Market Harmonics
 Energy Watch

June 15, 2008

Light Sweet Crude Oil

Since reaching $139 on June 6, July crude futures continue in a fourth wave consolidation pattern, with immediate support areas at $131 and $126.  Given the corrective nature of the pullback, an eventual resumption of the uptrend and retest of the high should follow.  

Natural Gas

July NatGas futures have remained in check beneath long-term Fibonacci resistance at the $13 area.  For the moment, we believe prices will range above $11 until a final test of $13 occurs.

Latest Commentary:  Getting the Last Drop Out (May 27, 2008)

Rising consumption demand, along with rising prices for crude oil, have resulted in expanded efforts at Enhanced Oil Recovery (EOR).  Also called "tertiary recovery,"  EOR attempts to extend the productive life of producing wells by getting at "stranded oil" that is not recoverable by primary and secondary means.  

The U.S. government’s National Energy Policy Report published in May 2001 (aka "the Cheney Report") addressed the scale of an expected shortfall in gas and oil supply, noting that by 2020, oil consumption would grow by over 6 million barrels per day.  U.S. oil production was also expected to decline by 1.5 million barrels per day.  To meet US oil demand, oil and oil products would have to grow by a combined 7.5 million barrels per day.  The report further projected that by 2020, US oil production would supply less than 30% of America's oil needs.

With oil prices now having probed above $130 per barrel, we have recently observed an increasing number of oil & gas projects from both public and privately-held companies that are focused almost exclusively in the area of tertiary recovery.  Besides the rise in energy prices and the effort to help meet U.S. consumption demands, also helping to promote the growth of such ventures are technological advances that now make tertiary recovery more economically viable than in the past.  

How exactly do these technologies work?  The U.S. Energy Department (DOE) has published on their website a fairly descriptive report on EOR extraction methods (http://fossil.energy.gov/programs/oilgas/eor/), parts of which we cite below.  The report notes that only about 10 percent of a reservoir's original oil in place is typically produced during primary recovery.  Secondary recovery techniques increase recovery 20 to 40 percent of the original oil in place.   However, with much of the easy-to-produce oil already recovered from U.S. oil fields, producers have attempted various tertiary techniques that offer prospects for ultimately producing 30 to 60 percent, or more, of the reservoir's original oil in place. Three major categories of EOR have been found to be commercially successful to varying degrees:

* Thermal recovery, which involves the introduction of heat such as the injection of steam to lower the viscosity, or thin the heavy viscous oil, and improve its ability to flow through the reservoir.  Thermal techniques account for over 50 percent of U.S. EOR production, primarily in California.

* Gas injection, which includes natural gas, nitrogen, or carbon dioxide that expand in a reservoir to push additional oil to a production wellbore, or other gases that dissolve in the oil to lower its viscosity and improve its flow rate. Gas injection accounts for nearly 50 percent of EOR production in the United States.

* Chemical injection, which can involve the use of long-chained polymers to increase the effectiveness of waterfloods, or the use of detergent-like surfactants to help lower the surface tension that often prevents oil droplets from moving through a reservoir. Chemical techniques account for less than one percent of U.S. EOR production.

According to the DOE, the EOR technique that is attracting the most new market interest is carbon dioxide (CO2)-EOR.  First tried in 1972 in Scurry County, Texas, CO2 injection has been used successfully throughout the Permian Basin of West Texas and eastern New Mexico, and is now being pursued to a limited extent in Kansas, Mississippi, Wyoming, Oklahoma, Colorado, Utah, Montana, Alaska, and Pennsylvania.  Until recently, most of the CO2 used for EOR has come from naturally-occurring reservoirs.  More recently, new technologies are being developed to produce CO2 from industrial applications such as natural gas processing, fertilizer, ethanol, and hydrogen plants in locations where naturally occurring reservoirs are not available.  

The DOE report highlights what it considers a "turning-point" in CO2-EOR advances, citing a project funded by the agency in Kansas that seeks to provide energy, along with economic and environmental benefits.  This involves testing the feasibility of 4-D high resolution seismic monitoring of CO2 injection in thin, relatively shallow mature carbonate reservoirs.  The DOE states that incorporating such time-lapsed monitoring data into CO2-EOR programs could dramatically improve the efficiency and economics of using the technology in many Mid-continent fields in the U.S.

As we noted in our previous Energy Watch commentary, it is clear that bull market speculation is adding a premium to the price of oil that well exceeds simple supply & demand based pricing.  Even so, it is also fairly obvious that both high prices and demand continue to feed off each other.  Whether or not one accepts the Peak Oil argument, the bottom line is that petroleum reserves are finite, while U.S. consumption is nevertheless still rising.  It's no surprise, therefore, that an the number of tertiary recovery projects being proposed is rising as well.  According to a 2006 report, the DOE stated that "Undeveloped domestic oil resources still in the ground (in-place) total 1,124 billion barrels. Of this large in-place resource, 400 billon barrels is estimated to be technically recoverable. This resource includes undiscovered oil, “stranded” light oil amenable to CO2-EOR technologies, unconventional oil (deep heavy oil and oil sands) and new petroleum concepts (residual oil in reservoir transition zones). The U.S. oil industry, as the leader in enhanced oil recovery technology, faces the challenge of further molding this technology towards economically producing these more costly remaining domestic oil resources."  Translation: expect to see more tertiary recovery ventures coming to the market.

Simply doing the math is another reason why tertiary recovery efforts in the U.S. are likely to expand.  If indeed 400 billon barrels is estimated to be technically recoverable, and using the DOE's minimum statistic that 30% of a reservoir's original oil in place can be recovered by EOR, then it implies that some 120 billion barrels could be extracted at minimum.  Noting the projected "7.5 million barrels per day" in rising U.S. demand that was cited in the Chaney Report, the ability to extract 120 billion barrels would address U.S. oil needs for more than 40 years.  If all of the 400 billon barrels were extracted, it would meet U.S. oil needs for well over 100.  Ultimately (and as usual) politics and investment will determine how real those numbers can become.