Tag Archives: crude oil export ban

New Opportunities in Oil: What’s Happening in Eagle Ford?

Late last year, we spent some time discussing the Permian Basin in Texas — specifically the Delaware Basin and the incredible rebound in oil and natural gas production it’s seen over the past few years. This month, we’re digging into the Eagle Ford Shale, the South Texas sibling of West Texas’ Permian.

 

Formation of the Eagle Ford Shale

Like the Permian Basin — which covers around 75,000 square miles of southeast New Mexico and western Texas — the Eagle Ford Shale was once submerged in the Tobosa Basin, the sea between the Laurasia and Gondwana supercontinents.

As the continents neared each other and the land rose, the area of the Permian remained submerged, thanks to the Hovey Channel, which kept the area connected to the ocean. As the Permian formed around 300 and 250 million years ago, the area that would become the Eagle Ford was still high and dry. It wasn’t until 153 million years later that the Eagle Ford Shale would begin to form.

Why the Recent Rebound?

The Eagle Ford Shale has a unique history, much different than that of its neighboring Permian basins. Those basins, the Delaware Basin, in particular, were impacted by three primary factors: availability, economic policy, and technology.

The United States’ embargo on Arab oil in the 1970s and corresponding crude oil export ban led to a considerable surplus of oil and a drop in crude prices — an inhospitable environment for large drilling operations. More recently, slowly rising oil costs, Congress’ 2015 vote to end the export ban, and advancements in horizontal drilling technology have led to a significant boom in Delaware Basin drilling, particularly for deposits that were unreachable until recently.

In the Eagle Ford, the situation has been somewhat reversed. In 2010, when drilling in the Permian was way down, the Eagle Ford Shale was among the most active drill sites in the United States. And as drilling in the Permian rose, drilling in the Eagle Ford slowed; by the last quarter of last year, there were 25 active Eagle Ford drilling operations.

Land, Oil, & Economics

Economics are the main cause of this contrast. The horizontal drilling opportunities present in the Permian are absent in the Eagle Ford. The ability of a single Permian well to tap multiple oil or gas formations reduces the break-even point for drilling to $30/bbl or less, while the Eagle Ford break-even, due to its lack of horizontally accessible formations, remains at about $50/bbl.

Land leases and production obligations also play a part. Eagle Shale drillers are operating the fewest number of drills required in order to maintain drilling obligations, allowing them to retain their leases and preventing other organizations from taking their own leases and starting wells. Simply put, drillers in this area are sitting tight on their Eagle Ford Shale assets while actively pursuing Permian Basin assets, which, at this moment, are more profitable.

This trend is already starting to reverse, however. While Delaware Basin drilling in the Permian remains strong, more wells are being reactivated in the Eagle Ford Shale. From its low point in fall of last year, the number of active Eagle Ford wells has increased by over 100%. While slow, with only a small handful of rigs coming online every week, the trend is distinct and holding steady.

A major driver of this rebound in the Eagle Ford is also a driver of the Permian rebound: the ever-present threat of peak oil. Though estimates of when we will hit peak oil vary tremendously, it is becoming increasingly clear that we’ll peak sometime in the next generation or two. The inevitability of peak oil — as well as constantly increasing pressure to move toward environmentally friendly and renewable energy sources — drives both an increase in oil drilling and an increase in natural gas drilling.

Southwest Process Controls

Southwest Process Controls, having maintained a presence in the petrochemical industries for 15 years, is committed to following and analyzing shifting trends in the oil and natural gas drilling fields. To keep on top of these trends and stay up to date on relevant industry news, visit our blog regularly and/or follow us on Twitter and LinkedIn.

New Opportunities in Oil: The Delaware Basin Bounces Back

The Mid-Continent oil field — stretching from northern Kansas, just shy of Nebraska, south to the bottom of Texas, and from New Mexico to as far east as Arkansas, Louisiana, and Mississippi — was the world’s known largest oil reserve prior to the discovery of Middle Eastern oil.

