Emerging from one of the deepest and longest down cycles in its history, the energy industry saw and heard its ambition and optimism on display at the annual University of Oklahoma Energy Symposium, sponsored by the OU Energy Institute and held in late March in Oklahoma City. The theme was “Preparing for the Future of Energy, Thriving in Complex and Uncertain Times.”

Daniel Pullin, dean of the Michael F. Price College of Business at OU, opened the symposium on a positive and progressive note. “There is more to energy than just extracting hydro-carbons from the ground. We are not stopping. While others are tapping the brakes, we are pushing the accelerator,” he said.

Putting a perspective on the vast changes the industry has undergone in just the last few years, keynote speaker Kenneth Hersh, CEO of the George W. Bush Presidential Center and co-founder and advisory partner of the major private equity firm NGP Energy Capital Management, said, “I’m always nervous saying ‘This time is different,’ but this time is different, at least for us.”

As a direct result of the unconventional development bonanza, oil and gas have moved from a history of scarcity to an era of abundance. To underscore how different the industry has become, Hersh noted dryly that there are no more dry holes. The exploration part of E&P has all but vanished. “There is no more E in E&P. People are not finding and prospecting. All that front-end stuff doesn’t really exist any more, at least not in the U.S. and Canada.”

The new reality in global oil and gas markets, Hersh stated, is that “your oil and gas have to compete with that of others like it’s breakfast cereal. So you have to know your customers [and their needs]. You have to consider price points and supply chain. You can produce what-ever you want, but so can your competition. You used to have to go where the oil is. Now, it is a matter of wanting to go. Angola or West Texas? It’s like real estate. Do you want to build in Oklahoma City or Tulsa? Dallas or Fort Worth?”

With a big smile, Hersh offered a hearty, “Congratulations! You and your industry are now just another business, like everyone else. Welcome to the party! You don’t have to con-sider below-ground risks much any more, but you have new above-ground risks. And not just mechanical and operational costs, environmental compliance and tax. You have to be concerned with corporate culture. That was never a worry. It used to be if you had a geologist who could find oil, it didn’t matter if he was the biggest jerk in the industry.”

As a cautionary tale, Hersh said: “Nigeria had customers for their light oil. Then along came the people in this room. Nigeria had no relation-ship with their customers, so their customers went elsewhere. Now, they are scrambling to sell their light oil. So, yes, now you have to know your customers. We are now a global business all around, exporting and importing crude and refined products. We are international players.”

Hersh cited another example of the new global business reality for energy. “The Saudis did battle with the entrepreneurs in this room and lost. So there was a production cut, which was called an OPEC cut, but fewer than half of the producing countries that agreed to the cut were actually members of OPEC. So how is that anything other than the market deciding there was overcapacity? It was just like car makers or airlines all looking at the same market condi-tions and making their own decisions.”

Offering some insight that runs counter to common perceptions, Hersh said that “the Saudis get this. Can they go from 10 million barrels a day to 12? Maybe. Can they go to 20? No. That is why they are trying so hard to diversify their economy.” In contrast, “Venezuela is on the wrong side of the cost curve.”

Bringing geopolitics back to energy, Hersh expects that global demand for oil will continue to rise by 1- to 1.5 million barrels a year for the next 10 years. “There will be gains in efficiency that will cut demand in the developed world, but increasing demand from others will take up the slack.” As a result there will be continued incentive to produce and continued competition among producers. “Welcome to the party.”

100 million barrels a day

“The future of energy is going to be exciting,” said Bruce Stover, member of the Energy Institute board, and founding member and retired executive vice president of Endeavour International. “Demand for oil is 96.6 million barrels a day globally, and that is forecast to reach 100 million barrels a day by 2020, so adding roughly 1 million barrels a day of demand each year.”

James Smith, professor of finance and Cary M. Maguire Chair of Oil and Gas Management (retired) at Southern Methodist University, did not disagree with that outlook, but noted, “Demand certainly could get to 100 million barrels a day in three years, but with all the headwinds that global economic development has, even forecasting three years out is tough.”

Keeping to the globalist theme, Joe Stanislaw, founder of the consultancy JAStanislaw Group, quoted the Arab proverb, “He who foretells the future lies even if he tells the truth.

