Oil Profits Fund Future Explorations
The history of oil is one of boom and bust. When prices are low and profits thin, companies tend to hunker down and cut expenses.
But when times are good for the oil industry — like now, with the price hovering just under $100 a barrel — companies often use fatter profits to search for new deposits, or to go back and suck the last drop from retired wells.
As prices have spiked, "there has been new exploration," said Paul Henshaw, a geologist and consultant who spent years at Chevron exploring for oil.
Henshaw said fields that had been put on a shelf are being looked at again for possible further exploration.
"A lot of us geologists have some area where we've said, 'Oh boy, if the economics are right, we should go for that,'" he said.
Paying Now for Future Fuel
In North America, one place many of the major oil companies are going is the Gulf of Mexico. Higher oil revenues mean they can spend more to drill farther out at sea and in deeper water. Lease sales in the Gulf are way up. But experts say there's no magic dollar number at which oil explorers decide to drill.
"They may be basing their economic models on $50 a barrel," said Henshaw, in part because oil prices can vary widely during the decades it takes to complete a project. So he said the oil industry needs to believe that high prices are here to stay — and not just a spike — before they will invest millions or billions of dollars in a project.
Ironically, high oil prices also help drive up the price of exploration.
"I was just reading a study last week that shows that the price for developing a field had actually doubled in the last two years due to the increase in costs of raw materials and services and equipment," said Andy Radford, an exploration expert at the American Petroleum Institute in Washington.
That is why some companies are going back to old, supposedly tapped-out reservoirs — or "plays," as they call them in the business — instead of opening virgin fields.
Geologist Henshaw explains it this way: Imagine a milk shake in a glass full of beads. You can suck most of the shake out with a straw, but some will stick to the beads. More than you would think, in fact.
"When we leave an oil field, there can be 20 to 80 percent of the oil left," Henshaw said. When prices go up, he said, it can suddenly become economical to go back for the dregs.
Small companies such as Michigan-based Arbor Resources have made that strategy their business. For instance, the company will sometimes go back and fix a broken well that had been abandoned by its previous owner.
"To fix that well it might cost several hundreds of thousands of dollars," said Arbor engineer Dylan Foglesong. "At $20 a barrel, you might walk away from it and go down the road." But at today's high oil prices, he said "people will jump" at the chance to reclaim the wells.
Only So Much Can be Squeezed Out
Higher prices can also help pay for the expensive technology needed to squeeze more oil out of old wells. For instance, engineers can force steam or carbon dioxide down into wells to force out the oil. Or they can use the latest seismic technology to make underground images of old plays with oil that was missed before.
But exploiting old wells can be complicated. Sometimes neighborhoods can spring up around an old site — leading to resistance from the new tenants. "It's a permitting nightmare," said Foglesong. "But at $100 a barrel, they'll hire 10 lawyers and spend the time in court and do whatever it takes to get that thing on line."
Those efforts often pay off. Ultimately though, there is a limit to how much more geologists and engineers can "squeeze the sponge."
Already, energy companies are investing more in heavy oil from tar sands or shale. But, if the past is a guide, oil prices will have to stay high for these pricey alternatives to remain viable alternatives.
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