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The World Gets Heavier
High prices and growing demand put global focus on unconventional oil plays

petroleumequities.com

By Darrell Stonehouse

The world is hungry for oil.

In 2007 it consumed around 87 million barrels per day, despite prices averaging a little over $75 per barrel for the year.

By 2015 supplies are expected to increase to 110 million barrels per day, according to global energy consultants Cambridge Energy Research Associates (CERA). By 2025 that number is predicted to climb to around 120 million barrels per day. And much of the new supply will come from unconventional sources.

CERA expects unconventional supplies—a mixture of light hydrocarbons like condensates and products from gas-to-liquids plants and ultra-heavy oils like bitumen that require enhanced recovery methods to produce and special refining technologies to upgrade—to account for around 40 per cent of global supplies by 2015. Today, they account for a little less than 25 per cent, up from 16 per cent in 2000.

“These unconventional supplies will loom increasingly large in the world’s oil supply,” said CERA chairman Daniel Yergin in releasing the company’s field-by-field analysis of current producing, fields and 360 major new projects worldwide in late 2006.

In the short term, CERA expects lighter hydrocarbons to account for the lion’s share of growth, with production rising from 15 million barrels per day to 26 million barrels per day by 2015. Ultra-heavy oil production will grow from current levels of around 1.9 million barrels per day to 4.7 million barrels per day over the next seven years. Further ahead, supplies will need to grow at an even faster pace.

In the short term, the growth in ultra-heavy production is expected come from two main sources—the oilsands of Alberta and the Orinco Belt in Venezuela. But other basins will add to supplies longer term.

Where Alberta fits into the picture

Currently, the Alberta oilsands industry produces around 1.1 million barrels of the 1.9 million barrels of ultra-heavy oil supplied annually.

A 2007 study from the Canadian Energy Research Institute (CERI) looking ahead 20 years to 2027 says that if all oilsands projects currently on the books were to go ahead, production would climb to almost six million barrels per day of raw bitumen by 2018. But, the CERI study also contains a more realistic assessment, based on likely timing conflicts in getting projects built, along with project delays and deferrals. Under this constrained prediction, oilsands production still reaches six million barrels per day, but not until 2022 or 2026.

CERI’s realistic case is based on the rising costs in developing the oilsands, whether by mining or in situ methods, along with the rising costs of upgrading bitumen into synthetic crude.

“Total supply costs at the plant gate are around C$35 to $37 per barrel of bitumen, with another $27 or so for upgrading,” says the CERI report. “Total supply costs have increased 23 to 86 per cent over the past year, depending on the type of project. The value of the tradable product from [steam assisted gravity drainage] and mining operations—SynBit delivered at Edmonton—is around C$51 to $53 per barrel.”

The role of Venezuela

Venezuela’s Orinoco Belt currently produces around 600,000 barrels per day of ultra-heavy crude oil. In early January its state oil company PDVSA said it is looking for international investment to more than triple production over the next five years by developing new projects that will add two million barrels per day in supplies. The new production partnerships will begin in the Carabobo Block 1, which has 9.1 billion barrels of proven reserves, according to the company. The entire Carabobo area has 25 billion barrels of proven reserves. PDVSA is looking for partners to make the projects a reality—a scenario analysts say might prove difficult given what happened in the country in 2007.

Venezuela’s government took control of nine projects in the Orinoco belt last year, forcing Chevron, BP, Total, and others into minority positions with new profit-sharing arrangements. Exxon Mobil and ConocoPhillips left Venezuela as a result of the government changes.

Unfortunately, as a result of the renegotiated deals, the country’s oil industry actually contracted by five per cent in 2007, according to Venezuela’s central bank. With the nationalization of the Orinoco belt all but finished, however, new joint partnerships are expected to be formed.

Last year, Iranian Petropars, Russian Lukoil and Gazprom, Belorussian Belorusneft, Malaysian Petronas, Argentinean Enarsa, Uruguayan Ancap, Bolivian YPFB, Ecuadorian Petroecuador, the China National Petroleum Company, and Cuban Cupet de Cuba expressed interest in Venezuela. Almost all of them are state-run companies.

In his annual address to the Venezuelan government, president Hugo Chavez said the nationalization of the Orinoco Belt was just one more step in the country’s efforts to establish itself as a major player in the energy world.
“ Our country is taking shape as a world oil and energy superpower,” said Chavez.

ExxonMobil chairman and chief executive officer Rex Tillerson takes a different view of what’s going on in the country. Tillerson says countries like Venezuela, which renegotiate deals and nationalize resources, could limit production growth in the future.

“Governments of some oil-producing nations are seeking to capitalize on the current high crude prices by renegotiating existing contracts or further nationalizing their energy industries,” Tillerson said during a visit to Calgary last fall. “Those actions will discourage needed investments and technology upgrades. The very large capital investments and long time frames required for today’s enormous energy projects make continuity and stability in energy policy even more critical.”

