school senior should be required to grasp the relevant parts of Daniel Yergin’s classic, The Prize. This nation’s existence depends on the fossil fuels produced by the men and women who serve in this industry, but our young people are simply uninformed. So, it’s fair to ask, would they comprehend, if exposed to the facts?

“The Deadliest Catch” is an interesting cable T.V. program highlighting the hazards and hardships of fishermen and women working in an environment that is intriguing, but we appreciate their work more when the catch makes it to the menu. Fair to say that most of us would not seek that existence as a career path, but the average viewer might run with some of these adjectives: dangerous, exciting, grueling, adventurous, profitable.

Circle around then to a career in oil and gas operations, and contrast the same observer’s opinion of working in the oil field: dirty, dangerous, polluting, uncomfortable, remote, disgusting, but everyone is unhappy when the price at the pump increases. Suddenly fuel and fuel cost are high priorities. Of course, that’s only the beginning, because little of our existence would be possible without cell phones, computers, makeup, fertilizer, and a thousand other products originating from oil and gas. It’s grossly inaccurate to describe our work that way, because industry is consistently driving down the incident rate.

It’s a far safer workplace with ever improved training and competence, and challenging career opportunities worldwide. For the industry, there’s a need for continuous messaging across the full social media spectrum, aimed at communicating with the 30’s and under, emphasizing personal benefits and careers. And what about an energy-smart Tiger Woods or Justin Timberlake type of spokesman, who could counter Al Gore and Tom Steyer?

Consider the substantial contribution to energy education through STEM curriculum programs, modeled by Houston and Fort Worth high school initiatives developed through the IPAA/PESA Energy Education Center; and the Houston Energy Institute High School. Then, there is the Oilfield Energy Center Mobile Oilfield Learning Unit program. These initiatives—and many, many more like them—supported by a broad cross-section of companies and individuals, are making a difference in the lives of motivated young people considering a challenging career in energy.

Ultimately however, these programs only exist from the efforts of hundreds of thousands of men and women working every day in remote E&P operations. We could start with a thank you to all of them, working tonight at places like the Slope, Permian, Bakken, Gulf of Mexico … who keep the lights burning and the wheels turning for the rest of of us. wo-box_blue.gif

ROBERT E. “BOB” WARREN is President of Baclenna, Inc., an energy consulting service based in Houston, Texas. He holds a BS degree in petroleum engineering from Texas Tech University, an MBA from the University of Texas, and has completed the CSR Program at Harvard Business School. He began his career as a roughneck on drilling rigs in West Texas, and worked for a period in the Far East. This was followed by 13 years in country management roles in Iran, Libya and the Arabian Gulf region. Mr. Warren then spent 20 years at Pride International, where he served as vice president in four different business areas—Russia, Marketing, Investor Relations and Industry Affairs. He received IADC’s Exemplary Service Award in 2010. His perspectives are his alone, but they tend to be shared by others.

DR. D. NATHAN MEEHAN, President, Gaffney, Cline & Associates
DR. D. NATHAN MEEHAN, President, Gaffney, Cline & Associates

The future of petroleum engineering

“Would you recommend that your son or daughter go into petroleum engineering?”

SPE presidents and senior executives have been asked this question for decades and, for most of the last 40 years, the answers have been positive. How realistic is that today? Societal negative attitudes toward extractive industries, fossil fuels particularly, have made our industry less attractive to college students.

Climate change issues greatly exacerbate this negative opinion. You may not believe that climate change is important, but college students do. Cyclical demand and massive layoffs during downturns seem to be a constant, and yet another negative factor. Pressures for efficiency, new data-driven approaches and AI-based systems suggest that petroleum engineering’s future will be very different from the past. Decreasing oil demand in America and Europe may portend radical changes, going to the very heart of our continuing existence as a viable industry.

We will not run out of oil or gas. Fossil fuels will be a key part of the mix for decades to come. But will the best and the brightest continue to join our industry?

State of engineering today. I have reviewed past employment data and salary figures for several engineering disciplines, analyzing and comparing them to that for petroleum engineering. The engineering disciplines with highly cyclic demand or in declining industries provide cautionary warnings.

