Natural gas prices have been in a slump in the US for several years now with prospects for returning to 2008 pricing of $8 for dry gas looking somewhat dim. Most companies that have been drilling gas wells recently have been producing reservoirs with high natural gas liquid and condensate yields which increase the effective gas price. However, there is a new breed of dry gas driller out there and they are drilling for a gas you would never expect.
Most people think of this gas only when they are having a birthday party but helium prices have risen to over $160 per MCF (over 40X the price of methane). As it turns out, helium’s main use is not balloons but for medical, cryogenic, pressurizing, purging, and welding applications. Having a low density, boiling point, high thermal conductivity, and being a noble gas (no one wants to have another Hindenburg), helium is used for many applications that no other gas would be as equally suitable. Unfortunately, reservoirs of pure helium do not exist and it is mainly present as a minor quantity in most fields. In certain areas of the country, you find larger quantities of helium making up just a few percent of the total natural gas stream.
Exacerbating the current helium problem is that the US government stored the nation’s supply of helium for decades buying it off the open market (Helium Act of 1960). Then in 1996, the government decided to begin unloading its entire supply of helium (one of the world’s largest repositories of helium) flooding the market selling it at artificially low prices encouraging waste and disposing of the nation’s only major supply of this precious resource. Given that there are no other large readily available sources of helium the market responded over the following decade with prices increasing exponentially as use of helium increased.
One of the reasons why helium is difficult to locate is how it is created.
Helium is typically present in areas with rich radioactive deposits of uranium and thorium present in basement rock (typically igneous or metamorphic). As the radioactive elements decay, they create helium as a byproduct. The light molecule then travels up through fractures and faults and then hopefully ends up in a sedimentary rock reservoir with a trap usually in combination with natural gases such as methane and nitrogen. Once it is produced on surface, it then requires expensive separation techniques to purify it from the rest of the gases it came up with. Finally, it needs to be transported. Most pipelines will not allow a large amount of non-hydrocarbon bearing gases into them.
Thankfully, it appears creative oilmen are slowly coming to the rescue before we reach a crisis level. Although almost none of us have ever considered drilling for helium as an objective, there appears to be a small movement forming of gas drillers who want to start exploring for it. Some companies are targeting states and reservoirs that typically would not be hugely of interest for traditional oil and gas formations but would be possibly prospective for helium. As the price continues to increase, it is even possible that larger companies will get involved in helium exploration and production. Helium is one of the few gases light enough to escape earth’s gravity and be lost forever. As a true resource that cannot be replaced, we need to use it sparingly. With a little bit of luck, we still will be able to have birthday party balloons fifty years from now as long as the oil industry can be successful in its new exploration frontier.
BLM Crude Helium Price and Refined (Grade A) Price Estimates, Fiscal years 2000 through 2012
USGS Chart of Helium use
As Pacific Energy Development completes its first extended length lateral of over 8000 FT and 33 frac stages after drilling four wells, it is interesting to compare the development of its Niobrara asset to what is happening in shale assets overseas. Horizontal drilling and completion technology has revolutionized US onshore oil production with the discovery of numerous oil shale plays. The International Energy Agency (IEA) has even actually predicted that the United States will be the largest oil producer in the world by 2020. Due to this success, many people have been predicting a similar surge of production internationally completely from shale based production growth. The reality has been somewhat different from the expectation in that infrastructure, pricing, political, and regulatory issues have delayed this growth possibly for decades in many countries.
In terms of infrastructure, many countries lack the technological services and pipeline systems to effectively develop shale assets. Without an existing midstream network, it is difficult to invest hundreds of millions of dollars in pipeline services for a remote region where development is not guaranteed. Without experienced personnel and technological service companies, it is challenging to develop shale oil or gas assets which do not produce any oil or gas without the appropriate treatment and drilling techniques. To give a relative idea of how far off technology is in Europe, the largest frac job ever performed is a nine stage well in Ukraine with a lateral length of ~3000 ft
Compounding these problems is that mineral rights are not owned privately overseas. Due to larger concessions being granted for acreage, there is a lack of competition within areas which inherently slows down experimentation and trying of new techniques. Using the US as an analogue, it was not the large companies, like Shell and Exxon, that led the shale revolution but small independents that were willing to fail over and over again until they found the secret recipes for success. From a regulatory and political standpoint, there has been a severe backlash against hydraulic fracturing overseas. Without having decades of understanding in the safety of technology, many areas of the world have attempted to ban it. What is especially interesting about this is that over 1,600 wells have been drilled within the City of Fort Worth with few ill effects.
