Tech Leaders

Oil and Gas Professionals’ Perspectives on Common Public Perceptions of the Industry

Ahmed El-Banbi, Cairo University; Geoffrey Thyne, Science Based Solutions

The purpose of this article is to address three common myths/misperceptions the general public has of the petroleum industry. Two oil and gas industry technical experts give their views regarding these common myths/misperceptions and the factors associated with them.

Myth #1: There’s plenty of oil and gas available, but the oil and gas industry is not making an effort to produce enough for world consumption or the industry fails to supply enough to the market.

Questions: If oil and gas resources are so abundant, why are prices so high? What is keeping more supply from being available?

AE: Statistics show that our industry has produced significant amounts of oil since the start of the modern oil industry and there are still more reserves to be produced. On the one hand, our industry has been mostly successful in replacing produced reserves over the last many years. On the other hand, the cost of producing those reserves and problems associated with delivering petroleum products to markets are increasing.

The petroleum industry is characterized by two important, somewhat unique features: high risk and uncertainty, and significant investment. Many people argue that the easy oil has long gone and we are left with more difficult-to-produce oil and gas. Through nurturing our people, using advanced processes, and expanding our technology portfolio, we have been able to produce commercially from the Arctic, shale gas and shale oil, deep water and ultradeep water, heavy oil and tight oil, and so on. The production of the more difficult oil and gas requires the use of more expensive methods and technologies, yet oil and gas production is still cheaper than most alternative energies and even probably safer and more environmentally friendly than some.

The oil industry is a technologically advanced industry that develops and employs high technology and borrows technologies from other industries as well. Although many factors impact oil prices and can drive them higher, the cost of finding, developing, and producing reserves is proportional to the complexity of producing those reserves. Many of our projects take significant time and assets to drive oil and gas and their products to our markets. Therefore, the combination of costs, need for technology, political stability in certain areas, and time required in developing reserves to market affects both the supply of petroleum and oil prices.

GT: The current oil price is a result of two main drivers. One is the demand for oil as the fuel of choice for transportation. While the future may bring other modes of transportation that do not rely on oil, for now, growth of the world economy means increasing demand for oil.

The second driver is the shift in who owns the oil. Over the last 30 years the majority of the world’s oil reserves have moved from corporate to national ownership. National oil companies (NOCs) now hold more than 75% of the world’s reserves. State-owned companies have more objectives than simply making a profit. They are often an agent of government policy and make decisions to maintain higher prices by limiting production.

In fact, over the last 30 years as ownership and production have shifted from publically owned companies to NOCs, the price of oil has risen from USD 20/bbl (in 2006 dollars) to as high as more than USD 100/bbl. We can better see that impact by comparing oil prices to natural gas prices. Natural gas prices are, and continue to be, very low because of the large supplies and rapidly growing production from unconventional resources. Is it coincidence that those new reserves are not controlled by national oil companies?

We have large supplies of oil and gas available, but recovering these supplies is dependent on several factors. While the price, and thus profit, may be attractive to the industry, the limitations imposed by NOCs as representatives of their government’s policies can be prohibitive.

We are also encountering limitations imposed by current technology. Supplies of easily extracted oil and gas are declining. We are facing ever-growing technical challenges to continue production of leaner resources. For instance, conventional resources are fairly energy-dense. We find ourselves having to develop less energy-rich resources such as shale gas. Unconventional resources require technological innovations, more intensive drilling densities, and additional stimulation techniques such as hydraulic fracturing to produce.

Myth #2: Oil is very easy to produce since it exists in a pool underground and you only have to drill a well and the oil will keep gushing out of the ground. 

Questions: Why should oil and gas companies enjoy subsidies when they are so profitable? What factors impact oil and gas prices?

AE: Oil exists in pore spaces and usually in deep reservoirs below the surface of the Earth. In many cases, it requires a significant expense to drill wells and reach the petroleum reservoirs. Also, after some depletion of the reservoir, we usually need to install artificial-lift equipment (pumps or gas lift) to help lift the oil to the surface. We will also need to build surface facilities to treat and process the oil and then transport it to refineries and petrochemical plants for further processing into products we use in everyday life. All of these processes require significant knowledge of the business and significant investment. Some governments encourage oil companies to use advanced technology and develop more technologies to produce higher-cost oil (more difficult oil) and therefore grant some subsidies for specific projects.

