In my experience, most people, if you ask them about oil (or gas) drilling, make references to Daniel Day-Lewis with a pickax, snarling something about milkshakes, or perhaps Jed Clampett shootin’ at some food.

For those interested in energy issues, it never hurts to be a little more well-versed in the how-to’s. So if you don’t know a BOP from a mouse hole, here are two quick films (like 5-6 minutes) about the process someone emailed me. One is about oil (with more technical terminology), the other shale gas and the new horizontal drilling. They are a lot less painful than the geology and drilling books I had to read when I first started researching this issue.

They are quite informative BUT please be aware these are industry videos, so you may be well served to ignore the editorializing.

General well drilling:
http://www.energyindepth.org/rig/index.html

Shale gas drilling:
http://www.api.org/policy/exploration/hydraulicfracturing/hydraulicfracturing.cfm

How do you cope when your main source of political good will depends on money and that money dries up?

Demand for oil just ain’t what it used to be. The shrinking of state revenues (regardless of the price of oil) is putting a cramp in the political and social largess of two countries — Venezuela and Iran — that depend on give-aways to keep their political base happy. They are chosing different approaches to dealing with it.

Iran, which relies on oil exports for about 80% of its foreign income, has decided to cut energy subsidies. (Gasoline prices can cost as low as $.38 a gallon.)

Officials say the step is needed to recoup some of the roughly $90 billion spent yearly on subsidies by OPEC’s second largest oil exporter. Subsidies currently consume about 30% of the government budget at a time when already high spending and the collapse of oil prices last year hammered Iran’s economy.” (AP 1-13-10)

President Ahmadinejad and company have stayed in power in part because its policies have curried favor with the poorer classes. Cutting fuel subsidies would hit the middle class hardest (according to the New York Times). The middle class and the elite already don’t like the ruling party, so it’s not a terrible short-term political loss.

But inflation is already above 25%. Fuel costs indirectly affect many daily expenses like food prices. In the end, President Ahmadinejad, who has said he will recycle the saved money to aid the poor, will have to circumvent the end of subsidies somehow.  And no matter what, cutting the subsidy will have an inflationary effect on the country as a whole. 

President Hugo Chavez of Venezuela meanwhile would rather keep the subsidies because they benefit the poor; for example, gasoline at less than 10 cents a gallon. In early January, he chose to devalue the bolivar.

The action, which Mr. Chávez had repeatedly ruled out in the past, came after Venezuela’s economy contracted by 2.9 percent in 2009. Hampered by disarray in the oil industry and nationalizations that have shattered business confidence, the economy is expected to remain sluggish this year even as other large Latin American economies show signs of vibrancy.  (NYT 1-8-10)

And The Economist writes

…there will be a multiple exchange-rate, just as there was in the 1980s. Priority imports such as food and medicines will be paid for at 2.60 bolívares to the dollar, with a rate of 4.30 for the rest. The government will also legalise—and intervene in—the “parallel” (or free) market, where the rate this week was over six to the dollar. Hitherto, just publicising the parallel rate was in theory punishable with a heavy fine.
Sceptics say Mr Chávez will use the cash on social programmes and on raising the minimum wage so as to shore up his public support ahead of a legislative election in September.

The country relies on oil for 90 percent of its export income. Devaluing the currency may help the PDVSA (the state oil company). But most countries do it to make themselves more competitive for investment. This is not President Chavez’s problem — for him, it is that the business community is leery of investing in a country which, no matter how much oil it has, keeps nationalizing things.

As soon as the devaluation was announced, there were (reportedly) widespread runs by consumers desperate to buy big ticket items before the devaltion. The inflation rate is already over 25%.

Neither country has made a great choice — both are politically playing for time — and they would be better served working hard to develop alternative industries.

1) Although Nigeria reached a tentative peace agreement with the militants in the Niger delta region in October, the fledgling peace was threatened by attacks of a Chevron Nigeria pipeline last week. The Movement for the Emancipation of the Niger Delta (MEND), according to the Associated Press, claims they sanctioned the attack but did not carry it out. MEND also was involved in a pipeline attack in December — one can only assume all this is to keep continuing pressure on the government while President Umaru Yar’Adua is ill and the massive Petroleum Industry Bill (PIB) — which seeks a more efficient and transparent national petroleum industry — is inching its way though the legislative process.

