Breaking New Ground

Despite concerns that global reserves of hydrocarbons may be approaching a point of irreversible decline, the oil and gas industry is continuing to maintain its long tradition of pushing back boundaries in development and production. Marius Goubert considers how the end of so-called ‘easy oil’ is driving new breakthroughs in unconventional oil and gas, and how superior technical know-how is increasing the oil clout of the import dependent West.

Before 1956, the oil and gas industry had certainly had its fair share of false prophets. So when an obscure geologist called M King Hubbert submitted a research paper to the American Petroleum Institute in San Antonio predicting the onset of a terminal decline in American oil and gas production – said to strike as early as 1970 – it was no surprise that his findings were met with a combination of indifference and contempt by economists, oil companies and government agencies like the United States Geological Survey (USGS). Yet, when analysts began observing how, true to Hubbert’s predications, the sector became gripped by a sudden, irreversible slowdown after oil production levels peaked at 10,200,000 (1,620,000 m3/d) barrels per day in the early 1970s, his ideas began to gain a measure of grudging credibility. The alarming accuracy with which Hubbert’s model was able to predict the exact point of this exponential decline saw the phrase ‘Hubbert’s Peak’ enter the mainstream lexicon and, in the decades that followed, refined models of his theory would be used to forecast peak oil and gas production for both individual countries and the world.

However, the exact date at which global oil production was set to hit Hubbert’s Peak – initially projected as 1995, with gas soon to follow – led to decades of debate, with projections ranging from 2020 to the middle of the 21st century. The 2010 World Energy Report issued by the IEA (International Energy Agency) even argued that the world had already passed this inevitable point in 2006. Indeed, identifying such a terminal event has proven particularly troublesome because of the industry’s long standing tradition of pushing back technological frontiers: venturing into the deep ocean, for example, or unlocking a means of economically exploiting natural gas locked away in formations of shale. Opinion may remain divided over the point at which production peaks, but what is clear is that the days of easy oil and gas are over. The need to redefine practices and challenge conventional wisdom has never been stronger as the industry seeks to secure future supplies of a resource that, for the short term at least, will remain the lifeblood of global economic growth.

Scraping the barrel?

At the heart of every one of the industry’s great achievements over the last 125 years has been technology and innovation, with game-changing advancements extending the range of explorers, from the easy-to-reach onshore reserves to more challenging offshore arenas (considered ‘unconventional’ just 40 years ago); and, more recently, into the deepest recesses of the world’s oceans. Huge growth in global reserves and supply has been driven by milestone developments in the identification, nurturing and production of reserves, while the quality of information available when assessing different geological structures has extended the span of surveyors and geologists into new mineral frontiers. Flexible, directional, and long-reach drilling has overcome the harsh terrains of Russia and the Middle East, as well as conquering the deep waters of the Mexican Gulf. Even oil fields that were once thought to be depleted have been brought back to life by injecting pressurised steam underground to drastically improve recovery rates.

And while the world may be a long way from pumping its last drop despite the looming spectre of peak oil, global reserves of easily accessible reserves (those found in their most prized ‘light form’ where they are easy to recover and cheap to refine) are reducing at an alarming rate. Even Saudi Arabia, a country where the abundance of high-quality light oil has driven five decades of prosperity, is now making huge investments in a bid to maintain its oil supremacy. With the Middle East’s reserves of light crude already in decline, Saudi Arabia is now eyeing the 78 billion barrels (three and a half times the total reserves of the US) of ‘heavy oil’ locked away beneath the Gulf desert. Thick as molasses, heavy oil is almost impossible to pump using current technology, and Saudi Arabia and Kuwait have together embarked on an ambitious experiment to try and coax it from the Wafra oil field, located in a sparsely populated expanse of desert shared by the two nations.

