Jan 1, 2013 12:00 PM, By Charles E Wilson
With the United States projected to become world's largest oil producer by 2020, logistics and infrastructure remain critical concerns
For the US oil and gas sector, 2012 was a very good year overall, and 2013 should be even better. That was the assessment given in the American Petroleum Institute's State of American Energy 2013 report.
The oil and gas sector has been a bright spot in a US economy that has grown sluggishly and achieved listless job creation in recent years. Exploration and production companies are producing record amounts of oil and gas, and a recent Labor Department report shows that 2012 oil and natural gas extraction employment was up 6.5% over the previous year.
“The US oil and natural gas industry is fundamental to our country's future, through its investments in energy exploration; through its investments in infrastructure to safely and responsibly produce, refine, and deliver the energy we need; through its investments in people, jobs, and communities; and through its investments in fuels and innovative technologies,” says Jack Gerard, API president and chief executive officer. “More domestic energy development equals economic growth, job creation, government revenue, and energy security.”
US oil and gas companies provide a substantial economic stimulus every year, according to the API report. In 2011, the industry stimulus was $545 billion in capital investments, wages, and dividends.
Producing more domestic energy provides opportunities for the United States to increase its exports and serve new markets. A recent NERA Economic Consulting study for the Department of Energy shows exporting liquefied natural gas (LNG) is a net benefit in all scenarios evaluated, and that more exports increase those benefits.
“Just a few years ago, we were more concerned with how to import LNG to meet our own growing demand,” Gerard says. “And by developing new technologies to access potential new sources, like oil shale, we will be able to dramatically increase our energy potential and role as the global energy leader. Oil shale in the western United States is estimated at more than 800 billion barrels, or nearly three times the proven reserves of Saudi Arabia.
“There is a new reality for the United States — a reality of vast domestic resources of oil and natural gas. The reality is that our energy supply is no longer limited, foreign, and finite. It is now American and abundant, greatly enhancing our national security.
“We have a game-changing opportunity to make the United States the global leader in energy. If we seize the opportunity now, we will be positioned to lead for decades and realize the economic and energy security benefits of that leadership. The world will be watching, because our willingness to step up to this opportunity has geopolitical implications in Europe, the Middle East, Asia, and elsewhere. North America could become self-sufficient in liquid fuels in roughly 12 years.”
Gerard's comments in the API's State of American Energy 2013 echoed the stunning prediction by the International Energy Agency (IEA) in 2012 that the extraordinary growth in oil and natural gas output in the United States will mean a sea-change in global energy flows.
The United States will become a net exporter of natural gas by 2020 and will be almost self-sufficient in energy, in net terms, by 2035, according to the IEA's 2012 edition of “World Energy Outlook.” The United States would displace Saudi Arabia as the world's largest oil producer.
Under the IEA scenario, North America will emerge as a net oil exporter, accelerating the switch in direction of international oil trade, with almost 90% of Middle Eastern oil exports being drawn to Asia by 2035. China, India, and the Middle East will account for most of the demand growth.
IEA expects fossil fuels to remain dominant in the global energy mix. Global oil demand is projected to grow by seven million barrels per day by 2020 and exceed 99 million barrels per day by 2035.
While the regional picture for natural gas varies, the global outlook over the coming decades looks bright. Natural gas demand is expected to increase 50% to five trillion cubic meters by 2035. Nearly half of the increased natural gas demand will be met through development of unconventional sources (shale formations), and most of the increased output will come from the United States, Australia, and China.
Developing those resources takes serious money. Gerard points out that a future of abundant domestic energy is being made real through today's oil and natural gas industry investments in cutting-edge technologies to access resources previously thought unreachable.
In the Eagle Ford Shale play in South Texas, for instance, it can cost upwards of $10 million to drill a well. Total cost depends on depth of the well, length of lateral drilling, number of laterals, and number of hydraulic fractures. Fracking itself can cost around $3 million per well.
By some estimates, the investment cost to continue developing the various oil and gas shale plays across the United States through 2020 will be in the $300 billion range. This conservative estimate includes exploration and production; natural gas processing plants; LNG facilities; and infrastructure development for pipeline, rail, and trucking.
While the long-term outlook for the oil and gas shale plays remains bright, some data shows that drilling activity could be slower during 2013. Drilling for natural gas had already slowed in 2012, and rig counts suggest that oil well drilling also is falling off. The industry could see drilling fall off by at least 3% this year, according to analysts.
They cite several reasons for the drilling downturn. Natural gas prices have been depressed for the past couple of years due to over production. There is a glut of product in the US market. However industrial activities — including LNG processing, gas-to-liquids technology, steel production, and petrochemical manufacturing — should create greater natural gas demand going forward. Demand for oil has fallen because American are driving fewer miles right now, and automobiles are getting better fuel economy.
