A decade of dynamic energy growth

BHP Eagle Ford drilling operations at night
Photo courtesy of BHP Billiton

It would be an understatement to say that the last 10 years have been momentous for the petroleum industry. In the United States, the past decade has seen the whole conversation change from concern about "peak oil" in 2004 to talk of "energy independence" in 2014. Few people could have predicted that the US would be on the verge of self-sufficiency in oil and gas production at a time when oil imports were rising and the government was issuing permits to companies to construct terminals to receive liquefied natural gas from foreign sources.

To what and to whom do we owe this one hundred eighty degree shift in direction?

Simply stated, credit should go to American technology and ingenuity, which has come to the industry's rescue time and time again when the outlook seemed bleak. In addition, credit should go the late George P. Mitchell, a Galveston, Texas native, who led the breakthrough in finding a way to extract natural gas, gas liquids, and oil economically from shale rock.

A first-generation Greek-American, Mitchell attended Texas A&M University where he graduated first in his class in petroleum engineering. He started an independent oil and gas company, Mitchell Energy & Development Corp., and built it into a Fortune 500 company. Over the course of his career, he participated in the development of about 10,000 wells, including more than 1,000 wildcat wells.

George Mitchell
Photo courtesy of The Cynthia and George Mitchell Foundation

The Economist said this of Mitchell: "The rise [in shale gas] has been helped along by a variety of factors.... But the biggest difference was down to the efforts of one man: George Mitchell, ...who saw the potential for improving a known technology, fracking, to get at the gas. Big oil and gas companies were interested in shale gas but could not make the breakthrough in fracking to get the gas to flow. Mr. Mitchell spent 10 years and $6 million to crack the problem (surely the best-spent development money in the history of gas). Everyone, he said, told him he was just wasting his time and money."

Mitchell died July 26, 2013 at the age of 94, but he leaves behind a legacy that will not be forgotten.

But the dramatic turnaround in global oil and gas production is not confined to shale. Credit must be given to the offshore sector as well. The technology used for deepwater drilling and production, including the advances in seismic imaging, is leaps and bounds ahead of where it was a decade ago. It has enabled the industry to drill to incredible depths far out from the continental shelf and to see through dense subsurface formations and find oil in places such as offshore Brazil and Angola.

"The emergence of the United States as a global energy leader was hardly imaginable even five years ago. In the past two years, US production of crude and natural gas liquids has jumped by 27% – more than two million barrels a day – making us the world's leading natural gas producer and putting us on track to surpass Saudi Arabia as the leading producer of oil by next year."

— Jack Gerard, American Petroleum Institute

Jack Gerard, president and CEO of the American Petroleum Institute, recently said, "The emergence of the United States as a global energy leader was hardly imaginable even five years ago. In the past two years, US production of crude and natural gas liquids has jumped by 27% -- more than two million barrels a day – making us the world's leading natural gas producer and putting us on track to surpass Saudi Arabia as the leading producer of oil by next year."

He added that US imports have dropped from 60% of supply 10 years ago to a projected 25% of supply by 2016, according to the Energy Information Administration.

Pulitzer Prize-winning author and IHS Chairman Daniel Yergin recently told the Houston Chronicle that he doesn't think the nation fully grasps the significance of how the "shale revolution" has impacted energy supply and demand economics in the US and the importance that has for the national economy and job creation. Yergin was in Houston for IHS's annual CERAWeek Conference, a gathering of the rich and powerful in industry and government, who convene to discuss energy strategies and market forces. He added that the event might help draw attention to the US oil and gas boom.

"In today's oil patch, the best operators can produce up to three times as much as the worst operators and some 30% more than average operators for the same quality of acreage. Better technology and better analytics are behind this success."

— Allen Gilmer, Drilling Info

OGFJ recently asked Niloufar Molavi, vice chair and US energy leader for PricewaterhouseCoopers, how the industry has changed in the past 10 years and where we are headed. "The biggest change is that we've gone from being a large-scale importer of oil to meet our domestic needs to near energy self-sufficiency in a relatively short time," said Molavi. "We're now talking about being a net exporter of natural gas and maybe even exporting oil, and probably three years ago we wouldn't be having this conversation. That's pretty phenomenal."

