Saturday, October 31, 2009

Oil Supply And Demand

Julian Murdoch thinks oil supply and demand are out of whack.

OPEC has publicly stated that they believe inventories in developed OECD countries to be equal to roughly 61 days of demand—a number OPEC is none too happy about. They'd prefer the world to be constantly on the brink of running out (that is, 55 days or less). So with all of this supply, you'd expect to see OPEC talking production cuts—or at least a drop in the price of oil.

Instead, last week the group discussed the need to increase production, so as to keep oil under $80—it seems even OPEC thinks prices are still too high. As OPEC Secretary General Abdalla El-Badri told Bloomberg:
"Anything above $80 will really hamper economic growth. Watch the floating storage, if that is eliminated, and watch the stocks, if they are at 52, 54 days, then OPEC will take action."
Of course, if the floating stocks (that is, oil stored at sea) remain at current levels and inventories stay full, then apparently OPEC will just sit back and rake in the money.
He does not say we have an oil bubble. But if you consider that supply is high and yet prices keep rising it seems obvious that there is a bubble.

And it may be more of a bubble than people think. There are a lot of new technologies becoming available sooner or later that will cut the cost of drilling wells. One of them is laser drilling of wells.
Laser drilling, Graves said, would have several advantages over conventional drilling:

-- Costs could be at least 10 times lower and up to several hundred times less than wells drilled with rotary rigs. For example, a typical, 10,000-foot gas well in Wyoming's Wind River Basin costs about $ 350,000 to drill. Laser drilling would drop that cost to $ 35,000 or lower, Graves said.

-- A laser drill's "footprint" -- the amount of surface space it occupies -- could be as little as 100 square feet, or even less with some models.

-- The laser rigs could be transported to drilling sites in one semi-trailer load. Conventional rigs take up several thousand square feet of space and require numerous truck trips to haul equipment.

-- Lasers could drill a typical natural-gas well in about 10 days, compared with 100 days for some conventional wells.
"You're looking at three months of disruption versus a week or so of disruption with a laser drill," Graves said.

-- Lasers could be programmed for precise well diameters and depths. In addition, they could alternately drill coarsely to deliver mineral samples, finely to vaporize rock and leave no waste materials, or with intense heat to melt the walls of well bores, thus eliminating the need to place steel casing in wells.
He goes on to say:
Compare this with the peak oiler theory:
So, as we slide down the Hubbert's Curve, not only will the rate of production decrease, but the cost of that production will increase.
Laser drilling may actually make production of the "hard to get" oil and gas easier than production of the stuff which was "easy to get". This would cause a lot of havoc with reserve numbers because commercially unfeasible small/deep deposits would suddenly become "proven" (i.e. exploitable with current technology).
Well OK! That article was from 2005 and so far the laser technology is not commercial despite advances in high power solid state lasers. Here a nice video about solid state lasers. However, the technology is advancing rapidly so it is only a matter of time.

But that is not all there is going on in the field. Exxon-Mobile announced in 2005 some very simple ways that it could reduce the cost of drilling substantially.
Exxon Mobil Corporation announced today that its drilling organization has developed an optimization process that consistently reduces the time required to drill oil and gas wells by up to 35 percent. ExxonMobil's Fast Drill Process (FDP) achieves this breakthrough performance by using real-time, computer analysis of the drilling system's energy consumption. This analysis, in turn, helps improve the management of the factors that determine drilling rate, such as weight on the drill bit, rotary speed and torque.

The result is significantly faster drilling rates and reduced downtime.

The company has used FDP in many of its operating areas, and the process improves performance in a broad range of conditions: hard and soft rock, deep and shallow wells, high- and low-angle wells in a variety of mud weights. It has shown comparable success in exploration, delineation and production wells.
So that technology is probably already being deployed. It may explain in part the recent reduction in costs for drilling natural gas wells.

There are other techniques that are coming to fruition. Here is another one from 2005.
Expectations are that widespread adoption of microhole technology could spawn a wave of “infill development”—drilling wells spaced between existing wells—that could tap potentially billions of barrels of bypassed oil at shallow depths in mature producing areas.

