Here’s a classic story of market reaction to higher prices - you’ve got to love technology and innovation acting according to market forces:
As Big Discoveries Wane, Drillers
Wring Oil From Older Fields
Texas’ Permian Basin Perfects
Latest High-Tech Tricks;
Mideast Visitors Take Notes
Blasting With Walnut Shells
By JEFFREY BALL
Staff Reporter of THE WALL STREET JOURNAL
December 3, 2004; Page A1
ODESSA, Texas – Joseph Stephen helps operate oil fields in Oman, in the oil-rich Middle East. So why was he recently trolling for tips at an oil convention here in the Permian Basin, a tired old patch where output has been falling for three decades?
The oilmen in this barren area of west Texas have something Mr. Stephen keenly wants: expertise in wringing more oil from fields that are long past their prime.
“There are technologies here which we could use back home,” said Mr. Stephen as he walked around the Permian Basin International Oil Show, a biennial event that increasingly attracts foreign companies.
The world has a growing thirst for oil. But production either is falling or soon will be in Oman and other major oil-producing countries from the Middle East to South America to the North Sea. Meanwhile, large oil discoveries, known in the trade as “elephants,” are becoming rarer. So the global oil industry is putting more effort into a less-risky way of boosting petroleum supplies – squeezing more oil from fields already being pumped.
World-wide, the approach provided 175 billion barrels between 1995 and 2003, more than the 138 billion barrels that came from new discoveries, according to IHS Energy, an energy research firm in Denver. In the future, existing fields could yield 688 billion additional barrels of conventional oil by 2030, almost as much as the 732 billion barrels ultimately expected from fields yet to be found, according to an estimate made four years ago by the U.S. Geological Service.
“You’ve got the infrastructure already there” in older fields, says Pete McCabe, a USGS research geologist in Denver. “The cost of going in, and the risk, is relatively small, compared with going into a frontier area.”
Traditionally the strategy of big multinational oil companies, known as “the majors,” has been to flush easy-to-get oil out of virgin territory and then sell the ground to smaller firms, who then try to squeeze out a little more. But it has become increasingly difficult to find vast new oil deposits and meet global demand. And so even the majors, lured in part by high oil prices, are taking a closer look at mature sites. (See related article.)
In September, Royal Dutch/Shell Group said it will spend about $900 million this year on new projects to increase oil and natural-gas production from existing fields. The Anglo-Dutch company says it is studying techniques honed in the U.S., where oil production peaked around 1970 and has been falling ever since.
Statoil ASA of Norway and other oil companies have gotten 65% of the oil from Statfjord, one of the North Sea’s bigger and more mature fields, and they’re aiming to extract an additional 5% over the next 15 years. For ChevronTexaco Corp. of San Ramon, Calif., its Permian Basin operations are something of a global laboratory; techniques perfected here are increasingly exported to operations abroad.
The Permian Basin is especially steeped in the nuts-and-bolts work of tapping new oil from mature fields. A huge bowl containing layers of sedimentary rock, the basin is named for the geological age that produced one of the layers closest to the surface. This swath of flatland in west Texas and southeastern New Mexico, which covers at least 70,000 square miles, has been drilled and re-drilled for oil since the 1920s.
It still looks like Hollywood’s version of the oil patch, a land of mesquite trees and pump jacks, their arms rocking up and down, stretching toward the horizon as far as the eye can see. In some places, the smell of crude oil hangs in the air. But the glory days of the Permian Basin are long gone.
Oil production here has fallen to between 800,000 and 900,000 barrels a day from a peak of about two million barrels about three decades ago. The decline would have been far steeper were it not for the scrappy efforts of the local oil industry to keep output as close to flat as possible.
Oil companies in the basin have perfected a host of high-tech methods to flush out hard-to-reach oil. They’re drilling new wells between existing ones. They’re shooting up oil fields with a mix of water and carbon dioxide. And in a technique known as a “frac” job, they’re blasting the holes with everything from sandy gel to gravel to walnut shells. The idea is to create cracks, or fractures, in the rock and draw more oil into wells.
Thanks to these methods, the basin has slowed its natural decline and remains the biggest-producing onshore oil region in the contiguous U.S. Geologists estimate that the Permian Basin holds about 100 billion barrels of oil. They expect that about half that amount ultimately will be recovered, a proportion many other oil-producing areas would love to achieve.
Large-scale oil production here began with the 1923 discovery of a legendary gusher known as Santa Rita No. 1. When huge oil deposits were discovered in the Middle East in the 1930s and 1940s, oilmen from the Permian Basin traveled there to help ramp up the region’s operations. During World War II, the basin supplied a quarter of the world’s oil.
Since then, the quest for oil in the Permian Basin has pitted new technology against nature. Contrary to popular perception, oil typically doesn’t collect in massive pools. It sits as tiny droplets in the pores of sedimentary rock, similar to the way that water sits in a sponge, and must be sucked or flushed from the holes.
Tremendous force is required. A typical oil well is only about 8 inches in diameter but can run more than a mile deep. It has to pull oil from an underground region that often spans 40 acres.
