Industry tech advances a success story for the nation

That horizontal drilling and shales have changed the oil and gas business is a given for the industry.

But for Mark Papa, it represents much more for the nation—$50 billion saved in energy costs due to lower gas prices; 1 million barrels of additional domestic oil, which reduces the importation of foreign oil by $29 billion and creates thousands of jobs; and he says, there’s more to come.

“It’s an amazing success story for the nation, though you’d be hard pressed to find anything in the mainstream press. I would maintain that horizontal drilling, multi-stage fracs, and unconventional rock have dramatically changed the U.S. oil and gas supply picture, and I think it’s the biggest technical change we’ve seen in the domestic industry in 40 years.”

Papa described what he calls a new paradigm for oil and gas, the future of the industry, and implications for the country.

Natural Gas

Five years ago, the assumption was natural gas prices would rise and remain in the $7 to $10 range. Even at those prices, the country would need to import LNG to satisfy demand.

“Between all the shale gas we’ve discovered in the U.S., I believe we have enough natural gas for the next 50 years and we won’t need to import any LNG at all—in fact, the probable way things are going to go is that there will be exports of LNG away from North America,” he says. “EOG is involved in one of those plays in British Columbia called the Kitimat LNG project.”

Never before has the industry’s perception of the long-term natural gas market changed so drastically and so quickly, he says. The implication of the huge upswing in supply is that prices will be bearish for at least the next five years. However, the result of the lower prices is that the energy cost to the nation is conservatively $50 billion lower.

“There is no press for this. It preserves more American jobs, not only upstream, but ancillary jobs that use natural gas for feedstock such as chemicals and steel,” he says. “I was talking to one of the board members of DuPont, and they said that they believe that it’s going to change how they view shuttering jobs in the U.S. Ammonia plants are re-opening here, chemicals are re-surging, and steel is becoming livelier.”

It gives the nation options for energy usage for the first time in more than 30 years. Using natural gas for vehicles and green field electric generation projects are now viable, economically attractive options.

“We’re going to see those things happen in a big way in the 2015 to 2020 timeframe,” he says. “Our job as an industry is to educate the utilities that there is a new gas paradigm, and that there is plenty of supply at reasonable prices. We’re getting helped by the current administration, especially the EPA, because they’re going after coal for environmental reasons.”

The nation uses 15 million barrels of oil per day, of which 70 percent is gasoline or diesel for transportation. Papa says that on a technical basis, fleets can be converted to CNG, as it produces less emissions, it’s cheaper, and it’s domestic. The technology is there, but so far not much has happened in terms of large-scale conversion.

“The reason is twofold: one, it’s only been in the last 1 or 2 years where even the industry executives have realized how much gas we have in the U.S. It takes some time to get your arms around the numbers,” he says. “Two, is infrastructure. We can’t convert the 18-wheeler fleet to natural gas without filling stations on the interstate.”

Papa believes that some form of federal assistance, likely tax credits, will be needed to bring the conversion process.

“My estimate is that between today and 2015, not a lot will happen—I look for 2015 plus when it will become so blooming obvious to everyone on both sides of the aisle,” he says. “My personal view on gas is that it has an extremely bright future. But until 2015, I think we’re going to be in a chronic oversupply in North America.”

Oil

U.S. oil production peaked at about 10 million barrels per day and is currently at about 5.5 million barrels. Between the peak and today, domestic oil production has declined steadily for 40 years. About one-third of the nation’s oil demand is produced domestically, and in 2009 the U.S. spent $246 billion importing crude.

“Most forecasters, even a year ago, would tell that it’s hopeless, we’re on a terminal decline and we’ll have to import more oil,” says Papa. “But now we have a couple of success cases in horizontal drilling for oil.”

Even after horizontal gas was discovered in 2005, Papa says the general rule was that the oil molecules, which are bigger than gas molecules, are too large to flow through fraced pore spaces in shales. Thus, one can produce shale gas, but not oil.

“We went counter to the trend, and said we think that the pore spaces are bigger than the oil molecules and we can produce commercial quantities.”

The first success was the Bakken shale. Production was 100,000 barrels earlier in the decade and since 2007 has jumped to 300,000 barrels. Most analysts predict that it will go to 500,000 in three to four years.

“In one state alone, the industry has raised production from 100,000 barrels to 500,000 in a relatively short time,” says Papa. “The effect so far is that North Dakota is a bigger oil producing state than Louisiana.”

The Bakken, of course is not the only oily shale play. In Texas, there are horizontal opportunities such as the Eagle Ford in South Texas, the Barnett in Ft. Worth, the Leonard / Avalon in West Texas, and others are likely such as the Wolf Camp. EOG is an expert in the Eagle Ford play.

“We believe that in our 500,000 acres, we have over 900 million barrels oil equivalent after royalty—since most companies report before royalty, that’s over a 1 billion barrel oil discovery,” he says. “Nobody has found 1 billion barrels in the U.S. in 40 years excluding Prudhoe Bay. We believe that the Eagle Ford will turn out to be the sixth largest oil field in the history of the U.S. These plays are game changers.”

Papa extrapolated the anticipated production decline for the U.S. from 2010 to 2015 absent horizontal drilling.

“We have new oil and a new means of reaching it, so my reasoning is whatever production would have been, add 1 million barrels, which is the contribution of shales,” he says. “It represents a $29 billion balance of payment improvement to foreign oil. Every $1 billion of reduced imports equals 7,000 jobs created, or 210,000 jobs for the work force in America. It’s a huge net benefit for the nation.”

Service Companies

Papa says that gas rig count will continue to fall throughout 2011 while oil rigs rise—likely more oil rigs will go to work than are lost in gas.

“There is a good chance for sustained long-term horizontal drilling activity unless the economy goes into a double dip recession,” he says.

EOG has learned that premium connections are a must for horizontal drilling due to the stresses placed on the drill string. There will be continued dependence on fracturing—Papa says that they routinely pump 10 million pounds of sand into a frac whereas five years ago, 1 million pounds was huge.

However, he sees a need for improvements to stem casing failure and he forecasts a huge market for artificial lift.

“This is the one where we really need help,” he says. “So far, a well on production is good for five years or so, but nobody has the equipment that industry will need on a broad scale in five years. It’s a wide open niche.”