At the same time, microhole and related micro-instrumentation technologies offer the opportunity to dramatically cut producers’ exploration risk to a level comparable to that of drilling development wells.

Together, such efforts hold great promise for economically recovering a sizeable portion of the estimated remaining shallow (less than 5,000 feet subsurface) oil resource in the United States. The Energy Department estimates this targeted shallow resource at 218 billion barrels. Recovering just 10 percent of this targeted resource would mean a volume equivalent to 10 years of OPEC oil imports at current rates.

In addition, the smaller “footprint” of the lightweight rigs utilized for microhole drilling and the accompanying reduced drilling waste disposal volumes offer the bonus of added environmental benefits.

The microhole initiative is in line with the Bush Administration’s goal, set forth in the National Energy Policy, of promoting “dependable, affordable, and environmentally sound” energy production.
I knew it. That evil Bush was in cahoots with the oil companies to increase American oil supplies and reduce American dependence on the terrorist supporting nations of the Middle East. How evil can you get?

How about another Exxon project to lower the costs of drilling for natural gas?
"We're about 15 minutes away from a new frac being born," Randy Tolman, Exxon's project coordinator for the Piceance Basin, shouts over the noise. He invented this faster method of fracturing, or "fracing," the underground layers of rock and sand to unlock natural gas.

Exxon aims to export the new process to the unconventional natural gas reserves it is accumulating around the world. Drilling for more natural gas could make Exxon a lot of money as Americans demand cleaner fuel because natural gas doesn't emit as much pollution or greenhouse gases as oil and coal when burned.
Do you suppose the Greenhouse gas hysteria is a plot by the oil/natural gas companies to get government to shut down their competition? I wouldn't put it past them. Thomas Edison used similar methods to get his competition, the George Westinghouse Company's Tesla invented AC electricity system, shut down. Fortunately it didn't work. Will the CO2 hysteria work against the coal companies? So far the answer is no. It all depends on the ability of the interested parties (Al Gore will make tens of millions) to get the Senate to pass the Cap Coal and Tax the People Bill. They appear to be stymied. Good.

Ah but we are not done yet. Jared Potter is working on a water/flame drill in order to tap deep geothermal energy sources. Obviously it might also be useful for oil and natural gas.
Conventional geothermal power plants draw upon underground aquifers of hot water relatively close to the surface to create steam that drives electricity-generating turbines. The problem is that underground water currently tapped for geothermal is found mainly in the western United States. But the technology Potter is developing could drill much deeper, meaning geothermal energy could be generated nationwide.

According to a 2006 MIT study, so-called Enhanced Geothermal Systems could potentially supply 2,500 times the country’s current energy consumption. That grabbed Google’s attention, and last August the Internet giant’s philanthropic arm agreed to invest $4 million in Potter Drilling as part of its green energy initiative.

The tech twist: Potter drills not with hard-as-diamonds bits but with water—extremely hot water. (More on that in a bit.) The goal is to radically cut the cost of EGS to spread the technology to regions that rely too much on coal for generating electricity but are not suited for solar, wind and other renewable energy generation.
You can watch a video of the drill in operation. Here is some of what the people who posted the video have to say:
Inspired by designs created by his father decades ago, Jared Potter is building an arsenal of ultra-powerful flame-jet drills. As seen in the NatGeo video above, one prototype directs a jet of burning hydrogen at 3200°F against a slab of solid granite. The rock doesn't melt, as one might expect under such a blast of heat; instead, the high temperature causes the rock to fracture as it expands along existing micro-cracks in the material. After a short exposure to the flame-jet drill, a gaping, perfectly smooth borehole has been created in the granite.

For deeper drilling jobs, in wet, high-pressure conditions where traditional bits jam and break, Potter has another prototype. This one burns at a toasty 7200°F, but the flame is used indirectly, to superheat a jet of water, which in turn bores through the rock and simultaneously flushes the fragments out of the borehole.
The drill could drill at up to 100 ft an hour. Not as fast as conventional drilling, however there would be no need to lift mile long strings of pipe out of the well to replace drill bits. Or at least it wouldn't have to be done as often. And when you are replacing a drill bit you aren't drilling.

