Tompkins County Relocalization Project

[Tompkins County Relocalization Project <tcrp-news AT lists.ibiblio.org>]

Perhaps this will make it easier to talk about the problem.

Jon

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Wall Street Journal
24 May 2011
Facing Up to End of "Easy Oil"
By BEN CASSELMAN

WAFRA, Kuwait--The Arabian Peninsula has fueled the global economy with
oil for five decades. How long it can continue to do so hinges on
projects like one unfolding here in the desert sands along the Saudi
Arabia-Kuwait border.

On the Arabian peninsula, U.S. oil giant Chevron has launched a
$340-million pilot project to extract heavy oil from beneath the desert
sands. WSJ's Ben Casselman reports from Wafra, Kuwait.

Saudi Arabia became the world's top oil producer by tapping its vast
reserves of easy-to-drill, high-quality light oil. But as demand for
energy grows and fields of "easy oil" around the world start to dry up,
the Saudis are turning to a much tougher source: the billions of barrels
of heavy oil trapped beneath the desert.

Heavy oil, which can be as thick as molasses, is harder to get out of
the ground than light oil and costs more to refine into
gasoline. Nevertheless, Saudi Arabia and Kuwait have embarked on an
ambitious experiment to coax it out of the Wafra oil field, located in a
sparsely populated expanse of desert shared by the two nations.

That the Saudis are even considering such a project shows how difficult
and costly it is becoming to slake the world's thirst for oil. It also
suggests that even the Saudis may not be able to boost production
quickly in the future if demand rises unexpectedly. Neither issue bodes
well for the return of cheap oil over the long term.

"The easy oil is coming to an end," says Alex Munton, a Middle East
analyst for the Scottish energy consulting firm Wood Mackenzie. The
major oil fields in the Gulf region, he says, have pumped more than half
their oil--the point at which production traditionally begins to
decline.

The U.S. Energy Information Administration said earlier this month that
world-wide oil consumption would hit a record 88 million barrels a day
this year. Turmoil in Libya, combined with slowing production growth in
Western countries, will keep supplies tight, boosting prices, the
federal agency said. It projects oil prices will average $103 a barrel
this year, up 30% from last year, and will be even higher next year.

No one suggests that the Gulf nations are running out of oil. Heavy oil,
although difficult to pump, is abundant. The Middle East alone is
believed to hold some 78 billion barrels of heavy oil that is currently
recoverable, more than three-and-a-half times the U.S.'s total reserves.

The U.S. Geological Survey estimates there are some three trillion
barrels of heavy oil in the world, about 100 years of global consumption
at current levels. The catch: Only a fraction of it--about 400 billion
barrels--can be recovered using existing technology. New techniques like
the ones being tried in Wafra could unlock more.

"When people talk about how we're 'running out of oil,' they're not
counting the heavy oil," says Amy Myers Jaffe, who runs the Energy Forum
at Rice University's Baker Institute for Public Policy in
Houston. "There's a huge amount of resource there -- It's just a
question of developing the technology."

To get to Wafra's thick oil, workers are injecting steam into the ground
to heat the oil and make it less viscous, allowing it to flow to the
surface. The technique is tricky, expensive and unproven in the type of
rock that holds Wafra's oil.

For their half of the project, the Saudis have enlisted the help of
Chevron Corp., which has decades of experience extracting heavy oil from
fields in California and Thailand. It is a rare chance for a Western oil
company to get a piece of the world's biggest oil reserves.

But it is also a gamble. The project, much more complex that what
Chevron has done before, will cost billions of dollars and take decades
to complete. And it will be Chevron, not the Saudis, putting up the
capital needed to make the project work--and taking the risk that it
won't.

The Wafra oil field lies 30 miles inland from the Persian Gulf, along a
highway lined with power cables, pipelines and the occasional herd of
camels making their way across the desert moonscape. Inside the oil
field's guarded gates, hundreds of dun-colored pumps rock slowly against
a forest of drilling rigs, radio towers and utility poles. Pipelines
snake across the sand, gathering crude from more than a thousand
wells. About 45% of Wafra's crude makes its way to the U.S.

That oil is the easy-to-pump stuff. The bigger prize: Wafra's 25 billion
barrels of heavy oil.

Chevron is conducting what amounts to a four-year, $340 million test in
a small corner of Wafra. Oil, like molasses, thins when heated. Large
silver pipes carry 600-degree-Fahrenheit steam underground, flooding the
oil-rich rock. Nearby, a grid of pumps pulls up the oil.

So far, the results have been encouraging. As of November, the wells
were producing 1,500 barrels per day, seven times what they produced
before steam injection began in 2009.

Saudi Arabia and Kuwait are paying close attention to the
results. Princes, emirs, ministers and ambassadors have visited the
project's incongruously ornate field office, which boasts marble
floors. "Everyone is watching our project," says Ahmed Al-Omer,
president of Chevron's Saudi Arabian division.

