Are the International Oil Companies Running Out of Oil?

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worldenergysource.com: Are the International Oil Companies Running Out of Oil?

by Mike Bahorich
Director, Exploration and Production Technology
Executive Vice President
Apache Corp.

World Energy, v10n4

It is no longer news that world energy consumption is increasing at a phenomenal rate: The Energy Information Administration’s International Energy Outlook 2007 projects a 57 percent increase between 2004 and 2030. Most of us understand that the bulk of the growth is in the less-developed world, with China and India named most often. Even with all the talk about new forms of energy, we in the industry know that liquids – mostly oil – will continue to provide the largest share of the world’s energy for decades to come.

Of course, this begs the question: Is the world running out of oil? The answer is: No, not for a long, long time. So far, we have produced only about 1 trillion of the world’s approximately 5 trillion barrels of recoverable oil, both conventional and nonconventional.

But getting at the other 8 to 10 trillion barrels of oil locked within planet Earth is going to be very, very difficult, if not impossible. Even for the 4 trillion barrels of remaining recoverable oil, we face production barriers, environmental concerns, infrastructure constraints and geopolitical complications that are truly mind-boggling.

The National Petroleum Council’s (NPC) 2007 draft report, Facing the Hard Truths about Energy, puts it this way: “While risks have always typified the energy business, they are now accumulating and converging in new ways. Geopolitical changes coincide with increasingly large and complex technical challenges. Environmental concerns that limit access to some U.S. resources may compete with security concerns that would promote expanded access. … Carbon constraints would require huge capital investments to maintain energy production.”

Are the IOCs Running Out of Oil?

Geopolitical and environmental concerns, however, are not the subject of this article. I am concerned instead with another big question: Are the international oil companies (IOCs) running out of oil? This question is worrisome enough to keep many of us in the industry awake into the wee hours.

Just four examples will suffice, I think, to make you sleepless, too:

1. Oil produced outside the Organization of the Petroleum Exporting Countries (OPEC) and the former Soviet Union peaked in 2002 and has been trending slightly lower through 2006. We are squeezing 43 percent of the world’s liquids production out of just 15 percent of the world’s reserves. This is not sustainable, and a peak is imminent – if it did not already occur in 2002.

2. An analysis of data from 1999 to 2005 for 68 IOCs shows oil production remaining essentially flat during that six-year period, rising only from 17.2 million to 18 million barrels per day.

3. From 2004 through 2006, the composite net oil production of BP, ExxonMobil, Shell, ChevronTexaco, Total, ConocoPhillips and Eni fell from 14.1 million barrels per day to 13.6 million barrels per day.

4. Nine of the top 10 reserve holders (the exception is Lukoil) are state-owned, with an average reserve-to-production ratio of 78 years. In reserve holdings, the five highest-ranking IOCs are ExxonMobil (14th on the list of all companies), BP (17th), Chevron (19th), ConocoPhillips (23rd) and Shell (25th). Together, their average reserve-to-production ratio is just 11 years.

As the Congressional Research Service warns in its Aug. 21, 2007, report for Congress, The Role of National Oil Companies in the International Oil Market: “It is also not likely that the reserve positions of the companies will change in favor of the international oil companies in the future. As nations establish their own national oil companies, territories open for exploration and development by private companies may diminish. As suggested by the example of Venezuela, … even in countries where there are partnerships between the private oil companies and national oil companies, if there is any revision of ownership shares, it is likely to be in favor of the national oil companies.”

This is a pendulum that has swung before. In fact, most of us have watched the energy business change dramatically during the span of our careers, from the price shocks of the 1970s to the crash of 1986 to the once-unimaginable price increases we have seen since 1998.

What has changed most is the level and degree of competition. Today, our business is tougher than ever before, with access problems, smaller finds and the continuing decline of existing fields. OPEC’s role, of course, is unprecedented. And today we are witnessing new and growing competition between the national oil companies and IOCs. (When was the last time you heard someone refer to the “Seven Sisters”?)

It is a new world for those of us in the oil business. But there is nothing really new about that, is there? As in the past, we can lose sleep worrying about these changes, or we can lose sleep dreaming up new ways to innovate.

