Umbilical Oil - Part 1 (supply)

Crude oil, unlike natural gas, is a commodity in much shorter supply at current prices. While a vast amount of total reserves still exist, the marginal cost of production of these reserves continues to increase. Impressive technological improvements have only partially offset the increase in finding, development and operating costs of these deeper, tighter and less permeable hydrocarbon reservoirs.


Worldwide, average recoverable oil reserves have historically been around 30-40%. In other words, for every 100 barrels of oil we find, we can only economically produce 30-40 of those. Natural gas recoveries, by comparison, have historically been in the 70-90% range. Of course, if market prices are higher, economic recovery rates also go up as energy companies can spend more capital and energy to improve efficiency. Physics and thermodynamics however, ensure that this relationship is typically a logarithmic one--doubling the oil price could, for example, only lead to 5% more recovery. On the gas side, it's much easier to move the relatively small independent methane molecule across the reservoir rock and to the wellbore than a large viscous molecule of crude oil. Two of the largest undeveloped reserves of oil in the world are deep offshore oil and unconventional resources like the oilsands. Both have the potential to produce a vast amount of oil, but it will take a lot more to fill up the gas tank if we are to rely exclusively on fuel derived from these sources.

Offshore Oil
For comparison's sake, I will compare BP's recent 'huge' Tiber oilfield find to Ghawar. Ghawar, the world's largest and most prolific developed oilfield, has produced 48% of the 131 billion barrels it's operator, Saudi Aramco, expects to recover. It has a very favorable set of geological preconditions that we have yet to find anywhere else in the world. The number of large oil discoveries is dwindling and those that have been made also have more fragile economics because of the engineering (and political) complexities involved. BP's recent Tiber oil sits 10.6 km below the ocean floor--that's more than the height of Mount Everest. It also sits in 1.2 kilometer deep water--deeper than the crush depth of the most advanced military submarines. Some submersibles and special unmanned vehicles can get this deep, but it speaks to the challenges involved. Challenges that will ensure the oil does not come out of the ground cheaply. Even when the infrastructure is in place and capital expenditures have been made, early recoverable estimates for Tiber of up to 1 billion barrels would only sustain current global oil consumption for 12 days (a thousand barrels a second is about how much the world currently consumes).

Oilsands
Unlike offshore oil, oilsands are typically very shallow and geographically accessible. It is the quality and flowability of the hydrocarbons that present challenges--the oil is too viscous to be produced using a conventional oil well scheme. The oil is typically either mined and extracted from the sands using steam, or it is produced 'in-situ' using a steam-assisted gravity drainage (SAGD) technique where high-energy steam is injected to lower the viscosity of the oil enough that it can be produced in a horizontal well. Both techniques use vast amounts of steam, which itself requires lots of energy to produce (currently most of the steam generation is produced by burning natural gas). Unlike conventional crude oil, the resulting hydrocarbon slurry then needs to be either upgraded or mixed with lighter hydrocarbons before it can be pipelined to a refinery. These processes often involve several steps such as distillation, cracking the large molecules into smaller ones, removing sulphur and heavy metals and in some cases dilution with lighter hydrocarbons (i.e. condensates). One of my textbooks from elementary school said that the oilsands would never be commercially viable. The authors were wrong--but producing the heavy oil isn't cheap by any means. Not to mention the potential of added costs due to environmental regulations and CO₂ reduction or sequestration.

"Currently oil at about $60 to $70 per bbl we think is not enough to justify some of the significant projects we are contemplating, especially on the mining side," says Jean-Michel Gires, CEO of Total E&P Canada. The energy company CEO went on to predict a sustained price of at least $85 was needed to make many these projects commercially viable.


From the supply side, it appears as though the fundamentals might support an oil price of around $80/barrel, with a continued ascent upward as the elephants* mature and decline. But that's just the supply side--stay tuned for the demand side (part 2).

*the term 'elephant' refers to a very large oil field, typically one that contains at least 100 million barrels of recoverable oil.