1.3

EXPLORATION AND PRODUCTION

More than 90 percent of the world’s energy is supplied by fossil and biofuels. These fuels are composed of molecules containing hydrogen and carbon and often are referred to by the name hydrocarbons. When combusted (combined with oxygen to produce a flame), these molecules produce heat that can be used to power engines or electrical generators. When obtained by exploration and production of existing resources, these types of fuel are called conventional fuel or fossil fuel.

Before they can be used, fossil fuels must first be found (exploration) and then brought to the surface (production). These are complex jobs that often require a company with a specific technical expertise (an exploration and production company) to work with the owner of the fuel (the mineral rights owner).

•   Exploration. Fossil fuel exploration involves getting licenses to search for new resources, searching for fossil fuel resources, and then negotiating contracts with the owners of the mineral rights to extract the fuel from the ground.

•   Production. Production involves extracting the fuel from the ground. This is typically done through drilling (for oil and gas) or mining (for coal).

After production, the fuels need to be separated from one another (in a process called refining) before they can be sold to consumers. There are a variety of hydrocarbon fuels, largely distinguished by the length of carbon chains in each molecule.

Hydrocarbon Fuels

The term fuel describes a wide variety of substances that can produce heat or power through a chemical or nuclear reaction. The most abundant type of fuel, called conventional fuel, is composed of hydrocarbons that produce energy when burned. This type of fuel is most commonly formed when decaying plant life has become trapped underground. The process of converting dead plants to fuel can take millions of years. Because of that, another term for conventional fuel produced from trapped, decayed plant life is fossil fuel. It is also possible to create fuels from recently grown plants; this fuel is called a biofuel.

In fuel molecules, carbon will form long chains, and the length of the carbon chain will determine the properties of the fuel (Figure 1.3.1). The typical notation to describe the length of a carbon chain is a capital C (the chemical symbol for Carbon) followed by a subscript that indicates the length of the chain. For example, C₅ indicates a hydrocarbon molecule with five carbon atoms. The shortest molecules, called natural gases, exist as gases at standard temperature and pressure. The mid-length molecules exist as liquids and are called petroleum. The longest chains are solids and are called coal.

Figure 1.3.1 Hydrocarbon fuels

To a large extent, even after processing, all fuels exist as a mixture of different hydrocarbons. Gasoline, for example, will predominantly contain hydrocarbon chains in the C₇ to C₁₁ range. However, gasoline will also contain a portion of molecules on both ends of that range (C₅, C₆, C₁₂, C₁₃, and so on). The amount of gasoline composed of those lighter or heavier elements can vary substantially. Because of that, different countries, states, and even processing locations within states, may describe the carbon-chain makeup of each fuel slightly differently.

Exploration and Production Agreements

Because a high percentage of the Earth’s energy is provided by fossil fuels, a major focus of the energy industry is in the exploration and production of fossil fuel resources. This requires identifying the location of potential resources and extracting them from the ground. It also requires working with the owners of the fuel to secure the rights to obtain fuel from wherever it is located.

Energy companies often will lease the property where fuel is located. They will remove the fuel from the ground and compensate both the party who owns the property and whoever owns the mineral rights to the fuel underneath the land. Land and mineral rights owners will typically get paid royalties, a percentage of the profit obtained by the production company.

The typical owners of the land and mineral rights will vary by location. For example, in the United States, the rights to fossil fuel resources located under the surface are often owned by private individuals. However, in most other countries, these resources are owned by the government. Regardless of who owns the land, exploration companies must typically get licenses before exploring for new resources. Then, once the resources have been identified, exploration companies will need other licenses to develop the resources for production.

Energy exploration and production can be extremely profitable. However, it is also a highly risky activity. First, finding and extracting fossil fuels from the ground is technically complex. Even when everything is going well, mechanical problems can cause problems. Unfortunately, things often do not go well. Sometimes exploration companies will take on a lease only to be unable to identify any fuel reserves. In other cases, energy companies can identify reserves but find the reserves uneconomic to extract. Finally, even if the reserves are originally profitable to extract, changing energy prices in the future can continue to impact profits. Exploration companies can find a reservoir of underground fuel and think it is profitable to extract, only to find that after they have drilled wells that prices have fallen.