Mining engineering has declined dramatically over the decades, particularly for coal. Efficiencies and changing practices have made earlier mining engineering skills increasingly irrelevant. The absolute number of mining engineering jobs has declined, even as total global mining output has escalated. Many schools have dropped or scaled back their departments.

Industry pressures on other disciplines (e.g., textile engineering, aerospace engineering) continue to decrease demand. When I started my college career at Georgia Tech in 1972, there was a thriving department called “textile engineering,” dealing with all aspects of the textile industry. That department is gone, along with most of its peers at other schools; only one significant U.S. program remains. Although the world produces vastly more textile products today than in 1972, this discipline’s decline hasn’t changed.

Of the major engineering programs, electrical engineering has had the most ups and downs. Mechanical engineering remains (by far) the most popular discipline, but EE usually ranks approximately the same as civil engineering and ahead of chemical and biomedical engineering. EE graduates have increased recently, but the number of people working as electrical engineers has dropped precipitously.

Much of the work that architects do can be replaced by increasingly sophisticated tools. Creativity may be hard to replace, but the skills and tools required to do the basics may result in far fewer available jobs. Modern AI-based diagnostic tools are proving themselves equally (or more) capable of diagnosing X-rays or other medical tests. Self-driving vehicles may threaten taxi and Uber drivers’ jobs. But petroleum engineers?

Engineering’s future. AI-based products and services can, and will, greatly leverage petroleum engineers in their work. They should enable one engineer to do the conventional work of many. So, what happens to the many that will be displaced? Big Data approaches also will change petroleum engineers’ duties.

Engineering designs to decrease carbon intensity and make hydrocarbon production more environmentally acceptable, and other factors, suggest that future petroleum engineering jobs are likely to be smaller in number and radically different than those of today. We also should do that work much better. Waterflood and EOR project surveillance efforts used to require teams to pore over massive amounts of data at the pattern and fault block levels. Tying this data in with simulation models, production log data and myriad test information could lead to various efforts to increase recovery and lower costs.

Modern approaches, including the digital thread and digital twins, can revisit even high-frequency data and integrate pattern recognition algorithms on all the data constantly. Such approaches can lead to reduced downtime, much better “next best step” recommendations, and vastly improved performance. This won’t dramatically lower the number of engineers required. Each engineer will do more than anyone could have previously accomplished.

Not every engineer will adapt. We are already far along the “great crew change,” and those who cannot develop the necessary digital skills will be left behind. We will have to “up” our game to lower-carbon intensity of oil and gas production and make fossil fuels more sustainable.

Has the way that we educate petroleum engineers responded to these challenges? First, the good news. Today’s engineering students know the world is changing. They are more digitally savvy than their predecessors and often come fully prepared to code. Today’s undergraduate petroleum engineering programs have evolved slowly and continue to emphasize the fundamentals. One significant change has been an increased emphasis on teamwork and collaboration; most programs have the equivalent of a senior design project. Computers and programming are integrated, but the focus remains on the fundamentals.

Advanced material sciences, supply chain, big data analytics, etc. can hardly be touched by undergraduates. In many scientific disciplines (even geology) the B.Sc. degree is not terminal, and an M.Sc. is required. Most firms hiring engineers accept entry-level engineers with a B.Sc., but this may change, as the discipline requires increased sophistication. wo-box_blue.gif

Dr. D. NATHAN MEEHAN is President of Gaffney, Cline & Associates and served as the 2016 SPE President. Previously he was president of CMG Petroleum Consulting; V.P. of Engineering for Occidental Oil & Gas; and G.M., E&P Services, for Union Pacific Resources. Dr. Meehan holds a BSc degree in physics from Georgia Institute of Technology, an MSc in petroleum engineering from University of Oklahoma, and a PhD in petroleum engineering from Stanford University. With more than 42 years of experience, he has served as a director on several corporate boards, as well as a director of SPE. He has won numerous awards, including several from SPE, as well as the World Oil Lifetime Achievement Award. He serves on the boards of Georgia Tech’s Strategic Energy Institute, and the Penn State and University of Texas petroleum engineering departments. He is an appointed member of the IOGC and a widely published author. Dr. Meehan is a licensed professional engineer in four states.

