RMI: Challenges affecting many US energy elements

April 1, 2008
NOCs, which now have "superior access to resources and booming domestic markets," made two thirds of the largest oil and gas discoveries in 2007, said Parker Drilling Co. Chairman and CEO Robert L. Parker Jr. at the RMI Oilfield Breakfast Forum in Houston Mar. 28.

Judy R. Clark
Senior Associate Editor

HOUSTON, Apr. 1 -- National oil companies (NOCs), which now have "superior access to resources and booming domestic markets," made two thirds of the largest oil and gas discoveries in 2007, said Parker Drilling Co. Chairman and Chief Executive Robert L. Parker Jr. at the RMI Oilfield Breakfast Forum in Houston Mar. 28.

"The game is changing," Parker said, from the 1960s, when international oil companies (IOCs) had full access to 85% of world resources, NOCs controlled 1%, and the Soviet Union held 14%.

"Nationalizations in the 1970s and 1980s and tougher terms in the 1990s and 2000s have changed the power balance, with NOCs controlling 65% of reserves in 2005 and 77% today," Parker said. IOCs now have full access to only 10% of global oil and gas reserves and limited access to 13%.

This change in dynamics has also transformed the role of international service providers (ISPs), which now supply technology and technical expertise for NOCs without owning production, thereby competing with IOCs.

"This has enabled NOCs to make major finds in complex geologic formations, in remote locations and under harsh conditions," said Parker.

"IOCs still have unique combination of technology, financial backing, market access, and operational expertise," he said, yet "ISP technology is expected to take the lead in the next few decades."

Service providers
Nevertheless, service providers also face challenges, said Richard K. Mitchell, Devon Energy Corp.'s vice-president for worldwide drilling and E&P services.

When the utilization of rigs is 100%, equipment reliability and maintenance difficulties surface, with concern about the capacity for spares and no time for long-term maintenance, Mitchell said.

"The constantly varying rig counts and activity levels make it difficult to meet the requirements of E&P companies" as well, he added.

Health, safety, and the environment also present challenges when there is a shortage of trained personnel who may be too "young and inexperienced," Mitchell said.

With reduced reserves per well drilled, service providers need to improve recoveries per well, communicate better, and work to create win-win contracting strategies, he said.

Mitchell emphasized the technology Devon needs from service providers: a continued focus on training, an expanded workforce, and more reliable equipment, including improved drill bit-reamer designs to reduce stick-slip loading; more rugged mud-while-drilling, logging-while-drilling, and rotary steerable systems; and continued improvements in open hole completion systems, stimulation technology, and subsea artificial lift equipment.

In addition, Devon would like to see more economic water management cleanup systems, minimal erosive proppants, and reliability engineering and failure mode effects analysis on service provider equipment.

Market challenges
With oil and gas price volatility continuing, it is difficult to plan in the North American markets, commented Jim Wicklund, principal and portfolio manager of Carlson Capital LLC. "The market is on a roller coaster," he said.

"Energy stocks are most closely aligned with the markets than with supply and demand," he said. "Last week the commodities market almost crashed, and credit markets today are worse than in a decade."

Oil prices hit $112/bbl on Mar. 17 and natural gas prices rose to $10.30/MMbtu—the highest since January 2006. Wickland thinks the upward trend in oil and gas prices will continue, as did most of the attendees, who thought oil would reach $120/bbl before it would reach $90/bbl.

Exploration continues to thrive, with drillers experiencing a 54% increase in revenue per rig since the second quarter of 2004. The international rig is count up 14% since January 2006 and the US rig count up 21%. Canada is the exception with its rig count down 46% in that 2-year period.

Wicklund predicted that offshore drilling growth will continue. It has increased operation income by 700%, more than triple that of onshore drilling.

Wicklund also sees caveats ahead, however. Political instability and restricted access will continue to plague the industry.

Oil companies face the prospect of peak oil—with what he called "twilight in the desert" (the Middle East)—and Russian oil production down for the first time ever. Mexico is considering changing its Constitution to allow international investment to offset its production drop in Canterell field, Wicklund said.

Gas companies will see more cost competition with substitutes as prices continue to move up. LNG imports will decline due to global competition, Canadian production is declining, and conservation is biting into demand. For example, US production has increased 3.8% in 2008, but demand is up only 1.7%.

Government challenges
According to the National Petroleum Council, to meet future energy demand to 2030 without jeopardizing economic growth, the US must take five actions: moderate demand by increasing energy efficiency, expand and diversify US energy supplies, strengthen global and US energy security, reinforce US technology and capabilities to meet new challenges, and address carbon constraints, said Rod Nelson, Schlumberger Ltd.'s vice-president for innovation and collaboration. He also served as chairman of the Technology task group for the NPC study.

NPC gave the recommendations to Secretary of Energy Samuel Bodman last July in response to his 2005 query regarding such strategies (www.npc.org).

Nelson said NPC's in-depth study reported that global energy demand would grow 50-60% by 2030 because of improving living standards in a growing global population and that coal, oil, and natural gas will remain indispensable in meeting that demand growth because, although the use of alternates will grow during that time, so would fossil fuels proportionately, and the energy "pie" would retain the same proportions.

"Coal is not the flavor of the day," Nelson said. "Maybe [it is] in India and China, but not in the US" because the technology for "cleaning" it is not yet economically feasible.

Two thirds of the study participants were not from the energy industry, Nelson said, but from such diverse entities as universities and environmental and financial groups.

Other findings from the study, Nelson said, were that although the world is not running out of energy resources, there are growing risks to continued expansion of oil and gas production from conventional resources and that these risks present major challenges to meeting total demand.

Mitigating those risks will require expanding all economic energy sources, including biofuels and other renewables, nuclear, coal, and unconventional oil and gas. Each of these in turn will face such challenges as safety and environmental, technical, political, economic, and feasibility hurdles, Nelson said.

Moreover, Nelson said, the study emphasized that "energy independence" is not realistic in the foreseeable future, but US energy security can be enhanced by strengthening global trade and investment, diversifying domestic supplies, and moderating demand.

For instance, Nelson said, new corporate automobile fuel efficiency standards could save 1 million b/d for each increased mile per gallon gained nationwide.

The study, which gave specific methods for accomplishing the goals identified, said that the workforce must also be replenished and trained, and that policies aimed at curbing carbon emissions will alter the energy mix, increase energy-related costs, and require reduction in demand growth.

Nelson said Schlumberger is working on methods for sequestering carbon dioxide in the ground but it hasn't been done on a large scale.

Contact Judy R. Clark at [email protected].