How easy it is to extract oil depends on two features of the underground rock. One is the rock’s porosity, the size of the pores holding the oil. The other is the rock’s permeability, the size of the pathways within the rock that the oil travels through. Oil geologists hunt for rocks with big pores and big pathways.
Rocks in the Permian Basin tend to have small pores and small pathways. Yet the region continues to attract drillers because it has multiple layers of rock, each holding oil.
Extracting oil here was initially a simple process of putting a hole in the ground and watching the liquid shoot out. Because of pent-up underground pressure, early wells were prototypical gushers, often spewing thousands of barrels of oil a day.
Within a few years, drilling had released much of that pressure. Permian oilmen had to resort to artificial tools in order to pry the black gold from the ground.
The first was the pump jack, the familiar steel device with its rocking arm that lifts oil in what amounts to a giant version of an old-fashioned water pump. By the 1950s, that was no longer enough. The oilmen then took water, which naturally comes out of wells along with oil, and re-injected it into the ground to force out more oil. The process is called a “water flood.”
By the 1970s, the water floods needed an extra boost. The industry hit upon the idea of injecting a mix of carbon dioxide, or CO2, and water. Carbon dioxide dissolves in oil, producing two benefits. It swells the oil, which helps to force the oil out of the rock. And it makes oil less viscous, helping the oil to flow more easily.
Such techniques have breathed new life into an 86-square-mile oil field that Kinder Morgan Inc., a Houston company, operates in the northeastern part of the Permian Basin. Though tapped for more than a half-century, the field remains one of the biggest and richest in the U.S. Geologists estimate it was endowed with about three billion barrels of oil, about 3% of the Permian Basin’s total supply.
By the time Kinder Morgan acquired the field four years ago, oil production there had dipped to 8,500 barrels per day, a fraction of its peak output a quarter-century earlier. The company has since drilled about 200 new wells. It has undertaken frac jobs and similar “workovers” at about 500 older ones.
The Kinder Morgan field gets its CO2 from two sources. One is a natural-gas operation about 200 miles away, which produces the gas as a byproduct. The other is a natural underground store in Colorado.
Without the CO2 boost the field would be producing virtually no oil today, the company says. The fluid coming out of the field today is a mix of 94% water and 6% oil. Even that proportion yields 31,000 barrels of oil per day – nearly four times the amount pumped from the field at its production nadir in the 1990s.
“Essentially, this is a water-treatment facility that skims a little oil off of it,” says Pete Hagist, who manages the Kinder Morgan field.
The company in 2004 will spend a total of $300 million to get more oil out of the field. Visitors from various oil-producing companies, worried about their aging oil fields, increasingly are dropping by for a first-hand look. Lately, they’ve come from Norway, the United Kingdom, China, Canada and Mexico.
On a recent day, Mr. Hagist donned a hard hat and dark safety glasses and played tour guide for two visiting Nigerian oilmen. Arrayed before them were hundreds of wells, each about 300 yards apart. Below ground, a maze of pipes carried CO2 and water around the site.
The nerve center of the operation is a group of buildings in the center of the field. In one, a technician sat before giant computer screens and monitored the precise flow of the fluids.
“Get the dregs – that’s what we do,” explained Mr. Hagist, standing beside a vibrating pump attached to the CO2 pipeline. “There is still a lot of oil here, but it takes a lot of finesse to get it out.”
One visitor was Anthony Onoriode, chief executive of Petro-Scanalog International Ltd., a Nigerian oil-services company. Overall oil production in Nigeria is rising because of large offshore projects developed by the majors. But yields have fallen at onshore fields, which the government is now parceling out to local businesses.
Mr. Onoriode is part of a group of investors who received a small onshore field. Some of its wells already had been plugged. Those still pumping produce 80% water and 20% oil, he says. Though that represents a far better mix than what Kinder Morgan gets from its field, previous owners hadn’t considered it economical.
Mr. Onoriode wants to expand production. “For the country to develop, we need to go into this,” he said.
That view is shared by Mr. Stephen, the oilman from Oman who recently attended the convention in Odessa. Oil production in Oman has fallen by about 25% in the past four years, a decline that most experts expect will continue.
The Indian-born Mr. Stephen, 48 years old, moved to Oman two decades ago to enter the oil business. Today he’s general manager of Special Oilfield Services Co., based in the capital, Muscat.
At the Odessa oil show, he stopped at the booths of several local companies selling technologies he thought could be used in Oman’s mature fields. Among them was Downhole Fluidics Inc., a Midland, Texas, firm that offers a technique to clean clogged pores in the depths of old oil wells. Another was Hy-Bon Engineering Co., of Midland, which builds equipment for the removal of gases that build up in wells and make it harder to pull up oil.
At each stop, Mr. Stephen handed out his business card, inscribed in both Arabic and English. “Some of the stuff I’ve seen here,” he said, “I’ve not seen anywhere else.”
Write to Jeffrey Ball at email@example.com