CERAWeek topics span deepwater drilling, the economy, oil prices

March 14, 2011
More investments are necessary if oil production is to keep up with spiraling demand worldwide, and industry is increasingly relying on partnerships to spread financial risk and share expertise, oil company executives told the IHS-CERA energy conference last week in Houston.

Contributing to this coverage of CERAWeek, the annual energy conference hosted by IHS-CERA in Houston, were Bob Tippee, editor; Alan Petzet, chief editor-exploration; Guntis Moritis, production editor; and Paula Dittrick, senior staff writer.

The economy, oil prices

More investments are necessary if oil production is to keep up with spiraling demand worldwide, and industry is increasingly relying on partnerships to spread financial risk and share expertise, oil company executives told the IHS-CERA energy conference last week in Houston.

Total SA Chairman and Chief Executive Officer Christophe de Margerie said sufficient short-term oil supply exists worldwide despite civil unrest in the Middle East. But he said more investments are needed if long-term oil and gas production is to meet forecast demand.

Industry is responsible to produce more oil and gas in an acceptable way given rising environmental concerns, De Margerie said. "For the time being, there is no reason to consider a shortage of supply," he said. Total is relying on numerous partnerships worldwide to grow its oil and gas production, he said.

John B. Hess, Hess Corp. chairman and chief executive officer, said he foresees an energy crisis coming as a result of rising oil demand. Current rising oil prices are a warning, he said.

"While we are not running out of oil…we are not investing enough to grow production capacity to keep up with demand," Hess said. "The world's surplus oil production capacity is currently about 3-4 million b/d. As demand grows in the next decade, we will not have the oil production capacity we will need."

Energy policy needed

Calling for a US energy policy, Hess advocated energy efficiency, increased oil supply, and he urged government to maintain tax provisions that encourage drilling.

"As we moderate demand for oil, we must do all we can to increase supply," Hess said. "It serves nobody's purpose for our political leadership to vilify oil producers…. Our country needs to do everything it can to encourage more drilling to strengthen our energy security, including proper regulatory oversight to ensure protection of the environment."

A US energy policy also needs to emphasize natural gas for electricity generation, invest in research for new forms of energy, and set realistic targets for reductions in carbon emissions, Hess said.

IHS CERA Chairman Daniel Yergin said he expected the conference to be dominated by questions about the Middle East, uncertainty about oil prices, and what it means for the global economy.

"The future of the economic recovery and its vitality are very much front and center," Yergin said.

BP's deepwater drilling policies

US drilling regulators need to find a balance between ensuring offshore safety without placing unnecessary constraints on operators, BP PLC Chief Executive Robert Dudley told delegates during CERAWeek.

"But ensuring that outcome means the industry has to go further than ever before to ensure safe operations—wider than the upstream, wider than the US," Dudley said. The April 2010 blowout of the deepwater Macondo well off Louisiana resulted in a massive oil spill. BP operated Macondo.

BP is implementing company policies in which it will not drill a deepwater reservoir using a dynamically positioned vessel unless BP already has plans and equipment for shutting in the well and drilling a relief well, Dudley said. The new policy also requires that BP stands ready to launch an emergency response.

"If anyone ever has to manage a simultaneous operation involving 50 surface vessels and 16 subsea remotely operated vehicles in a radius of 1 mile, then our experience from last year may be useful," he said.

Since Macondo, Dudley said industry has developed new technologies, systems, and equipment through innovations from both oil companies and contractors.

"We believe we have a responsibility to share our learning with those who can benefit from it—including our competitors, partners, governments, regulators," he said.

Enhanced standards

BP is enhancing its standards for blowout preventer testing, cementing, well-integrity testing, rig audits, and other well operations, he said. BP is working with industry groups to determine if spill prevention standards can be enhanced industry-wide.

"In 10 years' time, I would expect that there will be a new generation of blowout preventers that represent a major advance on the ones we use today," Dudley said.

BP implemented new standards for its cementing-services oversight including an approval process and stringent contractor lab-quality audits, he said. Regarding its containment efforts, BP is building a next-generation capping stack based on what was learned from the one that shut in the Macondo well, he said.

BP also continues to enhance the real-time ranging technology developed during the drilling of the Macondo relief well.

"This cuts the time needed for logging from about 2 days to about 6 hr because the drill bit doesn't have to be removed," Dudley said. A ranging tool was field tested on a land rig in Wyoming before using it in the gulf, and more work is needed to improve the tool's mechanical reliability for future wells, he said.

BP also is reviewing the physical cleanup efforts to see what technology needs additional development. One innovation developed during the Macondo spill response was equipment called the sand shark that lifts and sifts beach sand to remove oil.

Views differ over 'systemic' problem

Differing perspectives on allegations about "systemic" safety problems in offshore oil and gas work emerged during a session panel session on deepwater operations at CERAWeek.

William Reilly, co-chairman of the US National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, defended the characterization, which appeared in the commission's report to President Barack Obama in January an drew criticism from industry groups.

The Apr. 20, 2010, accident, which killed 11 workers, showed the industry lacked the ability to contain a deepwater spill, had provided assurance to the contrary in "pro forma response plans," and hadn't modernized spill-cleanup equipment, Reilly said. And the commission report found lapses not only by BP, the well operator, but also by Halliburton, which performed the cement job, and Transocean, which owned the rig.

