German literature knows the expression “Schlaraffenland”. A rough and dirty translation into English would be “the land of milk and honey”. German literature and fairy tales used it to describe a fictional land. Everything exists in excess in this land.
Water becomes wine, milk or honey. Animals roam the lands already roasted and ready for consumption. Houses are being built from cake, rocks consist of cheese. Inhabitants of this realm consider idleness and sloth as their best virtues. Hard work and effort are being frowned upon.
As crazy as this sounds, but that’s the state of the oil industry by the year 2000. Here, we are long before the shale oil revolution. And long before all the old dogmas of the oil world dominated every energy executives mind. Needless to say that OPEC still held sway in this world.
Yet, the oil industry still thrived on one single business model – going after easy oil. hats what actually matters.
I can almost hear you howling by now. How can I say this? Deepwater oil was never easy to do. And look at the Trans Alaska pipeline to see that there was nothing easy with this oil, to begin with.
And yet – it is. We still talk about oil that is easy to find, develop, extract, process and use. At least when we compare it to what’s done today.
To understand that, we need to look at what “hard-oil” is and what it is like to work with it.
Oil is one of the biggest industries in this world. Its the basis of almost all mobility. A lot of industries and petrochemicals would not exist without it. If – for a moment – you imagined life without oil, much of what your life depends on today would not exist anymore. Modern life as we know it would not have developed. Things like airplanes would not even be conceivable. Railway, modern medicines, the clothes we wear, agriculture able to feed billions, …
Oil has a huge footprint in our daily lives. Without it, it is unthinkable. And yet, most of what you see today exists as a courtesy of easy oil.
When I say easy oil, you must think that’s the sort of oil where some Arabs stick their fingers in the sand and oil comes out. That’s a small part of it, but not the most important one.
What’s easy oil then?
Impermeable rock created a seal capping production-rock. Oil is being created in this production-rock. The production rock is also permissible enough to oil flows to allow the oil to rise. The oil accumulates below the capping rock layer and forms a reservoir. Now you can drill into this reservoir and produce the easy oil.
Yet, those situations are actually quite rare in the oil reserves universe. Crude oil is a pretty ubiquitous substance. It is being found pretty much everywhere on earth in certain quantities.
The question is not if its there. The question is – how much does it cost to find, develop, extract, process or use it and what does the market pay?
What we have extracted so far is the top of the barrel, the easiest take, the cream in the milk can. So, there is an awful lot more oil in the ground that we can term today as unconventional.
Now I know what you say. Unconventional oil, that’s shale oil. Well yes, to a degree. I would throw in all oil where the cost of bringing it to market is above a certain threshold. A non-exhaustive list would be:
- Oil in deep arctic fields – because of the environmental conditions suffered during production and the afferent cost;
- Sour Oil – Because of the steep cost of extracting the sulfur and disposing of it;
- Super Heavy Oil – because of the cost of cracking long oil chains into shorter ones to produce the sweet, light oil we need;
- Oil sands – because of the cost of separating oil from solids and after treatment;
- Oil under salt domes – because normal seismic discovery and exploration methods fail here;
- Oil from EOR (Enhanced Oil Recovery) – because of the cost of pumping water, gas or other stuff into the field to strip the oil out;
- Oil from super deep sea reservoirs – because of the cost of a single drill and the associated risks attached to that;
- Shale oil – because of the cost of fracking and continued well stimulation;
- Kerogen (precursor-substance of oil) – because of the cost of treating this low-quality resource;
If I forgot one or more, please tell me so. But you get the gist of it. There is an awful lot of oil out there. It’s only not that easy anymore to get it.
The oil industry works on all those harder oil sources. The real issue is not which ones are better or worse. It is which of those above has a more credible path to lower costs and more efficient operations?
Two business models emerge.
The Casino model
This is the traditional business model. It consists of spending vast sums of money to find, develop and extract the oil upfront. Deep-sea or arctic oil are prime examples. Once the oil is on the surface, things are simple and easy. Getting there often requires a multi-billion-dollar effort. There are lots of pitfalls on the way. Only companies with massive balance sheets can do this as you need a huge war chest to afford all the upfront cost.
This model needs very log payout terms. Oil wells must produce their goo over decades on a very stable rate. They need to pay those massive investments back. Lead times are often measured in decades and oil comes with a bang as soon as the well goes online. Experimentation is being frowned upon as bets are so big. New things are being introduced on a very slow and hesitant trickle.
The farming model
This is much more like continuous milking of a reserve. Continuous optimization of the cash to production ratio is the goal. This means that a great number of low-cost holes are being drilled. Once they are being drilled comes reserve stimulation – that’s shale.
It could also be old unproductive conventional wells. They are being revitalized using stimulation like EOR. The oil is also sometimes easy to produce but treatment is a challenge. New ways are being tried out all the time.
In this model, R&D plays an important role as well as experience. Entry bar is low, cough up single-digit millions, get drilling rights and off you go. As there are so many wells, experimentation is very high and the learning curve very steep. Also, the time from appraisal to oil is rather short.
History has shown that the high turnover, high volume business beats the Casino model. Its the sheer amount of innovation those companies get going that flings them into the lead. There are many small minions trying out everything under the sun. On the other side, you got a few big, heavy monoliths. They need a committee to decide everything that the little guys decide on the kitchen table.
OK, many of the big folks are in shale now. They eat this cake too. Those companies are much more regimented and methodical than the wildcatters. They are also much better funded.
Shale is in the next phase. It needs less wild entrepreneurs and more corporate spreadsheet wielding firepower. Imagine what those resources will do to all the new doors the wildcatters have flung open.
There is still easy oil out there. But in the bigger picture, it’s not the driver of the market anymore. The constant onslaught of the oil-farmers pushes the cost of shale down. It is at the point where the other oil production methods have problems competing.
Sorry NOPEC but this time, the battle is for survival.
Image by 85Miranda from Pixabay