Competition always has driven innovation as we have pushed into remote areas, into ever-deeper waters, into more inhospitable environments and deeper into the Earth’s crust, with its higher pressures and temperatures. I believe it is simply time to roll up our sleeves again.

Where Are the Opportunities?

Where do the opportunities lie today? At Apache, we see plenty of potential in already-discovered reservoirs. We are basing our optimism on cold, hard data. From 1994 to 2004 new field discoveries provided less than 25 percent of new reserves booked in the lower 48 states, with the majority coming from adjustments, revisions, extensions and new reservoir discoveries within old fields.

The NPC, in Hard Truths, agrees: “In 2005, over 17 percent of oil and 9 percent of natural gas produced onshore in the United States came from marginal oil wells. … Access to existing fields provides the opportunity to deploy new technologies to enhance the ultimate recovery of oil and natural gas from these fields.”

The report also pushes hard for more attention to and investment in enhanced oil recovery (EOR), making two specific recommendations to the U.S. government:

1. Support regulatory streamlining and research and development programs for marginal wells.

2. Expedite the permitting of EOR projects, pipelines and associated infrastructure.

The report predicts that these steps could help produce an additional 90 to 200 billion barrels of recoverable oil in the United States alone.

Unconventional oil and natural gas also hold great promise. Natural gas in coalbeds, shale and very-low- permeability formations represents about 20 to 25 percent of current U.S. natural gas production, says the report. It elaborates: “Typically, unconventional natural gas wells are productive longer than conventional wells, and they can contribute to sustaining supply over a longer period. Similarly, there are large deposits of crude oil in unconventional formations where production is currently increasing with recent technology innovations.”

The report continues: “Vast hydrocarbon deposits exist in the oil shales in the Rocky Mountain region of the United States. Until recently, technology has been unavailable to produce these oil shale deposits at a competitive cost and with acceptable environmental impact. Research, development, and demonstration programs are increasing to advance the technologies required to expand economically and environmentally sustainable resource production. However, successful production at scale may still be several decades away.”

Again, the report makes two specific recommendations to the U.S. government:

1. Accelerate U.S. oil shale and oil sands research, development and leasing.

2. Accelerate U.S. unconventional natural gas leasing and development. This action could double our unconventional natural gas production to more than 10 billion cubic feet per day, increasing total U.S. natural gas production by about 10 percent.

Great potential also lies in new discoveries. Again, I quote Hard Truths: “In the United States, an estimated 40 billion barrels of technically recoverable oil resources are either completely off-limits or are subject to significant lease restrictions. … Advancements in technology and operating practices may now be able to alleviate the environmental concerns that originally contributed to some of these access restrictions.”

The potential effect? “Material increases to current reserves within 5 to 10 years from currently inaccessible areas could approach 40 billion barrels of oil and 250 trillion cubic feet of natural gas with current technology.”

More Capital Investments

It is not just a matter of where we can innovate, but also how we can innovate. This is basically Business 101.

We must invest more capital in our industry. Of course, this is not as simple as it sounds, even with prices at current levels. As the Congressional Research Service notes: “The private international oil companies’ ability to make the investments needed to meet projected demand for oil is limited by a number of factors. The international oil companies may not have access to what they consider to be favorable prospects. … Large companies have expertise in developing and operating large fields, a type of oil deposit in diminishing availability. In this sense, there may be a mismatch between the capabilities of the companies and the reserves to which they have access. The price of oil is volatile over time. As a result, a conservative investment policy, based on an expected price, not necessarily fully reflecting high current prices, might be in the companies’ interest. … Tight markets in trained manpower, specialized equipment, and materials are likely to lead to higher project costs as well as delays that may make investments less attractive. The private firms may be under financial market pressure to generate current returns. … Finally, as a result of the mergers that have taken place in the industry over the past decade, the number of potential investors attracted to any particular exploration tract may have declined, slowing the need to respond rapidly with investment plans.”