ALEXANDER G. KEMP, Professor of Petroleum Economics, University of Aberdeen, and Director, Aberdeen Centre for Research in Energy Economics and Finance
ALEXANDER G. KEMP, Professor of Petroleum Economics, University of Aberdeen, and Director, Aberdeen Centre for Research in Energy Economics and Finance

Mixed signals for activity in mature North Sea 

The industry in the North Sea has made dramatic and painful adjustments since the oil price collapse of late 2014. The latest estimates produced by Oil and Gas UK (OGUK) for the UK Continental Shelf (UKCS) indicate that total employment supported by the industry (including induced) fell from a peak of nearly 464,000 in 2014 to 282,700 in 2018.

Indicators. Investment in field developments fell dramatically between 2014 and 2017. This was a main cause of the decline in employment. Exploration activity had already reached low levels in 2014, before the price collapse. Production efficiency (the ratio of actual production to the maximum efficient rate) had been falling continuously from 2004 to 2012.

The industry has adjusted to the changed operating environment in several ways. Thus, according to OGUK, costs have been reduced on the UKCS from a peak of $23.8/boe in 2014 to $11.8/boe in 2017 and an estimated range of $13 to $15/boe in 2018. Similarly, operating costs have been reduced from $29.60/boe in 2014 to $15.20 in 2017 and an estimated range of $15.80 to $16.4/boe in 2018.

Production, which had been declining at a brisk pace from 1999 to 2014, has increased continuously since then from 1.42 MMboed to an estimated 1.68 MMboed in 2018. Further, production efficiency has increased from a low level of 61% in 2012 to 74% in 2017. These impressive developments, plus the increase in oil and gas prices, has resulted in the industry’s net cash flows becoming positive in both 2017 and 2018. Another positive feature during 2018 has been UK governmental approval for 11 greenfield developments.

Further development. These are all encouraging signs, but it is clear that further field investments are necessary, if the Maximum Economic Recovery objective agreed by the industry and government is to be achieved. There are large numbers of undeveloped discoveries. Most are quite small. Many have reserves within the 5-MMboe-to–25-MMboe range. Others have HPHT or heavy oil reservoir features, or are in deep water, sometimes far from infrastructure. In all cases, the costs per boe are relatively high.

Nevertheless, with the cost reductions and productivity enhancing achievements over the past few years, many of the undeveloped discoveries could become commercially viable. With investment screening prices of $60/bbl for oil and 55 pence/therm for gas (both in real terms), economic modeling by the present author and Linda Stephen found that, if the cost reductions and productivity gains could be maintained, substantial numbers of viable field developments would become a reality.

To realize this, the efforts of the Oil and Gas Authority (OGA) to effect collaboration among investors will have to be successful. Specifically, more cluster developments, which bring economies of scale through the use of common infrastructure, can render a group of small fields viable, when on a stand-alone basis, they are uneconomic. Further collaboration between asset owners of infrastructure and third-party user fields also can facilitate more developments. There are inevitable thorny problems in making third-party access agreements, but modeling suggests that the longer-term prize can be substantial.

Can the UK government do more to enhance investment and production? In recent years, several measures have been implemented to promote activity. Thus, seismic and other data costing £45 million have been provided free-of-charge. This should be of particular help to very small exploration companies, for whom seismic data acquisition can be expensive.

Taxes. Over the last two years, there has been a major consultation on the transfer of tax history, when late-field-life asset transactions are under consideration. Some of the major companies have been selling mature assets. This has attracted the interest of new players to the UKCS. But the looming decommissioning obligations can cause problems for buyers. They may not have enough post-transaction profits and taxes paid to procure full relief for the decommissioning costs, when they are carried back and set against the income and taxes only from the date of the transaction. But if the carry-back of these losses could continue into pre-transaction years of field life, full relief could be obtained.

After much deliberation, the UK government has acknowledged that desirable transactions could well be inhibited, when prospective returns to the seller exceed those to the buyer, because of the loss carry-back restrictions for corporation tax and Supplementary Charge. Legislation is in the process of being introduced to permit the transfer of tax history to be included in an asset transaction. Restrictions are to be placed on the extent of the amount that can be transferred. The result will certainly be more late field life transactions and hopefully extra investment in mature fields.