“Yes, this year the world will add a mil-lion barrels a day of demand. But that cannot be assumed for the future. Washington could be going back to the ’30s [in terms of protec-tionism]. Will there be a major incident in the Middle East? We just don’t know. Reaching 100 million barrels a day global demand for oil is plausible, but there could be roadblocks, not just headwinds,” Stanislaw said.

Stanislaw related that he had spent much of his life in the Middle East, and detailed just how complex the interplay of interests is. Even though the U.S. no longer depends on the region as a source of oil, the world does, and events there still move markets.

Mark Mills, senior fellow at the Manhattan Institute and a partner with venture capital firm Cottonwood Venture Partners LLC, agreed those conflicts were important and serious, but questioned how much they would change long-term demand trends. “We have had 50 years of post-World War II demand growth. Through the his-tory of the world people want more of the things that energy provides. Absent exogenous events such as a major war, minor wars don’t change things much,” outside the affected region.

What has changed, noted Stanislaw, “is that we grew up with a mentality of scarcity in energy. There is no longer scarcity, there is abundance. But it is tough to change a mindset.”

Running with that theme, Stover added that the nature of supply had changed. North American unconventional production is broad and deep, and volumes tend to rise and fall smoothly in aggregate. In contrast, offshore development is “chunky.” He said: “For three years, we have had no exploration offshore [because prices have not supported big capex]. In the overall decline in production, the decline in offshore is significant. Some think that the incremental increases in shale will not be able to keep up if demand grows faster than anticipated.”

Mike Ming, general manager of the GE Global Research Oil & Gas Technology Center, said, “For offshore to come back, it will have to drive down costs the same way shale did. We are going to need those resources, but the bar on operational efficiency and cost control has now been reset by the shale operators.”

Gas goes global

Another step change has been the entry of the U.S. into the LNG market, turning that global business from a specialized one into a common commodity business. “It used to be that natural gas was a continental commodity,” said Stover. “Now we see a global market for LNG.”

He said that was a positive development, even if more LNG producers have made for lower prices at present. “Nodes make a network more robust. The global economy for gas is huge. Right now the limiting factor is not demand, it is capital. These things are hugely expensive.”

Ming contrasted the current cautious investment in North American LNG liquefaction with the rush to build regasification plants two decades ago. “In the early 2000s, the U.S. pushed the panic button and built a massive LNG import infrastructure, of which we have used none. And unfortunately, you can’t just run these things backward.”

For the units running forward, he added that the U.S. is likely to become a major global competitor. “The new, enlarged Panama Canal becomes important. U.S. gas can now supply Chile.”

Smith noted that U.S. competitiveness is boosted not just by abundant supply but also by the flexible contract terms being offered by sellers. “The rest of the world is limited by oil-linked, long-term contracts. That limits the ability of the existing nodes to function efficiently in the network.”

There have been two recent milestones in the global LNG market, according to Mills. “There is now a futures market, and for the first time ever we have seen a shipment change direction en route. That is common for oil tankers but used to be prohibited for LNG. So if you are looking for a signal in LNG, it’s behind us. The previously existing producers have already started to renegotiate their terms.”

Getting ahead of induced seismicity

Several speakers touched on the controversy surrounding the recent series of earthquakes in Oklahoma and whether oil and gas drilling is to blame.

Jeremy Boak, director of the Oklahoma Geological Survey (OGS) had some ground-shaking news. “There have been serious questions about the cumulative effects of magnitude 3+ earthquakes in our state, especially in regards to the structural integrity of buildings.” He stressed that “the quakes are deep in the crust, well below the level of oil and gas operations. But they are closely oriented to injection wells.”

He explained that while the water going down those wells is technically produced water, only a tiny fraction is the flowback from water used for hydraulic fracturing. “About 97% of this is formation water. It is what is left of ancient seas and is more saline than the Dead Sea. Only about 3% is frack flowback.”

Jake Walter, lead seismologist for OGS, elaborated: “There is a clear correlation of earthquakes to injection. There is some natural seismicity in the state, but we believe the rise in seismicity is tied to the vast injection into the Arbuckle formation. It is difficult to tie individual wells to individual events because there has been so much injection for so long. We need more funding to study and we need more sensors. But we do know that this is a hazard to homeowners, but also to the industry.”