2) Royal Dutch Shell is considering selling off its onshore oil assets, worth (the Wall Street Journal says) between $4-5 billion. Maybe it figures, on top of all the headaches, the new Bill will make it unprofitable. The company is apparently not planning on divesting its gas holdings.

The militant attacks, fueled by years of poverty and government corruption, have caused manifold operational headaches for Shell because the company often gets blamed by locals for the oil spills and environmental damage resulting from attacks on its pipelines and facilities. Security risks mean Shell usually has to wait days, if not weeks, before going into remote swamp areas to repair damaged facilities.
‘I think one can say that Shell is looking to throw in the towel for its onshore Nigeria operations to focus on the offshore, where it doesn’t have the problems it has onshore,’ one of the people familiar with the matter said.” WSJ 12-21-09

Unsurprisingly, one of the most promising potential buyers is China.

3) The Financial Times reported a few weeks ago that at least some of Nigeria’s politicians are pressing for direct cash payments to the local population, emulating (distantly) Alaska’s tax rebate and trying to “manufacture a constitutency” by handing 10% stakes from the petroleum joint ventures. If they succeed, it will be incorporated into PIB, which has created almost as much political wrangling as the US health care bill.

It’s considered a way to make stakeholders shareholders of sorts. Financial remuneration is an idea whose wisdom has finally been acknowledged, but will it work in a place as thoroughly corrupted as Nigeria? The cash amount comes to $20 a year for each person in the Delta, scarcely enough for anything, even there.  Will it become an entitlement or an economic engine? Will it aggravate the already tense situation between any number of ethnic groups? How can this pittance make a difference?

The Bill also includes the requirement that corporations submit a detailed sustainable development plan for local communities — which is weird. (Shouldn’t this be in the hands of the local people and communities, or at the very least be based on services the national government is supposed to provide?)

A Dutch district court in the Hague has decided that it does in fact have jurisdiction to hear a case brought against Shell Nigeria (a subsidiary of Royal Dutch Shell) by four Nigerian farmers from the oil region and Friends of the Earth Netherlands, an environmental group.  According to the Nigerian newspaper, The Daily Independent, the oil from a pipeline leaked onto their land and fish ponds and they want it cleaned up by Shell.

Shell contends that the leak was a result of sabotage which has happened frequently by militants, and by those seeking to steal (bunker) the oil and then sell it. They had also stated the Dutch court does not have jurisdiction, but that point now seems moot. Of course, this simple decision on jurisdiction is a long way from winning the case, but the plaintiffs had said that they could not get this far in Nigerian court.

(The non-jurisdiction defense appears to be blowing up in the faces of the multinational oil companies who try it, as it did most recently in Ecuador (versus Chevron) and in New York City (by the heirs of murdered Nigerian activist Ken Saro Wiwa). It is unclear what will happen if someday the defendant is a national oil company, like a Chinese company, or Statoil.)

Shell has until February to respond.

Last month, the Iraqi government held its second round of auctions for its oil fields. Mid-month, seven fields were awarded to international oil companies.  American companies did not win any new leases in this round, but Petronas, a state-owned Malaysian company; Sonangol, of Angola; and Lukoil of Russia and Statoil of Norway did. Petronas and Shell won the the Majnoon field with more than 12 billion barrels of oil; and Petronas, CNPC of China and Total (French) got Halfiya, in the south, with 4 billion barrels. Last week, it was reported that  Lukoil and Statoil had actually signed for their West Qurna oil field, much faster than BP and China signed for the Rumaila oil field this summer.

Oil companies are famously an optimistic bunch but still, the enthusiasm is surprising. There just isn’t much profit for them in Iraq. The June oil lease auction was a bust, with only one signing, because the profit margin was so thin (about $2 a barrel), and according to the New York Times, Iraq also demanded nearly $3 billion in “signing bonus” loans for the six under-producing or undeveloped oil fields. Iraq sweetened the deals marginally for the most recent round but still the AP reported in December that

Companies must accept 20-year service contracts and receive a flat fee per barrel produced for their services instead of production-sharing contracts, which are much more lucrative.

And in an unstable war zone at that.

So why the optimism that the Iraq investment will ultimately pay off? Between the weakened demand, the natural gas glut (with more coming online all the time and gas being the preferred hydrocarbon of the future), the effort at green energy, and several recent smaller oil discoveries  in Uganda, Ghana, Gulf of Mexico, Brazil, it’s hard to see the reason for their faith.

