Posted on 05/21/2008 10:25:36 AM PDT by Red Badger
High prices still haven't prompted companies to use advanced extraction methods.
Even with record-high oil prices, about two-thirds of the oil in known oil fields is being left in the ground. That's because existing technologies that could extract far more oil--as much as about 75 percent of the oil in some oil fields--aren't being widely used, according to experts in the petroleum industry.
Several well-established technologies, including "smart oil fields," exist that could significantly boost the supply of petroleum from oil reservoirs. But a lack of investment in such technologies, particularly by the national oil companies that control the vast majority of the world's oil reserves, is holding back implementation. When oil is drawn from a field too quickly, or from a bad location, or with the wrong kind of well, large amounts of oil can be left behind, says Richard Sears, a visiting scientist at MIT who has served as a vice president for exploration at Royal Dutch Shell, based in the Netherlands. But the best technologies for managing an oil field require up-front investment--when an oil field is mapped and characterized and the first wells are drilled--and the payoff can take decades.
In most oil reservoirs, the oil resides in porous rock in geologic layers that are tens of meters thick but stretch for miles. A conventional oil well is a vertical shaft, so it is in contact with only a narrow cross section of the reservoir. Such a well depends on oil percolating through microscopic pores over long distances. That can slow production, and often oil can be stranded inside the irregular geometry of the oil field.
For 15 to 20 years, however, it's been possible to drill horizontal wells. These follow along the length of an oil field, so that the well is in contact with oil for miles, rather than for just several meters. What's more, advanced imaging technologies and new drilling rigs have made it possible in recent years to drill to an accuracy of one or two meters, Sears says. The increased precision in drilling allows oil companies to stay close to the top of the reservoir, where the oil is, and away from the water that can exist in the reservoir.
It has also become possible to make "smart wells" that include sensors that can survive the extreme temperatures and pressures found deep underground. These allow oil companies to detect, for example, when water, instead of oil, is being pulled into the well, and to quickly shut off production from that area, while continuing to produce from other sections of the well.
Such smart oil fields have started to become more common for international oil companies such as Shell, Exxon-Mobil, and BP. But they still aren't used in most oil fields. And their use is particularly low in fields run by national oil companies, says Larry Schwartz, a longtime researcher and scientific advisor for Schlumberger, a Houston-based company that provides various services to oil companies.
Schlumberger historically focused on providing services at the "front end," he says, which includes taking measurements, such as of the amount of oil and how easy the oil will be to produce, and "drilling sophisticated wells." But since oil prices have been high, the company's biggest revenue stream has come from projects related to improving existing wells, such as by fracturing rock underground to try to improve oil production at conventional wells that have stopped producing as much as they used to.
Steven Koonin, BP's chief scientist, says that cutting-edge research could lead to automated oil rigs on the sea floor, ultra-deep-water ocean drilling, and arctic exploration and production, as well as to technology for extracting oil from unconventional sources, such as shale. But although oil prices have been higher than $60 a barrel for almost three years, Koonin says that for the most advanced technologies, "oil prices will have to stay high for a couple of years longer before companies think they can make big investments."
I should have added “per gallon”.
It doesn’t really matter, and conservatives like Sean Hannity don’t really understand the economics of the oil industry even though he tries to explain it to his listeners.
He’s got the gist right, but it’s WAY more complicated than he understands.
For one thing, let’s understand that most refineries are not owned by the oil drillers. They are totally dependent on whatever crude they can buy from whatever source. They are as much the victim as the consumer when it comes to the price of oil. They pay whatever it takes to get the feedstock.
And I know this is hard to understand, but this is even true for oil companies who both explore and refine. Historically for those “integrated” oil companies who both produce and refine, one side is making a profit and the other side is not.
Believe it or not, now is a bad time to be in refining. Those managers are trying to time the market so that they don’t buy $133 oil when their competitor buys $125 oil two days later. It kills them. Refining sucks, especially in a volatile market.
Then why are profits breaking records each quarter? The oil companies just went before the Senate to audaciously defend the billions in subsidies given them each year.
Won't the sheiks decide they can undercut my price?
So I have a hard time justifying that investment.
For a preview of the next logical step, go to "Department of Agriculture" and click on "Farm price supports."
Your experience with the cycles in oil mirrors mine. Maybe not as many downturns in my 30, but I soon figured out that getting all the way to retirement was a pretty good accomplishment.
Same observation re profits in one part of the business vs. another. Refining was under extreme competitive pressure pretty much the whole time; plus, since refineries are pretty often located near metro areas, the need to plow back capital to meet environmental regulations has been a real impediment.
??? It was 12 cents a gallon 2 or 3 months ago. I don’t know about your town but it’s not uncommon for there to be a 10 cent or more variance between stations in mine.
“Then why are profits breaking records each quarter?”
When you’re talking billions of barrels you are talking about some very big numbers. Many people are misled by this. So ... here’s an example for your AP students
Let’s suppose I buy $1.00 worth of crude for my refinery and sell the finished product for $1.05. I’ve made a 5% profit (not all that far off how refineries are performing economically these days).
Now let’s suppose my crude supplier charges me $2.00 for that barrel I run through my refinery. I sell it for that same 5% profit when I sell it for $2.10.
My profit was $.05 and now it is $.10. But it is still the same return on investment.
