Agora Financial’s Rude Awakening

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Dubai, United Arab Emirates

• Grab your lab coats…welcome to the next generation of the oil biz,
• Record highs for black goo spur innovation, 
• Carbon sequestration, 4D seismic imaging and other breakthroughs
  ahead…

Joel Bowman, reporting from the Arabian Peninsula…

Yesterday crude closed at US$87.57. That leaves us about three-dollars off
the $90.46-per-barrel inflation-adjusted peak of 1980. Again, political
instability in the Middle East is a major driver for higher prices.

When we broke through the US$90 mark, some quarter of a century ago, the
Iranian revolution was about a year old and the Iran-Iraq war was just
getting underway. Today, we have an increasingly volatile situation between
Turkey and the Kurdish rebels inside northern Iraq contributing to
skyrocketing prices. That’s on top of the ongoing situation in the rest of
Iraq.

Throw in the depleting supply of the world’s finite reserves, a few other
testy arenas where the gooey stuff is inconveniently located (Venezuela,
Nigeria, Russia) and our unwavering insatiability for carbon-based energy
consumption and it’s not hard to imagine oil topping one-hundred bucks.  

Then we also have the diminishing value of the greenback, which oil is almost
universally priced in, to contend with.

With the added price incentive for procuring the world’s favorite liquid,
those jostling for poll position in the extraction business are leaping over
each other to get at the prize.

As resident oil and energy expert, Byron King, explains below, the
methodologies of the future are sure to excite and intrigue. So, grab your
lab coats and your hard hats as we take a look at the great global grab for
the next trillion barrels. Enjoy…

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————————————————————–

The Next Trillion Barrels
By Byron King

Where can we find the next trillion barrels of crude oil?

During the last 150 years, mankind has lifted about 1 trillion barrels of oil
out of the Earth. And the reported figures are that there are about another
trillion barrels of oil in “reserves” left in the ground. At the current
rates of extraction and consumption, therefore, the world’s known oil
reserves will last about another 30-40 years.

Are there more barrels of oil out there, waiting to be discovered? Where can
we find the next trillion barrels?

The world’s prospective hydrocarbon basins have been delineated to a pretty
good degree of certainty. So even the best-case scenarios do not yield large
volumes of conventional oil and gas still waiting to be uncovered.

If the Peak Oil viewpoint is correct (and with each passing year, the data
are matching many of the Peak Oil predictions of the past), conventional oil
is going to be scarce and expensive. So even what used to be considered
“small” oil finds will, in the future, take on added significance. Future
discoveries will likely occur by extending the geography of exploration,
especially into the Arctic and deeper waters offshore.

For the first trillion barrels of oil that have been extracted to date, about
another 2 trillion have been left behind. This is because much of the
“original” oil extraction relied on natural reservoir pressures to move the
oil from its place within the microscopic pores of a buried rock formation
into an oil well borehole. When the natural reservoir energy was depleted,
the oil stopped flowing and whatever was left behind (which was usually about
two-thirds of the original oil in place) remained in the rock formation. Over
the years, the geologists and engineers developed methods to maintain
reservoir pressures as high as possible for as long as possible, and this
helped to increase the ultimate oil recovery. But there are more developments
waiting to occur, and there is still a lot of oil “down there” in those older
oil fields.

Thus, even small increases in recovery efficiency can make a significant
difference in overall yield from an oil field. For example, a 1% increase in
recovery factor from the stated reserves of BP could yield an additional 2
billion barrels of oil equivalent (boe). On a global basis, a relatively
conservative increase of just 5% in recovery could yield an additional 300-
600 billion barrels. These increases in recovery efficiencies will have to be
achieved through the application of newer technology.

Looking forward, in addition to the known technologies that are being applied
on wider scales, there are several new trends that will likely prove crucial
in improving oil recovery factors. These include 4-D seismic imaging
(tracking the change in reservoir properties overtime) and other reservoir
imaging and investigation techniques up to and including using nanotechnology
down the holes. These developments are already providing the geologists and
engineers with the real-time ability to “track” hydrocarbon molecules deep
underground. Combine this tracking ability with the extensive digitization of
the data, and the long-term ability to store and manage the data through
advanced computational techniques, and this is leading to what is called the
“digital oil field.” The bottom line is that these developments are greatly
enhancing the ability to optimize overall oil field management and to monitor
and control reservoir depletion to nearly the last barrel.