Attracting the Next Generation

The need to train a new workforce is widely recognized in the energy business. In 2004 an American Petroleum Institute survey predicted that by 2009, the U.S. oil and gas industry will face a 38 percent shortage of engineers and geoscientists and a 28 percent shortage of instrumentation and electrical workers. That is just one year away.

“One of the more important predictors for the future supply of potential employees in oil and natural gas is the number of students earning university degrees in petroleum engineering and geosciences. Enrollment in these petrotechnical programs has dropped about 75 percent over the last quarter-century. … The U.S. government and the energy industry should work actively to renew this vital workforce through education, recruitment, development, and retention – much as companies strive to develop and renew energy supplies,” says Hard Truths.

The report recommends that federal and state governments assist in this effort by funding university research and development in science and technology. “Consistent support for university research programs relating to the energy industry will signal prospective students that these subjects are vital to the country,” notes the report. “For example, several universities have recently increased petrotechnical enrollment by active recruiting aimed at high school seniors, their parents, and their counselors. These results indicate that vigorous recruiting can yield positive results, but efforts need to be more widespread.”

But we need more people now as well as in the coming decades. The report recommends more knowledge sharing, coaching and mentoring, as well as addressing regulatory barriers that restrict the part-time work of retirees.

The report also recommends increasing the quotas on work and study permits for foreign nationals, who are facing shrinking quotas in the United States.

Investment + Brainpower = New Technology

Energy always has been a technologically driven business, and the importance of technology has only increased in recent years. New technology will be the inevitable result of increased investment and the brainpower of our experienced and soon-growing workforce. But we have to invest now. As the report reminds us, new technology in the oil and gas market takes an average of 16 years to move from concept to widespread commercial adoption.

Hard Truths notes: “Gaining access to the best technology for exploration, development, and production is one of the key motivations oil-producing nations have for entering production-sharing agreements with the private international oil companies.”

The report lays it out very clearly: “Government has a role in creating new opportunities and developing the regulatory framework and infrastructure needed to extract new resources. Enhanced oil recovery is an activity for which funding by the DOE [Department of Energy] for research could pay significant dividends through increased domestic production. Coalbed methane and oil shale present additional opportunities.”

The report makes four recommendations:

1. Review the current DOE research and development portfolio to refocus spending on innovative, applied research in areas such as EOR, unconventional oil and natural gas, biofuels, nuclear energy, coal-to-fuels, and carbon capture and sequestration.

2. Maintain a fundamental research budget in the DOE Office of Science to support novel technologies.

3. Focus and enhance research in the U.S. universities and national laboratories.

4. Encourage cooperation among the DOE, Department of Defense and industry in innovative areas of development, such as advanced materials and metocean information and analysis.

If you have not read it yet, I recommend a close look at the NPC’s July 2007 report Hard Truths. In it, the council proposes five core strategies for the U.S. government to assist markets in meeting the energy challenges to 2030 and beyond. Together, these five strategies would reduce the gap between domestic demand and supply by about one-third from 2006 to 2030, improving the outlook for energy availability, reliability, cost and environmental impact.

Although this kind of government/industry cooperation is essential, we do not have to sit on our hands while bills wend their way through Congress. We can rev up our (fuel-efficient) engines, starting now, and make real headway the same way we always have in the energy business: through innovation.

Mike Bahorich became Apache Corporation’s executive vice president of exploration and production technology in 2000. He joined the company in 1996 as chief geophysicist and was later promoted to vice president of exploration technology.

Prior to joining Apache, Mr. Bahorich was with Amoco, where he spent his first decade involved in prospect generation and development. He then spent three years with Amoco Research in scientific and management positions, where he invented two geophysical concepts that are now widely used in the industry. He later became a resource exploration manager in the company’s mid-continent operations.

A graduate of the University of Missouri at Columbia, Mr. Bahorich received his master’s degree in geophysics from Virginia Tech. He currently serves on advisory boards at Stanford University, Yale University and the Houston Museum of Natural Science. He received the Kapitska medal and was elected as a foreign member of the Russian Academy of Natural Sciences. In 1998 Mr. Bahorich received the Virgil Kauffman Gold Medal from the Society of Exploration Geophysicists, and he was president of the organization in 2003. He holds eight patents.

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