Finally, many countries have long term pricing contracts which are not directly tied to the costs of production. Shale oil and gas development has a large capital cost compared to drilling conventional high permeability wells. Given how traditional production sharing contracts work, it would be very challenging in most areas to economically develop a shale gas asset.
In spite of all this negativity, there appears to be a bright spot overseas in China. The government there has made it a priority to develop shale assets providing relatively stable and high pricing compared with the rest of the world along with numerous incentives for success. They have made it a point to buy interests in US oil and gas operations to train staff to take the technology home. Finally, they are actively drilling and testing horizontal shale wells exceeding the European record leading shale technology growth overseas. It will be curious to see how development continues to grow within countries such as China where shale exploration is actively encouraged by its government vs. other countries where it appears that fracing is still a four letter word.
The Mississippian Oil play has been a topic of conversation recently in the oil and gas industry. Core areas have been established along counties bordering Kansas and Oklahoma with numerous rigs running. With some of the most inexpensive horizontal well costs in the oil industry, core areas within the play rank as some of the highest rate of return projects in the nation. One the main reasons why the well costs are relatively insignificant is that the Mississippian, unlike other resource plays, has substantial porosity and permeability with relatively shallow drilling depths. Permeability (which is a measurement of the ability of fluids to flow through rocks) in the Mississippian is up to 100,000 times greater than most shale plays. This allows for minimal hydraulic fracturing costs as the rock does not need significant treatment to flow.
Another interesting fact about the Mississippian is that it is a limestone and not a shale, meaning it is not self-sourcing. Almost all of the oil and gas present in the Mississippian was sourced by the Woodford Shale (a world class source rock) which then traveled long distances and was trapped by the stratigraphy in the Mississippian (examples of which are illustrated below).
Schematic diagram of stratigraphic traps
Sandridge map showing horizontal wells drilled along Oklahoma/Kansas border
As a result of this, the Mississippian has a greater variability between wells of whether it produces oil, gas, or oil and gas. This can lead to sometimes surprising well results in areas where there is sparse vertical well control. Often times, these accumulations can change very rapidly in producing phase with areas going back and forth between predominantly oil to predominantly gas. You can even have situations where you intersect an oil reservoir followed by a gas reservoir in the Mississippian due to the nature of how the oil and gas is trapped. Thankfully, due to the thousands of vertical wells, it is possible to map areas in the play where oil accumulations are more prevalent than gas and calculate statistical probabilities. Geologists can also determine which rock types are present allowing for a better understanding of rock properties and depositional environments.
As horizontal drilling continues along the borders of Kansas and Oklahoma, it will be interesting to see how the play continues to grow as companies learn about this play.
Recently, across the US, there has an outpouring of hate for fracing. From movies, such as Gasland and Promised Land, to local communities banning tight oil and gas operations, the issue of fracing has become a cornerstone of the environmental movement. There are people claiming that “Big Oil” is out there to pollute the water of America and destroy the earth. Of course, the reality is far from that. It has always been interesting that anything that is “big” in America is automatically considered bad as if the people that work in these companies are inherently trying to do something evil because they work for a successful business someone built. No one I have ever worked with in the oil industry has ever told me that they got into the business of energy production to engage in a Machiavellian scheme to destroy the earth. With that stated, it is important to look at the facts around fracing and to understand what the true risk factors are without all of the hyperbole surrounding it.