The formation of the Oil and Gas Technology Centre (OGTC) via funding from both the UK and Scottish governments has led to an upsurge of activity in the design and application of new technologies relating to oil and gas. Many contracts have been awarded to contractors and relevant university departments. For some years, the R&D effort relating to the UKCS had been relatively low, compared to the 1980s. The formation of OGTC and the fruits of the work being undertaken, and in prospect, should enhance productivity on the UKCS, and reduce the size of the decommissioning obligation.

In sum, 2019 will be a test year of the industry’s ability to respond to opportunities and challenges. It also will be a test year of the OGA’s ability to continue to promote growth in an environment of both opportunities and challenges. wo-box_blue.gif

ALEXANDER G. KEMP is Professor of Petroleum Economics and director of Aberdeen Centre for Research in Energy Economics and Finance, at the University of Aberdeen. For many years, he has specialized in petroleum economics research, particularly licensing and taxation issues, and has published over 200 papers and books. He was a specialist advisor to the UK House of Commons Select Committee on Energy from 1980 to 1992, and in 2004 and 2009. From 1993 to 2003, he sat on the UK government’s Energy Advisory Panel. In May 1999, Professor Kemp was awarded the Alick Buchanan-Smith Memorial Award. He is a fellow of the Royal Society of Edinburgh, and was awarded the OBE in 2006. In recent years, he has been a member of several official energy boards advising the Scottish government. He has written The Official History of North Sea Oil and Gas, published in 2011 in two volumes. In March 2012, Professor Kemp received SPE’s Lifetime Achievement Award and was inducted into The Press and Journal’s Hall of Fame in Aberdeen.

DOUGLAS C. NESTER, Co-Founder and Chief Operating Officer, Compadre Resources, LLC
DOUGLAS C. NESTER, Co-Founder and Chief Operating Officer, Compadre Resources, LLC

Turning torward conventional thinking

At a time when our leadership in exploiting unconventional reservoirs is making the U.S. the world’s largest oil producer, perhaps it is a bit counterintuitive that I should suggest now to be an appropriate time to also turn some of our focus back toward the significant reserves remaining within the country’s conventional oil fields. After spending the last seven years managing conventional development operations in Iraq and Albania, I returned to the U.S. and an industry focused almost entirely on resource plays. From energy services to energy investing, it appeared that nearly every segment of our industry was single-minded in its efforts.

Therefore, the conventional wisdom prevailing this year was to follow the multitude of companies participating in these plays, which drove total U.S. crude output from 5.0 MMbpd in 2008 to 11.3MMbpd in August 2018. While such growth is enticing, I believe the well-documented financial and operational challenges associated with many of these plays provide independents with the opportunity to establish lucrative business models that are contrarian to this prevailing wisdom.

As an example, Compadre Resources, LLC, was founded in early 2018, to capture the significant underdeveloped and by-passed conventional oil reserves remaining within aging fields, away from ongoing resource operations. We at Compadre believe that applying modern drilling, completion and production technology to these “cold” assets allows for return on investments that challenge operating results in many plays. This editorial provides brief insight into this contrarian business model.

Acreage acquisition. The rush by operators to gain acreage positions in resource plays has caused leasing costs to skyrocket. Wood Mackenzie reports that the current acreage price in the Permian basin has increased 50-fold over the last four years, and if the September BLM lease sale in New Mexico is any indication, the Permian’s average price of $60,000/acre will continue to grow. In this sale, a bid of $101.5 million, representing $81,855/acre pricing, was made for a 1,240-acre parcel in Eddy County. This is double the BLM’s previous record in 2017.

Contrary to this, per-acre cost for open acreage in Compadre’s conventional plays is below $500, with many below $250 and including significantly better lease terms.

