Anyone who’s been in the oil business for more than, say, a month, knows how ridiculous it would be to confidently predict where oil and gas prices are headed.
Tensions in the Middle East, growing output from the Permian, offshore adds to reserves in Guyana and Brazil, uncertainty over tariff implementation, pipeline infrastructure buildout timing, tax policy implementation, legacy refinery crude quality limitations, storage builds, price of the dollar—these are just a few of the many drivers that affect wellhead pricing of oil and gas. It’s a thoroughly bewildering set of variables, and probably beyond the analytical capability of most mortals.
More often than not, our discussions and musings about oil and gas prices focus on supply.
So, I’m going to avoid putting on my dunce cap, but I am going to look at the demand side of oil and gas while questioning the assumptions we all make about hydrocarbon demand.
My guess is that most folks, when they think of future demand, envision the rest of the world achieving first-world status like Western economies did—through a drawn out industrialization process that required massive amounts of infrastructure and fuel to power the mobility of goods, services, and people.
We’ve certainly seen this in China and India, but are we considering the ways that technology can bypass the traditional routes to building wealth to “Western” standards?
Looking at cell phone adoption in Africa is instructive.
Over the course of just 12 years, South Africa has nearly tripled the number of its citizens who own a mobile phone, while Uganda increased its usage by a factor of seven!
Moreover, internet access is predominantly by smartphone, and although not yet dominant, smartphone ownership is projected to account for nearly 87% of all connections in sub-Saharan Africa by 2025.
The mobile overprint on the African economy is projected to add $45 billion to sub-Saharan GDP (https://www.gsma.com/r/mobileeconomy/sub-saharan-africa/).
Here’s a technology that has leapfrogged the old model of landlines—without needing tens of thousands of miles of copper, hundreds of thousands of poles, and unknown hours, days, and years of trenching—and the power consumption to mine, smelt, transport, and embed the infrastructure.
Not to mention that it’s bypassed the last-mile problem of fiber.
Although cost of ownership is a stretch for many in the region, as is the case with many competitive commodity technologies, the cost of cell phones is dropping in the region.
Fine and good, we might think, but what about the fuel needs across the world to get people from point A to point B, especially in nations with huge populations.
Let’s look at the demographics.
China’s population will start to decrease within seven to nine years, but India’s will certainly pick up the slack. From now until 2058 there will be a net add of approximately 140 million people to the population represented by these two countries over nearly 40 years. That’s roughly 3.5 million people per year.
That’s a lot of added people on our planet, and this addition to world population by itself might make us believe that world demand for fuels would increase inexorably.
African population growth, however, will dwarf the net gain from India, adding more than 1 billion people in the next 25 years, or roughly 40 million people per year.
So, problem solved, right? A developing middle class in China (although dwindling and aging) adds more than 1 billion people in the next couple of decades, and they’ll all need cars to get around, capiche?
Perhaps, but will new third-world miles traveled mimic the American model?
To drive anywhere you need decent roads. Having hitchhiked in 1979 through what is now called the Democratic Republic of Congo, I vividly remember waiting for hours at a washed out portion of the road from Bunia to Bafwasende while trucks lined up on either side of a 15-foot pothole and took turns winching each other through the mud. The distance between the two towns is about 230 miles as the crow flies, or roughly the same distance between Lake Charles, Louisiana, and New Orleans.
The two Google Map images below compare roads in the Congo vs. roads in southern Louisiana.
If the roads are not there to be driven on, the picture that emerges for Africa is a growing population with lagging infrastructure development to support increased mobility. In other words, unfulfilled demand.
Should we be comfortable in assuming that the demand for mobility options is limited to internal combustion vehicles?
Admittedly, EVs (electric vehicles) don’t yet account for huge market share of transportation options, but the trend is growing. Although EV ownership in the U.S. lags ICE (internal combustion engine) ownership, the market share for EVs in the U.S. is forecasted to achieve nearly 22% in six years.
