Michael Lynch appears to be waiting for Harry Potter

It sometimes seems that predicting future supplies is a battle, where on the one side we have the Cornucopians, such as Michael Lynch, and on the other those whom I will call the Realists, both looking at the same situation and calling the future in entirely opposing ways. We are now in a situation where Spain has had to start implementing conservation measures in light of the problems with the loss of their fuel supplies from Libya. Spain gets 13% of its oil and 2% of its natural gas from Libya, and is starting to take precautions (H/t Luis).

On a temporary basis, the government agreed to lower the maximum speed limit on Spanish highways to 110 kilometers per hour from 120 kilometer per hour to reduce gasoline consumption. It will also lower ticket prices on the state-owned railway system to encourage the use of public transportation. In coming days, Industry Minister Miguel Sebastian will meet with regional authorities to study additional energy-savings measures.

Michael Lynch, on the other hand, is quite happy telling folk that there isn’t a problem, and that the Kingdom of Saudi Arabia (KSA) has lots of additional oil fields that it can tap, whenever they are needed.

There are several other reasons to remain calm about Saudi reserves. Officials there have discovered approximately 70 major oil fields that they have left untapped over concerns that increased Saudi production would cause global oil prices to collapse.

And while Aramco is hardly likely to find anything on the scale of the Ghawar oil field, the world’s largest, they haven’t been looking very hard. The Saudis drilled about 500 wells last year; some 11,000 are drilled every year in the United States alone.

The situation is, of course, that any analysis of any worth about the rising demand for liquid fuels comes to the conclusion, relatively quickly, that we are going to need several multiples of the production of the KSA it the world is going to continue to be supplied with an adequate resource to meet the demands of the almost immediate future. But that is not the real point.

What the current situation is likely about to teach us, however, is a somewhat different lesson, though one that some of us have been preaching for the last half-decade. It is that, regardless of resource, it is the rate at which you can bring this to market, to meet immediate demand, which is the critical value. It matters not if there are a billion barrels in the ground, if the wells taping into that deposit are few, and their individual productivity small. There are, for example billions of barrels of oil in the oil sands of Athabasca, as there are in Venezuela. Do we see that pouring into the market to meet the challenge that we face as the countries of the MENA falter in the face of political challenges more important to them than maintaining their fossil fuel production rates? No we do not, because there are a whole lot of steps between having the oil in the ground and being able to put the produced and refined gasoline into your car, and these all have to be in place before a resource can be brought into production at sufficient volume to be significant.

There is also the non-trivial point that the world is not discovering the multiples of the oil in Saudi Arabia each year that would stabilize supply, and in fact we are far beyond that point. Yes discoveries continue to be made, and likely will for decades, but they will no longer be enough in terms of volume of availability to meet the burgeoning needs of society, at the cost it is willing to pay.

Now having said that I don’t necessarily disagree with Mr Lynch’s point about the investment priorities of the current Administration. They (and also the previous Administration) were beguiled into spending more on trying to get cellulosic ethanol into significant production before fundamental commercialism of the technology was established. Robert Rapier has explained in detail what the problems have been, so there is no point in renewing that discussion here, and so I would agree that this was overdone. But to suggest that there should be no investment in future technologies is folly.

To suggest, almost in the same sentence that we should aim to stop importing Saudi oil, and at the same time not invest in “technologies of the future,” leads me to wondering as to whether Michael Lynch has been watching too many Harry Potter movies. You cannot, short of waving a magic wand in a fictitious universe, replace something with nothing. If the nation is to stop importing Saudi oil it has to replace it with something else.

Reducing demand by improving energy efficiency is a method that has been demonstrated to work in California. I get 50% better mileage with my Camry hybrid than I got with the Buick that preceded it. So technology has already a track record of providing a way of reducing energy demand. In the right places wind has been able to generate significant amounts of power – I don’t think that it is going to be enough, or grow fast enough to play a significant part in the coming energy shortage, and since it largely is aimed at replacing coal rather than oil it is a bit of a red herring to the problems of the coming oil shortage.

In the immediate short term KSA has said that they can produce enough crude to meet any potential shortages. Whether they can match the quality of the crudes that are needed is yet to be determined, as will be the time that such an increase in production must extend. The IEA has also mentioned drawing down the reserve stocks held by member nations.

IEA also said it can make up for any lost shipments from Libya by tapping into large surpluses held by member countries, which include the U.S., the United Kingdom, France and Germany. Altogether, member nations hold 1.6 billion barrels of emergency oil supplies, or enough crude to supply the group for 145 days.