Oh my gosh! That’s a 100% increase in profits! Outrage! Windfall! You’ve done nothing to deserve this (ignoring the fact that I invested twice as much money as before). We’re in pain and we think we’re being screwed. Increase taxes or come up with some sort of penalty for this outlaw company!
Well, you may be getting screwed, but it isn’t by my company. If you want lower prices (and to do something constructive about the pain vs vindictive), find competition for the guy who sells me crude. Perhaps by truly opening up drilling right here at home -— ANWAR, offshore, government land.
On this we agree 1000%! But the oil companies are making only half hearted attempts to do this because they want to divert the pols attention in these hearings. These companies should be taking their case to the public in ads and open town meetings and every other medium available. The public in an election year will take those politicians to the proverbial woodshed. But that's not happening. Because if they do DRILL ANWR like a $10 hooker, it will produce a glut that will drop the prices down to the level of the 1960s and literally kill that golden goose. However it will only start producing viable product after several years, but the pressure will still be on the companies to do something now and that goose is still gonna be dead.
No, I’m afraid you are the one who needs to re-read the article. Seems to me the execs and I are saying the same thing:
“Profits have been huge “in absolute terms,” conceded J. Stephen Simon, executive vice president of Exxon Mobil Corp. (XOM), but they “must be viewed in the context of the massive scale of our industry.” And high earnings “in the current up cycle” are needed for investments in the long term, including when profits will be down.”
You're right. And that shows what the people who know what's going on are really thinking. They're afraid oil won't even stay above $50-60.
“But the oil companies are making only half hearted attempts to do this because they want to divert the pols attention in these hearings.”
In my experience with these sorts of hearings, and it is considerable, the companies dread them because they are nothing more than grandstands for the Senators to demagogue the public with economic untruths, half-truths, fantasies and red-herrings. The hearings are wanted by government because it is a way to pretend they’re doing something when they in fact aren’t, and they are a way to transfer blame from the people who caused the problem to the people who are trying to solve it. After all, who REALLY makes money from high prices? The Government, via the taxes you pay on each gallon -— taxes which far exceed the profit on each gallon.
Add a reporting medium of journalists who are virtually economically illiterate and appearing in one of these hearings is about the last thing you’d ever want to do.
Hirsh is wrong and has been wrong for years.
So like squirrels, they're hoarding their nuts for the long anticipated winter. However those nuts would be much better spent on developing new technologies to sooner wean this country off the oily teat. I personally think that it's more practical to extract the oil still in the ground and drop the prices to 1960s levels than to pour $$$ into a technology that has yet to show itself as a viable alternative like hydrogen cell vehicles.
“In absolute terms (IOW, the perception of the public) things seem impossibly and obscenely high.” When he says “In absolute terms” he doesn’t mean “in the perception of the public”; he simply means in absolute dollars as opposed to ROI or return on investment. Perhaps he should use something like my simple $1 worth of crude sold for $1.05 example, but he mistakenly thinks that people can see beyond the astoundingly large numbers.
The Senators of course do nothing more than pander to the public misconception when in fact there is nothing impossible or obscene about the level of profits when considered from a “return on investment” basis. Some of the Senators know that the absolute dollar figures are virtually meaningless; however, none of them care because the purpose of the hearings is to put on a show. A “show trial”, so to speak, in the old Soviet sense.
What is obscene, the amount of tax income to government from high petroleum prices will never be the subject of such hearings -— nor will the truly obscene current pay and benefits and future retirement packages of the Senators themselves!
Can you give me specifics? This was the first I had heard of the guy. Do you argue (as I would like to believe) that there is tons of untapped oil out there-—and more important, that there are vast reserves that we haven’t even “though of?”
I agree with this as well. It's never really a good idea to tax the business sector. It slows the economy, I feel.
However I have to say that the airline industry was more passenger friendly when it was heavily regulated than in today's climate of deregulation. Regulation, not taxation.
But if the profit situation is as you claim, why don't the oil companies undertake a MASSIVE educational effort? If this were successful, they'd have the public off their necks and be free and clear. Unless they're afraid that somebody is going to come along and publicly blow this theory out of the water. Probably some economist. We both know that when properly tweaked a good statistician can make the numbers crunch any answer they wish.
“why don’t the oil companies undertake a MASSIVE educational effort”
That’s what Hofmeister has been trying to do for the last couple of years. See http://www.shell.com/home/Framework?siteId=us-en for Shell papers on energy profits, etc. Here again, the assumption is that intelligent free citizens will expend time and energy to become informed rather than relying on the boob bait thrown their way by those who wish to exploit the situation (see Ethanol subsidies and Archer Daniel Midland) or by an economically illiterate media whose whose fundamental economic interest is in exacerbating controversy rather than enlightening their audience. Not bloody likely, I’m afraid.
Of course it would help if other “thought leaders” (e.g., Congress) would take a responsible course as well rather than resorting to demagoguery. Don’t hold your breath.
Your observation about National State run oil companies certainly matches what I saw in my career. That and the negative effects of governmental “help” in managing private oil companies.
A parallel on a lower level would be the State of California’s putting itself smack in the middle of the electrical power generation business a few years ago. In very short order they had bankrupted the power companies and the state was experiencing blackouts. They distrusted a free market and were unable to actually run it themselves. What they were good at was demagogy and blaming the companies they effectively controlled. That government is best which governs least!
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