About the blog: What Things Are Made Of
AMERICA'S GLOBAL DEPENDENCY FOR NEARLY EVERYTHING
Sunday, May 1, 2011
Why “Drill Baby Drill” doesn’t matter
It takes a long, long time to find oil fields. It takes a long, long time to develop them. It takes a long, long time to finally get some oil out. The most recent large example I’ve seen is the Hebron field, offshore Newfoundland. Discovered in 1981, ExxonMobil and others are about to develop it. They expect “first oil” in 2017.
Hebron contains an estimated 700 million barrels. The estimated cost to set up the field for production is $C 8.3 billion (US$8.75 billion), and the estimated cost of operations over the life of the field is an additional $C 5.8 billion (US$6.11 billion). I have not found an estimate for finding costs specific to this field, so I’ll start with the estimated US offshore cost (average for 2006-2009) of US$53 per barrel. That would put finding at 53x700 million = $37 billion. That amortizes all exploration expenses including failures, to make an average total cost for actual oil found. But offshore Newfoundland has a relatively low finding cost – and Exxon is a pretty efficient company, so the actual finding cost for Hebron is probably closer to US$7 per barrel, or around $5 billion. So there’s something like just under US $20 billion in costs.
Production rate will be something like 150,000 barrels a day. At $100 a barrel, that’s a whopping $15,000,000 every day. And about 1300 days – under 4 years – to repay the investment. Of course, things like corporate taxes, transportation to market, and so on come out of that, as well as dividends to shareholders. And obviously it could not happen without the huge up-front expenditures. And the patience and money to wait 36 years from discovery to first oil.
36 years is an unusual length, even for offshore oil fields. But 10-15 years is not.
At 150,000 barrels a day, the 700,000,000 barrels would take about 4700 days or 13 years to produce. But it won’t be at 150,000 barrels a day for the entire time – it will ramp up to that point, probably be managed to sustain a production plateau, and then decline. For comparison, Prudhoe Bay, North America’s largest oil field, reached a peak production level of about 1.6 million barrels a day in 1979. It’s still producing, but about 200,000 barrels a day and declining. ExxonMobil estimates Hebron’s productive (economic) life at 46 years, beginning in 2017.
The main point of this exercise is to illustrate that any major oil field discovered today will not impact the price of oil until it is actually produced – in 10, 15, or 36 years from now. When you consider the future, consider that almost all existing oil wells are declining in their production rates, like those in Prudhoe Bay. 525,000 oil wells in the US average about 10 barrels per day per well, and the estimated rate of decline in US production ranges from 3% to 7% per year. If it is 5%, 5% of 10 barrels is half a barrel a year – so in 10 years, on average, the 525,000 wells in the US today will have lost 5 barrels per day per well, so they’d be at 5 barrels a day rather than 10. We’ll have lost 2.5 million barrels a day. You’d need almost 17 Hebron fields to make up that loss.
The Hebron field is an extreme example, but the concepts apply to any large oil discovery in the United States – and large oil discoveries in the United States are very few and far between, and getting scarcer. Drilling or discovery today will have no impact on the price of gasoline for years to come.