How many times have I started a weekly note by stating that “I’m in fill-in-the-blank”? That is, I might be in Houston, Denver, New York, Toronto, London or someplace else for some conference or another.
Well, this week I’m in Pittsburgh — my hometown. The American Association of Petroleum Geologists (AAPG) was nice enough to schedule its 2013 annual convention here in the (former) Steel City. I can commute to the event on a streetcar.
Why Pittsburgh, you might wonder? It helps that Western Pennsylvania is the cradle of the modern U.S. oil industry, what with Titusville and Col. Drake in 1859. Closer to our own time, AAPG recognizes the importance of this region to North America’s booming oil and gas business. It’s the heart of high-impact shale resources such as the nearby Marcellus and Utica plays.
As cities go, Pittsburgh works for a big get-together. There’s a large convention center and hotel rooms nearby. There’s plenty to do at night, like attend a Pirates baseball game (the Bucs are nine games over .500, too). Plus, the regional economy is booming — in no small measure due to an influx of oil people and oil money. At least from what I know, the local and state tax collectors never fail to cash the “Marcellus checks.”
When I want to bait people, I say things like, “Pittsburgh will turn into the Houston of the northeast over the next 20 years.” They look at me kind of funny, if you know what I mean.
As an aside, though, I should note that the city of Pittsburgh suffers from conformity to trendy political fads. In particular, the Pittsburgh City Council has banned fracking within city limits. Not that it matters, because few oil companies are interested in the hassle of urban drilling — at least in Pittsburgh. And the ban is likely illegal under the state oil and gas code. But still. It says something.
Fracking ban or no, it’s nice to have AAPG in town. People in the oil industry have money to spend and tend to get along in whatever bizarre political jurisdiction they happen to be. Plus, you never know what kind of good geological vibes might emanate down Grant Street, toward the City-County Building. Wisdom may come late, but it seldom never comes.
Big Geologists Recognize the Big New Play
As the name implies, AAPG is a professional association for geologists who work in the oil biz. In fact, it’s “the” main professional association for oil geologists — although the whole truth is that geophysicists, petroleum engineers, etc., have their own societies, of which they’re justifiably proud.
At the end of the day, though, you can’t do much “stovepiping” in the oil fields. Oil? Geophysics? Engineering? That and much more, of course. There’s too much for most individuals to know in detail. Thus, all large projects require multiple skills. People in a wide array of fields have to be cooperative and collaborative.
I’ll add that AAPG is quite an international group. It’s hardly just “American” anymore — indeed, there’s a long-running debate within the organization over changing the name.
You can see the international flavor of AAPG at the Pittsburgh convention center, which is crowded with geologists from all over the world. They wear all manner of garb and speak all sorts of languages. Are you into that “diversity” thing? Try attending an AAPG convention.
Flags of many nations hang at the 2013 AAPG Convention.
My point is that AAPG isn’t just American. It’s global, and it encompasses what I’d call the “Big Geology” side of the global oil biz. You can take a lot of industrial-scale pulses and blood pressure readings here.
Ground Zero for the Next Energy Tech Revolution
Which leads me to note that it’s interesting how the North American energy crowd has utterly embraced new fracking technology and the ensuing shale gale. Meanwhile, it’s evident that many geologists from overseas are still wrapping their brains around it.
In other words, we’re at ground zero of something very big. Fracking is a long-term trend. It’s a major energy tech revolution that’ll last for many decades to come. Sure, people overseas have read about it, followed it and even invested in it. But Big Geology from the rest of the world is just now truly coming to grips with it at the science and technology level.
For example, compared with conventions from years past, this year’s AAPG technical papers involving North American subjects show a heavy swing toward fracking and related exploration and production issues. Meanwhile, the overseas technical themes are much more “conventional,” in every sense of the word.
It strikes me that North America is a decade or more ahead of the rest of the world in fracking. We’re pioneering the fracking process here. It makes sense, because North America is where the energy supply deficit has been made up by expensive oil imports for many years. So there’s a need, there’s demand and there’s money.
Meanwhile, on the geological side, North American basins are well understood after 150 years of development. Oil operators have drilled through a lot of shale formations over the decades. Along the way, the gas sensors and chemistry analyses revealed a lot of hydrocarbon molecules, but it was always too hard to get those little things into a steel pipe. Until now.
On the exploration side, it’s critical that most of the fracking revolution has occurred on private lands, due to the U.S. approach to mineral ownership. Private deals between private parties expedite capital to flow into the oil patch. It all happens outside much of the regulatory maze — and “just say no” attitude — of working on, say, federal lands.
