I recently asked millennials in my office if they were familiar with King Hubbert. While most had heard of the concept of “peak oil,” few knew that it was a Shell geologist who had modeled the rise and fall of U.S. oil production 63 years ago. The concept of hydrocarbons as a finite resource whose levels of production must ultimately peak and then decline is almost as old as oil production itself. What set Hubbert apart was that he developed a numerical model that incorporated statistical rates of discovery, and for a time his model seemed accurate. He predicted U.S. oil production would peak between 1965 and 1971, then retreat. U.S. production did peak in 1970 and declined for the next several decades. The accuracy of his predictions reinforced the perception that hydrocarbons were a limited resource that would become increasingly scarce before 2000.
So long as the concept of “peak oil” was the guiding understanding of our industry and the investors who support it, operators were rewarded for replacing and increasing their reserves. A significant percentage of current income could be invested in finding new reserves that would be produced in the future at presumably ever-increasing prices. Indeed, the market allowed operators to spend more than current income to find the resources of the future. Exploration and the 3Ps of reserves were the order of the day.
This set up an interesting and somewhat contradictory dynamic. Recognition by major producers that their fields were in decline was good for commodity prices. Replacing reserves annually was good for attracting investment and maintaining stock prices.
We know now that Hubbert’s predictions of production decline have been consistently overthrown by technology, innovation and the industry’s resourcefulness. U.S. oil production in 2018 exceeded the previous record set in 1970 and continues to grow. Hubbert can hardly be faulted for not predicting horizontal drilling, high-intensity hydraulic fracturing, microseismic monitoring and how these developments have turned nano-Darcy rocks into producing reservoirs. Record setting production and the fact that the other 70% to 80% of the sedimentary rocks in the world can now be reclassified as potentially productive has understandably called into question the notion of peak oil, or has pushed that event past the horizon of most investors. Monotonically increasing commodity prices have not materialized. A few rather public downward reserve revisions and the difficulty of estimating reserves in tight rocks have made the old business model unpopular.
The end game of all this has been a change in the way the market evaluates the business. It is no longer who can find the most for least, but rather who can produce at the lowest cost. Supply is unlimited. Live within cash flow. Drive costs out. Exploration is mostly unnecessary. Geosciences are mostly irrelevant. Service companies are struggling to justify their value in this new paradigm. Near-term return on investment (ROI) is the new king.
Don’t get me wrong. Money is how you keep score and investors deserve a good return, but those of us who have been around longer than a decade have learned that nothing continues in a straight line for very long. Prudence requires acknowledgement that King Hubbert was not wrong; he simply did not have all the facts. We would be well advised to expect some surprises as we venture to exploit the tight rocks of the world and to invest in better characterization of these newfound reservoirs to drill better, not just cheaper, wells. I cringe when I hear an operator say they want to drill “a science well or two” with the expectation they will then have the knowledge to design a template to exploit the entire field. Geology is not that simple. So please, settle down folks, spend a little on understanding these reservoirs to increase revenue in the long run. Long live ROI.
Recommended Reading
Meta, Sage Geosystems Enter Geothermal Deal
2024-08-26 - Sage Geosystems says the company will use its geopressured geothermal system to provide Meta’s data centers with carbon-free power.
Marketed: Henry Energy Non-op Delaware Basin Divestiture
2024-08-26 - Henry Energy LP has retained RedOaks Energy Advisors for the sale of certain non-operated working interest properties in Reeves County, Texas.
Weatherford Announces Acquisition of Technology Company Datagration
2024-09-03 - The acquisition gives Weatherford International digital offerings for production and asset optimization and demonstrates its commitment to continuously driving innovation across its technology portfolio, the company said.
Voyager Midstream Buys Haynesville G&P Assets from Phillips 66
2024-09-03 - Voyager Midstream acquired about 550 miles of natural gas pipelines, 400 MMcf/d of gas processing capacity and 12,000 bbl/d of NGL production capacity.
SandRidge Closes $144MM Western Anadarko Basin Acquisition
2024-09-03 - SandRidge Energy’s deal, with an undisclosed party, adds net production of 6,000 boe/d (40% oil) in Ellis and Roger Mills counties, Oklahoma.
Comments
Add new comment
This conversation is moderated according to Hart Energy community rules. Please read the rules before joining the discussion. If you’re experiencing any technical problems, please contact our customer care team.