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From Fossil To Fuel™
From Fossil To Fuel™

Episode 4 · 2 years ago

Episode 3 - Conventional vs Unconventional

ABOUT THIS EPISODE

What is the difference between conventional and conventional oil and gas? Why is it important?

My name is Brendan McDougall and I'm a professional engineer. Or the last decade I've worked in many different facets of the oil and gas industry. While I have a pretty solid technical background in oil to gas, I don't really know a whole lot about the other non technical departments that help run an oiling gas company. Recently I took a course to help develop my business acumen and better understand how the financial side of the business works. What a novel concept to educate the technical people on the business and financial side. I thought it would be a really cool idea to return the favor and educate the non technical people on the technical side. This is how the concept from fossil to fuel was born. Through these twenty four episodes, we will take a journey from how oil and gas was formed millions of years ago how it is refined into the fuel that runs our cars and heats our homes. Come join me on this adventure as we learn how the oil and gas industry operates from fossil to few.

If you've been paying attention to the oil and gas industry in the last decade, you've probably heard about the emergence of what's being called unconventionaltional oil and gas. What exactly is unconventional oil and gas? Why are we talking about it in the media and is there any difference in the oil and gas itself? When most of US think of oil and gas, we think of some giant pool of oil or gas under the ground. Well, that's not exactly how it works, it's a fair enough approximation. In reality, the oil and gas molecules fill tiny little spaces in the rock called pores. Remember,...

...this is perosity that we talked about last episode. Much like water is soaked up by sand at the beach or a sponge in your kitchen. This is conventional oil and gas. Once you drill a well into the reservoir, it will flow naturally or it can be pumped. Essentially, and again we're simplifying here, this is the main difference between conventional and unconventional oil and gas. Unconventional oil and gas will not flow naturally. It generally takes a lot more work and money and technology and energy to produce unconventional oil and gas. So, naturally, everyone has always produced conventional oil and gas first. It's just easier. But after decades of producing it, you start to use it up and the production that you get out of your conventional wells will start to decline. As a result, most of the easy oil and gas that we call conventional has already been tapped into or used up. Because of this decline and...

...because of new technologies that have come to market, oil companies have been able to start producing economically from unconventional reservoirs that were previously impossible or uneconomic to produce from. Hydraulic fracturing is one of the key bologies, but it actually has been around for a while. The other factor, and really only since the early two thousands, is when we started drilling horizontal wells as opposed to only vertical wells, and this is where unconventional reservoirs started to become economic. Here are a few analogies to help you understand what makes conventional oil so easy and unconventional so relatively difficult. Think of a sponge and a piece of clay. Both of them contain water, but it will be a lot easier to squeeze the water out of a sponge. The clay is like your unconventional oil and...

...gas, because it's a lot harder to get the water out the other way to look at it is with permeability. We talked about this last episode two, so recall that permeability is the ability or the ease with which the oil and gas molecules can flow through the rock. Conventional Oil and gas is like driving your car around the neighborhood block. It's pretty easy to get around, or we would say it's permeable. Unconventional oil and gas is trying to drive your car through a very dense jungle. You just can't, and so we would call it impermeabile or impermeable until you at least help the situation out with something. So why go all through the trouble of trying to produce unconventional oil and gas if it's so hard to do? There's really no significant difference between the conventional oil and the unconventional oil. Obviously simplifying here, they're basically the same. So there's no distinct advantage to trying to produce one over the other...

...for higher quality. I'm going to throw in a huge disclaimer here because I know there's some people that are going to have an issue with that previous statement. But given the level of detail that we're getting into in these PODCASTS, I'm not really going to go into a debate about the quality of conventional versus unconventional oil. So really, just to keep it simple, we'll call it apples to apples for now. It's simply just comes down to the fact that we're running out of conventional oil and gas in most places in the world, but there are vast resources of virtually untapped unconventional oil and gas. It's really supply and demand. So if you think about it, the demand for oil and gas, or energy for the world as a whole, continues to grow year over year, and what we're saying with conventional oil is that we're starting to use it up and so therefore supply is going down. So in order to meet demand, you need to have oil and gas coming from somewhere else.

That's somewhere else is unconventional oil and gas. That's why you hear people refer to unconventional oil and gas, and shale gas in particular, as the future of gas supply in North America and other places around the world. The reason I mentioned shale gas in particular is because that seems to be the one area of unconventional oil and gas that is in the spotlight. The most particularly in the United States. To put the growth of shale gas in perspective, let's take a look at it over the last decade. In two thousand and five shale gas made up about five percent of the natural gas production in the US. It got close to fifty percent before oil prices started to decline in two thousand and fifteen. That is a massive jump in only ten years, especially considering the enormous volumes of oil and gas already produced in the US before the emergence of shale gas. So what's the good side of unconventional oil and...

