OTC: Many variables dictate N. America’s emergence as a global energy force

North American businesses and governments must work together toward the collective goal of advancing the continent’s energy aspirations. That was the message delivered by producers and government officials during a May 5 panel discussion at the Offshore Technology Conference in Houston.

The US and Canada represent two of the world’s top five oil producers, and Mexico hopes to ramp up its production in the coming years once its energy reforms are fully realized.

Gustavo Hernandez Garcia, general director of Petroleos Mexicanos (Pemex), said a primary challenge faced by his country is rising technical commercial complexity including deepwater, heavy oil, unconventional, and LNG. To attract the players capable of developing these resources, Mexico must offer attractive contractual and fiscal terms; transparent and clear roles for regulators and operators; an agile and competitive national oil company; and minimal political intervention, he said.

Pemex benefits from its geographic proximity to major producers and their unique skillsets in the US. Paula Gant, deputy assistant secretary for oil and natural gas in the Department of Energy’s Office of Fossil Energy, said there’s “a tremendous need” to build on public data, statistics, and mapping in North America; for modern and resilient infrastructure; and for best practices for unconventional oil and gas.

Gant emphasized the necessity of constant and clear communication among government agencies in the three countries, and boasted that the US is “the envy of the world” with its existing natural gas pipeline system. Building out infrastructure and sustaining output growth in the US also relies on public confidence, she noted, adding that the office of oil and gas at DOE “provides scientific base from which politicians can make decisions.”

Friendlier US Congress necessary

US Rep. Bill Flores (R-Tex.), member of the House Energy and Commerce Committee and founder of Phoenix Exploration Co., bemoaned the lack of true oil and gas industry knowledge in Congress, saying that only two people in the body have C-level experience.

The lack of empathy for the industry has led to unfriendly policies under the current administration. Flores was less than pleased by the US Bureau of Ocean Energy Management’s draft proposed 2017-22 Outer Continental Shelf lease program, which included only one Mid-Atlantic lease sale. He remarked that it “isn’t a very dynamic way to look forward” as it relates to the country’s energy future.

Notably last month, a group of US Senate and House members primarily comprising Democrats from Northeastern and Mid-Atlantic states introduced bills to stop federal offshore leasing off the Atlantic coast (OGJ Online, Apr. 23, 2015).

Despite fervent opposition in some quarters to expanded US oil and gas exploration, Flores believes the nation should proceed by adopting the same regulations for Atlantic exploration and production that apply to Gulf of Mexico, and work from that template as activity increases.

As for onshore E&P, he wants the US to make all non-environmentally sensitive public land available for oil and gas development, noting that production from taxpayer-owned land is declining.

Another theme echoed at OTC this week was that government agencies should work with operators to determine functional regulations. Similarly, Flores said rules such as EPA’s revised ozone standards are costly because most of the technology required to meet those standards doesn’t yet exist.

According to study by the National Economic Research Associates, those standards could reduce US gross domestic product by $140 billion/year and create $1.1 trillion in compliance expenses from 2017 to 2040 (OGJ Online, Mar. 2, 2015). US Senate and House members introduced bills in March to block the proposal (OGJ Online, Mar. 18, 2015).

Flores also called for natural gas to be used as a transportation fuel, a quicker LNG permitting process, and the US to work with Canada to “create a North American energy powerhouse that would be untouched by the world.”

NWT prospectivity

David Ramsay, government minister of Canada’s Northwest Territories, boasted the sparsely populated area’s resource potential. “What we lack in population we make up for with energy reserves,” he said.

Most of the region is part of Western Canada Sedimentary Basin, which the US Energy Information Administration describes as the “traditional center of Canada's oil production,” containing “some of the most abundant supplies of oil and natural gas in the world.”

The Norman Wells reservoir under the Mackenzie River, the largest river flowing into the Arctic from North America, has been operated by ExxonMobil Corp. affiliate Imperial Oil Ltd. since continuous production began in 1932. When discovered in 1920, it was the world’s northernmost Arctic oil field. Produced oil is currently transported through an 870-mile pipeline to Zama, Alta.

He sees the area from the Mackenzie Valley to the Beaufort Sea as a major infrastructure corridor. While the 1,196-km Mackenzie gas pipeline system that would connect northern onshore gas fields with North American markets has been constantly delayed, the next leg of the Mackenzie Valley highway has been completed, making the area more accessible to exploration and production.

Ramsey noted that new hydraulic fracturing regulations have been drafted for the territory as it hopes to tap into some of its “stranded potential.” He also touted his territory’s offshore prospectivity. “Arctic waters off the Northwest Territories have the potential to rival the Gulf of Mexico,” he stated. “The Arctic matters more today than it has in the past.” He believes oil and gas there will keep production high and imports low for Canada and North America as a whole.

With regulations pending, oil prices low, and infrastructure costs high, he believes “this is the right time to create the conditions for investment.”

Cutting costs onshore, offshore

Developing the continent’s vast oil and gas resources in the near future will depend on the ability of producers to operate in a cost-effective manner. Michael Bahorich, executive vice-president and chief technology officer at Apache Corp., said his company has dealt with the downturn by reducing its North American rig count from 90 rigs in third-quarter 2014 to 17 today, consolidating acreage, lowering base-production decline rates, and establishing medium-term and long-term field development plans to accommodate changing cost structures.

Bahorich lauded technological advancements as critical for improved efficiency. He credited the 4 million b/d growth in US oil production to “just one invention,” the multi-frac horizontal well. He mentioned 30-stage fracs, a variety of fluid systems, and different proppant sizes as facilitators.

In the Permian basin, where Apache holds the third-largest position, the company in 2014 averaged 40 rigs, of which 26 were horizontal.

Offshore returns, meanwhile, are declining because of “extraordinary cost increases,” noted John Gremp of FMC Technologies Inc. during a separate panel discussion comprising chief executives of major services companies.

Gremp asserted that offshore production will have to ramp up in the coming years to meet rising world demand, and companies will therefore look toward the deepwater, the site of 80% of recent offshore discoveries and where reserves average 400 million boe/discovery.

He said a third of the cost increase is from inflation while two-thirds is from a change in work requirements such as deeper wells, higher pressure, and strengthening regulations. Incremental changes within the services sector aren’t enough, Gremp said, and changes must be sustainable. “This is much more than just $50/bbl oil,” he stated. “The industry has had a terrible record in execution,” he lamented, adding that most projects are delivered late with substantial cost overruns.

Gremp noted that the industry has been talking about standardization for years but it has eluded them, describing the difficulty in getting two companies to come to an agreement. He added, “Where’s robotics, data analytics? We must borrow from other industries.”

Luis Araujo of Aker Solutions said reducing topsides’ weight by 50,000 tonnes has contributed to savings for his company.

He believes companies must collaborate at the earliest stages of a project, and continue to invest in technologies. Aker Solutions and Baker Hughes Inc. recently formed the Subsea Production Alliance in which they’ve developed a powerful flowline booster system. Aker also has developed the first subsea gas compression facility, which will be installed at Asgard field offshore Norway, an important technological step forward as many companies swim upstream in the current environment.

Contact Matt Zborowski at matthewz@ogjonline.com.

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