The failure of OPEC members to discuss production ceilings at a recent meeting has compounded selling pressure in crude oil, and the global benchmarks are trading at close to six year lows. ETFs have followed suit, with United States Oil (N:USO) closing out last week at $12.46 – a 90% discount on the $113 highs recorded back in 2008. Oil producers are struggling to drill profitably, and with OPEC’s seeming monopoly on the price of crude, are turning their focus to a factor that remains within their individual control – efficiency. The major producers can’t control the price they sell at, but to an increasing extent they can control their cost per barrel, and as we go forward, it is this latter factor that looks set to be the primary determinant of their bottom line. So, with this said, how is big oil approaching this efficiency drive?
The space is called enhanced oil recovery (EOR). By employing a selection of techniques, oil companies can extract up to 60% more of a reservoir’s original oil than is possible without EOR. There are three categories of EOR – thermal, gas and chemical. Gas is by far the most used in the US, accounting for circa 60% of EOR production. Thermal accounts for just under 40%, and chemical around 1%. The science behind the thermal technique is pretty simple: steam is injected into wells, it heats up the oil and makes it less viscous, which makes it easier to pump out of the well. Gas injection (most commonly CO2 injection) is similar, in that it decreases the viscosity of the oil in a well, but it also helps to maintain the underground pressure and – in turn – improve displacement.
According to a report published by BP plc. (L:BP), a 5% increase in the recovery rate of its wells would translate to between 300 and 600 billion barrels of extra annual production. US oil demand is approximately 6 billion a year, with 1.4 billion of these barrels imported from OPEC nations. With an increasing drive towards complete self reliance a big part of both political and social agendas, the impact of EOR is tremendous. Why, then, are all companies not employing EOR tactics at all wells? As always, it’s a matter of economics. If the price of oil is too low, the added cost per barrel disincentives EOR.
Consider CO2 EOR as an example. For companies that use CO2 EOR, the cost of the CO2 makes up the majority of the entire undertaking, assuming the wells in question have already been redrilled/redressed to accommodate the process. On average, the cost of the CO2 accounts for 25-50% of the cost of the barrel produced. The price of CO2 varies (it usually fluctuates in line with the price of oil), but using a reasonable average of price over the last few years, and for the purposes of this study, let’s put it at $2/McF. At this price, total CO2 purchase costs come in at around $15, based on the amount of CO2 required to produce the extra barrel of crude in question. Say the price of oil is at $70 a barrel, and an oil company pays $15 in royalties and production taxes, it makes $55 net revenues per barrel. Subtract $15 for operational costs and $15 for the C02 costs, and the company in question nets $25 per barrel, pre-tax. Consider the same scenario at current per barrel prices, however, and the situation is not so positive. Assuming the same costs, and the current price of $40 a barrel, the company in question loses $5 per barrel of CO2 EOR oil it produces.
Essentially, therefore, the US has billions of barrels of oil in its domestic fields that CO2 EOR could drill, but at current prices, there is no financial incentive for the companies who own the wells to produce. Conversely, there is a financial disincentive. So, what’s the solution? If the US can enhance its enhanced recovery methods, and bring the cost per barrel of recovery down, it could reverse the disincentive. Enter, Russia. A large portion of Russian oil operations have adopted the latest trend in EOR – plasma pulse technology. Plasma pulse EOR involves the insertion of a pulse tool into vertical wells, which emits repeated bursts of impulse waves. These bursts cause the wells to vibrate, loosening the sediment surrounding the oil and increasing permeability. This increased permeability makes it easier to pump the oil out of the well. A team at the St. Petersburg State Mining University developed and patented the technology, and it is proven across more than 200 wells in Russia and Europe, with an 87% success rate, with success measured as a 100% increase in well production. It is cheaper (by way of reduced operational cost and lack of necessity to store and purchase CO2) than gas EOR.
Now, the technology is coming to the US. Licensed through Novas Energy Group, a subsidiary of Propell Technologies Group, Inc. (OBB:PROP), plasma pulse has completed around 40 successful treatments in California, Kansas, Louisiana, Oklahoma, Texas, Tennessee and Wyoming. So far, the companies adopting the treatment have been small – AusTex (OTC:ATXDY), Miller Energy Resources (OTC:MILLQ) and Richfield Oil and Gas to name a few – but in Europe and Russia industry giants such as ConocoPhillips (N:COP) and Gazprom (MCX:GAZP) have incorporated plasa pulse into their operations. Further, big name individuals associated with the oil and gas industry are allocating capital towards the technology. Russian billionaire Roman Abromavich, perhaps best known for owning UK based Chelsea FC, invested $5 million earlier this year in Propell, and a further $9 million a few months later (the second investment was the result of an option to invest further associated with the first investment). As stated in this Business Insider article, he is known for going big in these sorts of spaces, so the $15 million likely represents an initial position, preceding a much larger investment once the technology starts to expand.
Can, then, plasma pulse technology replace the US’s reliance on CO2 EOR? It is probably too early to draw this conclusion, as the CO2 EOR framework is well established in the US. However, we can reasonably conclude that it is an attractive alternative, especially given current oil prices. If oil remains at less than $50 a barrel, the larger oil companies will need to look to alternatives to CO2 EOR if they are to profitably draw on their sleeping oil reserves. Plasma pulse technology is a viable alternative, and could, therefore, be a major part of EOR in the US going forward. Definitely a space worth watching.