Unfortunately the political crises may play out over a longer time frame than will allow this to be a viable solution. Short term fluctuations in the price of oil, as the reality of the situation starts to play out over the next few months are similarly no useful guide to the ultimate development of this situation. It is too early to know whether, for example, changes in government will change the supply of fuel to Israel, which is already looking for alternate sources of supply. (Their indigenous new gas will likely not show up in a pipeline for a couple of years yet). And that is but one precursor of other changes that might come about.

Being more cautious than Mr Lynch I do not plan on predicting how this might play out, but that does not stop me suspecting that, as he has been frequently in the past, he will be proven wrong this time also.

If we can't get oil from Mexico . . . .?

The news from Mexico just continues to get worse with bad news from all three of their biggest oil fields, even as our perennial cornucopian talks of “a Mexican surprise.” As Gregor noted recently (h/t ft energysource) at the beginning of the year Cantarell was producing 862,000 bd and at the end of July this was down to 588,000 bd. The graph plotting decline continues to show a linear decent at the rate of 35,000 bd per month or roughly 100,000 bd every three months – giving it just 17-months at that rate (ending right at the end of next year) until there is nothing left. Somewhere in there the drop is likely to stabilize, but suddenly and soon the questions as to where the replacement hundreds of thousands of barrels are going to come from is going to stop being an almost academic exercise.

The peak and decline of Cantarell – where Mexico once got most of its oil.

But they aren’t the only ones in trouble. Consider U.S. imports from Mexico over the same period. That decline also looks pretty linear, with a projected intersection with zero in 2017, depending on where you draw the line.

Imports From Mexico (EIA)

Mexico itself is not likely to be able to come up with much of an answer.

The President just changed the head of Petroleos Mexicanos (Pemex) as the revenues that the state gets from sale of its oil (making up nearly 40% of the federal budget) dropped 30% in the first half of the year. Current Mexican Government predictions that overall Mexican production will stabilize at 2.5 mbd over next year don’t reflect the collapse of Cantarell, and also fail to recognize that the promised increases in production from other fields are not reaching the goals set. It is only a few days since the production at Chicontepec was “evaluated” after falling some 12,000 bd short of target. This field is still in development, with ultimate production targeted at 550,000 to 700,000 bd by 2017, but as it is already 16% behind the mark that does not augur well for that future.

As Euan Mearns pointed out the fields at Ku-Maloob-Zaap (KMZ) which lie adjacent to Cantarell are being produced in the same way as Cantarell, and thus production has recently risen dramatically.

Ku Maloob Zaap (KMZ) adjacent to Cantarell in the Gulf of Campeche is the largest source of new production growth. It recently overtook Cantarell as Mexico’s biggest producer, with record output of 814,000 b/d in April. The KMZ complex produced 740,000 b/d of crude in 2008, up from 550,700 b/d in 2007. Production has doubled in the last 3 years with a nitrogen reinjection program similar to one at Cantarell. Pemex expects KMZ production to peak at 820,000 b/d before declining to 810,000 b/d next year.

Read that last sentence again! Now the oil in KMZ is proving to be much heavier than that from Cantarell and so may not decline at quite the same rate, but given the very rapid increase in production, and that the peak is already here, this does not bode well for sustaining Mexican production using that region for any great period into the future. Rather it might increase the already precipitate drop in total production levels going into 2011.

Mexican exports of heavy crude (that from Cantarell and KMZ) had fallen, by July to 1.06 mbd from 1.22 mbd in January. Pemex had domestic sales of 1.8 mbd in July which is up some 45,000 bd from January, largely due to increases in sales of motor gasoline. The country imports some 550,000 bd of refined products.

If we go back to the Export Land Model, if internal demand continues to grow, and if Chicontepec proves to consistently fail to produce the needed production by as much as 20% or more (assuming that they are now working the best prospects first) and if we start to see the decline in KMZ next year . . . . . .

And to quote an “expert” on the subject:

Michael C. Lynch, president, Strategic Energy & Economic Research Inc., differs from the generally pessimistic consensus on Mexico. “I think Mexico will probably surprise many,” he said.

Lynch said, “[Pemex’s] first need has been capital; the government has a long tendency to starve them of money, and only recently has this been reversed. Mexican drilling activity is twice what it was a couple of years ago, and they have a lot of medium-sized fields that could make a serious contribution. (The decline in rigs rates has helped them, but the peso decline offset that somewhat). Deregulation and outside investment would certainly help, but capital is the main thing.”

Perhaps somebody could explain to Michael that when one uses the word “surprise” it generally means you’re going to hear good news – none of this is!

