Foundational Transformations

I recently participated in the 10th anniversary of the formation of the Berg-Hughes Center at Texas A&M. The theme of the celebration was geoscientists and petroleum engineers in a time of energy transition.

From my perspective, our industry has always been in transition—from Azerbaijan to Titusville; the Spindletop salt domes to the East Texas Field strat trap; Ekofisk to Prudhoe Bay; Tupi to Guyana; and from the Fort Worth Basin Barnett to the Permian Wolfcamp.

We’ve gone from early gravimetry to 4D multifold seismic; from P-waves to shear waves; and from classic conventional exploration driven by geology to unconventional multi-well pads supporting numerous long laterals guided and driven by engineers.

Our industry has always been about trying to rethink and improve our models … and about outthinking our competitors.

As geoscientists and engineers, we have been engaged in the most magnificent endeavor of all—working our minds through hundreds of millions of years of earth’s history to find and develop the hidden resources that support and advance civilization.

Since I entered the industry in 1972, I have been awed to see my professional geoscience education and experience influenced by four massively important paradigm shifts, and one enduring truism.

1. Plate tectonics: In 1963, Frederick Vine and Drummond Matthews released their paper in Nature titled, “Magnetic Anomalies over Ocean Ridges,” and confirmed Harry Hess’ speculations about seafloor spreading. This accelerated the acceptance of plate tectonics and the subsequent reinterpretation of basin formation, and thus how sedimentary processes fill those basins. It had a profound effect on how we prospect for hydrocarbons and caused a massive reinterpretation of the exploration models that had guided the industry. Understanding a dynamic, moving earth through time gave us new perspectives on the development of petroleum systems and where they might be found.

2. Revolution in computing: When I broke in with Gulf Oil at their Houston Technical Services Center, one of the first tasks we were given was to do some simple seismic processing on the company’s large bank of Univac computers. I remember going through reams of punch cards, submitting a job, and then, all too often, finding that the next day—or even longer—the job didn’t execute. The sign of someone with technical chops was that they had a chalkboard in their office. No one had desktop computers, laptops, or tablets. The most sophisticated data transmission device was the telex.

3. Maturation of the internet: When I was exploring the viability of using the internet to deliver geological information in June 1995, I got a fax from a friend. He forwarded me a survey that had been done on the use of the internet in the oil & gas industry. Among the survey results:

Let this sink in.

Over the course of one generation of geoscientists, access to critical information has exploded into a digital democracy that has forever changed our expectations about the density and availability of information that we need to do our jobs.

4. The development of unconventional reservoirs: When George Mitchell—an engineer—persevered in perfecting the engineering model of horizontal drilling combined with large frac jobs in the Barnett Shale, he single-handedly exploded all geological assumptions about exploration models the industry had relied on for nearly 150 years. Overnight—at least in the time scales we are used to—he pivoted the assignment of risk from geology to engineering. This renewed definition of risk attracted huge amounts of investment capital, re-calibrated our understanding of global total recoverable hydrocarbons, and forever changed our industry.

5. Price volatility: Burned into our collective memories are the images of the giddy highs when prices rose and everyone bought a new truck or King Air, and soul-crushing lows when prices fell and folks lost their jobs. By my simple reckoning, since the end of WWII, we’ve had 30 years of stable, or semi-stable prices, and 32 years during which prices have climbed and fallen by anywhere from 200%600% (in 2019 inflation-adjusted dollars).

Ironically, as we continue to perfect our unconventional models, our technical success has swollen supply metrics by more than 2 MMBOD in just two years, to the point that pricing is, yet again, under pressure.

The day after the event at Texas A&M, drones and cruise missiles took out 5% of Saudi’s oil capacity and prices spiked 14%.

We have entered a period when one day the quants on Wall Street short every oil stock they can trade, and a week later, they’re all long. Pricing now seems to be algorithmically determined by the news cycle, and credible arguments can be made to be either long or short oil. It’s clear that it’s a hell of a time to try and be strategic about CAPEX spend as we continue to perfect our unconventional models.

As an industry, we have both profited from and been hurt by events that are totally outside our control. With a projected global 2019 CAPEX spend of $540 billion we expose huge amounts of capital to an environment of increasing uncertainty and risk.

As an industry, we face multiple headwinds.

Wall Street doesn’t like us … but it sure likes tech.

Apple’s market cap is nearly 65 times its expected 2019 CAPEX and Facebook’s market cap is 30 times its CAPEX. However, on our side of the street, ExxonMobil’s market cap is only 5.7 times its expected CAPEX and Conoco Phillips is 6.1. It’s obvious access to both public market and institutional capital is hampered.

Worldwide economic demand is basically “undetermined” … with lagging numbers often not what our frequently interviewed talking heads predict at the moment, contributing to price weakness.

Recovery of demand, we assume, will be driven by the old economic models that expect the third world’s ascent to first world status will replicate that path of proven industrial powerhouses—smokestack industrialization followed by infrastructure buildout. We should, however, be extremely cautious about buying into this assumption. Here’s an example where the prior model fails; cell phone adoption in Africa—expected to be the largest demographic in the world by 2030—has bypassed the need for landlines and fiber for internet.

But goods still need to get to market.

Can we bypass highways with drones?  Maybe, for localized delivery out of transshipment depots. But certainly not for intercity and town movement of major weight loads.

Can we move the volumes of goods that are a hallmark of economic progress without the physical infrastructure? Not without a reformation of assumptions about how human nature guides consumption.

I’ve used the graphic below in a previous blog, but it is still a useful reminder that the pace of innovation is likely to require us to question our assumptions about the way energy will be generated, transmitted, and used.

Should 3.5 million barrels of curtailed Venezuelan and Iranian production come back on line, there will be further downward pressure on oil prices.

Whether we agree with it or not, the developed world will be focusing on how to mitigate the effects of climate change by reducing demand for fossil fuels. This is an issue that will not go away … ever.

Developed economies are taking steps to counter climate change, resulting in increasing sales of electric vehicles and aggressive adoption of renewable energy sources like wind and solar. Combined, Volkswagen, Volvo, and Nissan expect to sell 4 million–5 million electric vehicles (EV) by 2025. Although current EV market share is about 2.5%, there are many projections that see EVs attaining market share of about 30%–35% by 2030.

Tesla is continuing to work on delivering large-scale battery storage systems that can help solve the intermittency issues of wind and solar. Utilities are migrating to these as highly subsidized alternatives to peak fired natural gas backup power supplies. It doesn’t take a great deal of imagination to envisage these battery packs supplying power to an ever-increasing number of electric vehicle charging stations.

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