And that is not the only place such work is being done. The Swiss are working on it too.
Heated oxygen, ethanol and water are pumped into the reactor burner through various pipelines and valves and mix under temperature and pressure conditions, which correspond to the supercritical state of water (see box). The auto-ignition of the mixture is being observed through small sapphire-glass windows by means of a camera. A newly developed sensor plate measures the heat flux from the flame to the plate and records the temperature distribution on the surface for different distances between the burner outlet and the plate.

Based on these experimental results, conclusions are drawn concerning the heat transfer from the flame to the rock. “The heat flux is the crucial parameter for the characterization of this alternative drilling method”, explains Philipp Rudolf von Rohr, professor at the Institute of Process Engineering of the ETH Zurich and supervisor of the three PhD students.

During the experiment, the flame reaches a maximal temperature of about 2000°C. Rapid heating of the upper rock layer induces a steep temperature gradient in it. “The heat from the flame causes the rock to crack due to the induced temperature difference and the resulting linear thermal expansion”, explains Tobias Rothenfluh. The expansion of the upper rock layer causes natural flaws, already existing in the rock, act as origin points for cracks. Disc - like rock fragments in the millimeter scale are formed in the spallation zone. These particles are transported upwards with the ascending fluid stream of the surrounding medium. “One of the main challenges of the spallation process is to prevent the rock from melting, whilst it’s being rapidly heated”, says Tobias Rothenfluh. “The lager the temperature gradient in the rock, the faster you can drill.”

The method is particularly suitable for hard, dry rock, normally encountered at depths greater than three kilometers. In such depths conventional drilling bits wear out much faster, and their frequent replacement, renders the conventional drilling techniques uneconomic: a 10 km borehole costs around 60 million US dollars.
And that is just what we know publicly. Who knows what is going on in labs all around the world that is currently being kept secret for commercial advantage?

Bottom line? We may be running out of oil. Or not. But I do think fears of a near term peak oil limit on production are greatly exaggerated. Near term our limits are political not geological or technological. But isn't it always that way? And you know what they call a system where businessmen are in cahoots with the government to restrict the competition? National Socialism.

H/T pbelter at Talk Polywell

Cross Posted at Classical Values


Don-n-ABQ said...

A couple thoughts:

1) What ever happened to the fine idea over at Particle Drilling Technologies?

2) I am guessing that the E&Ps will have to come up with some major advances in drilling technology just to keep even with the ever increasing environmental scrutiny. The Naderites will increase drilling costs with new legislation, rules, and requirements to treat water, cap & trade, etc., so for ever new "green" rule from the EPAs out there, there will have to be a corresponding new technology cost cutting measure just to stay even. The long term net-result is they cancel each other out and the price of crude and NG don't change. But, if they don't offset the coming "green rules" with new tech the results could be disastrous and crude prices would go through the roof.

Neil said...

The technological stuff is interesting in the medium term, but there's a non-bubble reason why short-term oil prices might be rising.

The negotiations over Iran's nuclear program are morphing into a crisis, and nobody but the Israelis seem to be in crisis mode. The Russians, Iranians, and the Obama Administration are all acting as though they're holding the high cards with no reason to compromise and no reason to back down.

Russia is tacitly acknowledging they've been helping Iran with warhead designs, not acknowledging that Obama probably doesn't politically have the option of letting Iran get a bomb. V.P. Biden is touring East Europe not-so-subtly claiming that Russia's day is over and anybody that wants a "color revolution" can get it--not acknowledging that if Russia loses Ukraine and Georgia, soon there's not going to be a Russia anymore. Iran is acting crazy, as usual, not acknowledging that they've finally managed to truly scare the socks off the Israelis. If anybody at this table is bluffing, they're doing an awfully good job of it.

What this means is that there is a heightened risk that one of these parties is going to mis-calculate and start a war. If there is a war, the first thing that's going to happen is that Iran is going to shut down the Straits of Hormuz to oil shipments.

It's not for sure, but it's definitely a risk now. And it's a pretty good reason for floating reserves and high oil prices.

Oh, and just in case you needed help staying up at night, the U.S. has begun preparations to tap the Strategic Petroleum Reserve.