Oil well pressures - what brings out the oil

Michael Lynch would have it believed that those who follow this site are relying purely on “anecdotal information, vague references and ignorance of how the oil industry goes about finding fields and extracting petroleum,”, so I’m here again proving him wrong. Here, on Sundays I give a little of the technical background so that those interested can understand more about the realities of production. The posts are a simplification of what goes on, but give enough detail that, hopefully, it is understandable (and if not then you should ask questions). The posts build on an original set I wrote for The Oil Drum four years ago, but are a bit expanded. Interestingly four years ago Michael was spouting the same sort of stuff and getting it wrong back then too.

This post is going to deal with some of the problems that a driller encounters as he reaches the layer of rock (the reservoir) in which the oil or gas is being held. And what I want to talk about is something called Differential Pressure, but to explain that, I need to drag you back to High School for just a minute.

Let's, in fact, go back to Newton's Three Laws. And, for those who slept through that part of the Physics class in school, don't be too ashamed - I have seen the desk where Newton whittled his name, being similarly bored. Let's start with the first law, which is probably the most relevant.

Every object in a state of (rest or) uniform motion tends to remain in that state of (rest or) motion unless an external force is applied to it.

Except that I want to change external force into pressure (which is force divided by area) since it is the way we normally think of it. (Note: I added rest which is a special case of uniform motion since that is specific to the oil we want to talk about). In other words, nothing is going to move unless something pushes it. It is what does the pushing and what does the moving that this is all about.

And now our drill, is down through the casing, drilling the well open hole and using the circulating mud to carry away the cuttings as it continues to go deeper. I had stopped progress last week just before we went down to total depth (TD) of the well, or into the pay. And the reason I did has to do with this differential pressure. But first, the bit about how you calculate pressure.

As you go deeper into the earth, the rock at any layer is carrying the weight of all the rock vertically above it. For rough calculations we generally consider that this rock weighs 144 lb a cubic foot. So that 10 ft down the weight of the overlying column on a square foot would be 144 x 10 = 1,440 lb/sq ft. But through convention we reduce the area that we talk about to a square inch (144 sq in= 1 sq ft) so with this division the weight on a square inch would be 10 lb. A remarkable resemblance to the depth number (grin). This means that we can assume, as we go deeper into the earth, that the pressure on the rock increases by 1 lb/sq. inch (psi) for every foot we go deeper. This means that at 6,000 ft, the rock is under a pressure, from the rock above it, of 6,000 psi.

Now water does not weigh as much as rock, but can be approximated to roughly half the weight. So that, by the same argument, under water, for every foot of depth the pressure goes up roughly half-a-psi. So that at 6,000 ft under water the pressure is 3,000 psi (roughly twice the water pressure in the wand you use at a car wash). Now because we have increased the density of the fluid in the well (the mud) to help lift the cuttings out of the hole it weighs a bit more than water, but for the sake of working the example I'm going to use the half-psi measure for now. We are now at the point where the actual amount that it weighs becomes important.

Simplified sketch of an oil bearing layer in the ground.

I have made a very simple sketch of the layer of rock that we are going to drill into. In order to trap the oil it is shaped into a dome, and the sketch shows a vertical slice through that dome, viewed from the side. It has a layer of oil in it (the reddish layer), but above that is a layer of gas that has diffused from the oil (brownish), and below it is water (bluish) which may have been there when the algae died and which has stayed with the remains as they turned into oil under the temperatures and pressures deep in the rock. Oil floats on water, and gas is lighter than oil, so we have the three layers. At the moment the well has not arrived and all three fluids are sensibly in equilibrium at the same pressure.

Now why do we need to know this before we reach our layer of oil-bearing rock? Well first let's go and interpret that first law a little more.

If a person on either side of you pushed you with equal force at the same time, you don't move, because the two forces balance out. It is only if there is one force, or if one of the two pushes harder, that you move. In other words, where there are a number of forces acting on a body, it is the size of the difference in pressures, and the direction of that difference, that controls the movement.

Consider, here we are drilling merrily away (and have cased the well near the surface, and hit no more fluids on the way down) and at 6,000 ft. we penetrate the rock that is capping the well, and enter the rock with the oil in it. The oil (in the rock) is at some fraction of the overburden pressure, since it is trapped in the rock, and for the sake of this example I am going to say that it is at 5,000 psi , the fluid in the well is at 3,000 psi, the height of the mud column.
There is a difference of 2,000 psi. We are drilling a hole some 6-5/8th inches in diameter. That has an area of about 34.5 square inches. The total force we have suddenly applied to the bottom of the well (bit and fluid) is thus (area x pressure difference) 34.5 x 2,000 = 69,000 lb (or 35 tons). Oops!

