Tuesday, 23 February 2016

The Future of Oil Exploration

Guest Post by David Whitehead, geologist and paleoclimatologist

 Irish offshore  oil and gas may well be on it's last legs. The success ratio is too low, the oil price is too low ( and will remain so for decades although with occasional spikes due to political and/or logistical crises). Corrib has shown how investor unfriendly we are, the geology of the Irish offshore is very difficult ( thick chalk over prospective horizons) and the sea conditions are deep water and  highly exposed to  weather  extremes ( there are regularly 50 ft high waves and hurricane force winds  off our South and West coasts) . That is why there is so little interest in exploration of the Irish offshore - whatever the hypothetical resource base might be. Eamon Ryan is delusional in as far as he seems to believe that if we raise taxes on production sufficiently  the oil companies  will be induced into coming here and  exploring the Irish offshore.

Moreover people do not appreciate that shale oil and gas and directional drilling and developments in  hydraulic  fracture propagation and maintenance ( frakking for short) has radically changed the paradigm of the oil and gas  from being a resource constrained business - where the source of rent is the rarity and difficulty of finding an economic reserve - to an industrial process which can be successfully applied over wide areas largely eliminating exploration risk. These developments have allowed the USA to change from being the world’s largest oil importer to being an oil and gas EXPORTER. This, and the revival of production in Iraq and Iran ( following the end of sanctions) have collapsed the price of oil on world markets.

The principal requirement for success and hence the economic rent will in future come from being able to obtain a production permit and satisfying  the production regulations   ( esp. environmental compliance) so as to be able to produce from very widespread   bituminous shale  resources using “frakking” techniques, rather than from having  to discover an oil or gas field from which hydrocarbons  flow spontaneously under natural pressure or induced by water injection  and CO2 flooding. The Anti frakkers worked this out - hence the nature of the anti frakking strategy.  They are not interested in the environment or people’s lives - they want to end the Capitalist system  and       realised that  the best way to do this is to deprive it of cheap energy.  

This sort of  transformation happens from time to time  in industry - think of the change in dynamics caused by the discovery of how to breed salmon in captivity - Salmon went from being the rarest and most expensive of fish to being  one of the cheapest and most widely available. Similarly the invention of the process to recover nitrates from air killed the Chilean and Peruvian nitrate mining business and allowed the expansion of fertilizer manufacture which permitted  the enormous growth  of  global agricultural production ( not to mention the explosives required for WWI and WWII).There are many other examples (especially how steam power eliminated wind and water milling and the sailing ship!)

The old oil and gas  business model relied on the source of economic rent being  the discovery of rare and difficult to find oil and gas fields and such discoveries, required specialised geophysical surveys, and interpretative expertise. This was  time consuming , expensive and subject to very high failure risk. Once a field was discovered, if it was big enough, it would be economic. The OPEC strategy of keeping oil prices high meant that it was sensible to explore in remote and difficult areas such as the north Slope of Alaska, the North Sea and the Gulf of Mexico. Many of these fields were developed and  those  in production will continue to produce because the marginal cost of production is  low ( often $<10/bbl ). Many  old fields will now be able to stay in production   much longer because the new methods allow recovery of oil not  previously accessible. The average recovery of oil from an existing field with earlier technology - including CO2 and water  flooding`-  is only around 1/3 rd of the contained amount.  Now in many cases  much of the remaining resource can  be recovered. This will extend the life of many  oilfields already in existence  around the world.

Oil and gas have ceased to be scarce resources - forget about peak oil theories - we have and can access enough oil and gas  to last at least a couple more centuries - by which time we might not need it as a fuel anymore as small scale ,fail-safe fission reactors  and perhaps even small scale fusion technology will most likely be available.

The Greens have lost the bet!

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