Yet, the attraction of the Orinoco Belt remains huge. Improved reservoir access through horizontal and multilateral wells, combined with hybrid artificial lift systems like bottom drive progressive cavity pumping systems, have increased production targets from wells in the region from 200 barrels per day in the early 1990s to up to 2,000 barrels per day today. PDVSA claims average production costs in the Orinoco Belt come in at around $8 per barrel.

The potential of the Middle East

The sleeping giant in the unconventional oil world is the Middle East. With plentiful reserves of cheap, easy-to-access light crude, the world’s biggest resource base has put little effort into exploring and developing its ultra-heavy supplies. But that’s beginning to change.

The heavy and ultra-heavy oil resource in the Middle East is estimated at around 500 billion barrels. In 2006, Chevron announced it was partnering with Saudi Aramco to test whether this resource can be turned into reserves.

The test, at the billion-barrel Wafra field, involves one steam injection well, four producing wells, and one observation well to collect data about the interaction between the oil and steam. Chevron says it is committed to expanding the operation to include 16 steam injection wells and 25 producing wells, along with water-handling and boiler systems. The cost of the project is estimated at around $300 million. If successful, Chevron believes it could recover up to 40 per cent, or 400 million barrels of oil from the field.

In nearby Oman, Occidental Petroleum is building a case to invest around $2 billion on a steam flood operation at the billion-barrel Mukhaizna field. Occidental is operating the field, from which it expects production to increase from current levels of 15,000 barrels per day ten-fold to 150,000 barrels per day.

Middle Eastern heavy and ultra-heavy crude oils are trapped in carbonates, similar to hundreds of billions of barrels of bitumen trapped under like circumstances in Alberta’s oilsands. The challenge facing technical explorers in the region is identifying sweet spots in formations where steam won’t leak out through fissures in the rock, allowing temperatures to climb high enough to melt the oil so it flows.

Heavy in the U.S.A

The United States has an estimated 6.1 billion barrels of bitumen in oilsands, found mostly in Utah and other western States.

Tri-Valley Corporation is attempting to become one of the first commercial oilsands producer in the country with its Pleasant Valley Project in the Vaca Tar Sand Formation near Ventura, California. Tri-Valley drilled one test well in the Oxnard field last year and is in the process of drilling four more horizontal wells early in 2008.

The company says the Vaca Tar Sands share many characteristics with Canada’s Athabasca oilsands, and that it is applying methods derived from four decades of technological evolution in the Athabasca that have never before been applied in the Oxnard field. A brief initial test steaming of the PV No. 1 well enabled it to flow more than 300 barrels per day and achieve a steady production rate in excess of 200 barrels per day on pump.

“We believe we can drill the first suite of four wells this quarter subject to rig availability and have those all steamed and producing by the end of the second quarter. In fact, we envision being able to drill up to 20 such shallow horizontal wells on our properties here,” says Joseph R. Kandle, president of the operating subsidiary, Tri-Valley Oil & Gas.

The company believes it can ultimately achieve several thousand barrels per day from its field development program on the Vaca zone alone, using steam assisted gravity drainage (SAGD).

The United States is also sitting atop a shale oil resource thought to total around two trillion barrels. In 2007, the U.S. Bureau of Land Management leased five quarter-sections in the Peceance Basin for companies to research extraction technologies and to develop demonstration projects.

Shell and Chevron are the major players in the shale oil game in the U.S. The technology they plan to use to extract the resource involves putting giant coolers into the ground to build a ‘freeze wall,’ and then pumping out the groundwater inside the wall. The next step in the process is heating the shale for a few years before product can be pumped to the surface.

Shell expects to make a decision on an oil shale project in the region by 2010. Chevron says it needs three to seven years to work on its technology before it makes any sort of commercial decision.

If successful, the projects expect to recover around one million barrels per acre, or 640 million barrels per square mile. The U.S. government has plans to lease 27 square miles to oil shale development, representing a potential of almost 20 billion barrels of oil.

French oil giant Total and Brazilian state oil company Petrobras are also looking to oil shales as a source of future supply. Petrobras has what it calls “the world’s most advanced oil shale oil extraction process,” Processo Petrosix, and has an industrial-scale unit that has been operating commercially since 1991 producing oil, fuel gas, liquefied gas, and other derivatives. The two companies announced in January they are looking to partner with resource owners in the Middle East and Africa to develop oil shale operations.

The future: supply and demand

Whether the ongoing and future unconventional oil developments will help meet global demand remains an open question. In the short term Jeff Rubin, chief strategist and economist for CIBC World Markets, has his doubts. He says delays in getting huge unconventional projects off the ground, combined with declining conventional production, likely means a tight global market for years to come.

Rubin says delays in Canada and Venezuela bringing projects on stream will likely result in 700, 000 barrels per day of oil missing from the market by 2012.

“Protracted delays in some of the world’s largest energy megaprojects will have huge impacts on actual supply growth over the next five years.”

Darrell Stonehouse is regular article writer in the Canadian media.Petroleumworld does not necessarily share these views.

Editor's notice: This commentary was originally air by Oilsandreview on March 2008. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 03/01/08

Copyright© 2008 Darrell Stonehouse. All rights reserved.