Indeed, the upswing of U.S. oil and natural gas output in recent years is almost entirely a “private lands” phenomenon. Energy output from federal land is declining — although the feds, too, are happy to cash the tax checks.
Also, by comparison with the U.S., entire countries — France comes to mind — have banned fracking. Essentially, they’re taking themselves out of the game for future energy development. Maybe someday they’ll change their collective mind.
Critical Players Address Critical Problems
What’s the key to fracking? Well, smart geologists are necessary, of course. And I mean “smart” in ways both old and new. You still need classical old geological understanding — that “Old Time Geology,” so to speak, with structures, mineralogy, sediments, basic geophysics, geochemistry, paleontology and more.
But the new breed had better be well versed in using Big Data, math and statistics, as well. That is, at AAPG conventions of old, there used to be all manner of “hard” exhibits — drill bits, logging tools, etc. Doing oil geology still involved kicking steel and getting your hands dirty. Now, the AAPG displays are all screens, on which you see examples of data being manipulated by work station levels of computational power.
Don’t be deceived, though. Another aspect — and advantage — for North American fracking is that there’s a massive amount of specialized, fracking-oriented equipment already here, like rigs, trucks, pumps and much more. Other nations certainly have their respective oil industries, but not the specialized equipment one needs to kick off a fracking campaign.
Much of the industry’s specialized equipment is under control of oil service companies. These guys keep the barrels coming out of directional, multistaged, fracked wells.
The names — familiar to you, I hope — include Schlumberger (SLB), Halliburton (HAL) and Baker Hughes (BHI). Indeed, all three companies are worth a look.
At the AAPG convention, I attended several fascinating talks by several oil service reps. One guy from Schlumberger talked about the issues of horizontal drill holes collapsing due to improper drilling techniques.
Hole collapse is much more common than most operators let on, apparently. It can lead to expensive lost time on rigs, not to mention losing drill bits, pipe and equipment down holes and having to seal up a lost hole and redrill. The trick is to understand the geomechanics of what you’re doing and really get a handle on the drilling mud quality and weight. Talk about approaching things from an interdisciplinary angle.
There was another great presentation by a Halliburton rep. He stated that, per Halliburton statistics, as many as half — 50% and more! — of frack stages either don’t work from the beginning or fail soon after the well goes into production. That’s astonishing.
Think about how much money goes into drilling a well, casing it with pipe, inserting equipment down the hole and then fracking the stages up the pipe to bust up the rock and liberate hydrocarbon molecules. Now you learn that half or more of the stages don’t deliver gas or oil? Clearly, there’s room for research and development to improve on this, and thus improve returns from each well.
One Baker Hughes guy gave a strong talk on interdisciplinary collaboration. It was humbling, really, to see charts and graphs that lay out in detail the things that you simply do not know and often don’t even realize that you don’t know. Yes, you could make a series of checklists for everything, but in the end, you’ll still be confronted by new issues with every well and every completion.
So where is this all going? Well, the fracking revolution is a product of technology and high oil prices. If oil prices tumble, we’ll see a pullback in energy investment — similar to the drilling slowdown for natural gas in the U.S. in the case of last year’s gas glut and low prices.
Still, much of the oil biz is outside the short- and even medium-term commodity cycles. Oil firms tend to look at long-term pricing trends and make their investments that way.
The future is strong for unconventional plays. There’s much drilling and fracking yet to come. Along those lines, I saw several great presentations about just the Marcellus and Utica successes in Pennsylvania and Ohio. Indeed, Range Resources has performed utter miracles in efficient exploitation of its leases in some parts of western Pennsylvania.
At the same time, new tech is moving backward, into older, “mature” oil fields from days past. By incorporating fracking into traditional oil extraction, the Permian Basin of West Texas, for example, is now growing oil output after literally generations of decline.
Out in the field, it’s all about improving the efficiency of operations at the wellhead and down the pipe far into the ground. It’s about having people who understand what’s going on and equipment that can do the work. As long as the economic and regulatory environment is favorable to this kind of effort, we’ll have successful energy investment opportunities in North America. Even more important, we’ll have abundant, affordable energy.
That’s all for now. Thanks for reading.
Byron W. KingOriginal article posted on Daily Resource Hunter
After the 2008 market crash, something unexpected happened. The fracking revolution took American energy to the next level.
Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.
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