Increased Rocky Mountain access and improved productivity technology could lessen the effects of the accelerated depletion occurring in US oil and gas fields, according to a recent US Energy Information Administration (EIA) study.
For example, the study indicates that elimination of environmental and other constraints on production would increase the natural gas available for development in the Rocky Mountain states by 136 tcf.
EIA undertook the study because of concerns raised by six trade organizations: API, Domestic Petroleum Council, IPAA, US Oil & Gas Association, National Ocean Industries Association, and Natural Gas Supply Association. EIA says the six organizations felt that the effects of depletion on future production may be more severe than shown in EIA's Annual Energy Outlook 2000 (AEO2000).
The study says, for example, that while natural gas wells drilled in 1972 declined from their peak rate at an average rate of 17%/year, natural gas wells drilled in 1996 have been depleting much faster, at an annual rate of 49%.
At the same time, the ratio of natural gas production to the level of proved reserves has increased from 15.7% in 1991-1992 to 18.0% in 1997-1998. And 1999 exploratory drilling for oil and gas averaged only 625 rigs/day, the lowest in decades, although drilling has rebounded strongly in 2000 with higher gas and oil prices.
Assumptions
For its study, EIA used the oil and gas supply module (OGSM) of the national energy modeling system (NEMS) to evaluate the effects of resource depletion, technology advances, and access to new oil and gas resources.
It developed 12 sensitivity cases to evaluate the effects of accelerated depletion of US oil and gas resources that might result from higher imports of natural gas, higher or lower world oil prices, different rates of improvement in technology, and increased access to unconventional natural gas resources in the Rocky Mountains.
Some of the study's main assumptions are:
- The reference case has only minor changes from the AEO2000 reference case, such as revised world oil and natural gas prices.
- The accelerated-depletion case assumes one-third fewer oil and gas discoveries and faster depletion than the reference case. EIA says this hypothetical case highlights the potential impact of lower reserve additions and faster depletion rates on natural gas and oil prices, production, imports, and consumption.
- In 1998 dollars, the high case increases world oil prices to $28.04/bbl in 2020, compared with $22.90/bbl in the reference case. The low case has a $14.90/bbl oil price.
- In the reference case, technology growth is based on past trends and in the rapid technology growth case, EIA assumes technology advances increase the rates of cost improvement, accuracy, and reserve additions per well by 50%. The slow technology growth case assumes improvement rates are 50% slower.
- EIA captures productivity-technology improvement only for changes in reserve additions per well drilled, without changing assumptions about future costs or drilling accuracy. In the improved and reduced productivity technology cases, it adjusts by plus or minus 50% the rate of growth in the amount of oil and natural gas added to proved reserves per well.
- EIA eliminates environmental and other constraints on production, thus increasing natural gas available for development in the Rocky Mountain states. In the reference case, EIA assumes 97 tcf out of 251 tcf of unconventional gas resources is not accessible before 2020. In the high Rocky Mountain access case, EIA assumes only 18 tcf is inaccessible.
- Both the reference and accelerated depletion cases, despite higher price projections, limit pipeline imports of natural gas from Canada because of pipeline capacity constraints and liquefied natural gas (LNG) imports because of gasification plant capacity constraints.
But in the natural gas import case, EIA allows for a more rapid increase in imports in response to higher domestic prices.
Accelerated-depletion projections
With accelerated depletion, EIA projects 22.5 tcf natural gas production in the lower 48 states in 2020 (Fig. 1). This is 13% less than the reference case of 26 tcf/year.
Likewise, EIA sees lower crude production in 2020 from the lower 48 states. In the accelerated depletion case, it expects production to be 4.7 million b/d compared with 5.0 million b/d in the reference case.
EIA indicates the difference in the two fuel markets causes a more pronounced change for natural gas than for oil, mainly because gas prices in the US are determined by domestic supply and demand; whereas, oil prices follow world prices.
In the accelerated case, tighter supply causes both production and consumption to be less than in the reference case, and wellhead prices are uniformly greater (Fig. 3), reaching $4.12/Mcf (in constant 1998 dollars) compared to $2.79/Mcf in the reference case.
As a result, it sees 2020 gas consumption to be about 9% less with accelerated depletion than in the reference case because consumers either switch to other energy sources or consume less energy.