The Saudi government is also looking towards Western drilling companies as it seeks to exploit this huge, untapped reserve. Using its experiences pumping heavy oil from fields in California and Thailand, Chevron is now conducting a pilot project on a small corner of the Wafra Oil field where it is using pressurised steam to heat the oil in an effort to make it less viscous. So far, the results have been encouraging. The Wafra field is now pumping 78,000 barrels per day, and the experiment is being keenly watched by neighbouring Gulf states like Bahrain, the UAE and Oman – all of which are eager to exploit their own heavy oil reserves. Ironically, the ease with which Gulf oil has traditionally been extracted saw many Western companies locked out of the Middle Eastern oil boom. Countries like Saudi Arabia found it more profitable to simply create their own NOCs (National Oil Companies). However, by returning to their depleting fields in the West, companies like Chevron were forced to make huge investments in new technology, and their subsequent experience and superior technical know-how could well create their passport back into the Gulf region.

In deep water

Even more remarkable is the speed with which the industry has adapted to the challenge of drilling in deepwater (defined as depths ranging between 300 and 1,500 metres) and ultra-deepwater (anything higher than 1,500 metres). The Brazilian state-owned oil company Petrobras has now become the undisputed world leader in the development of advanced technology for deepwater and ultra-deepwater operations. Advancements in exploration techniques enabled prospectors to use enhanced 3D to see through thick salt layers in Brazil’s Santos Basin. In November 2007, the country discovered the largest oil deposits in its history, which began with the giant Tupi field (located 300 km from the coast of Rio de Janeiro). Estimated to contain between five and eight billion barrels of oil, it is believed to be the world’s largest deepwater oil-field discovery, and was soon followed by other deposits like the Sugar Loaf and Jupiter natural-gas fields – all of which are poised to catapult Brazil into one of the world’s leading oil producing and exporting countries.

The challenges facing the Brazilian oil and gas industry are significant, however. The reserves are locked away beneath a salt layer more than 4km beneath the seabed. Unlike rock, which can be relied upon to maintain its integrity once drilled, salt is much less stable, and Petrobras is also facing challenges arising from temperature shocks as the oil travels to the surface. Yet, with prospects of the pre-salt region going as deep as 3,500 metres, Brazil’s new discoveries are indicative of a far broader global trend in which the deep ocean has become the final frontier of petroleum development. Since 2006, deep-sea discoveries have accounted for half of the oil and gas added to total global reserves. Now, analysts predict that deepwater output will double between 2010 and 2017, with the vast majority deriving from the ‘Golden Triangle’ of Brazil, the Gulf of Mexico and West Africa.

An end to easy oil?

As it moves to harvest pre-salt fields like Tupi, however, the Brazilian oil and gas industry is facing service bottlenecks resulting from a scarcity of equipment like deepwater rigs. Petrobras President José Sérgio Gabrielli warned: “We also lack subsea systems, tubing to connect the ocean floor to the surface. Today, we have the whole world’s production capacity contracted and we need more. We must advance in the area of large turbo-compressors, which are floating electricity generators. So we are talking about gigantic quantities of equipment.” Again, it is US companies like Transocean, Pride International, Noble and Diamond Offshore, that stand to gain, as these contractors own the small number of specialised floating rigs needed to operate in Brazil’s deep waters. Indeed, Petrobras alone will invest an estimated US$90 billion in deep sea developments between 2010 and 2020, while the industry’s annual expenditure will hit $35 billion by 2014 according to energy business advisor, Douglas Westwood. This will see investment grow by an annual rate of eight per cent – the majority of which will be in the Golden Triangle – with US$63.6 billion to be set aside for drilling and competition wells, and another US$62 billion earmarked for pipeline and control lines. As it mobilises to meet this demand, however, the industry is also proving remarkably nimble in its attempts to improve existing processes, and to provide operators with more robust, economically viable ways of conducting deep sea operations.

