Ryan Bushell

Recently we were asked about our view of the possibility of US energy self sufficiency and the prospects for the Canadian oil and gas industry going forward. Here is our response:

Our overall view is that US oil self sufficiency will not come to pass, however North American oil self sufficiency is possible.

1. The Decline Curve = The Math:

The first thing that anyone needs to understand is a typical decline curve for any light oil well. Oil decline curves look like one side of a tadpole with a large hump to the left representing flush (high) initial production followed by a long declining balance until the well reaches zero at some point, decades in the future. Hydraulic fracturing of horizontal tight oil wells only exacerbates this curve (making the flush production higher and the decline rate steeper). In fact most horizontal multi staged fractured wells decline to less than 10% of first year production after only 3 years. That’s 90% decline spread over the second two years of initial production.  Compare that with a traditional vertical oil well that would take over 10 years to decline that much, but also would not receive that huge rate of initial flush production. Overall decline rates for tight oil companies are typically in the 30-40% range, but given that math they are going to continue to move higher over time as more horizontal wells come on stream, potentially approaching 50% by the end of this decade. What does this mean? It means that in order for  companies in the shale oil industry to just keep production flat they have to extract 30-50% of their current production EVERY YEAR as “new” oil before they can grow at all. We are still in the initial flush production phases of these reservoirs (first 3-5 years), but the industry will reach that downward point on the curve at some point over the next 5 years and production should flatten out. Any report claiming “US Oil Self Sufficiency” extrapolates current growth rates out indefinitely and are typically written by economists and professors,  but that is simply not how the industry math works. Any credible oil industry person I’ve discussed this topic with understands the decline math.

2. Heavy Oil – The Difference Matters:

Canadian production growth is increasingly heavy oil coming from the oil sands region. Heavy (think thick) oil reservoirs are much more predictable and lower decline than shale oil resource plays. Oilsands will increasingly represent North American base production given their long lived reservoirs (30-50 years) and predictable decline rates (10-20% per year). The other reason heavy oil matters is that the two largest oil refining complexes in North America (and the world for that matter) are in the Gulf Coast and Midwest United States.  Those US refineries have been increasingly investing capital to refine heavy oil as opposed to light. This involves hundreds of millions of dollars of investment per refinery in “Cokers” which allow the refinery to produce lighter fuels (gasoline/diesel etc) from heavy oil without stressing their equipment. The reason these conversions were done was to improve margins at the refinery by giving them the ability to take discounted heavy crude streams that, 10-15 years ago, represented the bulk of the incremental anticipated production coming on globally in places like Venezuela, Canada, and even the Middle East. As one oil exec put it “everyone was convinced that heavy oil was the way of the future, no one could have guessed that a million barrels a day of light oil production was the next thing to spring up in our own back yard”. These investments in Cokers are not easily reversed so heavy oil will have a buyer, at the right price of course. Canadian heavy crude has a very thirsty customer sitting in plain view. Transportation (lack of pipelines) is the major negative issue currently impacting Canadian heavy oil prices, but we believe in time that will get sorted out (hence our large position in the pipeline industry as well).

US Energy Self Sufficiency Part 2

3. Environmental Opposition – It’s Coming for US shale plays

4. Economics 101 – Tight Oil is NOT Cheap

 

 

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