"There's plenty of evidence that it was a systemic problem," said Reilly, a former administrator of the US Environmental Protection Agency who said he has investments in and sits on the boards of oil and gas companies.

Ali Moshiri, president of Chevron Africa & Latin America E&P Co., said the Gulf of Mexico problem "was not a systematic problem. It was an accident that never should have happened."

Reilly applauded the industry's rapid development of spill-containment capability through the Marine Well Containment Co. and Helix Well Containment Group and said, "Major obstacles to renewing drilling have been removed."

Alluding to a strong message in the commission report, he said, "A renewed culture of safety does seem to be emerging."

Reilly also acknowledged the need for oil and gas from deep water but warned of the consequent "migration toward risk."

Of the need for development of challenging resources, Moshiri said, "We have to be in the deep water because the era of easy oil is over, and demand continues to grow."

The Chevron executive said companies apply the best safety and technical standards they can.

"Safety and environmental protection is not a cost," he said. "It's part of the value that you create."

Unconventional gas

Rapid growth in gas supply from shales and other unconventional reservoirs inverts expectations for North American petrochemicals and underscores the importance of feedstock flexibility in an integrated business strategy, says the leader a major US petrochemical manufacturer.

The brightened business outlook shows the importance of integrating petrochemicals not only with refining but also with upstream operations, according to Stephen Pryor, president of ExxonMobil Chemical Co. and vice-president of ExxonMobil Corp.

A 20% surge in gas supply from unconventional resources during the past 5 years has boosted ethane production by 25% and lowered the cost of an important feedstock, Pryor told CERAWeek delegates.

"We see ethane reemerging as an advantage feedstock in North America, reflecting the growing production of unconventional natural gas and the increasing importance of gas in the world energy mix," he said.

In the US last year, the growing supply of relatively low-cost ethane strengthened margins for ethylene and derivatives, lightened the feed slate, and increased US exports.

"The current strength of the US petrochemical market contrasts with conventional wisdom of just a few years ago when it was believed that US petrochemical production would decline, feed slates would get heavier, and the US by 2010 would flip into a net import position," Pryor said. "Actually, exports grew by about 28% last year."

Capacity gains?

The ExxonMobil Chemical chief doubts that the improved outlook for North American petrochemicals will lead to an early surge in grassroots construction of ethane crackers.

At least in the near term, he said, capacity growth will be incremental, resulting from debottlenecking of existing light-feed capacity and limited conversion of heavy-feed crackers.

Capacity investment will depend on the pace and pattern of North American ethane supply growth, which in turn will depend on the location and rate of unconventional gas development, liquids content across geologic plays, and construction of equipment able to strip, transport, and store NGLs.

"Just as in refining, incremental investment in feed flexibility and capacity creep are the most efficient ways to meeting growing demand in a mature market like North America, major investments at full grassroots costs would be subject to significant risks relative to long-term oil and gas prices, export economics, and gas developments around the world that could provide feedstocks for competitors overseas," Pryor said.

Integration strategy

Feedstock flexibility is central to what Pryor described as the "site-wide optimization" ExxonMobil Chemical applies in its integration strategy.

It involves "having the flexibility to process a wide variety of feedstocks and selecting the feed slate that generates the highest value for the integrated complex," he said. "It entails adjusting the process conditions and product slates in real time so that you extract maximum value from every molecule processed."

Integration is "more than simply collocating refineries with petrochemical plants," Pryor said.

It involves optimization not only of feedstocks but also of products, costs, capital, and people. Pryor said 90% of his company's petrochemical capacity is integrated with refining or gas processing capacity.

The process is continuous and oriented to long-term outcomes. Managing through the "turbulence" of modern markets requires a "disciplined, long-term approach that does not change with short-term changes in commodity prices and profits," he said.

Plays driving innovation

New play types are driving innovations in the oil and gas industry, Jonathan Lewis, Halliburton senior vice-president, drilling and evaluation, said at CERAWeek. Deepwater presalt and shale gas are two examples of the new type of plays that the industry is developing.

But with such plays as shale gas, the industry can ill afford the 20-30% nonproductive rig time common in the industry and the industry needs integrated work flows to gain efficiencies in well construction, Lewis said. This cannot be done in laboratories but must be done at the wellsite and operations centers, he added.

Operating companies have been driving down costs and gaining efficiencies in tight gas sands and in shale plays. As an example, Charles Stanley, president and chief executive officer of QEP Resources Inc., said QEP in 2010 completed gas wells in the Haynesville shale in 40 days compared with the 66 days/well when the company first started developing the play. For these 12,000-ft wells in the vertical depth and with 5,000-ft horizontal laterals, fraced with 14-16 stages, well completion costs have continued to come down with costs in the later half of 2010 averaging $8.5 million/well compared with $10 million/well in 2009, he said.

Another example of efficiency gains is the Pinedale tight gas sands. In 2004, QEP needed 64 days to complete a well compared to 16.8 days/well averaged in 2010, Stanley said. Initially QEP drilled these 14,000-ft wells that contain a 5,000-ft gross gas column from well sites with single wells. Now QEP has some well pads with up to 50 wells. Costs for completing these wells with about 14 frac stages have dropped to $3.9 million/well from the $8 million/well spent in 2003-04, Stanley said.

Stanley attributed much of the gains in efficiency to the people involved, to real-time data that allows speedy improvements in the process, and using the appropriate technology for the economics involved. He noted that the industry has a lot of innovative tools but many are too expensive to deploy.

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