New E&P Technology Needed--Quick

Abstract: Trends indicate that future breakthroughs will hinge largely on yet-to-be-developed technology; meanwhile, government-sponsored R&D seems to be the "only show in town."

Analysis: Recently, the U.S. Dept. of Energy (DOE) added six new R&D projects to a list grouped under its "Technology Development with Independents" program. The projects, to be conducted by small producers in domestic fields, are part of a growing list of initiatives funded partially with taxpayer dollars (the program is described in detail in the March 17 edition of Oil and Gas Advisory).

There are always some who would decry such programs, presuming them to be telltale examples of "corporate welfare" doled out by thankful politicians to "Big Oil" for election campaign contributions or other political boosts.

The truth is, government support for oil and gas research is, generally, just about the only long-term R&D effort available, not only in the U.S., but in many larger countries.

Matt Simmons, founder and chairman of Simmons and Co. International, a Houston-based investment-banking firm, says that while government-backed R&D has been a valuable new technology breeding ground, unless all R&D sources are ratcheted up exponentially--and soon--the outlook for the world is grim.

Other new technology sources include major multinational oil company research labs, as well as those run by national oil companies; "think tanks" (universities and private research labs); and the petroleum service/supply companies, who developed much of the new technology during the last 20 years, particularly for offshore, but who experienced little in return on their investment. Venture capitalists also are needed, said Simmons, to fund development of new tools and techniques (and most likely over longer periods of return-on-investment time than those to which they have grown accustomed).

Simmons, whose 25-year career in petroleum financing gives him a unique viewpoint on industry trends, says the last of the "low-hanging fruit"--new major oil and gas reserves in traditional petroleum provinces--has been picked. From now on, he told a recent Offshore Technology Conference audience, energy resource adequacy will be a serious global issue. Advances in petroleum technology must accelerate steeply, he said, both in deepwater offshore E&P and in improving production from newly discovered, middle-aged, and mature fields.

Despite oil price gyrations and a temporary supply glut in certain parts of the world, Simmons said the epoch of cheap energy has passed. And while the world will never "run out" of oil and gas (as if that had to happen before the problem got everyone's attention), supplies of both will peak, then drift into steep decline, as they have always done, only faster. Breakthrough technologies developed during the last two decades (e.g., 3D seismic, multilateral wells, simultaneous production from multiple pay zones, etc.) might have increased overall supply, he noted, but they also precipitated much higher field decline rates.

Yet, Simmons noted, the details of what causes production decline curves really aren't fully understood. New technology focused on moderating such declines, he said, is critical, since a large percentage of production from many fields ends up as "unrecoverable," either technically or economically. Despite all that's done in primary, secondary, and even tertiary recovery, literally billions of proven barrels of oil equivalent still remain in mature fields around the world. Apparently, even with today's higher oil prices, little new technology is being developed to recover those remaining reserves.

So like it or not, in Simmons' view, energy prices will need to drift even higher, with a greater percentage of increased wellhead revenues used to pay for what he called a necessary "explosion" of new technology. In fact, he said, to elicit a big enough response, the world may need something on the order of importance of the Soviet Union's development of the first earth-orbiting satellite (Sputnik, in 1957, which prompted creation of the U.S. space program) to galvanize the R&D community into a massive technology development response.

In the absence of such a show-starting event, however, Simmons said the status of new petroleum technology remains vague. The need for the "next-generation tool kit" has never been greater, yet the roadmap for critically needed new tools is hazy, he observed, and the work-in-progress blackboard is relatively bare.

As for the traditional technology sources, Simmons flatly deems multinational companies as "bored" with long-term R&D, particularly since they are hunting for elephant-sized new reserves and selling off anything smaller. At the think tanks, enrollment in critical petroleum-related disciplines is at an all-time low, and experienced university faculties are nearing retirement age. Oil service companies can't be expected to carry the load, either, particularly if returns are 10 percent or less on investment, as was the case in the past.

Government-sponsored research is growing, however. Yet, it is "not very visible" and, therefore, is effectively untapped. In Simmons' view, the industry might not appreciate what governments can bring to the R&D table. What's more, he noted, U.S. producers benefit from tax credits afforded by government for tackling unconventional energy sources like tight sands gas (including coalbed methane) production. Other government-derived benefits include reduced royalty payments on deepwater oil production and on deep gas in shallower water, as well as tax breaks on tertiary recovery programs in mature fields, among others. More of the same also could help open the R&D tap.

Not unlike other industry trend watchers, Simmons stressed that further development of offshore reserves--the last and largest oil and gas frontier--will depend heavily on construction of an all-new technology base. That sector, he said, needs the fastest growth curve in terms of new tools and techniques to wrest production economically from beneath ever-increasing water depths.

But the need for "edge-of-the-envelope" (thankfully, a new substitute for "outside-the-box") technology is a vital one, said Simmons. He cited a recent ExxonMobil study that states that with current demand increases, the world will need to add some 100 million barrels per day of oil equivalent in new production by 2010--a 40 percent increase from today. Deepwater offshore production increases alone aren't likely to meet that target, he pointed out, so it's even more crucial that the R&D eggs are spread among multiple baskets.

Overall, Simmons said the biggest technology gap today lies in divining the reserves that remain in both developing and developed fields around the world. Techniques to assess such reserves are still obscure, particularly in the areas of reserve appreciation; recovery of known, but not produced, reserves; and assessment of undiscovered potential reserves.

Actually, gaining knowledge about those things is a part of the DOE's shared funding of new technology projects for improved oil and gas recovery by independents. Though low in profile compared to the multinationals' search for all-new reserves, this has been surprisingly successful in the last 10 years or so. The implications of a much wider, more heavily funded program are more than noteworthy.

For example, seeds contained in one of the recently announced projects are hard to ignore.

Tenneco Energy LLC, of Wheatridge, CO, will apply regenerative biochemicals like microbes and organic surfactants to see if they will reverse formation damage, restore permeability, and improve ultimate production in a number of wells in the East Texas field, one of the largest U.S. oilfields ever discovered (in the early 1930s and still flowing today after having so far produced more than 5 billion barrels of oil). Abnormal wellbore paraffin and asphaltene deposits resulting from early E&P practices have reduced the field's productive life severely. A successful application would remove the deposits and improve production, say Tenneco and its partners, MICRO-TEX Inc., San Antonio, TX and Oil Patch Pipe and Supply, Kilgore, TX. Total project cost is $191,565 (DOE share: $89,862).

By disclosing what they have learned with other producers in the field--a must when taxpayer money is involved--such companies could increase more of the field's original oil in place. The technique also could be expanded into other fields with similar problems.

Other of the most-recent projects include similar potential benefits to U.S. producers. They range in scope from instituting alkaline-surfactant-polymer (ASP) flooding for recovering trapped oil in a field in Natrona County, WY, to using new cased hole logging equipment to identify bypassed oil pay in a field near Los Angeles, CA. In either case, effective new technology could help to capture production deemed previously to be unrecoverable.

The estimated cost of those two projects, by the way, is $200,000 apiece, with the DOE contributing half of the up-front money. Should they prove out, such investments would seem paltry enough when stacked up against the longer-term technology benefits to U.S. producers and, ultimately, to U.S. consumers.

If such low-ante government R&D sponsorship can help the industry chip away at its E&P technology gap, it's not difficult to imagine what other new technology sources could do, given their access to much larger resources. But they have to raise the stakes--and be quick about it.