Articles Posted in Oil and Gas News

The oil and gas industry has always been cyclical. Always has been and no doubt always will be. $20 per barrel oil is not new. Just during my career, there have been three substantial downturns in oil prices prior to the one we are experiencing today. These happened in approximately 1970, the mid-1980s, in the late 1990s. Each downturn was followed by a tremendous uptick in prices.

Keep in mind that the current issues facing the oil industry are not from a single cause. In a sense, the industry is facing a multiple whammy. First, our country was experiencing a substantial oversupply of oil going into the current situation. Many oil companies continued to produce, despite the oversupply, because increased production resulted in higher stock prices which in turn resulted in higher bonus for officers of the oil company. To this extent, some oil companies have brought this situation upon themselves. Secondly, the production war between Russia and Saudi Arabia exacerbated the oversupply and helped drive the price of oil down. Third, as the price of oil declined, the value of individual oil company’s reservoirs declined. In the cases where reserves were used as collateral for loans, the bank would then require either repayment of at least a portion of the loan or new collateral for the loan. Oil companies that cannot comply default and/or file bankruptcy. Fourth, the covid 19 virus creates staffing issues for oil companies, both in their offices and in the field. Fifth, shelter in place orders have resulted in drastically reduced demand for oil and gas. Finally, all of these factors make lenders and investors very nervous and so new money for exploration, production and pipelines is becoming more scarce.

There has been a lot of discussion in the industry about the appropriate response to these factors. Some have suggested the imposition of tariffs on imported oil. Others have suggested direct federal assistance to oil companies. Unfortunately, there is no consensus in the industry on what solution might help, or even as to whether any solution is called for. The smaller independent companies appear to prefer some kind of federal assistance. On the other hand, it appears that many of the large oil companies, who are better equipped to weather the storm, would prefer to let the downturn play out and then gobble up the smaller independent oil companies who can no longer stay in business. There are others who fear that government assistance now means government overregulation in the future. Anyone who remembers the draconian and impossibly complex oil allocation and pricing regulations of the Carter Administration knows just how uneconomic and illogical government regulation can be.

A well operated by Chesapeake Energy Corporation experienced a fiery blowout on Thursday, January 30, 2020.  The well, the Daniel H 1 H, is located in Burleson County, Texas near Deanville. The well is in an area where Chesapeake is drilling long lateral well bores to develop Eagle Ford shale deposits. Two of Chesapeake’s subcontractors, C.C. Forbes and Eagle Pressure Control, were operating a service rig to install new hardware on the well at the time of the accident. Unfortunately, three employees of these subcontractors were killed by the fire. News reports indicated that Boots & Coots, a well control company now owned by Halliburton, was hired to get the well under control and put the fire out.

KBTX Photo

As production in Texas’ Permian Basin increases, so does the industry’s need for pipelines to transport production to treatment facilities and markets. Kinder Morgan, EagleClaw Midstream Ventures and Apache Corporation recently announced they have signed a letter of intent to build yet another oil and gas pipeline, to be called the Permian Highway Pipeline Project (PHP Project). The 42 inch pipeline will be designed to carry about 2 billion cubic feet per day and will be about 430 miles long, from Waha hub in Pecos County, Texas to several liquid natural gas facilities on the Texas Gulf coast. (Waha is a West Texas trading hub and pricing point). It appears from news releases that much of the pipeline capacity will be used to transport production by the three partners, but they are apparently also considering adding enough capacity to transport production from other companies.

ExxonMobil and Plains All American Pipeline have also announced that they have signed a letter of intent to build a common carrier pipeline from Wink and Midland, Texas to Webster, Baytown and Beaumont, Texas.

If you get a call from a landman representing a pipeline company, do yourself and your property a favor: do not try to negotiate a pipeline easement without the assistance of an attorney experienced in this area. The truth is that you don’t know what you don’t know, and in all probability you will have to live with your mistakes for many decades.

Economists at IHS Markit  recently issued a report (summarized here) that predicts that oil production in the Permian Basin will almost double by 2023, increasing by 3 million barrels per day (mbd) to 5.4 mbd.  That level of growth will account for more than 60% of net global oil production. As Daniel Yergin, vice-chairman of IHS Markit indicates, “(i)n the past 24 months, production from just this one region—the Permian—has grown far more than any other entire country in the world. Add an additional 3 mbd by 2023—more than the total present-day production of Kuwait—and you have a level of production that exceeds the current production of every OPEC nation except for Saudi Arabia.”