A complex network of hundreds of fields and pools, the Mid-Continent oil field was first tapped into in 1892 by the famous Norman No. 1 well, spurring the American oil boom of the early 20th century. By the 1950s, much of the Mid-Continent oil field had been depleted.

Formation of the Permian Basin

However, one section of this field, the Permian Basin — named for the Permian geologic time period, 299 million to 251 million years ago — has not only remained productive but has even seen an increase in drilling activity in recent years.

The Permian Basin was originally submerged, part of the marine Tobosa Basin separating the supercontinents Laurasia and Gondwana. Over many years, deposited sediments formed a depression here. Around 323 to 299 million years ago, when the supercontinents Laurasia and Gondwana collided, forming Pangea, faulting and erosion resulted in various sub-basins. As sediment filled these sub-basins, the Permian Basin slowly took shape.

Today the Permian Basin extends across roughly 75,000 square miles of southeastern New Mexico and western Texas. It is made up of three main basins: the Delaware, Midland, and Central basins.

Thanks to the Hovey Channel, which supplied seawater to the Delaware Basin, the Delaware remained submerged well into the Guadalupian period, unlike the Midland Basin, which had been almost completely filled with sediment by the middle of Permian period. As a consequence, the Delaware is deeper and, over the epochs, was able to accumulate more algal, coral, and zooplankton organic material — the foundation of crude oil.

Why the Rebound?

Despite an overall depletion of the Mid-Continent oil field, there has been a notable increase in drilling activity in the Permian over the past 5-10 years, particularly in the Delaware Basin. But why the upsurge and why now? The answer lays in three interconnected factors — technology, economic policy, and availability.

While technologies for slanted and horizontal drilling — directional drilling methods that allow access to previously difficult or impossible-to-reach reservoirs — have existed since the 1930s, they weren’t very reliable or cost effective until the 1970s.

The 1970s, of course, also saw the Arab oil embargo shake the U.S. economy, leading to the crude oil export ban. Intended to reduce the country’s dependence on foreign oil, the ban lead to a glut of domestic crude oil saturating a market of limited demand, leading to great drops in crude prices and subsequent reductions in drilling and extraction.

In mid-December of 2015, Congress voted to end the ban on exporting crude oil. This, plus the availability of new, sophisticated horizontal drilling technologies, is driving the resurgence of Permian Basin drilling. Besides newly opened markets and the ability to reach previously untapped, difficult-to-access reserves, the prospect of peak oil is also increasing drilling in the area.

While experts’ opinions vary on the exact timing of peak oil, it’s now widely accepted that oil production will decline by 2050, leading to a decline in extraction and production. As peak oil nears, there has been a corresponding increase in drilling for natural gas, which is still found in relative abundance in the Permian’s Delaware Basin.

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Time to Lift the U.S. Oil Exports Ban?

In 1975, the United States enacted a ban on the exportation of crude oil.  The Energy Policy and Conservation Act (EPCA) was legislated in response to the energy crisis that ensued as part of the Organization of Arab Petroleum Exporting Countries’ (OAPEC) 1973 oil embargo, which had quadrupled the cost of oil.  At the time, many countries throughout the world were seeing their domestic oil production drying up, and the U.S. was no exception.  Then, as now, domestic and world economies were heavily dependent on fossil fuels.  The U.S. Congress sought to enact policies to protect domestic oil supplies by increasing and conserving energy production, particularly crude oil.

The ban on exporting U.S. crude was part of a multi-pronged strategy to try to insulate the domestic economy from volatile global crude markets.  It included numerous conservation measures, as well as fuel standards for motor vehicles.  A reserve of petroleum known as the Strategic Petroleum Reserve (SPR) was officially created to keep a supply of emergency fuel for the United States (the SPR is still with us, and currently holds 691.3 billion barrels of oil).  The crude oil export ban played an important role in this overall strategy, with the goal to keep as much oil at home as possible to cut reliance on international imports.