Given that Volvo, Daimler, Volkswagen, Ford, GM, and other vehicle manufacturers are increasing their fleets of both passenger and truck vehicles—including long haul trucks—it’s not unreasonable to speculate that EVs will make up a significant portion of the global vehicle fleet. Even China is directing its domestic auto industry to increase the percentage of EVs in their fleets.
Bloomberg forecasts increases in global EV usage to be about 23% of global vehicle ownership by 2040.
Maintenance cost for EVs are about one-third of those for ICEs, and power costs per mile for an EV are about 50% of fuel costs for ICEs, so the total operating costs for EVs are about 16% of the cost to operate an ICE vehicle. This is significant consideration that no doubt factors into the decision to go EV vs. ICE.
All well and good, but where does the power come from? In poorer countries the availability of power from centralized power generation facilities is often meager.
This is being slowly addressed by sovereign nation investments in power development, such as China’s $46 billion investment in Angola’s Caculo Cabaca Hydropower project, and its $2.5 billion investment in Guinea’s Kaleta hydroelectric facility.
Will less affluent countries need the range we require in the U.S.? Although there has been a pronounced migration of rural populations to dense urban cores in search of employment and wealth, I can envision scenarios where local development powered by better solar and wind power options could occur.
If so, the need for EV range could be significantly curtailed, and the lower the range, the more affordable the vehicle.
Moreover, there are low-cost options. India’s Mahindra e20 vehicle sells for approximately $8,200—affordable, especially if several individuals pool resources.
As far as I’m concerned however, the black swan in the whole picture is our ability to innovate.
The graph below gives a sense of how powerful innovation feeds on itself.
Improvements in battery storage technology, dropping costs of solar, the internet of things, materials research into substances such as graphene, and even 3D printing of houses will be just part of the technological revolution that will unfold, with, as of yet, unforeseeable impacts in how we live our lives—including how we obtain and use BTUs.
The demand side for hydrocarbon fuels is probably stable over the next 10 to 15 years, but after that, I think there’s real chance that world markets will see demand begin to soften.
Disagree? Have an opinion? Please let me know at firstname.lastname@example.org.
My last post on geosteering took a high-level look at wellbore placement across unconventional basins. In closing I promised to next look at some problematic areas—places where out-of-zone wellbore placement occurred at a higher rate than in well-controlled areas, like the Central Basin Platform, Mid-Continent, or the Midland Basin.
Let’s start by asking the question a few questions: Does being out of zone matter? Is production impaired by landing less lateral than planned in your target zone?
Since I called the DJ Basin problematic, and I received several comments from folks who are actively placing wells in the DJ, and who reinforced the idea that structural complexity causes the out-of-zone problems, I thought we’d start there.
Of the wells in our Play Assessments app that have targeted the Niobrara B as a landing zone, and for which we have directional surveys, nearly 28% have been characterized as having less than 75% of the wellbore in zone.
Compare the map below—colored by Peak Oil rates—of the wells in the Niobrara B that have 75% or more of the lateral in zone …
… with this map of the Niobrara B of wells with less than 75% of the lateral in zone.
Note that in the map of <75% in zone, there are fewer wells with higher peak oil rates.
Zooming in we can see that the distribution of “good wells”—using the assumption that high peak oil rates are a proxy for more favorable EUR values—is much higher in the “in-zone” map:
The following montage shows that wrench and other faulting with appreciable throw/heave occurs in the Wattenberg area and appears to persist to the northeast (for reference, red and pink boxes refer to the map and the well cross section in the montage below).
So, no mystery here. Faulting offset in the DJ through the Niobrara section requires out-of-zone wellbore path manipulation to stay on track to place the majority of the lateral in the upcoming downthrown fault block.
Interestingly, First 12 oil rates in the Niobrara B are counterintuitive. You’d think that the more wellbore in zone (100%), the higher median First 12 oil volume would be compared with wells with less wellbore in zone.
That’s not the case. The following graph hints that the opposite may be true.
