Wednesday, October 7, 2009

Pelican State Oil

Matthew Simmons is an author and energy investor who happens to give some pretty good presentations. I noticed a new one that had some very important fact I'd like to highlight.

Here's the Presentation [PDF]. It was put together for Acadiana Business Magazine and is all about the Louisiana's oil industry.

As I've pointed out before, there's a huge amount of infrastructure off the Louisiana coast. At least $100 billion dollars in offshore infrastructure. Simmons points out that offshore is the most important "Parish" in the state. The heart of Gulf of Mexico Oil production is in South Louisiana. All of the major support bases and logistical centers, as well as the pipelines and a good chunk of the refineries are in Louisiana.

There are a couple of slides I'll steal that I think are important because they illustrate a point far better than I can in words:

Production Scorecard, From Matthew Simmons

One of the realities of offshore fields is their incredibly short lifespans. They are incredibly prolific for a couple of years and then the pressure gives out and the field depletes. Cognac peaked at 72,000 barrels/day 5 years after first oil. 10 years after that it was 17,000 barrels/day. Today, it's roughly 2,000 barrels/day. Since words don't really describe it as well as pictures, here's a few more slides I'll highlight:

NOTE: Curves from Simmons & Co.

What do the curves all have in common? Quick peaking fields with harsh declines (>10%/year sometimes, 4-6%/year is industry average). Because of that, 90% of the production comes from less than 10% of the fields. There are a lot of platforms out there that are only kept around because their abandonment costs are so high [not entirely true; a lot have extended leases on life thanks to subsea fields or pipeline stations for deeper fields]. Trace amounts of pollutants are one concern (see the Brent Spar for an idea of what I'm talking about), but I think the bigger issue is the hazard to marine traffic. The Gulf of Mexico has two of the biggest ports in the world (NOLA and Houston). Some of these platforms are only a couple thousand feet of major shipping lanes, which is like threading the needle for the really big, really unmaneuverable oil tankers and cargo vessels. There have been some minor collisions and some major near misses, but so far there's been no major accidents.

Another of his points I don't totally agree with: Louisiana's oil infrastructure is very old, which is true, but it tends to be pretty well cared for and Katrina was, in some respects, a blessing in that a lot of old equipment got replaced and upgraded. Rust isn't as big a deal as it could be. He raises the specter of having to rebuild or expand the LOOP. I've heard of the latter, but I've never heard of anyone saying the LOOP was rusting away.

One of the major subjective assertions he makes, that I happen to agree with, is that the demographics of the Louisiana oil industry, in terms of the aging workforce, might be the WORST IN THE ENTIRE GLOBAL OIL INDUSTRY. There's some young engineers that have been hired since the 2000-era boom and some old guys who survived the cutbacks in the 1980's, and almost nobody in the middle. Not a day goes by without more older engineers going into retirement. A company can keep a stable headcount, if you're lucky, but you'll never be able to keep the experience and talent level the same. The oil industry is paying a price for firing so many workers at the end of the oil bust. The business people thought the Gulf was a "Dead Sea" and these workers would no longer be needed. Oops.

Louisiana's oil industry has had several obituaries written for it, but it's not dead yet. When things are said and done, Louisiana will still be playing a major role in bringing energy to the nation, no matter what form that may come in.


Peripatetic Engineer said...

A couple of comments.

The thing that helped deep water development was the MMS royalty relief. It reduced expenditures and made the risk to explore deep water worthwhile. Obama wants to eliminate it. Without it, deepwater exploration could dry up.

A new play called sub-salt is just now being developed. I heard geo-guessers talk about this 20 years ago but the technology wan't there. It could cause another boom.

The sharp delines are caused in part by horizontal completions which allow a longer length of perforated pipe in the completion. This helps the cash flow and decreases payout time. Without horizontal completions, it is doubtful that deep water would be profitable.

Clay said...

I think Royalty Relief is overrated. For background, when oil was $10/barrel in '98, Congress passed an act that allowed companies that took the risk to drill in the Gulf extra time to recover their investments. It's very risky. Even now, the wildcat success rate is still only about 1 in 4. They don't always find oil and even when they do it's not always economical.

That article give some more background. Royalty relief has been about $19 billion over 11 years. I'm going to call it $20B in 10 to make my math easy ($2 Billion/Year subsidy).

A $5/barrel swing means a lot more than royalty relief. $5 * 365 days * 1.5MMB/D (approximate total deepwater production) = $2.7 Billion/Year.

So, Royalty Relief is a factor, but a $5 swing in oil prices wipes it out. Companies drill in the US for three reasons: legal stability (look at SCOTUS backing Kerr-McGee), physical security (no abductions or roadside bombs), and market price of oil (when it's high enough, they invest). Royalty Relief adds a little, but I don't think it's detectable in the long run and $20 billion could put at least a dent in the deficit.

Mars is a sub-salt play and was developed about 10 years ago. We've know about it for 30+ years, but the problem was the salt distorted seismic images and you could never get an accurate idea of what was below. Now, with 4D seismic, computers, and some fancy math, they get a good (but not perfect) idea of what is underneath. Maitri ( was a geophysicist for many years working on subsalt imaging.

I've heard that, if you have all the necessary production and water treating equipment, a DVA (direct vertical access) well will be better than a horizontal well in total recovery of the oil in place. Is that true?

Clay said...

"Geoguessers" is a great term.

More on major Brazilian sub-salt finds, including how they're formed.

Pelican Products said...

I think that the companies should be looking less at the government for help, and more toward private engineers that have been generating new waves in the technological fields. There are too many relying on the government for help, and to be perfectly honest, they are not doing a very good job helping themselves. My true opinion is that these companies need to look at alternative energies and do individual research on the best methods. These current ones are far too risky and dangerous for everyone, including the environment.