unconventional oil: filling in the gap or flooding the market?
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Unconventional Oil: Filling in the Gap or Flooding the Market?
DOE NEMS APRIL 12, 2005Michael C. Lynchlynch@energyseer.com
URBAN LEGENDS (OIL DIVISION)
l CONVENTIONAL OIL NEAR A PEAK– DISCOVERIES ARE INADEQUATE
l TAR SANDS TOO DIRTY TO BE PRODUCEDl EROEI ON ETHANOL IS NEGATIVEl SHALE OIL ALWAYS MORE EXPENSIVE THAN
CONVENTIONAL OILl EASY OIL IS GONE, COSTS ARE RISINGl OIL MARKET ANALYSTS ARE YOUNG AND
HANDSOME
PERTINENT ISSUES
l VOLUMES ARE HUGEl COSTS MODERATE—COMPARED TO PRICES,
NOT CONVENTIONAL OIL– VERY CAPITAL INTENSIVE– FUEL INTENSIVE
l RECOVERY RATES LOWl CONTAMINANTS/EMISSIONS SIGNFICANT l WHAT RATE OF CHANGE POSSIBLE?
HURDLES
l NIMBY/GHG AND OTHER ENVIRONMENTAL PROBLEMS– BUSH CAN OPEN IRAQ, BUT CAN HE OPEN
COLORADO?
l RELATIVELY HIGH COSTS– ARE HIGH PRICES PERMANENT?
l WILL GOVERNMENTS ACCEPT LOW RETURNS IF PRICES DROP?
CONVENTIONAL OIL SUPPLY CURVES
0
5
10
15
20
25
30
35
40
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
MB/D
1996
$/B
BL
ADELMAN & SHAHI (89) STAUFFER (93) DEMAN (85) MNOC (99) IOC(01) FAGAN 2001
UnconventionalOil Costs
Unconventional oil is cheaper than conventional oil prices, but aboveMost conventional oil costs.
ADVANTAGES
l NO EXPLORATION RISK, MODERATE POLITICAL RISK
l INCREMENTAL VOLUMES MEANS LOWER PRICE RISK
l CONTINUING TECHNOLOGICAL IMPROVEMENTS– NON-VIABLE RESOURCES MOVE INTO
VIABLE CATEGORY– LESS PRICE RISK AS COSTS DROP
MAIN SOURCES
l CANADIAN TAR SANDSl VENEZUELAN HEAVY OIL
– ORIMULSION
l ETHANOL, MTBE, ETC.l GTLl US SHALE OIL
“OTHER” LIQUIDS(ETHANOL, MTBE, ORIMULISION, ETC.)
0
200
400
600
800
1,000
1,200
1980 1985 1990 1995 2000
TB
/D
U S BRAZIL VENEZUELA SAUDI S AFRICA ASIA GERMANY
HEAVY OIL/TAR SANDS
l RESOURCES 5 TRILLION, 10-15% RECOVERABLE
l PRODUCTION BOOMINGl COSTS ARE APPROXIMATELY $8-12/BBL,
$15-18 IF ADJUSTED FOR QUALITY– EXCHANGE RATE SENSITIVE
l CANADA/VENEZUELA MAIN ARENASl HIGH FUEL USE
OGJ 7/28/03
SHALE OIL
l ENORMOUS RESOURCE, MUCH IN US– 3 TO 10 TRILLION BARRELS
l COSTS REMAIN HIGH, RESEARCH ONGOING
l WHAT COST MODEL?– “CRUDE OIL +$5/BBL” (i.e., Manana)– OR TAR SANDS DECLINE?
GAS-TO-LIQUIDS
l LARGE POTENTIAL RESOURCE– STRANDED GAS OF >1 TRILLION BBLS– ULTIMATE GAS MUCH MORE
l TECHNOLOGY ‘PROVEN’ BUT EVOLVINGl 500 TB/D IN 5 YEARSl CAPITAL COSTS ARE DROPPING:
$50K/BBL TO $25K/BBL (c. $10/BBL)l SENSITIVE TO OIL PRICES, TAXES
INVESTMENT APPROACH
l HIGH-COST MEGA-PROJECT– HOPE PRICES STAY UP – TAR SANDS/SHALE OIL 1970S
l GO FOR SWEET SPOTS– CBM, ORINOCO, TAR SANDS
l DRIVE COSTS DOWNl NEW TECHNOLOGIES
– SAGD
SAMPLE COST TRENDS
Oil & Gas Journal 7/28/2003.
Revolutionary
Evolutionary
EQUIPMENT COST TRENDS
-6%
-4%
-2%
0%
2%
4%
6%
8%
1960 1965 1970 1975 1980 1985 1990 1995 2000
EXPECTED OIL PRICE TREND(ANNUAL REAL CHANGE 2010-2025)
-4%
-3%
-2%
-1%
0%
1%
2%
DOE IEA GII CGES SEER DB
DOE IEO 2004, expect increase next year.
LESSONS
l SHORT-TERM PROBLEMS ARE LONG-TERM OPPORTUNITIES– ENGINEERS ARE SMART– HIGH PRICES MOTIVATE THEM
l RESOURCES ARE CONTINUOUS – CONVENTIONAL OIL– UNCONVENTIONAL OIL
l QUALITY, DENSITY, EASE OF EXTRACTION
Most people think of engineers as nothing but geeks.
Okay, they are geeks, but don’t undersell them.
Microsoft founders c. 1978.
FUTURE TRENDS
l WILL HIGH PRICES SEE HEAVY INVESTMENT, THEN COST-CUTTING AS IN TAR SANDS IN 1970S?
l WILL LOWER PRICES CAUSE ABANDONMENT OF GTL AS IN 1980S?
l HOW WOULD GOVERNMENTS RESPOND TO LOWER PRICES?– PUSH VOLUMES OR REACH INDIFFERENCE
TO INCOME?
POTENTIAL COST TRENDS
0
5
10
15
20
25
30
35
40
45
2005 2010 2015 2020 2025 2030
2005
$/B
BL
HEAVY OIL GTL SHALE OIL EVOLUTIONARY SHALE REVOLUTIONARY 2010
EXPECTATIONS
l HEAVY OIL/TAR SANDS TO ADD 200-350 TB/D PER YEAR
l GTL TO ADD 75-150 TB/D/YRl “OTHER” TO ADD 50-100 TB/D/YRl SHALE OIL NOT BY 2010l PRICE PRIMARY FACTOR DETERMINING
LEVEL– TECHNOLOGY, POLICY SECONDARY
THEREFORE…
l MAINLY GAP FILL, BECAUSE OF ‘INERTIA’– CAN’T ADD CAPACITY FAST ENOUGH TO SWAMP MARKET
UNLESS DEMAND WEAKl PRIMARY UNCERTAINTY TO 2010 IS PRICE
– FOLLOWED BY GTLl SHALE OIL COULD BECOME IMPORTANT BY 2015l HIGH INVESTMENT NOW IS THE SEED FOR LOWER
COSTS, HIGHER VOLUMES IN NEXT DECADE– HIGH PRICES FOR 2 MORE YEARS COULD BE BIG TROUBLE
FOR OPEC LATER
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