Median proppant values are relatively consistent across all ranges of in-zone percentages, and as the graph below shows (for wells with less than 60% in zone) variations in proppant per perforated foot don’t correlate well with First 12 oil.
Perhaps, being more out-of-zone in the DJ implies greater faulting, and with greater faulting, chances are that natural fractures improve flow rates.
This kind of first cut evaluation will at some point need to be normalized for other important variables such as lateral length, frac job size, etc.
However, even when normalization is performed, there is still meaningful variability in results, as shown below (Niobrara—from DI Engineering Explorer).
We can conclude that using DI Play Assessments out-of-zone metrics can be used to high-grade basins, or areas within basins, that are likely to have higher percentages of wells with 75% or more of lateral in zone, but we should be careful about assuming that in-zone percentage correlates with better production values in faulted plays. In areas known to be faulted like the DJ, out-of-zone wells hint at faulting complexity and the enhancement to reservoir flow that natural fractures confers.
Naturally there are some outliers, so in the last part of the series I’ll look at some of these and then dig into production metrics.
If you’ve got perspectives on using in-zone, out-of zone percentages as drivers (or not) of production response please email me at email@example.com.
PART 1 of 3—OVERVIEW
In the last 36 months, 34,070 horizontal wells have been completed in the U.S. This represents about 12% of all horizontal wells drilled, and since the last three years have seen a big uptick in both activity and technology improvement in unconventional play development, I thought it was a good time to dig into geosteering data to get some perspective on this critical piece of the unconventional puzzle.
Of the horizontals completed in the last three years, nearly 14,000 have been analyzed in our Play Assessments application for characteristics, such as percentage of well bore in landing zone, toe in landing zone, and footage in landing zone.
How good of a job have we done getting our horizontals into their targeted landing zones to maximize the productive potential of our unconventional resource play acreage?
Using our highly quality controlled DI Play Assessments data, we can start taking a look at these 14,000 wells to see where operators landed their wells.
Since wells with a relatively high percentage of out-of-zone drilling within targeted landing zones will negatively affect play economics, I thought I’d look at wells, by basin, in Play Assessments with 25% or more of lateral length out of zone. The graph below shows the percentage (displayed logarithmically) of wells, by basin, that had less than 75% of their wellbore positioned in the intended landing zone.
Note that the DJ, Gulf Coast, and Williston were the most likely basins to see wells out of zone (DJ 35%, Gulf Coast 13%, Williston 21%).
In contrast, the basins that showed the highest percentages of wells 90% or greater in zone were the Central Basin Platform at 94%, Mid-Continent at 91%, and Midland Basin at 90%. What accounts for the differences?
Operators in the three Permian sub basins—Delaware, Central Basin Platform, and Midland—are doing a great job of landing their wells in zone and keeping them there.
But what’s going on the Williston and DJ in particular?
These are the most targeted landing zones by basin (source: DI Play Assessments).
For the 23 operators that have completed any wells in the last three years with at least 25% of the wellbore out of Middle Bakken landing zone, nearly one quarter of them account for almost 45% of the out-of-landing-zone wells.
Since the percentage of total wells completed with more than 25% of lateral out of zone in the Middle Bakken in the last three years is about 16%, is this operator dependent or geologically driven (high faulting, rapid lithologic changes, challenges of staying in zone in high dip areas)?
Since the out-of-zone wells are not concentrated in one part of the basin, this implies that geology, faulting, or steep dip complications are not the drivers of out-of-zone performance.
Most of the large operators have done a good to excellent job of keeping their wellbores in their landing zones.
If we look in DI Play Assessments at the 10 operators in the DJ that account for 93% of the wells landed in the Niobrara B, their in-zone landing performance is also quite variable.
Plotting these on a map also shows spatial variability in the position of these wells, again implying that the out-of-zone performance in the DJ is most likely operator driven and not tied to geologic complexity.
In Part 2, I’ll look at identifying the most problematical landing zones.
Please send me an email at firstname.lastname@example.org if you have any observations on or comments about geosteering challenges.