...gas? Well, for starters, it's emergence has enabled some countries, specifically the US, to be able to produce enough oil and gas to become close to self sustaining. That means that you no longer have to import oil from other countries, or at least you're comfortable not doing so. You're also creating jobs by bringing that work back into your country. In Two thousand and ten development of shale resources supported six hundred thousand jobs in the US. That also doesn't include all of the incremental taxes and funding that the government can collect. Furthermore, a lot of the unconventional production comes in the form of natural gas, and natural gas generally means lower greenhouse gas emissions, as natural gas is the cleanest burning fossil fuel. That could mean more natural gas power plants to displace dirty or coal power plants. It will mean lower gas prices for heating our homes, and not just all of our homes, but all of our...

...businesses, manufacturing plants and industries. There's truly a ripple effect. I'm quoting from the National Association of Manufacturers Right now to put it in perspective. They estimate that quote high recovery of shale gas and lower natural gas prices will help US manufacturers employ one million workers by two thousand and twenty five, while lower feedstock and energy costs could help them reduce natural gas expenditures by as much as eleven point six billion dollars by two thousand and twenty five, end quote. America's Natural Gas Association estimates that quote. Lower gas prices added an additional nine hundred and twenty six dollars of disposable household income annually, between two thousand and twelve and two thousand and fifteen, and that amount could increase to two thousand dollars by two thousand and thirty five and quote. There has to be balanced,...

...though. The revelation of unconventional oil and gas, and specifically shale gas, has helped to increase global oil and gas production to new highs. This is part of the reason why oil prices fell in previous years, as we just saw, over the last ten years, shale gas production has skyrocketed, but the global demands for oil and gas didn't increase as fast as global production did. The result is created a situation where the global supply of oil and gas exceeded global demand. Supply and demand forces take over the market, because when supply exceeds demand, prices should fall. I want to talk a little bit about the crash and oil prices between two thousand and fourteen and two thousand and sixteen and how unconventional resources, and specifically shale gas in the US, played a part of this, because I think it's an important piece of the story when we're talking about unconventional oil and gas and the role it place in...

...the global market. But I want to throw a bit of a disclaimer out here, because I don't have any intention of going into detail about the GEO politics involved in global oil and gas supply for unconventional resources. But if there is an interest on your part in falling up on this, there is a lot of material available on this subjects, specifically online, and so I'd encourage you to read up a little bit more to understand exactly what was going on. But for the sake of this podcast, I'm just going to touch on it briefly so that you can understand a little bit of what happened at a high level. So, to make a long, very long story short, the dropper crash in oil prices between two thousand and fourteen and two thousand and sixteen, from a hundred and seven dollars a barrel to twenty nine dollars a barrel is partly a result of the dramatic increase in shale gas production. A...

...group of countries known as the Organization of Petroleum Exporting Countries, or OPEC or short, had been able to regulate their own production to help control of the price of oil. In the past, they had the ability to, quote unquote, shut in the taps or decrease their overall production when prices were going down in order to cut the supply. Conversely, when prices were high, they could open the taps back up to balance the market again. This large part was driven by Saudi Arabia, one of the thirteen OPEC members and by far the largest producing member of OPEC. However, in late two thousand and fourteen, with prices below eighty dollars a barrel, Saudi Arabia decided that they would not shut in their production and let the oil market balance itself at lower oil prices. Effectively there to protect their market share relative to the significant production...

...increases from the US over the past decade due to shale gas. Think of oil demand like an apple pie and, to simplify things, let's say there are four entity sharing the pie, the US, Russia, China and OPEC. Let's assume oil production from Russia and China stays the same. If the US is doubling the oil production over the last decade, they're effectively trying to take a bigger piece of the Pie. But if the PIE stays the same size, if us is taking a bigger piece of the pie, someone else has to take a smaller piece. So, in order to keep prices stable, OPEC would therefore have to take the smaller piece of the pie to balance things out. Their logic was, why should they take a smaller piece of the Pie? They didn't do anything wrong. Their oil is cheaper to produce than the oil in the US. So if they choose to not lower their...

...production, they know that will drive oil prices down. With lower oil prices, a lot of North American shale projects and producers no longer become economic and we'll be shut down, which actually happened. As these projects get shut down, the oil production from the US will go down. As the oil production goes down, their piece of the pie gets smaller and everything gets balanced again. So by by doing nothing, as the oil prices were dropping in two thousand and fourteen, OPEC, and specifically Saudi Arabia, was attempting to protect their piece of the pie so that it didn't get smaller. The piece of the Pie, if we're using market terminology, is called market share. As is the case in any open market, prices will reflect supply and demand. So until global demand catches up with production or production fails to meet demand, oil prices can be expected to remain low. Ultimately, shale gas and unconventional...

...resources will play a big part of this balance in the future. So it's important to understand at least the fundamentals, especially when it comes to supply and demand. Hey, guys, if you like today's episode, make sure you subscribe to the podcast. Unlike most podcasts that release an episode every week or two, I did all twenty four at once, Netflix style, so you can listen to them all right now if you just hit subscribe. If you like today's episode, make sure you leave me a comment or thumbs up, or you can email me at from fossil to fuel at GMAILCOM, or look me up on Linkedin. I'm Brendan McDougall.

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