M. Simon said...


There is a reason why Russia gets no respect.

1. Their hapless effort in Georia
2. Their population is declining at the rate of 1 million a year

It is just a matter of waiting until they are weak enough to pick the carcass.

You can't do business with them.

Then read this about the oil powers:

Oil Outlook

It is long but very good.

Don-n-ABQ said...

Matt, did you have any thoughts about Particle Drilling Technologies?

Neil said...

Simon -

Oh, I agree; in the medium-to-long term, Russia is in deep doo-doo. But right now, they could pretty easily start a war. The concern is that perhaps the Obama administration is mostly thinking about the long term, and underestimating the pain that Russia can bring to bear in the here-and-now.

Or, perhaps they know something about Russia that I do not. I'm not predicting anything--I'm just noting that it's possible the run-up in oil prices is partly a result of the heightened risk of supply disruptions, not just bubble behavior.

LarryD said...

Looking at the EIA reports, it seems that Coal is not really in competition with Oil, some with Gas.

I.e., Coal is primarily a fuel used to make electricity, and it's the cheapest one. Gas is also used to generate electricity, it's not quite as cheap as coal, but you can fire up a gas turbine quickly.

Oil's big usage is in transportation fuels.

If fusion comes in, the biggest impact is on Coal and Gas, not Oil. Same results if modular late Generation 3 or Generation 4 fission reactors are deployed in large numbers.

In fact, that is an issue that must be addressed if Coal is to be retired: What do the Coal miners do for a living? Until there is a good answer for that, the Members of Congress from the major Coal producing states will do their best to block anything that hurts the Coal industry.

Don-n-ABQ said...

RE: Russia

I guess I am not as down on Russia as Neil is.

I think that over the long term, looking out 50-years, they want to raise their GDP per-person and make things better for their people.

They have over 60 billion barrels proved reserves of crude oil and almost 150 trillion cubic feet of natural gas proved reserves. Both of these numbers will probably go up as Arctic drilling techniques are improved. They also have a basket full of other natural resources, including the number one, water.

I think that their long term interests will come to be that they want to sell those assets to China, India, and Western Europe.

I don't really think that they want to jeopardize this.

Right now, when they turn on the news all they hear is "China" and the "United States". So, they have a problem because they used to get a lot of attention back in the day. They want publicity too. They want respect. They want to be heard. So, they say things that basic equate to: "Don't forget about us."

But, I don't think they will do anything drastic because of one thing: greed.

The country is controlled by a group of billionaires who like having inside information and dirt on other people, and will do things to protect that power and wealth.

So, if we give them some attention (they are like a child), I think that their goals will align with us, they want a stable environment in which to sell their goods into. They are dependent on it. The lower oil and NG prices go, the more their economy hurts.

Now, that doesn't mean that there won't be individuals within the country that don't want more for themselves. The biggest problem within the country (and the one that Vladimir Putin is most afraid of) is infighting.

So, there will be occasional power struggles within the country over money, and one of these might "go off the reservation." But, the majority on the whole want a steady rising economy.

This biggest problem Russia has is the level of corruption. All countries have corruptions, bribes, scandals, crime, etc. But, what matters is the percentage break-point. If Russia lets the corruption go to far they will become the next Argentina (a country that has had tremendous potential for years, but can't seem to get past the break point of corruption).

Russia must realize that they must keep corruption to a certain level and try to control it or it will spin their economy around and around.

Lets face it, with most countries in the world the leadership is just the most powerful mob that is in control at the time. But, if they want long term stability they must at least share a little with the masses. They can't let things get to lop-sided.

I think Putin knows this fact very well. Putin maybe a lot of things, but he is not dumb.

I guess I just don't think that Putin or Russia wants a war with anybody. They have assets and know they can sell those over the next 100 years. I can see border disputes over these resources, like the one they have with Finland and Norway over the offshore rights in the Arctic Ocean. Or over other resources on their southern border. But, for the most part, they know where the bread is buttered.

So, I guess I am not as negative as you are. And, if they can get leadership that takes a long-term view, they could actually be sitting pretty with declining birth rates and resources to sell to the rest of the world.