Well and field depletion. Production from unconventional reservoirs generally reaches its peak within the first few months after the start of production. Once this peak is reached, individual well production rapidly depletes at a rate of 70% to 90% in the first three years. To maintain production levels and overcome the annual decline rates of 20% to 40% for unconventional fields, operators must continue to make capital investments for new drilling. For most participants, these operations have been funded primarily by debt. As reported in The National Interest in May 2018, “the hundreds of independent companies which made the boom possible have spent $265 billion more than they generated since 2010, relying on cheap credit, equity sales, and asset-backed lending to remain solvent.”

Conversely, conventional oil reservoirs provide operators with wells that have slow and stable production declines, generally ranging from 5% to 20% throughout their productive lives. In addition, the annual production decline for mature conventional fields is historically only 5% to 7%, which enables these long-life assets to better mitigate price volatility risks. The lack of attention and capital investments into these aging assets has caused these field decline rates to creep upward since the start of the resource boom.

Size of the prize. While new drilling in conventional fields may not produce results like Devon’s recent combined 24-hr flowrate totaling 24,000 bopd from two wells in the Delaware basin, the results of bringing modern technology to these aging assets can still create impressive results. The use of tools, such as formation imaging logging to identify by-passed reserves and short lateral completions, to increase reservoir exposure, allows for more than doubling of historical deliverability rates from individual wells.

It is important to note that the costs to achieve such results are measured in the hundreds of thousands of dollars per well, instead of the multi-million dollars involved in developing unconventional reservoirs. In addition, the size of the conventional opportunities available in these fields, and currently being targeted by Compadre, are not measured in the thousands of barrels of oil but in the millions.

While break-even costs of developing resource plays have dropped significantly over the last five years, many of these operations remain sensitive to commodity pricing below $50 oil. In comparison, the operations being undertaken by Compadre require oil pricing of less than $25 to be considered successful.

In summary, the lack of attention given to our industry’s mature conventional oil fields creates an opportunity for independents that are willing to be contrarian thinkers and to look toward these aging assets to achieve superior returns. While time will tell how many contrarian thinkers are out there, I suspect the increasing competition and high cost barriers associated with the resource plays will make it a growing number. wo-box_blue.gif

DOUGLAS C. NESTER co-founded Compadre Resources, LLC, in April 2017 to exploit conventional reservoirs within mature oil fields and serves as Chief Operating Officer and Board Member. Prior to starting Compadre, he served as V.P.-country manager of Albania for TransAtlantic Petroleum’s redevelopment efforts in that country’s aging oil fields. Prior to joining TransAtlantic, Mr. Nester served as the COO of Iraq for Korea Gas Corporation. He has more than 30 years of global experience in the management of oil and gas operations.

ART J. SCHROEDER, JR., CEO, Energy Valley, Inc.
ART J. SCHROEDER, JR., CEO, Energy Valley, Inc.

Creating value, leveraging technology from other industries

“The future,” quoting Yogi Berra, “ain’t what it used to be.” Its vectors are approaching us with ever-increasing velocity and from unexpected directions. Who would have thought to reach for their phone, when wanting to take a photo? Certainly not George Eastman in 1888. It was just a few years earlier in 1876, when Alexander Graham Bell won the first U.S. telephone patent. President Rutherford Hayes commented, “That’s an amazing invention, but who would ever want to use one of them?”

Bell apparently had his concerns, too, as he offered to sell his telephone patent to Western Union for $100,000 and was rejected outright. However, there were visionaries, such as journalist Kate Field, who predicted in 1878 that eventually, “While two persons, hundreds of miles apart, are talking together, they will actually see each other,” and writer John J. Carty projected in 1891, “A system of telephony without wires seems one of the interesting possibilities …. someday we will build a world telephone system, making necessary to all peoples the use of a common language…”

How is it that some prognosticators apparently can see around corners into the future, and others miss that which is in plain sight today? Perhaps the more sure-fired way to get it right is to follow Peter Drucker’s advice, “The best way to predict the future is to create it.”

Certainly, change is accelerating. Professor Klaus Schwab, chairman of the World Economic Forum, explains that from the first industrial revolution powered by coal and steam, then electricity and the car, then computing, there is now a fourth revolution upon us, enabled by the convergence of mobile internet, automation and artificial intelligence (AI), which will fundamentally alter how we live and work.