Under accelerated depletion, EIA expects total energy demand to be 119.8 quadrillion btu in 2020, compared to 121.0 quadrillion btu in the reference case. It also expects the greater natural gas price to increase coal consumption by 3% and oil by 2% more than in the reference case.
With these scenarios, EIA indicates net imports of crude oil and petroleum products in 2020 to be 16.9 million b/d with accelerated depletion compared to 15.8 million b/d in the reference case.
More gas imports
The study indicated increased natural gas imports by 20% from Canada, gas imports from Mexico, and LNG imports would lower the gas price in 2020 from that projected in the accelerated depletion cases.
In the high natural gas import case, it assumes that in 2020 the US imports 90 bcf/year from Mexico and 450 bcf/year of LNG. With increased Canadian gas, the 2020 total imports would be 6.36 tcf compared to 5.52 tcf in the accelerated depletion case.
Because more imports allow consumers to buy gas at lower prices, EIA projects gas prices in 2020 to be $3.69/Mcf or $0.90 greater than in the reference case but $0.43/Mcf less than in the accelerated depletion case.
As a result, lower 48 natural gas production is projected to be less, at 22.1 tcf/year in 2020, than in the accelerated depletion case, 22.5 tcf in 2020.
World oil price
EIA assumes higher oil prices lead to increased demand for natural gas as a substitute for oil, resulting in higher gas prices and more US production.
At the higher prices, EIA expects lower 48 gas production to reach 23.0 tcf in 2020, about 0.5 tcf more than in the accelerated depletion case but still 3.0 tcf less than in the reference case. In this case, natural gas price is projected to reach $4.40/Mcf, $0.28 more than in the accelerated depletion case.
With high world oil prices, EIA projects less demand but more US domestic production at the expense of imports. US production reaches 5.3 million b/d in 2020, 0.6 million b/d more than in the accelerated depletion case and 0.3 million b/d more than the reference case.
In contrast, EIA projects natural gas production with higher world oil prices to be less than the reference case and only slightly higher in the accelerated depletion case in 2020.
With low world oil price, EIA expects natural gas demand to be less than in the accelerated depletion case, as consumers substitute oil for gas. It projects the gas price in 2020 to be $0.52/Mscf less than in the accelerated depletion case, and gas production in 2020 to be 0.6 tcf less.
Although it projects low oil prices to result in more oil consumed, EIA expects greater imports to meet this demand. Therefore, US oil production, in 2020, is projected to be 0.6 million b/d less than in the accelerated depletion case with reference prices.
Technology advances
Rapid technology development counters many of the negative effects of depletion, in this EIA case. Although EIA expects new fields to be smaller, technology allows the new fields to be found more cheaply and developed more thoroughly at lower cost; thus, more oil and gas is available from US fields.
This has the effect that by 2020 EIA projects gas price to be $1.75/Mcf less and production 6 tcf/year greater than the accelerated depletion case without rapid technology advances.
Unlike the accelerated depletion with rapid technology case, EIA's natural gas production with improved productivity is projected to be less than in the reference case in 2020, while oil production is projected to be greater.
Its gas price projection with improved productivity is projected to be $2.99/Mscf in 2020, more than $1 less than in the accelerated-depletion case with reference technology, and gas production in 2020 is projected to be 3.3 tcf/year greater.
Crude oil production in 2020, on the other hand, is nearly the same as in the rapid technology case.
With slow technology development, EIA projects less oil and gas available for development, with the 2020 gas price being $4.56/Mscf.
Rocky Mountain development
Increased access to natural gas resources on federal lands in the Rocky Mountains can lead to greater natural gas production, according to EIA.
The study indicates the access would allow producers to develop unconventional gas resources that currently are off limits. With these resources, EIA projects that in 2020 as much as 23.2 tcf/year could be produced.
EIA then expects gas price in 2020 to be about $0.22/Mcf less than the accelerated depletion case.
Combined effect
EIA expects the combination of faster technology development and increased access to unconventional gas resources in the Rocky Mountains to result in greater gas production and lower prices.
In this case, EIA's projection for 2020 is a gas price of $2.22/Mcf and production of 29.2 tcf/year.