Oil rig blowout in Turkmenistan (Energy Industry Photos)

Sadly most catch fire and the rig is destroyed (there are more pictures of such damage at the EIP site)
It's called a blow-out, and they still happen.

This is why we approach the oil/gas producing zone of the rock with caution. And bear in mind that the driller that is controlling the progress of this well is at the surface, trying to guide the bit at the bottom of the hole, with, historically, little immediate information to help.

Based on the surveys that brought the crew to the site in the first place he knows roughly how thick the layers of rock are, and probably what rock they are, but the only real information on where the bit is in that sequence, is from the returns (cuttings) that come out of the well, and there is the lag, we mentioned before, while those chips make their way up the 6,000 ft pipe. (This is why Measurement While Drilling [MWD] has been such a relatively recent boon to the industry ( though not all rigs have it).
By monitoring a number of pressure gages the driller can gain a sense of what is happening at the bottom of the well.

If he senses that there is going to be a problem, then he can do one of several things, based on the way the well is set up.
The first thing is to increase the density of the mud. By making the fluid in the well weigh more, the difference in the pressure across that face is reduced, and the change in conditions is easier to handle. However weighting up the hole has the disadvantage that it becomes much slower to drill with a heavier mud (it is a poor bottom-hole cleaner among other things). And, if done during drilling, bear in mind that once the heavier mud is added to the well it won't be fully effective until it has had time to get down to the bit and then fill back up the annulus between the drill string and the casing all the way to the surface.

So that is an expensive and slow option. Let us take the game a little more interesting and say that there is a gas pocket above the oil, and that the hole is going to go into the layer at A. Gas will enter the well at the down-hole pressure, but as the bubble rises, that pressure is reduced, and the gas expands, pushing the mud above it out ahead of itself. Another potential source for big-time trouble. And this one (which is known as a kick in the well) happens much faster, so there is less time to react.

How do we handle this? The answer is to invert the problem. Gas or oil flows into the well because the well is at a lower pressure than the fluid in the rock. The fluid in the well is, initially at the pressure created by the depth, and by the weight (density) of the mud in the hole. However, if we put a restriction on the flow of fluid out of the well (such as when you put your finger over the end of a garden hose so that the stream becomes smaller and shoots out further) we can increase the pressure in the well.

For those who want to know why, if the same volume has to go through a smaller hole in the same amount of time it has to go faster. This means it has to be pushed harder. Bernoulli explained it, and there is an animation available that helps explain it.
What it means is that by adjusting the flow out of the hole, the driller can adjust the internal pressure, and thus "kill the kick", or if gets to be too much of a problem, “kill the well”. But it is not completely that simple. Bear in mind that there is all the drilling and rotating equipment on the rig floor connected to the drill pipe at the top of the well. None of this can stand much pressure. So we need to place another piece of equipment between the drilling rig, and the top of the well.

Blow-out preventer (Schlumberger )

This is the Blow-out Preventer(BOP), which is essentially a ram that very rapidly shuts off fluid flow at the top of the well. These have to be well designed, since they are generally the line of last defense against a blowout, and when they fail as the pictures show serious problems arise. They also form the basis for the well-known structures, often referred to as Christmas Trees, that sit at the top of producing wells. By themselves, however, these aren't enough, since their main function is just to slam the door shut, before all the oil gets out and we have a gusher.

The more critical tools are the chokes on the well. (Below the rams in the picture above). There are generally several, both hydraulically operated and manual (in case the power dies) which are simply large valves that can be turned to increase or reduce the size of the flow path out of the well over to the mud pits. By adjusting these, in real time, the driller can control the well pressure, and thus the dynamics of the behavior at the bottom of the well. And after the rig leaves, an operator can adjust well pressure, and thereby the production from the well and its long-term performance.

If the operator is well trained (and you find drilling simulator equipment in Petroleum Engineering Departments so that students can understand how to do this (I last tried some decades ago) the well pressure will be controlled, so that any kicks can be handled, and the drill can now penetrate safely into the rock containing the oil/gas, which we call the reservoir, or the pay.

And you think the hard part is over?

Once the drill has penetrated through the layer, and the well has been completed, it is the controlled difference in pressure between the fluid in the rock and that in the well that will move the oil into the well, up and out into the pipeline. But we’ll talk about that when we talk about well completions and production in future posts.

As usual comments, questions and criticisms are welcomed. BTW if you're impatient with the speed of these posts, there is a lecture series on all this available from Rigzone, with videos. I haven't seen it, but I noticed it while looking for sources of pictures.