Drilling may have slowed somewhat, but the oilfield is still a busy place. Significant investment is going to infrastructure designed to make the oil and gas shale plays productive for many decades to come.
In addition to gathering stations and natural gas processing plants, oilfield operators are building thousands of miles of pipelines to collect and move the oil and natural gas out of the shale plays. The Interstate Natural Gas Association estimated in 2012 that North American operators would add 19,000 miles of oil pipelines by 2035, and that includes TransCanada's Keystone XL pipeline. On the natural gas side, more than 31,000 miles of pipeline was under construction or in the planning stages.
With pipeline operators unable to keep up with the logistics needs of the oil shale plays, producers are turning back to a transport mode they haven't used in a major way for more than a century. Railroads are back in the crude oil hauling business, and they are doing it in a big way.
US railroads report that oil shipments increased by more than 40% over the past year and continue to grow. For instance, Burlington Northern Santa Fe saw rail shipments of oil grow to 88.9 million barrels over the past five years, and the company expects to move 700,000 barrels a day by the end of this year.
While rail offers a temporary alternative to the pipeline shortage, some petroleum companies are saying that rail brings more flexibility for long distance land-based movements of crude oil. Specifically, railroads make it much easier to avoid the pipeline logjam in Cushing, Oklahoma.
Significant rail infrastructure for handling and transloading crude oil is coming on line in all of the major oil shale regions. New facilities include the Savage Bakken Petroleum Services hub in Trenton, North Dakota that opened in July 2012. The facility currently is loading two unit trains a day.
Rail shipment volumes of crude oil are somewhat lower in the Eagle Ford shale play but are growing. Gardendale Railroad operates one of the region's largest trans-shipment facilities in Gardendale, Texas. The facility has 80,000 feet of track, five switch engines, crude oil and condensate storage tanks, and frack sand silos.
While the railroads seem to have found a way to compete with pipelines, they don't seem to be taking crude oil shipments away from tank truck carriers. The trucking industry still appears to be doing well in the oil and gas shale plays.
Truck transportation remains a critical part of oilfield operations. By some estimates, the oil and gas shale created demand for at least 66,000 trucks, and the need continues to grow.
Tank trailers haul clean water to the well and wastewater away for disposal or treatment. They deliver drilling fluids and chemicals; and they haul crude oil and natural gas condensate from the well sites. Dry bulk transports provide a steady flow of frack sand and cement to the drilling locations.
It takes up to 8,800 truckloads of materials to support an eight-well pad, and the vast majority of those essential materials are hauled in tankers or dry bulkers. Each well site could take more than 400 loads of sand and 900 loads of water.
About 20% of the production water comes back out right away as flowback, and much of the remaining water comes out over 10 to 20 years. On average, a producing well can generate around 14 loads of process water a week.
When drilling in the oil and gas shale plays was running at full bore, drivers and truck fleets flocked to the opportunity. Some of the drivers turned out to be under- or completely unqualified to work in the oilfield, and the same could be said for some of the fleets.
“We've heard about too many truck accidents connected to oilfield operations, and that is a concern for the entire trucking industry,” says John Conley, past president of National Tank Truck Carriers. “Drivers and trucks are operating in places where they haven't previously.
“Without question, the oilfield is a tough place to work. It takes a toll on drivers and their equipment. Vehicles must be well maintained. It is important to make sure drivers are qualified and well trained. We've seen news reports that some people are driving trucks in the oilfield without a valid commercial driver license.
“At NTTC, we are talking about the issues with the companies involved in exploration and production. We're working with the Federal Motor Carrier Safety Administration and the Commercial Vehicle Safety Alliance to address issues related to oilfield trucking safety.
“We're participating in conferences to help educate the oilfield community in the importance of trucking safety. In November 2012, I took the safety message to carriers attending a North Dakota Trucking Association meeting and got a very positive response.”
The focus on improving trucking safety comes at a time when the boom-time phase seems to be ebbing in at least some of the oil and gas shale plays. With the rise of more permanent product handling infrastructure in those areas, production companies are seeking out tank truck fleets that are looking for long-term partnerships.
In this second phase, a number of the largest tank truck carriers now have oilfield operations. This includes Dupré Logistics LLC, which launched its crude oil hauling venture in 2011.
“We are looking for partners wanting to build a relationship, rather than a transactional arrangement,” says Jeff Colonna, Dupré Logistics vice-president of operations. Partnerships in this growing energy sector have needs that go beyond day-to-day hauling. We believe we have what it takes to meet our clients' needs for transportation that emphasizes safety, quality, collaboration, and scalability.”
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