The Race Is On: Drilling Technology V. Rising Oil Prices

By Dr. Mark J. Perry

Basic economic theory tells us that one of the predictable consequences of resources becoming more expensive is that higher prices will stimulate discovery, exploration and greater production on the supply side.  And that’s exactly what we’re seeing now in Texas for oil and gas, according to this WSJ article dated April 8 – “Chevron Rekindles Old Texas Flame: High Oil Prices, New Technologies Once Again Make the Permian Basin a Popular Spot for Drilling.”

Here’s an excerpt:

“Climbing oil prices are making the ageing oil fields of Texas’s Permian Basin look attractive again to some big petroleum companies. Chevron Corp. has pumped oil from this well-plowed area of west Texas and New Mexico since 1925. But in recent decades, as production in the area declined, Chevron and other companies used it primarily as a lab for oil-extraction techniques that could be employed in larger projects elsewhere.

This year, Chevron, the second-largest U.S. oil company by market value after Exxon Mobil Corp., plans to boost investment to $600 million in the Permian Basin, 32% more than a year earlier, and drill twice as many wells as it did in 2010 in the area. Its goal is to squeeze more oil out of these ageing fields at a time when commodity-oil prices have risen to over $100 a barrel—levels not seen since summer of 2008—and access to oil in the Gulf of Mexico and lucrative foreign fields has become more of a challenge. The company is also seeking to employ new technologies only recently available to unlock significant amounts of Permian crude that were hard to reach before.

The revival of the Permian Basin is also driven by the widespread use of relatively new technologies such as hydraulic fracturing (see diagram), which involves injecting a mixture of water, sand and chemicals underground at high pressures to release oil from hydrocarbon deposits. In recent years, this and other technologies have unlocked shale oil and gas that wasn’t previously accessible, leading to a boom of new wells across the country. Now they are being adapted and used to boost production from mature oil fields like the ones in the Permian Basin. Chevron and others are also planning to apply the techniques in previously unexplored shale areas of the basin.”

And as the new hydraulic fracturing and horizontal drilling revolutionise the oil and gas industries, that new technology keeps getting better and better. One example is the new QuikFRAC system, which is a “set of tools capable of simultaneously stimulating multiple stages with a single fracture treatment (batch fracturing).” The main implication of this new QuickFRAC technology is that it can pump three times as much oil in a given time period compared to conventional fracking methods, and therefore reduces the time spent drilling by two-thirds.

Bottom Line – Due to a) increased oil production in the U.S. and around the world and b) advanced drilling technologies on the supply side, along with c) increased conservation on the demand side, will all counteract and put some limits to how high oil and gas prices will rise.

Another factor that will moderate rising oil/gas prices is the substitution effect of switching to other currently available alternative energy sources like natural gas, along with the increased incentive to develop new, alternative energy sources.

About The AuthorDr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan, and he blogs at Carpe Diem.

The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.

EconMatters, April 12, 2011 | Facebook Page [Twitter [Post Alert [Kindle