Promising signs and a gentle cough toward Michael Lynch (again)

Another monthly Traffic Volume Trends this time for June, is now out and confirms the uptick in driving that I have been noting for the past three months is continuing and beginning to gain a little momentum.

The trend is now consistent across all regions, with the West up 2.5%; North Central up 1.6%; North-East up 0.8%; South Gulf up 2.8%; and South Atlantic up 1.8%. When the 12-month rolling total is plotted, the trend is now definitely upwards.

June 2009 12-month rolling total of miles travelled (FHWA)

The report breaks the miles travelled down into rural and urban sectors, and while the rural number has been above last year for a couple of months, it is only this month that the urban miles has also risen above last year.

June 2009 Travel on US Urban Highways by month (FHWA)

This is, again, a somewhat encouraging sign that the economy is in a state of turn around, although, apropos my post yesterday, the big question of what happens when not only the U.S. but all the other countries, including Western Europe also begin to pick up steam and look to additional fuel supplies may be answered more rapidly than had at first been feared. (Although the result of finding out may not be pleasant either).
UPDATE: I changed the plot below of US gasoline demand to the new plot that TWIP published today.

A quick look over at the TWIP shows that gasoline demand has really not changed much – if any, relative to last year, but the volume demand would have to increase quite a bit for that number to detectably change on the plot (the numbers show we are still around 300,000 bd short of last years demand at this time). (Number went up 100,000 bd relative to last week with the new data).

U.S. gasoline demand though August 22, 2009 (TWIP)

As I mentioned last week I expect that OPEC will be able to cope with the increase in demand next year, but will start to strain at the demand in 2011, and have difficulty meeting it towards the end of that year and into 2012.

Now that is not what you will hear from the cornucopians and Michael Lynch had an editorial in the NYT excoriating those of us who doubt.

A careful examination of the facts shows that most arguments about peak oil are based on anecdotal information, vague references and ignorance of how the oil industry goes about finding fields and extracting petroleum.

His main target at the moment happens to be Fatih Birol, the Chief Economist at the International Energy Agency (IEA) whose predictions I wrote about with concern at the beginning of the month. The particular one of concern is that the decline rate that has been reported for older oilfields is now at 6.7%, rather than the 4.5% which has been historically assumed and which models for future supply have been based on. Over a year ago Sam Fourcher in The Oil Drum showed in two graphs (one at the top of the post and the more worrying one, hidden in comments what a difference a change from 4.5% to 5.2% had on the time at which global production would peak (it moved it forward in time about 3 years) and in the steepness of the resulting decline. Now (and Fatih Birol is by no means the first to report these higher numbers) declining production is shown to be 1.5% worse that the second graph assumes. This is not “anecdotal information, or a vague reference.”

Unfortunately when the facts don’t support his argument our good cornucopian carefully changes his topic so that he can tar those of us concerned about the future supply of oil with a set of arguments that he can shoot down, vide:

for the most part the peak-oil crowd rests its case on three major claims: that the world is discovering only one barrel for every three or four produced; that political instability in oil-producing countries puts us at an unprecedented risk of having the spigots turned off; and that we have already used half of the two trillion barrels of oil that the earth contained.

Actually, at the moment none of my immediate concerns and the subjects of recent posts include any of those points. Yes there is a longer concern about the state of reserves – The graphs that are assembled from the Megaprojects database come from the predicted times of planned projects coming on-stream. These are projects that are of significant size, and thus take time to bring to fruition and, at that scale, receive significant coverage in the technical press (Rigzone and the Oil & Gas Journal spring immediately to mind as sources I look at every week among more than a dozen others).

Declining production from different countries (such as the UK and Mexico – as I pointed out yesterday) is a matter of public record, and the amounts that are disappearing from the world stage are not trivial. And when, as I reported yesterday, the major Russian oilfield at Samotlor now finds itself are producing at 90% plus water cut this significantly impacts production (pumps can only physically move certain volumes at a time and if most of it is water you can’t speed up your pump much to increase the oil flow for simple fluid mechanics reasons– a point that seems to be lost on our cornucopian.)

Yes the world continues to find oil in new fields, but they are not as easy to find and develop and they don’t last as long as the old giants. In Russia successive oilfields moved further East as the original fields wore out, and they have now reached as far East as Sakhalin Island.

Sequence of Major Russian oil discoveries and developments (after Grace shown on a Google Earth map )

So, according to Michael Lynch, we should anticipate that if they go North and East of Sakhalin Island they will make their next discoveries and we can all relax.

Oops! There is only one slight flaw in the argument – you see that new area is known as Alaska – Russia sold it some years ago, and I believe that somebody else has already been there and got that oil!