Fracing was first developed in the 1940’s as a method to increase the production in oil and gas wells. Over a million wells have been hydraulically fractured worldwide since then. The technique involves pumping water and sand down a wellbore inducing fractures in the reservoir to open up the rock to flow more easily. These fractures are incredibly small with most of them being significantly less than an inch in width. They typically extend upwards up to 300 feet and can extend laterally from between 100 to 2000 ft. The reason why they do not extend upward for very large distance is due to them having to overcome the thousands of feet of rock weighing down creating pressure on the reservoir. Most reservoirs are located at thousands of feet of depth and are not located anywhere near where usable water aquifers are. In fact, using seismic technology, the government and oil companies have monitored numerous fracing jobs and have shown no growth of fractures anywhere near fresh water. In areas across Texas, such as Ft. Worth where hundreds of wells have been drilled in the middle of a city, millions of people have lived for decades next to oil wells with no ill effects. In terms of composition, 99% of frac job fluids are composed of water and sand. The majority of the remaining chemicals are items used daily in many consumer products such as cosmetics, soap, and food. Additionally, there are layers of steel and cement set between the producing zone that isolate and further protect fresh water zones. In conclusion, there are numerous safe guards, historical data, and scientific reasons why fracing is not harmful to anyone’s health, safety, or the environment.
Hydraulic Fracture from Sandia Labs
Breakdown of Frac Fluid Composition (click to enlarge)
Graphic showing fracture height growth and distance to water table (click to enlarge)
Fracing is the reason why today the US is moving to energy independence. As a result of horizontal drilling technology and fracing, the US has seen record growth in production in both oil and natural gas. By replacing coal fired power plants with natural gas, the environment is becoming cleaner due to decreases in emissions. Energy prices have stabilized or dropped as a result of this technology allowing everyone a better quality of living. More jobs are being created in America in a down economy. It seems like a bad idea to ban something that has done so much for the country and that has been proven safe and proven for many years.
Chart showing growth of shale gas in the U.S. (EIA)
Lately, I have been receiving a large number of articles denying that peak oil will ever occur. The two topics that are almost always cited are the prevalence of shale oil and that oil is abiogenically sourced. These topics are actually diametrically opposed to each other which make for an interesting discussion topic. The first theory allows for human ingenuity to overcome a decade’s long problem of decreasing US oil production. The second theory claims that the world will never run out of oil due to oil not being produced through biological means and that the Earth will naturally recharge all the oil we use.
The New York Times recently reported that the US will become the top oil producer in the world by 2017 and will even be a net energy exporter in 2030. There is no doubt that US shale oil production has been a game changer. Note in the chart below provided by the EIA how dramatic US oil production has increased over the last two years, reversing a decline present over the last 20 years. The question is will shale oil solve all of our world petroleum problems for years to come? The first issue is to understand the differences in how shale oil vs. abiogenic oil works.
The theory of shale oil production is that petroleum is derived from ancient organic materials, such as algae, that were preserved in anoxic conditions where bacteria couldn’t destroy them. These organic materials were then buried deep into the Earth over tens of millions of years along with sedimentary rock debris. As a result of increased pressure and temperature, the organic material was converted into oil, gas, and coal. These organic rich sedimentary rock beds became the “source rock” for almost all of the migrated oil and gas into conventional oil and gas fields discovered over the last 100 years. Shale oil production came into play when someone made the decision that it would be an intelligent idea to drill the source beds which sourced all of the conventional fields and put massive hydraulic fractures on them, realizing that a lot of the oil in them had never escaped. Clearly, this idea has functioned pretty well. The chief reason why the chart above looks like it does is because of this theory of petroleum production. It has also been shown that you can generate oil from algae to make bio diesel. This is one of the most exciting newest forms of alternative energy.
Abiogenic oil proposes that oil and gas is produced from natural non biological processes from the center of the Earth and its mantle. This theory was developed chiefly by scientists in the Soviet Union. The articles I have recently read that have led to a resurgence of this theory are related to the discovery of lakes of liquid methane and methane rain on Titan (a moon of Saturn where the temperature is -180 degrees Celsius). Most of the hydrocarbons found seem to be simple ones such as ethane and methane and not complex hydrocarbons such as the ones found in oil. Although this does lead some credence to the theory that oil can be produced abiogenically, it does not account for the bulk of oil and gas deposits on Earth. Additionally, there have yet to be any significant discoveries of fields drilled based on this theory nor have there been examples of significant recharging of any oil reservoirs in the world. Even if the Earth was generating hydrocarbons, the mechanism would be very slow and wouldn’t have an appreciable effect compared to the rate we withdraw oil from the Earth currently. More importantly, if this was a main mechanism for hydrocarbon generation, we would not have such unbelievable success in drilling shale oil source beds.
