U.S. E&P surge hinges on technology, not oil price

Technology, not oil and gas prices, have fueled the recent surge in U.S. activity, leading to greater sustainability, according to Clarance P. Cazalot Jr., vice-president of Texaco Inc. and president of Texaco Exploration & Production Inc.

Retaining technical professionals will be a major hurdle in the next decade as the oil industry work force ages and fewer people pursue careers in petroleum engineering and the geosciences, according to Cazalot. He made these points in a presentation at the Arthur Andersen 1996 U.S. Oil and Gas Industry Outlook Survey in Houston last month.

Cazalot expects gas and oil prices to decrease slightly to within the historical range of $18-21/bbl for oil and $1.50-2.00/Mcf for gas for the next few years. Most oil companies, including Texaco, are basing capital expenditures not on the current higher prices, but rather on these more conservative historical price ranges.

An important trend in the U.S. is the continued pressure to lower lifting costs. According to Sterling Consulting Group, a Houston-based upstream management consultancy, the difference in lifting costs for majors and independents is narrowing as the majors begin to operate more like the independents. The median lifting costs for a group of 11 major operators has decreased steadily each year for the past 5 years (Fig. 1 [21436 bytes]). Independents' lifting costs were $0.74/BOE lower than that for the majors in 1991, and only $0.37/BOE lower in 1995. The majors are learning to operate more efficiently, Cazalot said.

Advantages disappearing

Other differences between majors and independents are also disappearing. Independents now hold 50% of the acreage in the Gulf, and their number has increased from 45 to 119 since 1985. The majors' advantage is also disappearing as new technology has become more readily available to independents and access to existing infrastructure has reduced the need for huge capital investments.

In 1995, independents drilled 54% of the 858 wells in the Gulf of Mexico.

Independents were more successful than the majors in the past two Gulf of Mexico lease sales. The independents had 50% of the high bids and 52% of the high bid amounts. Independents are moving aggressively on the continental shelf, but deep water is still favored by the majors. One factor helping the independents is the large amount of speculative 3D seismic information available to the industry.

The cost of doing business is increasing, most dramatically in drilling (Table 1 [6660 bytes]). Cazalot expects U.S. drilling and workover costs to increase by mid-1997 from as low as 10% for barge rigs to as much as 70% for jack ups. A continued rapid increase in rig rates will affect investment and activity levels.

U.S. emphasis

Majors are once again emphasizing the U.S. (Fig. 2 [13969 bytes]). One of the factors is that many of the perceived giant international opportunities have not developed as quickly as expected, and contracts have become tougher. Other factors shifting this trend back to the U.S. are new technology and large U.S. asset bases for the majors. Deep water has been a major component of this increase for only a few companies so far. For Texaco, deep water will become more important in 1997-98, according to Cazalot.

Another industry trend is continuing consolidation, primarily through alliances, joint ventures, and acquisitions. Additional opportunities are opening up largely onshore, as new acreage becomes available.

On the downside, the industry continues to face impediments to growth. There is no near-term access to new areas such as the Arctic National Wildlife Refuge, offshore in the Atlantic, and offshore Florida. Regulatory and environmental pressures continue from the Clean Air Act, including maximum allowable control technology issues on compressor and dehydrators and produced water discharge regulations on offshore platforms. The industry needs to make sure that these regulations are created based on science and cost/benefit analyses, and not because of politics, said Cazalot.

Technology

Cazalot said the two most critical factors affecting the future of U.S. exploration and production activities are technology and personnel. Technology is driving the current industry boom in the U.S. and is the basis for Texaco's projected U.S. production growth (Fig. 3 [19560 bytes]). The first step in Texaco's reorganization was to sell about 50% of its properties. Texaco's current U.S. production is about 667 million BOE annually, higher than before the sale of half its properties.

Very little of Texaco's projected production increase is from deep water. That will not come on line until 1999 or later. Cazalot attributes most of the increase in production to focusing people, capital, and technology on its core assets.

Technology, not price, has driven much of the recent U.S. activity (Fig. 4 [20523 bytes]). Seismic crew counts and rig counts have increased since 1992, despite fluctuating oil and gas prices. The rig count dipped slightly in 1995 because of a drop in gas prices, but the overall trend has been increasing.

The 3D seismic technology has been a critical component in Gulf of Mexico activity. According to Texaco, in 1989 only 5% of the wells drilled in the Gulf of Mexico were based on 3D; in 1996, nearly 80% of the wells drilled were based on 3D. The majority of that 3D data was acquired from 1990 to 1993.

One significant technology advance comes from the use of vertical instead of horizontal cable in acquiring 3D seismic data. The use of vertical cables has led to the economic development of 8,200 b/d of condensate and 130 MMcfd of gas for Texaco in the subsalt regions of the Gulf of Mexico.

Texaco's use of 3D seismic has improved its success rates in rank wildcatting and in offshore wildcatting. From 1985 to 1989, Texaco's rank wildcatting success was 33% and 48% offshore. With the use of 3D technology, the success rates increased in 1990-95 to 44% and 78%, respectively.

Using 3D seismic has allowed horizontal drilling to be applied more effectively (Fig. 5 [19826 bytes]). Horizontal drilling has targeted new reservoirs, updip traps, and updip accumulations that could not be resolved without 3D.

Technologies on the horizon include:

Deepwater technologies (fluid flow, multiphase modeling, subsea pressure boosting, riser systems, and mooring systems)
Seismic response to rock and fluid interactions (time lapse methods and direct permeability measurements from seismic).
Reservoir characterization (understanding fracture systems)
Drilling technology (quicker learning and more efficient operations).

Industry cooperation will accelerate development and application of technology. Companies need to share development risks, reduce costs, and not duplicate resources. Competition should be applied at the application level, not the research level, Cazalot said.

Personnel

Perhaps industry's greatest challenge is attracting, developing, and retaining skilled people at all levels, said Cazalot. People shortages result in increased competition for personnel with critical skills, high employee turnover rates, and increased costs associated with attracting and retaining technical talent.

The average age of all Texaco U.S. employees is 45, with few people under 35 or over 55. Texaco's average retirement age is 57-58. Over the next 10-15 years, Texaco, like many majors, will face a personnel shortage.

The number of graduating technical professionals continues to shrink in the U.S. In 1996, Texaco estimates 400 BS petroleum engineering graduates and 1,500 graduates with an MS in geosciences. For many majors, including Texaco, the U.S. work force has been viewed as a pool to fill the growing international business. Retaining a skilled work force will be a problem for most companies in the next decade.