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One of the live oaks that bless my home

Monday, April 30, 2012

The Discrete Charm of Living at the Peak

In the summer of 1858, Edwin Drake punched 33 ft of cast iron pipe into the earth to prevent near surface water from collapsing the hole. He then lowered drilling equipment into the cased hole and used a steam engine to drill a successful, 69 ft deep well. On August 27th, shallow oil flowed almost to the surface and was recovered with a sump pump. Edwin Drake made absolutely no money on developing modern drilling technology and died a poor man.

The North American oil industry four years after Drake's well. The Phillips well is on the right, and the Woodford well on the left. Located in the middle of Oil Creek Valley (note the river at the right of the photograph), these two wells showed the early promise of the Oil Regions. The Phillips well was the most productive ever drilled to date, flowing initially at 4,000 barrels per day in October 1861. The Woodford well came in at 1,500 barrels per day in July, 1862. Source: Drake Well Museum Collection, Titusville, PA.

On January 10, 1901, captain Anthony F. Lucas drilled a well to a depth of 1,139 ft (347 m) near Beaumont, Texas. By chance, he created the "Lucas Gusher" that blew oil over 150 feet (50 m) into the air at a rate of 100,000 barrels per day (4,200,000 gallons per day). Because of that spectacular event, the modern oil industry was born overnight. By the end of 1902, more than 500 companies had been formed and 285 wells were in operation. Captain Lucas died penniless.

The Lucas Gusher, 1901, Photograph, 1901; digital image, (http://texashistory.unt.edu/ark:/67531/metapth41398/ : accessed April 30, 2012), University of North Texas Libraries, The Portal to Texas History, crediting University of Texas at Arlington Library, Arlington, Texas.

Now I want you to read loudly this magic word:

"Technology."

Did you hear yourself? Was the sound of your voice soothing? Almost like experiencing a church mass on a Sunday morning? If the answer is yes, you are one of the 300 million Americans, who religiously believe in the magic of technology that will see us through any difficulty whatsoever with almost no pain and multiple gains.

Enter the modern oil and gas industry in the year 2012.  Yes, my industry has created an unbelievable technology to invade the most inhospitable environments ever encountered by humans.  We now use the super machines that put to shame the U.S. space program and, in particular, the Apollo missions.

The Troll A platform is a concrete offshore natural gas platform in the Troll gas field off the west coast of Norway. It is the tallest construction that has ever been moved to another position, relative to the surface of the Earth, and is among the largest and most complex engineering projects in history.

Imagine that using this miraculous technology humanity's deep ocean scouts, otherwise known as the "Super Majors" and "National Oil Companies," decide to drill in 10,000 feet of water a 25,000 feet-long well that may encounter pressures of up to 20,000 psi and temperatures above 350 degrees Fahrenheit.  That well will be drilled 200 miles offshore by a giant, semi-submersible drill ship that costs 700 million dollars, and is operated by a crew of 200 people and dozens of people onshore, who watch the functions of the ship 24/7 via satellite links and massive computers.

Twenty five thousand feet (7,620 meters) is much taller than Mount McKinley and as tall as Gonga Shan (Minya Konka) in the Szechuan Himalayas.  On the seafloor, the well will be protected by a newly designed blowout preventer (BOP) rated to 20,000 psi. This BOP may weigh 500 tons and be 70 ft tall.  It will be quite a chore to transport this new BOP offshore and lower it through 10,000 ft of seawater onto a well head that might be 3-4 ft in diameter. The 20,000 psi BOPs do not exist yet and may be too large to fit inside the existing drill ships.

Now try to imagine 25,000 feet of high quality steel casing pipe, starting from the inner diameter of 36 inches or more, because its walls might be thicker and we still want to land a 7 inch pipe at the depth of 25,000 feet sub-seafloor.  Then imagine 25,000 feet of the thick-wall, steel production tubing that will be placed inside this casing to conduct flow of a supercritical hydrocarbon fluid, while undergoing wrenching thermal and chemical stresses for years.  Picture how difficult it will be to pump cement through 35,000 feet of drill pipe and return it along the fragile narrow space between the casing and the open hole.