And when Iraq’s oil does finally hit its stride, how will this affect the market? Will prices drop catastrophically for the producers? Risk management and advisory groups (as in the link below)  are asking themselves, what will this mean financially for OPEC countries and OPEC’s free riders, like Russia? Will it help hold down prices or cripple those countries who depend on setting production quotas? If Saudi Arabia cannot cut back on its production sufficiently to accommodate Iraq’s output?  How will it affect OPEC itself?

This level of doubt about oil prices represents an amazing change from last year, when investors were told to look for $200  a barrel oil soon.

See the below link.

Just under the wire, the EPA has given its official “comments” in response to New York State’s draft plan for drilling for shale gas in the upstate Marcellus field. The EPA found the mammoth 800+ page draft does not adequately address issues of wastewater, air quality, land impact and several other problems. It urges the state to deal with them more fully before setting out the formal regulations for drilling, suggesting they learn from other states’ (Pennsylvania, West Virginia’s) greater experience in drilling.

As I have written before, it is of paramount importance to get this right, since New York City’s drinking water is at stake. The city’s water from several sources upstate comes to the city mostly untreated — a rarity in US cities — and a big mistake in drilling means billions of dollars in treatment plants and more. At least as important: if New York State can figure out a way to satisfy environmental concerns to protect local environment and New York City’s concerns and still get the gas out, it will be a major step forward to protecting the environment and populations in drilling which can be applied in the rest of the US and globally.

In almost painfully technical language, the EPA’s comments urge the smallest environmental footprint possible, the establishment of a regulatory program to deal with naturally occurring radioactive water and brine that comes up from the drilling, avoidance of wetlands and sensitive habitats, air quality oversight, limiting gas flaring (burn-off of the escaping gas), and vastly improved waste water and cuttings treatment, and addressing other water issues.

Not all these problems have been addressed adequately elsewhere. For example, The Dallas Morning News reported in early December that in Texas’s Barnett shale area,

Critics feared everything from polluted groundwater in the Barnett Shale to high-pressure gas lines beneath their front yards. Now the biggest concern – at least the one that governments are watching closely – is in the air. Tests at one natural gas site found benzene at 1,100 parts per billion… people can start experiencing dizziness and nausea at 180 parts per billion with short-term exposure… The OSHA limits for short-term exposure to benzene among workers is 500 parts per billion.

But the major problem is water. A shale gas well especially uses an the enormous amount of water (a million gallons or more) to drill such a deep well to keep the drill bit cool, to bring up the cuttings taken from the rock being drilled, and then to frack it. In some places in Pennsylvania, drilling companies are recycling the water or using air drilling, which has its own dangers (heat = explosion) but minimizes the water used.

There is the use of hydraulic fracturing chemicals that are injected into the well and subjected to explosive pressure to shatter the shale and release the gas embedded in it. The fracking fluid probably contains dangerous additives (and some safe ones), but the very lack of industry transparency and the fact it was developed (decades ago) by Halliburton, and inordinately protected in the 2005 Energy Bill by Dick Cheney,  sends up red flags.

And the EPA’s comments focus on a more important question that has not yet been settled to anyone’s satisfaction — what to do with the huge volume of waste water that comes from drilling of the well,  and the contaminating waters  subsequently pulled out mixedin with the gas. Re-injection into the ground has not been popular. (“Not in my backyard”, cost, and risk.) And what happens to flowback fluids? Open pits? Closed tanks?

New York City (understandably), the New York Times and several environmental groups are totally against the drilling, but I think drilling will happen. (There are already more than 6000 wells in the state.) The economic and energy security opportunity is too great, the land in too many hands, the technology for successful extraction available. Better to set aside and protect the really vulnerable places and set up strict regulations and oversight for the rest. (After all, the watershed isn’t only the streams and rivers that supply the water, but covers the entire drainage area for scores of miles in all directions.)

The beauty of the EPA getting involved and this long and convoluted process is that it is forcing a state to hash out the minutia of the environmental threats raised by drilling. The process is a bellwether. Okay, maybe I’m a geek, but I find it thrilling. In the end, we will all be much safer for the effort, even those who don’t think we need it.