AI and HMI (Human-Machine Interface, or collaboration) today are much more than chatbots or IBM’s Watson playing a chess match, or questions/instructions to Alexa—think self-driving cars. Tesla, Alphabet, Apple and others are spending billions in this area, viewing transportation as a service versus a product. And combine this with aerial drones and underwater systems, the possibilities are mindboggling. So, as we see these advances in the here and now, how best do we extrapolate into the future, and anticipate applications and build value?

SPE’s Unmanned Systems Technical Section is at the forefront of “disruptive technology,” exploring sea, land and aerial applications. Under the leadership of Ed Tovar (section chair), with sponsorship from Vodaphone and in partnership with ExxonMobil, a diverse group of visionaries from DARPA, NASA, regulators, oil companies and start-ups participated in a workshop. Their objective was to create a better future through understanding and leveraging technologies across a number of industry segments and disciplines.

Setting the stage for the day was Kyle Quinn, sharing perspectives from ExxonMobil’s Upstream Digital Transformation team. The underlying philosophy driving their future was illustrated quite vividly, with a single picture of a high mountain in the distance. Base camp was clearly visible, as was the snowcapped peak, with heavy cloud cover for a large portion of mid-altitude. His team is zooming in on the near-term (six to 12 months), with a heavy bias to action, while zooming out to vision a 10-to-20-year horizon. Recognizing there are technologies that they are unaware of being developed by others, they are constantly on the lookout, staying nimble and flexible for the one-to–10-year opportunities.

Harvard Business School professor Rosabeth Moss Kanter also talks of the value of the zoom-in/zoom-out framework from the management perspective, as it offers a dynamic model that can help current and aspiring leaders increase their own range of vision, and establish conditions that enable others’ success.

Tovar, with his wide-vision aperture and extensive network, brought in Houston Mechatronics, a venture-funded group of former NASA rocket scientists, who are now repurposing their expertise and experience to develop Aquanaut, literally a transformer that is transforming underwater observation and task performance. Ocean Power Technologies is a pioneer in renewable wave-energy technology that converts ocean wave energy into electricity. Power, when and where you want it by the sip, so to speak. Their PowerBuoy, originally deployed in ocean observing scientific applications, is now enabling operators to “cut the power cord” and provide sustainable power and a communications platform for subsea oil and gas applications.

Another start-up was repurposing laser technologies, developed to inspect tank and gun barrels to provide health/status of drill pipe. And those were the ones presenting. Others, such as Dean Richter (Captain, USN Ret.) and his team with expertise in optical laser (and LED) communications (OLC), were networking and sharing their technology’s amazing ability to transmit subsea gigabytes of data over relatively long distances, and even in murky water.

Summer of 1975, working for a large oil company, I was motor-boating around the swamps of South Louisiana, collecting gas measurement charts and performing other inspection activities on inland water wells. Now, visualize an autonomous underwater vehicle (AUV) launched from a dock in Port Fouchon, La., “flying” a pipeline to subsea facilities thousands of feet underwater. It utilizes OLC to gather and transmit data via a power and communications buoy to a satellite, and then into a cloud-based facility, where analytics are performed, coupled with predictive modeling. This provides the AUV with intelligent and actionable instructions. I think I will invest in the ladder, and then perhaps be able to afford the motor boat for pleasure. wo-box_blue.gif

ART J. SCHROEDER, JR., is CEO of Energy Valley, Inc., which provides money, marketing and management to commercialize and advance energy-related technologies. He has over 30 years of experience in operations, engineering, construction, strategy development, and crisis management. Mr. Schroeder is also a Principal of Safe Marine Transfer, LLC, which is in the final stage of building and qualifying a full-scale prototype, subsea chemical storage and injection unit, designed to deliver standard production chemicals as a service, at depths to 10,000 fsw. He also has served on numerous professional, corporate and civic boards, published over 100 technical papers, and been granted patents on his innovations. Recently, he was awarded a Special Citation for his work by the OTC organization. Mr. Schoeder graduated from Georgia Tech with BS and MS degrees in chemical engineering, and from the University of Houston with an MBA. He also has completed several post-graduate certification programs.

 

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Kurt Abraham kurt.abraham@worldoil.com

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