Our industry wished for better times, more demand, higher oil and gas prices, and guess what, we got it. For awhile most didn't believe these prices could be sustained, but after the better part of a year the mood shift is slowly favoring a high demand/challenged supply market. You can sense it everywhere with company announcements on the increase in floor prices for oil and gas; industry speakers a year ago, who were espousing no supply problems, are now touting a tight demand/supply situation, and there is the increased media and political attention on energy.

Some will still say: this is temporary and the bubble will disappear when Iraq stabilizes, when the domestic problems in Nigeria, Venezuela and Russia cool down, and when countries like Saudi Arabia and Iran really get serious about increasing production. And of course there are areas like the Caspian and Russia - look at the potential they have. Others will point to the famous boom and bust in the late '70s and early '80s. Our industry added capacity, actually over capacity, in less than 7 years.

Back around 1978, 5 years after the energy embargo, the price of oil had steadily increased and companies were making a ton of money, but as an industry, there was a general malaise about increasing exploration and development spending. Then, within 6 months, the industry went into exponential spending, hiring and activity. Back then the conventional opportunities were everywhere; North Sea, Gulf of Mexico, onshore United States, Alaska, Canada, and virtually all over the world where hydrocarbons existed or were thought to exist. All that was needed were people and equipment. The industry responded. It built capacity to drill, explore and produce like never before. It was easy because the opportunities were very conventional.

Is it déjà vu? Are we back to the late '70s?

Setting the stage

Predicting oil and gas prices is not my forte, otherwise I wouldn't be working for a living. However, I think most would admit the dynamics that are playing out over the last 6 months seem to favor stronger sustained prices than we've had since the middle '80s. So let us assume that the prices of oil and gas are strong enough to check off as a positive factor leading to a major up turn in activities.

What about opportunities? This is where we start departing from the past.

Back in the late '70s the average prospect was less than 8,000 ft (2,440 m) with the deeper prospects averaging around 12,000 ft (3,660 m). A few wells were drilled below 15,000 ft (4,575 m). Offshore, 600-ft (183-m) water depth was a deepwater well. For sure, there were some geological trends that had higher pressures and temperatures, but the industry generally stayed away from those prospects. Heavy oil, enhanced oil recovery, 2-D seismic, conventional platforms were the staples of the time. Natural gas exploration and production (E&P) easily kept up with the anticipated demand. There were plenty of onshore and offshore shallow prospects both in North America and Europe.

What about the opportunities today? First of all the industry has shifted from an oil focused E&P industry to more of a balanced oil and gas E&P industry, with a trend to expand natural gas E&P worldwide. One of the reasons for this is the expanded worldwide gas demand. Another overlooked reason is natural gas E&P still offers more conventional opportunities internationally (exceptions being the North Sea and onshore Europe). Otherwise, oil E&P is shifting to another level of reality. Industry is faced with looking for smaller and smaller fields in deeper and deeper water.

Most of the future opportunities for oil, and for gas in North American and Europe, are what I would call technical oil and gas. Deep water, tight gas, heavy oil, high pressure/high temperature gas, more complex geological traps are the types of complexities that categorize the portfolio of opportunities available to industry today. On top of that there are the environmental issues: no more flaring of gas, access problems and a general international awareness that the bad practices of the past will not be tolerated in the future.
Unlike the '70s, the opportunities are fewer and more challenged. It will take another level of technology and the application of the technology to add reserves and production for most companies.

So how are we doing? The prices of oil and gas are going up - check positive. There are fewer opportunities, and the ones that exist are technically challenged - check negative. Then what about the capacity to go after these remaining opportunities?

E&P capacity

During the boom period of the late '70s and early '80s, it just took people, equipment and the technology of the time to rapidly grow the oil and gas supply.

What also happened, during this boom cycle, was a build up of personnel both in operations, and research and development (R&D) that would sustain our industry for the next 25 years. A fallout of this was improved well bore telemetry; 3-D seismic; deepwater technology; extended reach wells; floating production; storage and offloading vessels; spars; tension leg platforms and many other innovations.
So what is our industry capacity today? Will the industry be able to respond to the opportunities to meet the future oil and gas demand?

Figure 1 is a simple diagram, which in the most macro sense, depicts the overall E&P capacity. Feeding the capacity are E&P companies, support companies, equipment and products, and an increasing sector - contract personnel. Industry personnel feed all four sectors, and as the arrows show, the flows can go back and forth between the sectors as personnel change jobs and roles such as going from a service company to an operating company or visa versa. The flux of people is controlled by the new hires in contrast with the people leaving the industry for one reason or another. Just like personnel, new companies form and old companies merge, are sold, or just disappear via a combination of both. All this feeds the overall E&P capacity. Two other major influences on the overall E&P capacity are oil and gas price, and technology.

One can view overall E&P capacity as a balloon that swells or shrinks, depending on what fills it or depletes it. For example, we have more old companies leaving than new companies forming. However, that is only part of the truth. As the opportunities become more technical there become fewer companies that can act effectively on these opportunities. A good example is heavy oil.

When the oil price plunged in the mid '80s the majority of companies who were in heavy oil got out of it. Some companies kept doing R&D, learned the technology and maintained heavy oil as part of its production portfolio. Today and in the future heavy oil is going to be an increasing part of reserve and production growth. Some would argue that, if this is the case, then they could get back into heavy oil. But at what price? There is a thing called the "price of the learn curve." How much cost can a company afford to endure before it learns to be efficient and make money with such things as heavy oil, tight gas, deep water E&P? Many companies will disappear because they underestimated the learn curve cost to build a certain company capacity.

Years ago, the overall E&P capacity was poised to grow to meet future demand; today it is doubtful that can be repeated, again. The boom and bust history of the last 20 years still drives most behavior in our industry, management and personnel. And I cannot underplay the impact of technology.
Reviewing the first two factors I asserted that the price of oil and gas is positive, and the conventional opportunities are greatly reduced and the majority of the remaining ones are technically challenged - check negative. The third factor, the overall E&P capacity is certainly less than 5 years ago and greatly reduced from the mid '80s. What is it today? In my opinion it is a big unknown whether we have the overall capacity to generate enough oil and gas supply to meet future demand.

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