Because of the uncertainty involved in energy exploration, there are a variety of contracts that can be used to limit the risk of various parties. The use of these contracts will depend on the interest and ability of the participants to take on the risk of developing fossil fuel reserves and the task of selling the fuel after it is extracted from the ground.

Some of the more common types of contracts are:

•   Tax and Royalty. In a tax and royalty contract, the exploration company (the developer) will give the owner of the oil and gas rights an up-front licensing fee and a percentage of the gross profits. Because of this, the exploration company takes on all of the risk of developing the fuel resources although both parties are at risk of declining energy prices. Even so, the mineral rights owner will never have to pay money out of pocket—they are limited to lower profits. A typical contract in the United States will give the owner one-eighth of the gross profits.

•   Production Sharing. In a production sharing contract, the exploration company gives the owner a percentage of the fossil fuels that are produced. The owner must then arrange to sell or use the fuel. This takes knowledge and the ability to handle physical energy transactions. However, because the landowner is taking on more risk, this can give him or her higher profits than tax and royalty contracts.

•   Service Contract. With a service contract, the developer acts as a contractor and is paid a fee to produce oil and gas. The developer does not take ownership of the crude oil. Since most of the costs are paid by the owner of the mineral rights, this involves relatively little risk for the exploration and production company. This provides the highest risk, and greatest potential profit, to the owner of the land and mineral rights.

Traditional Wells

The traditional way of extracting gaseous and liquid hydrocarbon fuels from the ground is to drill a deep hole straight into the ground. If fossil fuels are located in the ground, temperature and pressure will force the fuel to the surface. There are three mechanisms that cause oil and gas to migrate to the surface—overpressure, heat, and buoyancy. Overpressure occurs when long chain hydrocarbons decay into shorter chain hydrocarbons. Since smaller hydrocarbons are less dense than larger hydrocarbons, they take up more space per unit of volume; this causes an increase in pressure. Second, oil and gas (and almost all other liquids and gases) expand when they get hot. This is important since temperatures deep in the Earth are higher than at the surface. Higher temperatures deep underground force hydrocarbons to the surface. Finally, buoyancy pushes oil and gas to the surface since hydrocarbons are less dense than most underground material like rock, decaying plant matter, or water.

Certain rock formations, like an impermeable layer of rock above a layer of decaying plant life, will cause a reservoir of petroleum or natural gas to form. Without this kind of barrier, the fuel would leak to the surface and eventually disperse. This gives geologists a target—they can search for specific types of rock formations. Currently, this is done by using seismic waves to create three-dimensional underground maps. Once promising areas are identified, test wells can be drilled to determine if they actually contain fuel.

Wells are created by drilling a hole into the Earth. This hole is typically between six inches and three feet in diameter (12 centimeters to 1 meter) and created by slowly lowering a drill bit into the ground. The drill bit is typically suspended by a hollow metal tube, called a drill string, which transfers both torque (rotational energy) and drilling fluid to the drill bit. Drilling fluid is a mixture of clay, water, and other chemicals used to keep the drill cool, remove bits of broken rock (cuttings), and maintain the proper pressure underground.

After the hole is drilled, steel pipes slightly smaller than the borehole are placed inside. The space between the pipe and the surrounding rock is then filled with cement. These pipes provide structural stability to the well and separate different underground pressure zones from each other. To maintain stability of the pipe under more increasingly stressful conditions, progressively smaller casings (and drill bits) are used. Modern oil wells may have as many as five levels of progressively smaller diameter pipes. This process is repeated several times until the rock layer containing the fuel is reached. At that point, a perforating gun is lowered into the well to punch holes through the steel casing and cement. This will allow petroleum or gas to flow into the well and come to the surface.

When operating the well, the driller depends on the pressure of the well to bring the fuel to the surface. Typically, wells produce most quickly when they are first produced; production declines over time. The well will eventually run dry when the pressure underground is not sufficient to bring additional fuel to the surface. Underground pressure can be augmented by pumping or introduction of various additives that increase underground pressure. Even so, traditional drilling works best for relatively low density crude oil or natural gas that can flow easily (Figure 1.3.2).