A Changing Energy Landscape

Oil-LandscapeWhile the crude oil export ban may have made sense in the context of the energy crisis of the 1970s, the domestic oil production landscape is far different today.  There are certain conditions under which oil can be exported, such as if in the form of gasoline as well as when exported to Canada and Mexico under certain circumstances.  However, the vast majority of crude oil exports remain banned under the provisions of the EPCA.

There is a growing constituency who believe that it’s time to lift this oil export ban.  While energy production remains an important concern, circumstances have changed drastically since the ban was put into effect.  In the 1970s, U.S. domestic oil production was slowly disappearing.  The landscape is much different today, with innovative techniques such as hydraulic fracturing and horizontal drilling creating a new oil boom in recent years.  Shale formations such as Eagle Ford in Texas and Bakken in North Dakota are seeing some of their highest levels of productivity in their existence.  Given these new circumstances, many see the EPCA oil export ban as a hindrance—not only to the producers of American crude, but to the overall domestic economy.

Potential Benefits of Lifting the Ban

A recent paper published by the Council on Foreign Relations reports that crude exports could provide an important boost for the economy with an estimated $15 billion per year in revenue possible by 2017.  While oil that has been refined into gasoline can be exported, much of the crude that is coming from U.S. shale formations is lighter and sweeter than what Gulf Coast refiners are designed to handle.  This creates a bottleneck of unrefined light crude that depresses prices, ultimately constraining production and hampering a major domestic source of energy.  The whole world still relies on crude oil, and many willing buyers abroad would be able to work with the lighter, sweeter crude being produced in the U.S. with their existing refineries.

The exportation of crude oil has a number of other potential advantages as well.  The slowing of domestic production that occurs as a result of the ban increases America’s reliance on imported energy.  By lifting the ban, the United States’  leverage as an oil trade partner could increase significantly, especially if the U.S. became a major crude exporter.  It would also demonstrate a commitment to free and fair trade, and provide America’s allies with a stable source of crude.  It also has the potential to further catalyze domestic oil production, increasing employment and local service economies.

Where the Ban Lift Stands Now

There are a number of methods that could be employed to lift the oil ban.  The law allows for crude exports to occur if the Commerce Department determines that there are economic or technological reasons that certain types of crude oil can’t be marketed domestically.  The president could also effectively reverse the law by declaring it counter to the national interest, but many experts believe that the current administration is unlikely to act on its own to lift the oil ban at this time.  Perhaps the most effective method would be for Congress to change the law, and two senators are attempting to do just that.  Senators Lisa Murkowski (R-AK) and Heidi Heitkamp (D-ND) have introduced a bill to lift the EPCA export ban.  They hope to build bipartisan support on the logic that expanding exports will help the U.S. become a global energy leader while bolstering the economy at home.

While there is still some resistance to lifting the ban, supporters are hoping that the current bill (or one like it) will eventually succeed in reversing the 40 year old embargo.  Both sides of the political aisle believe that increasing U.S. exports is key for improving the domestic economy.  Supporters of lifting the ban argue that the current domestic abundance of oil is the perfect opportunity for opening trade doors.  Only time will tell if the current bill will succeed in reversing the ban, but one thing remains certain: the constituency of lawmakers and industry representatives that believe the law is outmoded is growing all the time.  If U.S. shale formations continue to contribute to the overall oil boom, the unrefined crude will eventually have to go somewhere.

Sources:

http://www.csmonitor.com/Environment/Energy/2015/0513/What-happens-if-we-scrap-the-US-oil-exports-ban

http://www.businessinsider.com/what-would-it-take-to-free-us-oil-exports-2015-5

http://thehill.com/policy/energy-environment/241906-senators-push-to-lift-crude-oil-export-ban

http://www.voanews.com/content/effort-to-allow-us-oil-exports-sparks-debate/2766900.html

http://www.wsj.com/articles/the-oil-export-ban-a-relic-of-the-1970s-1429913717

http://www.cfr.org/oil/case-allowing-us-crude-oil-exports/p31005

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/08/u-s-oil-exports-have-been-banned-for-40-years-is-it-time-for-that-to-change/