One of the four new
ultra-deepwater drill ships for Noble Corporation.

When this well is successfully completed (do you see the risks?), it and other similar wells will produce through a giant floating platform that might cost 1,000 million dollars and employ many dozens of highly skilled personnel flown in-and-out by helicopters.

Let us go back to Colonel Drake and his technology.  Do you see the fundamental difference between producing 20,000 barrels per day of shallow oil from 5 simple wells that may cost 0.04 million dollars each, versus 20,000 barrels of ultradeep oil and gas from one well that will cost 200-300 million dollars?

In the first case, the initial and ongoing expenditures of energy were nothing compared with the heating value of the oil.  In the second case, in addition to the well hardware, we need to throw in two hundred miles of a seafloor steel pipeline or a bunch of tankers, seafloor facilities, ships, and other energy-intensive means of assuring production from our well for a few years.

Net energy gain from the ultradeep wells can be much, much less than producing the old East Texas oilfields.  Net energy gain from the various oil and gas shale projects can be less yet. And this is the main energy problem the twenty first century Earthlings face.  Most are ignorant, others are in denial.  The current state of affairs is not a prescription for a meaningful social discourse on what to do next, when the current global economy is strangled by the lack of cheap reliable crude oil. For those in chronic denial, please note that I said "when," not "if."

P.S. What I just showed you is translated into the official business language as follows:
Our analysis of the 50 largest publicly traded oil and gas companies (ex-FSU) shows that cost inflation continues to increase sharply within the global upstream oil and gas industry. In 2011, production costs increased by 26% while the unit cost of production increased by 21%, which was higher than longer term trends. In 2011, the marginal cost of production the same companies increased 10.8% to US$92.26/bbl.
"Era of Cheap Oil Over As Secular Growth in Upstream Cost Inflation Underpins Triple Digit Oil Prices," Bernstein Research, May 2, 2012.

Do not feel guilty if you can't understand this quote, but it surely is scary when you superimpose it on top of the actual declines of production by most major oil companies.

2 comments:

  1. Professor Patzek, thanks for another great post. Your description of an ultra deep well project is quite illuminating. The economics of such a project seem doomed to fail from my limited understanding of the oil business. At best it leaves the oil producer highly vulnerable to price decreases from demand destruction bought on by recession. With prices trending toward 2008 highs it seems a volatile environment to operate in.

    I have a theory that industrial civilization has not been profitable since global oil per capita hit its peak 1979. The economic systems of the world decided deficits do not matter, full speed ahead for perpetual growth on a finite planet, even if it requires trillions of dollars of debt. Like a store owner who reports growth in inventory every month in glowing reports, but quietly mentions that he had to borrow 150 thousand dollars to pull it off, while the store operates in the red. Yes inventory grew, but bankruptcy is assured, it only is a matter of timing. I point to the deficits of industrial countries to ultimately make my point. Industrial civilization is now like a ponzi scheme running out of easy marks, and the end of cheap oil signals the game cannot continue much longer.

    Also in the course of reading all the posts on your blog, I find you to be an honest and credible source of information on non-conventional natural gas plays. I know there is a plenty of venom floating around our country these days, and plenty of misinformation to boot. I guess my question would be what percentage of well casings fail? Is that number acceptable and will it actually be able to prolong industrial civilization? If it is truly in the best interest of humanity to continue industrial civilization is another question altogether.
    Thanks for your time and effort, this blog is a valuable resource.

    Mark

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  2. Tad,
    I've only recently begun following your blog but I'd like to say that I really appreciate your perspective.

    In this post you have asked your readers to use their imaginations and in your conclusion you wrote:
    "Most are ignorant, others are in denial."

    I would also like to add that most also lack real imagination.

    I'm not a petroleum engineer, tech or scientist, but I can easily imagine the things you are describing and appreciate the fundamental differences at play - despite my not being an industry professional.

    It's "funny" how many "experts" there are with no apparent ability to imagine beyond their narrow conception of the future.

    It's the blind leading the blind.

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