Figure 1.3.2 Traditional drilling

Oil Sands (Heavy Oil)

A limitation of traditional wells is that the petroleum or gas located in the well needs to flow to the surface. This limits the effectiveness of traditional drilling to the lighter fuels—the ones with relatively short carbon chains. Heavy fuels need to be produced differently. For example, heavy crude is extremely viscous and ranges from the consistency of molasses to a solid at room temperature. If heavy crude deposits are located close to the surface, heavy crude can be strip mined. This is similar to coal mining. Otherwise, high temperature steam can be injected underground to melt the heavy oil into a liquid that is suitable for extraction.

Because it injects high temperature steam underground, producing heavy oil requires immense amounts of energy and water. It uses more resources and is generally more destructive to the environment than traditional drilling. Heavy oil also requires more processing than lighter crude oil to convert it into gasoline or diesel fuel. This makes heavy petroleum less desirable than traditional sources of fuel.

On the other hand, heavy oil resources are much more abundant than traditional oil resources. There are about twice as many heavy oil reserves in the world as light oil reserves. Additionally, many of these reserves are located near the surface in politically stable regions. Unlike light crude resources that are difficult to locate, the primary limiting factors to developing heavy oil deposits are typically access to water (for steam) and environmental considerations.

Shale Gas (Hydraulic Fracking)

Hydraulic fracking is another alternative to traditional drilling. In a traditional well, hydrocarbons are located in a layer of permeable rock that has allowed the hydrocarbons to rise close to the surface. Traditional drilling looks for reservoirs that are formed when the migration of hydrocarbons to the surface is interrupted by an impermeable layer of rock. By drilling through the impermeable layer, the hydrocarbons can be removed from the lower level of permeable rock. However, that isn’t the only type of rock in which hydrocarbons can be found. In some cases, organic matter may become trapped inside the cavities within impermeable rock formations.

When hydrocarbons are trapped within rock cavities, they can be freed if the rock is fractured. This will allow the hydrocarbons to migrate to the surface similar to traditional drilling. The difference from traditional drilling is that the rock formations need to be fractured before hydrocarbons can be removed. The most common way to create fractures in rock is to inject water or similar hydraulic fluid into a rock formation. This fluid can then be used to propagate compression waves caused by explosions deep into the formation. This process is known as hydraulic fracturing, or fracking. It has been proven as a very cost-effective way to recover hydrocarbons from shale rock formations.

Hydraulic fracking is a quickly growing technology. It tends to produce a large percentage of the lighter, more valuable, hydrocarbons (like methane, propane, and naphtha) than other technologies. It is also relatively abundant. Large shale deposits containing hydrocarbons are located in politically stable regions, like the United States. Finally, it is relatively low cost. The cost to extract hydrocarbons from shale formations is cost-competitive with the cost of extracting traditional petroleum from low cost producers in the Middle East.

Environmentally, hydraulic fracking provides a mixture of benefits and drawbacks. The biggest environmental benefit from fracking has been a reduction in carbon emissions and other air pollution from electricity generation. This has largely occurred because natural gas is much less polluting than coal. Cheap natural gas has displaced coal as the cheapest generation fuel for much of the United States. This is a primary cause for a 12 percent decrease in U.S. carbon emissions between 2005 and 2015 (Figure 1.3.3).

Figure 1.3.3 Carbon emissions down 12 percent, 2005–2015

From a negative environmental perspective, various types of pollution—from sulfur to heavy metals—can be trapped in shale formations along with hydrocarbons. Hydraulic fracking can release that pollution. As a result, it is necessary to treat the water used by fracking to remove this pollution before it can contaminate drinking water.

Shale Oil (Shale Rock Processing)

Another way to extract hydrocarbons from shale is to use traditional mining techniques prior to crushing the rock in a processing plant. The technology to crush shale and extract hydrocarbons has existed for more than 200 years. However, it is rarely economically viable—there are more cost-effective ways to get fuel. This process differs from fracking in that shale oil processing removes the shale from the ground prior to processing.

