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Robert Johnston, PhD
Eurasia Group (Washington)

High-profile investments by super-majors and national oil companies into the tight oil resource plays of North America have characterized the oil market over the past year. These investments, echoing the still-strong investment in North American shale gas plays, are raising the profile of the tight oil resource.

The focus on tight oil could boost likely North American oil reserves by somewhere around 5-15 billion barrels—but many argue that it will not be as transformative as shale gas. Such analysis misses the potential export of tight oil production techniques and expertise around the world, where the upside for reserves growth and eventual production is much higher. Such dissemination could occur via companies such as China National Petroleum Company (CNPC) and Statoil taking experience and knowledge from joint ventures in the Niobrara, Eagle Ford, and Bakken tight oil plays into other markets, while companies such as ExxonMobil are partnering with national oil companies like Rosneft to develop tight oil resources directly.

Canada is playing a central role in the emergence of the tight oil play.  In addition to the presence of significant tight oil deposits in the Western Canadian Sedimentary Basin , Canadian oil service firms with expertise in pressure pumping, reservoir stimulation, horizontal drilling, multi-stage hydraulic fracturing and other unconventional oil production techniques are playing a key role.  Companies such as Trican, Packers Plus, Sanjel, GasFrac, and Precision Drilling are among the world leaders in these areas.  Canadian firms are recognized for their expertise because of the geological characteristics of the deep basin  and mature oil fields of Alberta.

Changing Activity Focus and Production Outlook

Notably, while many of these techniques were developed in support of shale gas and coal bed methane production, recently both the Canadian and US oil services firms have shifted drilling activities to oil and gas liquids in lieu of natural gas. According to the Petroleum Services Association  (PSAC) of Canada, in 2011 80% of producing wells in Western Canada targeted oil versus only 20% for natural gas. By contrast, as recently as 2007, the ratio was 35% oil versus 65% natural gas. A similar trend is underway in the US where, according to Baker Hughes, 1112 rigs were targeting oil in early November versus 907 targeting natural gas. One year ago, there were 718 rigs targeting oil and 955 targeting natural gas.

The results from this application of new drilling technology and increased focus on tight oil formations in North America are compelling. Tight oil production in the US will likely reach a minimum 1mmbpd (million barrel per day) by 2020, putting onshore lower 48  US oil production at 6.5mmbpd–7mmbpd. In addition, mature fields in Canada and the US in particular are benefitting from in-fill drilling  utilizing horizontal drilling, multi-stage fracking, and—in some cases—enhanced oil recovery techniques (EOR) such as targeted CO2 or steam injection. These techniques have led the Canadian Association of Petroleum Producers (CAPP) to lower its expected decline rate for western Canadian conventional oil production, and also to estimate a modest growth in production for the first time in several years, alongside the more robust outlook for the oil sands.

Internationally, organizations such as the International Energy Agency (IEA) have flagged the role of horizontal drilling and multi-stage fracturing (fracking)  in lowering decline rate assumptions. In its 2011 Medium-Term Oil Outlook, the IEA stated that “advanced reservoir management technologies” for existing fields had pushed decline rates for non-OPEC fields from 7.3% in the 2009 forecast to 6.0% in the current year. China is a likely beneficiary of such technological innovation, as the country’s national oil companies look to extend the life of mature fields and target previously unreachable tight oil formations.

Extending the Play Beyond North America

The extension of the promising North American tight oil play to overseas markets is one of four critical pillars of global oil supply over the next decade, along with production from Iraq, Brazil, and the Canadian oil sands. Forecasting the actual production potential for global tight oil is more difficult than for the three other pillars, where consensus expectations predict a range of potential upside growth by 2020 of between 5.5 and 11mmbpd, with Iraqi potential being the hardest to define accurately.

With respect to tight oil in greenfield resource plays outside of North America. Countries like France, China, and Russia are seen as particularly promising candidates for development. In part, this reflects the presence of marine-type, liquids-rich, source rock, but also the potential application of horizontal drilling and multi-stagefracking to mature fields where traditional vertical drilling has exhausted its abilities.

There are a few case studies that investigate the potential upside of international  tight oil. The first is Colombia, where a successful turnaround in Colombian oil production clearly has benefitted from an improved security situation. But technology-intensive development of heavy oil and in-fill drilling on conventional mature fields has also been an important factor.

Other emerging plays include markets such as Egypt, China, and Argentina. In Egypt, Apache Energy announced earlier this year that it would drill two exploration wells to assess a potential 2.2 billion barrels of shale oil in its 74,000 acre play in the Western Desert—a potential major reversal of fortune for a country with stagnant oil production. In China, Hess Energy is also targeting shale oil and tight oil formations through its partnership with SinoChem Corp. Argentina also has an emerging shale oil play in the Neuquen Basin with at least 150 million barrels of reserves announced, despite just 2% of the shale acreage having been explored.

France also has a massive shale oil play in the Paris Basin but development is on hold, likely for some time, because of the moratorium imposed by the government on fracking. The French case signals that tight oil production will raise many of the same controversies and challenges to community relations that shale gas did, with concern about management of produced water and the safety of groundwater supply highest on the list.

Largest Producers Reap Great Benefits

Mega-oil producers Russia and Saudi Arabia may ultimately show the greatest yields from efforts to unlock tight oil. Russia has the flagship Rosneft-ExxonMobil joint venture, in which ExxonMobil’s expertise will be applied to mature, tight, and heavy oil plays in West Siberia, leveraging techniques employed by ExxonMobil (and its subsidiary XTO energy) in the US. The uncertain direction of Russia tax policy for the hydrocarbons sector is a risk that could constrain full exploitation of the mature West Siberian fields. Producers are hoping that lower export duties will encourage brownfield  investment. ExxonMobil, nonetheless, clearly sees Russia as a highly promising market to apply its tight oil expertise.

Saudi Aramco announced, as part of its “Maintain Potential” and “Accelerated Transformation” programs earlier this year, that it would expand its focus on shale gas and tight gas, in a bid to address its gas supply crunch. At the same time, building expertise on horizontal drilling, hydraulic fracturing techniques, and unconventional gas production will also benefit future efforts to produce tight oil. As the massive Ghawar field matures, Saudi Arabia will shift its focus to new plays outside the Eastern Province that will be more complex. Such a move is not imminent, particularly given recent Saudi statements that they would defer efforts to push production capacity from 12.5mmbpd–15mmbpd. However, longer-term, a Saudi shift to target more difficult oil will happen.

Canadian Technology Holds Promise for China

In sum, tight oil will be a crucial growth area for global oil supply and a significant business opportunity for Canadian oil services firms. The leading firms are expected to continue exporting expertise outside of North America, particularly via partnerships with state-controlled national oil companies eager to access state-of-the-art oilfield technology and unlock difficult oil resources in tight formations and mature fields.

For China, the presence of maturing oil fields and an absence of large new conventional discoveries means that getting more oil out of existing formations will be crucial. North American oil services firms, including industry leaders from Canada, are likely to be a key partner for Chinese NOCs in ensuring this process is successful.

Chinese NOCs will also likely continue to partner with Canadian and US companies to participate in tight oil plays in North American and in third-party countries in order to develop further expertise. This will be an attractive option particularly for gas-leveraged independent E&P companies that are dependent on external capital to fund drilling. Ultimately, such partnerships could facilitate inward investment by Canadian and US firms into China’s unconventional oil and gas plays through joint ventures with Chinese firms as well.