1. The U.S. has become the world’s
fueling station, sending more gasoline, diesel, and other refined petroleum
products abroad than ever before. Exports of these fuels have almost tripled in
10 years.
2. In 2011, the U.S. became a net
exporter of refined oil products for the first time since World War II.
3. Exports are forecast to keep
rising as European refiners close, domestic crude production rises, and demand
swells in emerging markets.
An Old Formula May Overstate U.S. Oil
Supplies
Jan Arps is the most influential oilman you’ve never heard of.
In 1945, Arps, then a 33-year-old petroleum engineer for British-American Oil
Producing Co., published a formula to predict how much crude a well will
produce and when it will run dry. The Arps method has become one of the most
widely used measures in the industry. Companies rely on it to gauge the
profitability of drilling, secure loans, and report reserves to regulators.
When Representative Ed Royce (R-Calif.) said at a March 26 hearing that
the U.S. should start exporting its oil to undermine Russian influence, his forecast
of “increasing U.S. energy production” could be traced back to Arps.
The problem is the Arps equation has been twisted to apply to
shale technology, which didn’t exist when Arps died in 1976. John Lee, a
University of Houston engineering professor and an authority on reserves, says
billions of barrels of untapped shale oil are counted by companies relying on
limited drilling history and tweaks to Arps’s formula that exaggerate future
production. “Things could turn out more pessimistic than people project,” says
Lee. “The long-term production of some of those oil-rich wells may be
overstated.”
Lee’s criticisms have opened a rift in the industry about how to
measure the stores of oil trapped within rock formations thousands of feet
below the earth’s surface. In a newsletter published this year by Ryder Scott,
which helps drillers calculate reserves, Lee called for an industry conference
to address what he says are inconsistent approaches. The Arps method is
particularly open to abuse, he says.
U.S. oil production has increased 40 percent since the end
of 2011 as drillers target layers of oil-bearing rock such as the Bakken shale
in North Dakota, the Eagle Ford in Texas, and the Mississippi Lime in Kansas
and Oklahoma, according to the Energy Information Administration. The U.S. is
on track to become the world’s largest oil producer by 2015, says the
Paris-based International Energy Agency. A report from consultants Wood
Mackenzie says that by 2020 the Bakken’s output will be 1.7 million barrels
a day, up from 1.1 million now.
Rising reserve estimates give the U.S. a false sense of
security, says Tad Patzek, chairman of the department of petroleum and
geosystems engineering at the University of Texas at Austin. “We have deceived
ourselves into thinking that since we have an infinite resource, we don’t need
to worry,” he says. “We are stumbling like blind people into a future which is
not as pretty as we think.”
The Arps formula is only as good as the data a company puts into
it, Patzek says. Estimates can be inflated when Arps relies on limited drilling
history for data or on a few high-performing wells to predict performance
across a wide swath of acreage. Forecasts can also be skewed higher by assuming
slower production declines than Arps observed.
In November 2012, SandRidge
Energy (SD) cut its
reserve predictions to the equivalent of 422,000 barrels per well from 456,000
barrels. Five months later, the estimate was cut again, to 369,000 barrels,
company records show. SandRidge has since made a small adjustment upward to
380,000 barrels. The early forecasts were based on a small number of
high-performing wells, which led the company to overestimate performance for
its other acreage, says Duane Grubert, SandRidge’s executive vice president for
investor relations and strategy. The company now has more than 1,100 wells and
has improved its drilling. It is confident that current estimates are reliable.
“Nobody knew that until we actually ground-truthed the field by drilling it,”
Grubert says. “What we came up with was, hmm, that initial estimate was a
little high.”
SM Energy (SM) of
Denver suffered a similar setback this year when its wells in the Eagle Ford
shale in Texas fell short of forecasts. The company on Feb. 18 cut its
prediction in one area to the equivalent of 475,000 barrels per well from
602,000. Estimating future production from early data is a challenge, says
Brent Collins, a company spokesman. “This is especially true when you are
trying to estimate an average from a limited number of wells.” Both SandRidge
and SM Energy use variations of the Arps method, company records show.
Tapping shale formations differs from the drilling in Arps’s
day, says Dean Rietz, an executive vice president in charge of reservoir
simulation at Ryder Scott. In 1945, oil production meant drilling straight down
to hit pockets of oil and gas that had become trapped after migrating upward
from deep layers of rock. Today’s drilling targets those deep layers, boring
through thousands of feet of the earth’s crust, then turning sideways to chew
for a mile or more through layers harder and less porous than a granite countertop.
The rock is shattered by a jet of water, sand, and chemicals to create a
network of small cracks to allow the oil and gas to escape. These fractured
wells seem to follow a different decline trajectory than the wells Arps
studied, says Lee.
Some in the industry defend Arps. “As far as Arps being old, the
wheel was invented a long time ago, but it still comes in handy,” says Scott
Wilson, senior vice president at Ryder Scott. Others are working to replace the
Arps calculation. Researchers are testing new formulas with names worthy of an
indie band: Stretched Exponential, which Lee helped develop; the Duong Method,
devised by Anh Duong, principal reservoir engineer for ConocoPhillips (COP); and
Simple Scaling Theory, which the University of Texas’s Patzek worked on. Rietz
has made a computer model that simulates oil production. “Come back to me in 10
years, and I’ll tell you how reliable it was,” he says.
The bottom line: A 70-year-old formula may overestimate
the future of U.S. oil production from shale.
Loder is a reporter for
Bloomberg News in New York.