Asked the reason for the successful transformation in the energy sector, Molavi attributed much of it to technological advancements. "Technology has played a significant role in this industry and will continue to do so. People don't think of the energy industry of being that technologically advanced, but if you step back and think about it, the industry is built on technology. In fact, given what they do, many companies, especially on the drilling and services side, could even call themselves technology companies."

So what are the challenges and impediments to increased oil and gas production? Molavi cited increasing environmental regulations and tax burdens on the industry. "I think we're going to continue to see a tightening of regulations, which will present significant challenges for the industry to be able to grow and to tap into these difficult resources. The industry will have to look for ways to minimize the impact of the regulations."

Where will we be in terms of energy development in 10 years in 2024?

"I would definitely have been wrong had I been asked that question 10 years ago," said Molavi. "But I believe we will continue to see technology play an increasingly important role in the industry. This will lead to innovation in the sector and possibly new sources of fuel in the future. One of the major challenges will be the ageing workforce. We'll have a population of young, inexperienced individuals moving into the industry. The big question is how will technology be used to train them because they will be replacing older people with significant knowledge."

"The biggest change is that we've gone from being a large-scale importer of oil to near energy self-sufficiency in a relatively short time. We're now talking about being a net exporter of natural gas and maybe even exporting oil, and probably three years ago we wouldn't be having this conversation. That's pretty phenomenal."

— Niloufar Molavi, PricewaterhouseCoopers

Some of megatrends we're seeing are changing consumer demands as energy usage declines in the West and increases in developing countries such as China, India, Indonesia, and Brazil. We also see Africa as a place to watch for opportunities. We're going to be talking about Africa a lot over the next 10 years.

Allen Gilmer, co-founder, chairman, and CEO of Austin, Texas-based Drilling Info, said he agrees with the comments about the importance of technology in the oil and gas industry. "In today's oil patch, the best operators can produce up to three times as much as the worst operators and some 30% more than average operators for the same quality of acreage," he noted. "Better technology and better analytics are behind this success."

Gilmer added, "There are 50 experiments taking place in the oil patch every day. When one works, many properties change value instantaneously. Profound value is contained in knowing and acting on that value change sooner than later. Securely incorporating your own information allows even more insight and quantification of that value change. Further, using information about what various geological and petrophysical signatures were associated with hydrocarbon production is a novel new way of looking for hidden pays."

Gilmer said this knowledge will help companies perform better.

Charles Dewhurst, a partner and leader of the natural resources practice for BDO USA based in Houston, told OGFJ that the technology that enabled the exploitation of shale resources in North America have been a "game-changing phenomenon" for the energy industry.

"There are so many aspects to that," said Dewhurst. "Not only has it allowed us to develop shale resources in North America, but we have the potential to develop shale formations in other parts of the world. US companies can take the lead in developing shale resources in those countries as well, which would be very good for the industry."

Dewhurst noted that the real benefit of shale has been its impact on the US economy as a whole. "Certainly the size of the reserves and what we are seeing in terms of production have had a far-reaching effect on the industry and the country. But low gas prices have enabled a dramatic comeback for the US manufacturing sector. This has created a manufacturing renaissance. Those benefiting from the low prices include such industries as plastics and chemicals, but also a lot of other types of manufacturing that are heavy users of fuel. That's very exciting."

Dewhurst also commented about the possibility of LNG exports. "Not long ago, we were rapidly building LNG terminals in various coastal areas around the US for the importation of natural gas. Now there is a lot of interest in the exportation of LNG to capitalize on the price differential which we enjoy compared to other parts of the world."

The US has a tremendous economic vitality, Dewhurst said, and when you add on top of that "almost Saudi Arabian levels" of petroleum reserves, we're really in for a tremendous economic boom over the next 10 years.