Michael Teague, secretary of Energy and Envi-ronment for Oklahoma, lauded the research that has brought some certainty to the issue already, especially the collaboration among industry, reg-ulators and academia. “This is how we do things. If there is a problem, you own it, you fix it and you move on.”

Mike Stice, dean of the Mewbourne College of Earth and Energy at OU, underscored that. “This is one of the major challenges of the industry: how do we work together for the common good?”

Noting the shift of in-state development to the Scoop and Stack plays, Walter suggested there was “an opportunity to mitigate the implications of new development,” even as more data and research are being accumulated on the existing situation. “Oklahoma should emerge as a leader in collaboration between industry and academia. We have a chance here to get ahead of induced seismicity.”

Water impact

Water is incompressible, which is what makes it so good for fracturing pay zones and so troublesome when injected into naturally occurring fault zones. It is also expensive for producers to acquire, so by way of solving several problems at once producers are looking into ways of using less water overall.

And of the volumes they do use, they are seeking ways of using less fresh water and more lower-purity water, and then recycling most or even all of it.

“Producers are shifting their

attention [from just oil] to water,”

said OGS hydrogeologist Kyle Murray.

“Brackish water has been added to the equa-tion, and some companies are moving toward being freshwater neutral. To the standard menu of enhanced oil recovery, reinjection and water disposal is being added beneficial water reuse, among other options. We hope that and others will grow.”

One of the few companies to achieve the status of being freshwater neutral is Southwestern Energy Co. Bill Way, president and CEO of Southwestern, said it was just good business. “We want to be a contributor, not a disruptor. That is why we needed a water strategy. We had a goal of being freshwater neutral by the end of last year. We did it, and at a cost of $10 million. That is not a lot of money to do the right thing.”

It helps that Southwestern is fully integrated with its own frack crews and midstream operation. “We have a natural gas gathering and pro-cessing system, and we have a water gathering and processing system,” said Way. “It is structured the same way. In our Arkansas acreage, the wells are not arranged in the same way, but even there we are making progress in moving less water over the road and more by pipeline.”

Not surprisingly, the energy industry’s forays into desalination have challenged the capabilities because for all the massive size and scale of desalination; its major use worldwide is to turn seawater into drinking water. “Seawater is about 35,000 parts per million salt,” said Laura Capper, founder and president of energy and environmental consultancy Cap Resources. “Those systems fall flat for the oil industry where concentrations in brine run four times that.”

There is also the challenge of variability. “A municipal water treatment plant will be handling the commingled streams from 100,000 or so households,” she explained. For all the variability among individual sources, “all the merging households get a steady state. That is in sharp contrast to oil fields where in any day the flow-back may be highly saline and the next day be low in salt but high in chemical composition.”

There has been a fundamental shift in the way water is thought about, said Jim Summers, CEO of H2O Midstream LLC. “For every barrel of oil produced, the industry gets 6 barrels of water. One third of drilling and completion cost is water, and half a well’s overall cost is water. The costs for water acquisition and disposal all went unnoticed when oil was $100 a barrel. No one cared about costs. At $40 oil, everyone cares.

He recalled that when the Marcellus was first being developed, Pennsylvania did not allow disposal wells and was reluctant to allow pipelines to transport produced water out of state. The only option in many cases was to truck the water to disposal wells in Ohio at a .

“Now, in the Permian, we are moving away from trucks to pipelines for water,” said Summers. “There is a drive for reuse because there is not enough supply. Just as we used to talk about the oil industry and now talk about the oil and gas industry, in 10 years we will talk about the oil and gas and water industry.”

Water seems to have burst into the industry’s consciousness, but Summers explained that several factors came together. “Not only did the shift to unconventional drilling and development mean more water produced, but it also means that less water was used for things like enhanced recovery. Sixty years ago, we talked about gas as a waste product of oil. Today, it has evolved into a full commodity in its own right. That evolving growth is from use in power generation, but also from cryogenic separation into ethane for petrochemicals and propane for rural heating and cooking.”

He sees the same thing happening for water—it will be further processed and segmented, and new markets will be found.

Cappers lauded the industry effort. But here is the industry solving problems that can benefit the world. “The industry can solve its water problem because within the industry, we only use 5% of water for beneficial reuse.”

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