Getting back to the oil that has historically been left behind, there are
other major leaps occurring in the effort to reduce what is called the
“residual oil saturation.” There are great strides occurring within the basic
science of “what happens” within an oil reservoir. For example, BP has
recently demonstrated in a number of laboratory and field tests that reducing
injected water salinity can increase recovery factors by anywhere between 5%
and an astonishing 40%. BP has published data that indicate it can add up to
1 billion barrels of proved reserves around the world just from this
technique. Although the precise chemistry for this dramatic improvement is
not yet fully understood, it is apparent that an improved understanding of
reservoir chemistry can increase the ultimate oil recovery from known oil
fields.

The same thing is going on in an engineering field called “miscible gas
injection,” one of the most successful EOR techniques. Rather than sell the
associated natural gas that is produced from an oil field, it is often better
to reinject the gas to maintain reservoir pressures and improve the long-term
oil recovery. (At the North Slope of Alaska, this is a foregone conclusion
because there is no gas pipeline to move natural gas to southern markets.)
Moving forward, if what is called “carbon sequestration” (that is, injecting
carbon dioxide into the ground via wells) becomes widespread, then it will
also lead to massive supplies of carbon dioxide becoming available for
purposes of EOR. The current experience with injecting carbon dioxide into
oil wells in the U.S. is that the process can improve oil recovery by between
5-15%.

The oil industry is also using new developments in biological sciences to
improve oil recovery. This involves a process called “microbial EOR,” or
using bacteria and other bugs to go in, mobilize and remove the oil that is
left behind. Generally, the bugs are bred, if not designed from the genes up,
to react with the heavy oil fractions and reduce the viscosity of heavier oil
deposits, which increases the possibility of flow to a well bore and, hence,
of recovery. The science is currently quite experimental, but the indications
are promising. Will it work? There are no guarantees, because microbial EOR
is a new frontier. But this is one key trend in obtaining the next trillion
barrels.

Another new technique involves the in-place heating of the heavier, less
mobile fractions of oil in the underground state. Some pioneering work is
already being accomplished by lowering small microwave-generating packages
down boreholes and using microwave energy to heat the oil within the rock
matrix, similar to how you heat a cup of coffee in your microwave oven. The
liquid coffee gets hot, but the crystalline coffee mug stays cool. A similar
process may work in at least some of the oil patches of the world, and this
may be one promising means of obtaining large volumes of heavy oil and tar
from deeply buried formations. The defense contractor Raytheon has funded and
performed some significant (and quite proprietary) experimental work in this
arena.

So welcome to the future of the oil business. Welcome to the quest for those
next trillion barrels. It is a future built on the traditional disciplines of
geology, petroleum engineering and geophysics, with a wide array of skill
sets from the drillers, the naval architects, the deepwater engineers and
many others. But the future is also digital, and the distinctions between the
classical science departments and the data crunchers will blur. The future is
chemical and biological, and the people in lab coats will be working to turn
almost any source of carbon into feedstock for useful energy or other
industrial applications.

The next trillion barrels will not appear just by people making incremental
changes to the old models of thinking and acting. Obtaining the next trillion
barrels will require an entirely new set of skills and a radically changed
mind-set.

[Joel's Note: A trained geologist himself, Byron is well-versed in the
cutting technologies that will deliver your next trillion barrels of oil.
Readers of his Outstanding Investments newsletter are, and will continue to
be, privy to any and all investment opportunities in the sector as we march
toward oil’s next generation.

For more information on oil’s meteoric climb and how you can secure a
position on Byron’s select mailing list, click here.

———————————————————–

Rude Endnote: Over here in the Middle East, members of the OPEC have been
quick to dismiss claims that record high oil prices are of their making. In
an interview with Al-Ittihad newspaper, Sultan Al-Mehairi, head of marketing
and refining at Abu Dhabi National Oil Company (Adnoc), said there were other
factors to consider.

“The main reasons behind the increase in prices is the shortage in refining
capacity and geopolitical tensions… These are the main factors that are
affecting the market and producers have no influence over them,” he said.

Representatives from the OPEC are due to meet in Saudi on the 17th of next
month to discuss the situation. Already they have agreed to bolster
production by 500,000 barrels per day, commencing on November 1.

In the meantime, the most pressing question for the next few days seems to
be, “what trader wants to be short oil going into a weekend when tensions in
northern Iraq could spike oil over the $90 mark?” Anyone? Anyone? …

Cheers,

Joel Bowman
Rude Awakening