U.S. Has The Edge For Developing Unconventional Resources

By Christine Ehlig-Economides, William C. Miller Endowed Chair Professor of Petroleum Engineering

The upstream petroleum industry has achieved near miracles producing unconventional resources, using technologies developed in the United States mainly by independent oil companies.

Unconventional resources require technologies typically not used to produce conventional oil and gas reservoirs. In particular, the combination of horizontal wells and hydraulic fracturing has been key to gradually increasing success, starting in the 1990s. While the well completions may be more expensive than those typically applied in conventional reservoirs, the advantage for unconventional resources, including tight (low permeability) gas in sandstone or carbonate rock, coalbed methane, and organic rich source rocks classed as shale gas and tight oil, is very large resource volumes.

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The above map shows conventional reservoirs (small outlined shapes) overlying known unconventional resource plays (large pastel-shaded regions) in the Permian Basin near Midland, Texas. Wells anywhere in any of the shaded plays may profitably produce oil for sufficiently high oil price. Economides Petroleum Technology, Inc. 

While tight gas and coalbed methane resources have shown important successes, shale gas enabled a stunning increase in domestic natural gas production of about 4 trillion cubic feet (TCF) per day in the five-year period from 2005 to 2010. In 2005, the United States needed to import natural gas to keep up with growing demand for natural gas to use in electric power generation.

Since 2010, a glut in natural gas production lowered the price sufficiently to 1) revitalize the petrochemical industry, 2) enable significant reduction of polluting nitrous and sulfur oxides and greenhouse gas emissions from electric power generation, and 3) inspire plans by Chenier and other companies to export U.S. natural gas this year as liquefied natural gas (LNG).

U.S. natural gas resources could sustain domestic natural gas use for nearly 100 years at current consumption rates.

A similar story followed for U.S. crude oil production.

Tight oil production ramped up nearly 5 million barrels per day over about five years, starting in 2008.

The production increase was comparable to conventional crude oil production increases by Aramco in the 1980s and by Russia at the turn of this century that used well known technologies imported largely from the United States and Europe.

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The above graph shows historic crude oil production since 1980 in million bpd. US production had been dropping since 1970, and the recent production peak exceeded the peak in 1970. The circles highlight how the upturn in US crude oil production compares to previous growth spurts in Saudi Arabia and Russia. Economides Petroleum Technology, Inc. 

When increased U.S. crude oil production volumes eventually affected global markets, the international oil price dropped, and we currently enjoy driving with much cheaper gasoline as a result.

The technologies that accomplished these near miracles were developed and implemented by petroleum engineers who specialize in drilling down to reservoirs, often miles underground, and producing crude oil and natural gas to the surface where it is transported to electric power plants, petrochemical plants, and refineries.

Right now, of course, profits have been all but erased for most producers working in unconventional reservoirs. Today the challenge for U.S. petroleum engineers is to find cheaper ways to produce unconventional resources. With the end of the ban on crude oil exports, U.S. oil can be sold at a global price. In time, the global price will creep up, but odds are the eventual equilibrium global price will be well below $100 per STB, or stock tank barrel. Some of the production costs will be met by belt-tightening economics involving employee reductions, corporate restructuring and reduced demand for essential oilfield services and products.

A role for academic research may be to reexamine data acquired by the operators with an eye on discovering ways to reduce well costs and increase hydrocarbon recovery efficiency.

Shale formations are found around the world, but it remains an open question as to whether other countries will be able to successfully develop their own unconventional resources. That’s because in addition to significant financial investment, developing unconventional resources requires at least three other elements: the resource, the right technology and the necessary infrastructure, including the legal, logistical and political frameworks.

Any one of those issues can be a barrier to successful development, but they all align in the United States. The U.S. legal edge, for example, is that landowners also own the subsurface minerals; this means landowners have a stake in the profits from selling the minerals. No other country has this legal framework. Some landowners in Texas and other states have become overnight millionaires as a result of shale development.

In other countries, the profits go to the government.

Christine Ehlig-Economides is professor of petroleum engineering at the University of Houston’s Cullen College of Engineering. A member of the U.S. National Academy of Engineering, her research focuses on production and reservoir engineering in conventional and shale reservoirs.

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