Deepwater Drilling

Oil can often be found underneath the ocean. When this drilling occurs in water more than 500 feet (150 meters) deep, it is called deepwater drilling. The depth of the water provides a number of difficult challenges. Pressure increases by approximately one atmosphere every 10 meters. At 500 feet (150 meters) deep, the pressure is almost 16 times water pressure at sea level—a pressure that humans cannot survive without specialized equipment. Some projects have much higher pressure still. The deepest projects are around 10,000 feet (2,900 meters) deep—about three times the world record for the deepest dive by a human.

The lack of human operators in deep sea environments places an increased burden on remote monitoring. For example, just changing a light bulb becomes a difficult task if it has to be done remotely using a robotic drone. Other problems that can face deepwater drilling are hurricanes, shifting sediments on the sea floor, swirling currents that shift the drill string, and unpredictable pressures (some higher, some lower) in the sediment layers beneath the sea floor.

In addition to making problems more difficult to fix, high pressure also increases the risk of problems. Steel pipes, electronic components, and other drilling equipment are all vulnerable to high pressure conditions. For example, gas bubbling out of crude oil is more likely to occur when drilling in deep water. This is largely due to the pressure difference between the top and bottom of the pipe. If a bend or weak point in the pipe allows the gas to collect, the resulting pressure can destroy a pipe. In addition, longer pipes have more surface area where a weak spot can occur. This problem is further exacerbated when shorter pipes need to be welded together to form a longer pipe.

In summary, there is a large amount of oil that can be found offshore. However, the combination of more problems, a greater severity of problems, and the difficulty fixing those problems means that deepwater drilling is substantially more complicated and substantially more expensive than traditional drilling. The amount of deepwater drilling activity is very sensitive to oil prices and is often seen as a leading indicator for industry sentiment around future prices.

Oil and Gas Reserves

No one knows how much hydrocarbon fuel actually exists on the planet. Even on the scale of an individual well, the actual amount of crude oil trapped underground is generally not known until a well is fully exhausted. Even after they are exhausted, wells will often still contain sizable quantities of hydrocarbons. However, the pressure just isn’t high enough to bring it to the surface. As a result, crude oil reserves (the oil that is economical to remove from a location) are typically described in terms of the probability of the oil being extracted rather than as a total amount present.

The quantity of hydrocarbon fuel that is located somewhere is often described by the terms proven, probable, and possible reserves.

•   Proven Reserves. Proven reserves are generally defined as having a 90 percent certainty of being produced with current technology and under current economic and political conditions.

•   Probable Reserves. Probable reserves are generally defined as having a 50 to 90 percent probability of being produced with current technology and under current economic and political conditions.

•   Possible Reserves. Possible reserves are generally defined as having a 10 to 50 percent probability of being produced with current technology and under current economic and political conditions.

•   Resources. The term oil and gas resources refers to the total volume of fuel present in a gas or oil field irrespective of whether that fuel is economical to remove or whether the technology to remove the fuel currently exists. Any attempt to estimate hydrocarbon resources is largely a guess.

An important qualification on fuel reserves is that the fuel can be produced with existing technology under current economic and political conditions. In other words, the quantity of reserves will change based on the price of crude oil and natural gas. Higher prices make additional reserves profitable to extract. This will increase the number of oil and gas reserves. Lower prices will decrease available reserves.

The description of crude oil reserves can also be described probabil-istically. For example, P90 refers to a 90 to 100 percent chance of recovery—a nearly certain amount over a number of wells. P50 refers to a 50 to 100 percent chance of recovery—on average, over a number of wells you would expect to recover this amount. P10 refers to a 10 to 100 percent chance of recovery—an unlikely, but still possible, quantity of hydrocarbons.

Another complication when describing the quantity of fuel in a location is that some different fuels have different compositions. Some fuels, like methane and propane, exist as gas. For the purpose of calculating reserves, fossil fuels are typically represented as a single number called the barrel of oil equivalent (BOE) or tonne of oil equivalent (TOE). Other hydrocarbon fuels, like natural gas, need to be converted into these units.