A paper released at Brazil’s Offshore Technology Conference Brazil (held in October 2011), written by specialists from Lockheed Martin MS2, highlighted the benefits of new, autonomous underwater vehicles in deepwater life of field integrity management. In place of ROVs (Remotely Operated Underwater Vehicles), autonomous vehicles could reduce the cost of operations, and provide faster inspection and automatic change detection without the need for dynamic positioning. Clive Packman and Nils Braaten from Roxar Flow Measurement and Emerson Process Management also identified how emerging markets like Brazil were in need of a better retrieval system for subsea sensors and transmitters (used to measures pressure, temperature, and erosion or corrosion in trees, manifolds and other process systems). Roxar’s development of the first industry-wide subsea sensor retrieval system – utilising an ROV – was recently evaluated by a consortium that included BP, Chevron, Shell, Total and Statoil.

The difficulties facing deep sea operators were highlighted most dramatically in April 2010, however, with the blowout of BP’s Macondo well in the Gulf of Mexico. Yet, while the political, environmental and economical repercussions saw the offshore sector shaken to its core, the industry has also been decisive in its response – applying its high intellectual capital and aptitude for innovation to develop new approaches to avoidance planning. This has led to pioneering new containment systems, for example, which can be deployed in a variety of global scenarios, as well as new blowout preventers and riser disconnect packages. Response procedures have been improved and major steps have been taken to restructure the agencies responsible for regulation.

Taking the reins

But in addition to demonstrating the world’s depleting reserves of easy oil, deepwater developments are also a reflection of a completely unforeseen growth in the oil clout of the Americas. While countries like Brazil and Venezuela are all contributing to this Latin American oil boom, North America has also begun to rein in its oil and gas demand. Indeed, this paradigm shift has flown in the face of all previous industry projections. In the late 1990s, North America was proposing the construction of a string of LNG terminals along its East coast to handle imports from the Middle East as its own resources dwindled. Now, however, the US is poised to meet 47 per cent of its own natural gas needs by 2020, and this has been achieved through a game-changing technological breakthrough in the field of shale gas. Throughout the last decade, the US has employed horizontal drilling and hydraulic fracturing to access natural gas contained within fine-grained sedimentary rocks. This so-called ‘unconventional gas’ has rejuvenated the US’ domestic gas supplies – with large shale plays found in Texas, Arkansas and Dakota; the country has an estimated 110 years of reserves, and the clear potential to commence overseas exports.

Indeed, the last decade has seen the natural gas market entering something of a golden age. It currently meets over 21 per cent of the world’s energy needs, and consumption is poised to outstrip oil within the first quarter of this century. But while large natural gas discoveries have justified the construction of dedicated pipelines or integrated LNG projects, smaller reserves often do not, and this scenario has led to a number of breakthrough innovations – many of which are set to be deployed throughout the next decade. Shell are now working on the construction of the world’s first floating LNG platform: a 488 meter long, 74m wide facility that will be moored 200 kilometres offshore from the coast of Western Australia. This will eliminate the need for pipelines and the risk of land-based LNG plants running out of gas reserves, as the platform can simply sail to new gas fields once the first is depleted. Shell plans to deliver 4.7 bcm per year from 2017 and, in the wake of rising gas prices, LNG has become one of the most attractive methods of transporting gas to the end market, and now represents one of the fastest growing energy sectors worldwide.

It also appears that as easily accessible oil reserves deplete within dominant markets like the Middle East, the West’s inferior resource endowment has ironically given it the upper hand as ‘unconventional’ sources of hydrocarbons play an increasingly important future role. What is clear, however, is that meeting the world’s growing energy needs will see oil and gas deriving from an increasingly diverse range of sources, from the shale plays of North America, to the tar sands of Canada, tight gas operations in Australia and the heavy oil of the Gulf. As the days of easy oil and gas come to an end, and operators go to increasingly extreme lengths to meet global demand, costs are also sure to continue to spiral. That said, the volatile, fast-paced nature of the industry has always made it problematic to predict what is around the corner. The industry’s trajectory is at the mercy of global politics, economic upheavals, technological game-changes and the varying cost of labour and finance. With all of these factors constantly in play, it is unsurprising that the oil and gas industries continue to challenge expert opinion and pre-conceived notions for the future.