Given that oil reservoirs aren’t replenishing anytime soon and we don’t have to deal with “methane rain” here on Earth, will shale oil resolve peak oil? There is no doubt that there are vast reserves throughout the world to tap of this resource. Currently, only the US and Canada have the technology to commercially exploit this resource to the degree needed to change the natural decline profile of the last 20 years. However, there is no reason why other countries can’t learn from the US and start producing their own source rocks. The question is at what price point will oil become too expensive for oil production to keep growing? The marginal cost of adding additional oil production in the US to replace and increase our current supply is now over $70 a barrel with some sources
even saying up to $92 a barrel. This number is going to continue to increase since drilling horizontal wells is expensive and cheaper sources of oil are going to deplete over time. As we replace cheaper OPEC oil with more expensive and technologically driven oil production, global commodity prices will have to respond by increasing the base price of oil. So in conclusion, the real issue isn’t peak oil. I think we have plenty of oil for years to come. The question is what is the peak price of oil before some alternative is cheaper?
Most oil & gas companies in the US are currently focusing on producing liquid rich plays. Given the decline in natural gas prices compared to 2008, this isn’t very shocking. As shown in the Baker Hughes rig count, it is clear that the number of rigs drilling for natural gas has been ever declining. Logically speaking, with such a precipitous decline in “gas rig” activity, one would think that natural gas storage would be decreasing year over year. However, in reality, this will be the 4th straight year that gas has hit record storage numbers. This shouldn’t be possible with gas rigs numbers decreasing from 1600 to less than 500. However, the reality shows otherwise and there lies some deeper truths.
The first thing one should note is that companies are constantly looking for “liquid rich plays.” There is a clear distinction in vocabulary that is not immediately clear. Liquid rich plays are not necessarily oil plays. They are actually gas plays that produce liquids either through natural processes (dropping from reservoir temperature & pressure to surface conditions) or artificial processes (going through a gas NGL processing plant). In actuality, the number of oil rigs in the US has been increasing, but not all of those oil rigs are actually drilling oil reservoirs. Portions of plays such as the Eagle Ford, Mississippian, Niobrara, and others have been classified as oil drilling when in reality sometimes greater than half of the production in the well is natural gas. This allows for a useful fiction in the public eye that companies are not drilling gas wells since gas is supposed to be uneconomic. However, in reality, these are gas wells, that are highly economic because they produce natural gas liquids and condensate liquids.
In example, in my previous work experience, I worked in the Eagle Ford shale drilling gas wells. However, these gas wells, also produced 60 BBL/MMCF of oil and 120 BBL/MMCF of Natural Gas Liquids after processing. The wells would have an initial production rate of over 7 MMCF/D. Doing some basic calculations, these wells were making over 850 BOPD IP rates (assuming a 2:1 price conversion on natural gas liquids). That is on top of the additional value from the natural gas. Finally, since gas wells have larger recovery factors than oil wells and drain larger areas due to mobility, these wells would have longer well lifes and shallower “oil” declines than a true oil well.
Baker Hughes Rotary Rig Count (click to enlarge)
Working Gas Underground Storage (click to enlarge)
Thanks to natural gas liquids and condensate, there are numerous gas reservoirs that are profitable today and are not accounted for in most analysts’ discussions regarding US natural gas production and pricing. Since gas has become a dirty word to use, the industry decided to change the name of what they are doing to oil. However, in reality, the US continues to profitably produce natural gas reservoirs and will do so for years to come even if we have record supplies year over year. The proof is there in our 4th record year of gas storage.
Oil exploration used to be a high risk and high reward industry. Investing millions of dollars in projects that had a possibility of absolutely no return (the infamous “dry hole”) required a gamblers mentality that to a large degree is no longer present in the onshore US oil and gas business anymore. As the number of colorful wildcatters has declined, the oil industry has become more institutionalized. The reason this has occurred in a large part is due to the change in how the industry quantifies or views risk.