In a separate report, summarized here, IHS Markit predicts that natural gas production will rise in the United States by almost 8 billion cubic feet per day (bcf/d) or more than 10 percent in 2018 alone. Altogether, U.S. production is expected to grow by another 60 percent over the next 20 years, the report says. In the Permian Basin alone, production of both natural gas and natural gas liquids (NGLs) are  expected to double from 2018 to 2023, reaching 15 bcf/d and 1.7 mbd, respectively.

The Permian Basin

As readers may recall, the US Environmental Protection Agency published a draft report in 2015 that concluded that there was no evidence that hydraulic fracturing (“fracing”) led to widespread, systemic impacts on drinking water resources in the United States.

Environmental groups went ballistic over this conclusion. Bowing to public pressure, the EPA decided to rewrite the report. In 2016, the EPA published a redrafted final report that you can read here. That report concluded that activities in the hydraulic fracturing water cycle “can” impact drinking water resources “under some circumstances”.

Shari Dunn-Norman, associate professor in the petroleum engineering department at Missouri University of Science & Technology, was a member of the 31-person Scientific Advisory Board panel of “subject matter experts” that reviewed EPA’s work during the study. Professor Dunn-Norman recently shared her thoughts about the experience at a Hydraulic Fracturing Technology Conference put on by the Society of Petroleum Engineers in The Woodlands, Texas.

The U.S. Geological Survey released an updated report (that you can read here) regarding the alleged link between induced earthquakes, defined as earthquakes triggered by commercial activities, disposal wells or and hydraulic fracing.

A Preliminary Forecast Model For Induced Quakes

USGS scientists studied 17 geographical areas spanning eight states, where increased seismic activity has been recorded that is presumably attributable to human activities and commercial endeavours, to try to develop a preliminary forecast model designed to determine how induced earthquakes could be assessed in geographical regions where increased oil and gas operations are occurring. The report is the first comprehensive study conducted on the hazard levels associated with human activity induced earthquakes.

Graph courtesy of EOG Resources

EOG Resources has been experimenting with enhanced oil recovery (EOR) techniques that may be good news for Texas mineral and royalty owners. Specifically, EOG has been using injections of natural gas to increase oil production on approximately 15 wells. They report that the new technique can result in producing 30% to 70% more oil from the Eagle Ford shale, at an additional cost of about $6 per barrel of oil.

EOG cautions that the technique may not be suitable for all wells in all reservoirs, however the early results from the EOG wells have resulted in attempts by scientists and other oil companies to study and duplicate the EOG results. For example, David Schechter, a petroleum engineering professor at Texas A&M University, has altered his lab that has been used to test carbon dioxide (CO2) for EOR to safely observe how natural gas affects reservoir rock. BHP Billiton and its partner Devon Energy have two EOR pilot projects in the Eagle Ford. Marathon Oil and Core Laboratories are also reportedly beginning pilot projects.

A company known as Biodentify, based in the Netherlands, announced that it can help predict oil and gas deposits based on DNA in the soil just a foot beneath the surface! Specifically, the company claims that by analyzing the microbiological DNA of shallow soil samples, it can predict “sweet spots” in shale reservoirs with 70% accuracy.

The Deep Carbon Observatory at the Carnegie Institution for Science is using “Big Data” to locate deposits of minerals, using techniques similar to those used by Amazon to recommend books based on a buyer’s previous book orders, or by Netflix to recommend new movies to a subscriber based on past movie choices. In a paper published in the American Mineralogist, scientists at the Observatory report the first application to mineralogy of network theory. Network theory has also been used to analyze the spread of disease, the scope of terrorist networks or even Facebook connections. The study reported in the paper was led by Shaunna Morrison of the Deep Carbon Observatory and Robert Hazen, Executive Director of the Observatory.

These scientists are using network theory to analyze data on the vast amount of information on Earth’s more than 5,200 known mineral species together with with data on the surrounding geography, the geological setting, and coexisting minerals, and from this producing patterns of occurrence and distribution of minerals  that might otherwise be hidden. Dr. Morrison stated that “(t)he quest for new mineral deposits is incessant, but until recently mineral discovery has been more a matter of luck than scientific prediction.  All that may change thanks to big data.” According to Dr. Hazen “(n)etwork analysis can provide visual clues to mineralogists regarding where to go and what to look for. This is a brand new idea in the paper and I think it will open up an entirely new direction in mineralogy.”

In terms of oil and gas exploration, petroleum geologists can use this new tool to discover new oil and gas reservoirs. One benefit will be that data analysis will be a lot less expensive than drilling test wells. In addition, fewer dry holes and test wells will be a good thing in terms of environmental impact.