"The big caveat for me looking out 10 years is some of the political sensitivity the industry is dealing with," Dewhurst noted. "We're seeing this in the continuing delays in the approval of the Keystone XL Pipeline. We're seeing it in many states clamping down on the use of fracking. I'm concerned about the political tension between the industry on the one hand and the big environmental groups on the other. It's become almost an anti-industry lobby. So I hope the industry can continue to reinforce the message that these resources are being developed in a very environmentally sound manner. That's really the only gray cloud I see on the horizon."

OGFJ recently spoke with Kirk Morgan, a partner with Bracewell & Giuliani's energy practice based in the firm's Washington, DC office, about the shale boom and the midstream sector. He said the oil and gas industry is undergoing the largest expansion in midstream infrastructure in decades. "This is partly attributable to shale growth, but it also coincides with a big uptick in demand, and there are a variety of reasons for that. For example, there is increased demand for natural gas for electricity generation, prospects for natural gas vehicles, LNG exports, and so on."

Morgan noted that the legal and regulatory framework over the midstream sector is very old and is based on statutes and governing agencies that are very old. The Interstate Commerce Act of 1887 is what is regulating interstate oil transport, and that was applied to oil pipelines in 1912. The Natural Gas Act of 1938 regulates natural gas.

"Low gas prices have enabled a dramatic comeback for the US manufacturing sector. This has created a manufacturing renaissance. Those benefiting from the low prices include such industries as plastics and chemicals, but also a lot of other types of manufacturing that are heavy users of fuel. That's very exciting."

— Charles Dewhurst, BDO USA

"These are statutes that came about in a very different period of time and in some ways aren't fully equipped to deal with the complexities and the demand we have now for new midstream infrastructure," said Morgan. "I don't see a change to those underlying statutes. I think there is some frustration as to what you can do under the Interstate Commerce Act, for example, but I don't see any legislative change. So we have to deal with the statutes – that's relatively ironclad. But within those statues, there is some flexibility, and the regulators have shown themselves to be quite adaptive, using that flexibility to create new midstream infrastructure."

On the natural gas side, Morgan noted that a common source of frustration with the regulators is the project delays. "That's the thing I hear over and over when I'm talking with folks in the industry and our clients," he said. "That's one area where we would like to see a regulatory improvement."

In its recent report "World Development Drilling & Production Forecast 2004-2020," energy advisory firm Douglas-Westwood says the world oil and gas industry will need to drill 670,000 wells from 2014 through 2020 to meet forecasts of global oil and gas demand, which is set to grow by 17% in the next six years.

Douglas-Westwood chairman John Westwood said that approximately 79,000 development wells were drilled in 2013. In 2020, well numbers will need to exceed 106,000. The additional wells will be needed to meet global demand, he said.

"[On the natural gas side], a common source of frustration with the regulators is the project delays. That's the thing I hear over and over when I'm talking with folks in the industry and our clients. That's one area where we would like to see a regulatory improvement."

— Kirk Morgan, Bracewell & Giuliani

Westwood added, "As the easiest-to-access oil and gas reserves deplete, each year we have to drill more and more wells for less and less production per well. Over the period, the number of development wells drilled needs to grow 35% to enable oil and gas production to meet an expected demand growth of 17%. This effect is most marked onshore where by 2020, we expect production to grow by 15%, whereas offshore production should grow at 21% due to developments in the deepwater."

API's Jack Gerard made an astute observation: "America's energy revolution is already an economic juggernaut, helping the US add 600,000 jobs between 2009 and 2011 for a total of 9.8 million jobs supported. Shale energy alone will support a projected 3.9 million jobs by 2025, including 500,000 manufacturing jobs."

He concluded, "Looking ahead, investment in midstream and downstream infrastructure could generate an estimated $1.14 trillion in capital spending between 2014 and 2025 and support up to 1.15 million average annual jobs over the same period."

The past 10 years have been exceptional ones for the oil and gas industry. The decade has also been beneficial to Oil & Gas Financial Journal, which was founded in 2004 and is marking its tenth anniversary this year. It's been a remarkable era in the petroleum industry, and we are pleased to have been here to report on news and events and to provide expert analysis and commentary from industry leaders. We hope the next 10 years are equally newsworthy and rewarding for everyone.