I recently heard a speech by the chairman of a large financial institution that provides funds to oil and gas companies drilling wells in the U.S. The primary theme of his talk was that “petroleum exploration is dead in the United States. We know where all the oil is now, and the industry’s job is just to learn to get it out more efficiently and profitably.”
As a geologist who’s spent a long career exploring for oil and natural gas, his statement struck me as naively shortsighted. I’d never considered that all our nation’s oil fields might already have been discovered, and that nothing is left for oil and gas explorers to do but pack up the maps and retire to their basements.
After all, within the last three years, two friends, Jim Musselman, president and CEO of Caelus Energy in Dallas, and Bill Armstrong, president and CEO of Armstrong Oil and Gas in Denver, have each discovered new oil fields that are the largest found in the U.S. in 30 years. Situated on Alaska’s North Slope, each of the fields is expected to yield more than a billion barrels of oil, and both Jim and Bill say they believe many more fields are waiting to be discovered in the state. I’m certain neither expect their new discoveries will be their last.
Both new fields were found by “conventional” methods: i.e. utilizing inferred models of geological “traps” where oil could be contained, then drilling vertical wells to test their ideas. For more than a century, oilmen and women have employed a variety of geological theories, methods and technologies to explore for, find and produce oil from the now?known fields around the world.
About a decade ago, the combined technologies of horizontal drilling and hydraulic fracturing (“fracing”) made possible the drilling and production from rock formations previously known to contain hydrocarbons but thought to be too dense or “tight” to yield them in commercial quantities. Oil and natural gas produced from this new resource base are known as the “unconventionals”.
Consequences of the “unconventional revolution” have been profound. The technologies have opened vast areas of the U.S. and around the world as new targets for drilling. For the U.S., 2009 ended an annual decline in oil production that dated back to 1971. Since then, a steady annual increase in daily production will allow the U.S. to reach or exceed 1971’s peak this year. In doing so, the industry
has employed thousands of new oilfield workers, decreased our reliance on foreign and often adversarial countries to make up our petroleum shortfalls, decreased our negative balance of trade deficits, and enhanced our nation’s security and influence abroad.
For the oil industry, the unconventional revolution is changing the nature of the business from exploration to exploitation. In the past, most wells and field discoveries were made by independent operators and small companies, who sold their holdings to larger companies to develop and exploit. Today, because “tight rock” shales and fine?grained siltstones are more tabular in form and wider in distribution than “conventional” reservoirs, finding productive zones is more predictable, and thus is less risky than “wildcat” tests. Greater predictability has attracted billions of dollars to develop these “resource plays”, commonly by new companies, venture capital firms and investment groups, for whom investors funds are readily available.
In this new regime, the role of the independent geologist or small?time operator has been greatly diminished. Prices of oil and gas leases and expenses of horizontal drilling, well completions, lease equipment and operations have all soared. The technical knowledge and expertise required to drill most wells today are well beyond that of past generations of “mom and pop” operators.
As a result, conventional oil and gas exploration has been in a decline for the past five years, with the number of exploratory wells down more than 60%. Last year, the total number of conventional discoveries was the lowest since 1952. Discoveries, once the backbone of reserve replacement, have failed to replace production for the past eighteen years. Since 2014, companies have cut exploration spending by 47%, or close to $1 trillion, with many companies completely shutting down their exploratory drilling.
Bygone years when an exploration army of would?be J.R. Ewings was active may be on the way to ultimate oblivion. But so long as individuals with knowledge, initiative, and burning desire to find new million?barrel fields are around, my bet is that some will. We anticipate that many new fields and producing areas will be discovered by individuals conducting exploration activities.