Global oil consumption, buoyed by skyrocketing demand in China and
India, jumped by 2.3 million barrels a day last year, a 2.8% increase,
according to U.S. government figures, the second biggest increase in 30
years. Oil production in the Western world, meanwhile, is barely
growing. That means the world is increasingly dependent on production
from countries in the OPEC cartel, and particularly Saudi Arabia, its
dominant member.

"All the countries in the Middle East are going to have to start
grappling with these [heavy-oil] reserves," says Andrew Gould, chairman
and chief executive of oil-field services giant Schlumberger Ltd., which
has worked on several heavy-oil projects in the region. "They've never
had to think about it before."

Already, some are trying to tap their heavy-oil reserves. Bahrain has
said it hopes to double or triple production from its Awali oil field by
targeting heavy oil there with the help of California-based Occidental
Petroleum Corp. Abu Dhabi in 2009 launched a pilot project with
Connecticut-based Praxair Inc. to boost heavy-oil production in its
Zakum field.

Oman has been especially ambitious with its heavy-oil projects as it
looks to offset a steep decline in its light-oil production. In 2007,
Occidental began a steam-injection project in the country's Mukhaizna
field; production in the field has increased 15-fold since the company
took it over in 2005. Last year, Oman's state oil company teamed up with
Royal Dutch Shell PLC and other companies to launch a $2 billion project
to increase production from its Marmul field using another, similar
technique.

The Wafra project dwarfs others in the region. If the Saudis and
Kuwaitis decide to expand steam injection to the full field, it would be
twice the size of the world's biggest currently operating steam project,
in Indonesia. They would need to drill 19,000 wells and hire some 3,000
workers. Ultimately, they hope to recover six billion barrels of oil.

"It's a massive, multibillion dollar project that's spread over 25 to 30
years of investment and drilling," says Chevron Vice Chairman George
Kirkland.

Chevron won't disclose the projected total cost of the project, but
Kuwait has previously estimated it will cost $10 billion over 10 years.

For Western oil companies, such projects are considered worth the risks
because they are an opportunity to gain a foothold in a region where
they have had little access in recent decades.

In the 1930s, 1940s and 1950s, Western oil companies, including
predecessors of Chevron, Exxon Mobil Corp., BP PLC and most of the other
big international producers, helped discover many of the world's
greatest oil fields: Ghawar in Saudi Arabia, Burgan in Kuwait and
Rumaila in Iraq.

Those fields were so easily tapped, however, that by the 1970s most
governments in the region had decided they no longer needed the help of
Western companies and nationalized their oil fields. Big Oil found
itself virtually shut out of the region.

As a result, Western companies were left pursuing tougher, less
profitable projects: exploring in deep water, mining the Canadian oil
sands and coaxing the last drops out of aging fields around the world.

Those projects gave companies expertise they now hope will give them a
chance to move back into the Middle East.

But the projects are long and costly, and governments in the region
drive a hard bargain, forcing companies to shoulder the costs of the
project while governments take a big portion of the profits if they
work.

Many experts believe that companies are mostly taking on these early
pilot projects to get an inside track on bigger, more profitable
projects down the road--a tactic they have used before in places like
Russia and Iraq, with mixed results.

Using steam to extract oil isn't a new idea. Chevron has been using the
method to recover heavy oil at its Kern River field in Bakersfield,
Calif., since the 1960s. That field yielded less than 10% of its oil
using traditional methods. Using steam injection, Chevron is now on its
way to pumping as much as 80% of the crude.

The Wafra project, however, is far more of a challenge than traditional
steam projects. As in most of the Middle East, the oil at Wafra is
trapped in a thick layer of limestone that also contains minerals that
can build up inside pipes and corrode equipment.

An even bigger challenge is getting the two crucial elements for
generating steam: water and a source of energy to boil it. Most
successful steam projects are in places with easy access to relatively
pure water and a cheap fuel source, usually natural gas. Saudi Arabia
and Kuwait have little of either.

With no fresh-water sources in the Arabian desert, Chevron has been
forced to use salt water found in the same underground reservoirs as the
oil. That water is full of contaminants that must be removed before it
can be boiled and injected into the ground.

Finding the energy to boil the water will be even tougher. Chevron could
use oil instead of natural gas--literally burning oil to produce
oil--but that would burn profits, too. So the company likely will be
forced to import natural gas from overseas, an expensive process that
involves chilling it to turn it into a liquid, then shipping it
thousands of miles.

Some experts are shaking their heads.

"They're in trouble," says Robert Toronyi, a retired Chevron engineer
who now serves as chief operating officer for Quantum Reservoir Impact,
a Houston-based consulting firm. He says the project is so challenging
that it will be hard for Chevron to turn much of a profit.

Chevron says the project will be profitable as long as oil prices stay
above $60 or $70 per barrel, well below Monday's level of $97.70.

Bill Higgs, Chevron's top operations manager in Saudi Arabia, likens the
project to a "chemistry experiment" and says the company is still
figuring out whether it is worth the massive investment that would be
required to take the project from the pilot stage into full-scale
development. Still, the project has an advantage over deep-water
exploration.

"You know where the oil is," Mr. Higgs says. "There's no doubt about
that. So the question is: How do I economically produce it?"