When developing an onshore project, there are 3 main reserve considerations that management reviews before approving any well. The three risk factors are Pg, Pm, and possible recoverable reserves. Pg is the chance that you will locate a reservoir with hydrocarbons present in it. This number in the past could vary widely even sometimes going as low as 20%. Of course, if you were drilling wells with such high chances of failure, you needed to have a large possible recoverable reserve value allowing you to hit a “gangbusters well” with huge amounts of oil and gas in it. Generally, these types of high risk and reward wells would be drilled in multiple well packages to allow you to have a managed portfolio risk. Although, often times, someone would come up with a unique target drilling program and sell it to a group of oil and gas investors and “prospect” it out. This type of investment appealed to a large number of high net worth individuals since essentially you were engaging in a treasure hunt 1 to 4 miles under the earth. The final risk factor is Pm which is the risk of not having a mechanical failure (drilling a well which has a producible pathway for the hydrocarbons). There is always a risk of mechanical failure in any oil and gas operation due to the complexities of targeting reservoirs at high temperatures, pressures, and depths. This risk was especially true when you were drilling a well in a new area you have never done before (the” true wildcat”).
Nowadays, the game has changed. With the development of resource plays (see my first
post) , Pg has become almost 100%. Statistically, it is almost impossible to have a dry hole in a resource play since you know the oil and gas is always going to be there. The Pm factor is also 90% or even greater. Due to the repeatability of resource plays, the drilling & completion program has to manage with less risk and has transferable knowledge to be improved upon from previously drilled wells. The one downside of resource plays is that the wells don’t necessarily produce as much as wells drilled in the past. However, there is a level of consistency present which results in more stable profitability and returns. Most importantly, operators are able to optimize reducing drilling and completion costs over time of individual wells and increasing reserves as they learn what factors are important in each reservoir. Operators are able to deploy large multi-billion dollar capital programs and numerous rigs on a scale that was not possible in the past due to the repeatability of these resources. The effect of this can be seen in the large increase in natural gas and oil production the US has been experiencing over the last few years (as discussed by Geoffrey Styles,
in the previous post
In conclusion, although the elephant hunt of the past might be over in the US, the advent of resource plays has guaranteed the US a long and stable supply of energy. It makes for a little bit less of excitement, but when your money is involved that is probably for the best.
For my first blog post, I thought it would be useful to introduce some basic geology. Hopefully, this will be helpful in increasing readers’ general understanding of the modern oil industry.
The energy industry has had a great deal of change in the past twenty years with the introduction of the concept of shale plays. Resource plays (which include shale plays) are defined as oil and gas projects where there is low geologic risk in not finding hydrocarbon and are generally statistically repeatable for a large number of wells. Often times, the word is used for all forms of resource plays which is not accurate.
Shale is a sedimentary rock which is composed of clay and silt sized particles. Shales and other mudstones actually are the most common sedimentary rocks present in the geologic record. One would expect that since shale is found in almost every single well ever drilled there would be a huge number of successful shale plays in the U.S. The reason why that is not the case is twofold. The first reason is that most shales do not have a large kerogen (organic) content which is necessary to make oil and gas. The second reason is that shale is ductile. Due to the large amount of clay in the rock, it does not frac well. Even if you are capable of fracing the formation, your fracture ends up closing due to the rock being so plastic.
So what is one of the main factors that differentiates a successful shale play from a failure? The rock is not a true shale! If you look at the most recent successful shale plays in the U.S. (such as the Eagle Ford, Barnett, Niobrara, Bakken), they have almost all been either carbonates (often marly) or very silica rich mudstones. Many times these rocks were misnamed shales due to their black coloration (due to organic content) and higher gamma ray measurements. Due to their extremely low clay content and large mature organic content, these rocks previously thought of as shales are now some of the biggest and most prolific reservoirs in the U.S. Unfortunately, the original names have stuck through time and the rest is history. So in the future, when you hear about a new shale play, be sure to ask the deeper question as to what the actual play is.
Michael Rozenfeld, P.E.
Mr. Rozenfeld is a licensed professional engineer in the State of Texas