There are many factors that affect oil and gas prices. These include the usual supply–demand rules that govern most commodities. However, because oil and gas are so tied to our lives, and because there is always fear of disruption of oil or gas (or their products) supply at certain times, prices may be affected by other factors. These factors include political stability, storage capacity and stock amounts, Organization of the Petroleum Exporting Countries and high-production countries’ interference in the market, accidents, weather conditions, and public perception.

GT: The actual profit margin of oil and gas companies is fairly average (4%–8%) compared to many other industries. However, since the energy industry is the largest business on the planet, the absolute profit value seems huge. That said, the energy industry does enjoy a number of tax incentives that may or may not be necessary. This is a political question since there are national security issues involved in maintaining a secure energy supply.

First, it is important to recognize that the oil and gas market is a world market. Few countries are self-sufficient when it comes to energy. And second, while most of us think of oil and gas as commodities, they are much more.

The reality is petroleum is a critical source of energy in the modern world, and as such is a tool of international power. In the free-market view, prices are a function of supply and demand; however, that ideal has been substantially changed by the rise of national oil companies. As producers, they have good reason to maximize production, which increases supplies and lowers prices; however, as instruments of their government’s policies there are other considerations. World oil and gas supplies have become instruments of policy as much as commodities.

Myth #3: Hydraulic fracturing is harmful to the environment.

Questions: What are oil and gas companies doing to reduce harmful environmental impacts to air, water, land, and people? Why aren’t they doing more and faster? Do oil and gas have a role in a low-carbon future?

AE: Hydraulic fracturing is a technology that uses hydraulic power to pump fluid, chemicals, and proppant (sand particles or other material) to fracture the rock below the Earth’s surface (reservoir layers) to create conduits of high permeability and allow more oil and gas to flow to the surface. Hydraulic fracturing technology is credited with adding significant reserves to some hydrocarbon reservoirs and to changing many nonprofitable oil and gas extraction projects to profitable ones.

When engineered properly, hydraulic fracturing operations have very low impact on the environment. In most locations, oil companies exercise high standards of safety, adhere to environmental constraints, and employ good industrial practices that reduce the impact on the environment to a minimal footprint.

GT: Over the decades of petroleum extraction, the industry as a whole has done an enormous amount to balance the production of resources with minimal environmental impact. There is, and always will be, a dynamic tension between corporate profits and public good; however, mature corporations have implemented policies and practices that recognize this balance. This is and will remain a constantly moving target. Instilling and maintaining corporate philosophies that encourage and reward practices that reduce environmental impact is key.

However, on the hydraulic fracturing issue, oil and gas companies have not been proactive enough in acknowledging and minimizing environmental impact. In part this is the outcome of the rapid deployment of an evolving technology.

Another factor is that many companies involved in developing unconventional resources are relatively new to the business. In my experience, the larger, well-established corporations with long histories in conventional oil and gas have over the decades developed policies that balance business and environmental concerns. These companies have come to realize that minimizing environmental impact is simply good business. In contrast, many companies involved in developing unconventional resources are still climbing the learning curve.

Many companies view the problem as political rather than technical. Their public relations efforts are spent on propagating a story line whose premise is that development activities, especially hydraulic fracturing, are well regulated and have never caused environmental damage. Many in the industry accept these statements without question. Since this position contradicts the experience of many citizens, it creates a credibility issue with the public. The industry’s response to questions is too often further denial, efforts to influence policy-makers, and suppression of opposing points of view. This has created an antagonistic environment where sensible solutions and policies are ignored in favor of further polarizing stand-offs and conflict.

The fact is most of the problems are engineering and technical in nature, problems the oil and gas industry can solve. Realistic and practical solutions such as green fluids, public access to well records and fracturing-fluid composition, cooperative engagement with the public, and forward-looking business practices should be our focus.

Using oil in transportation more efficiently and the growth of natural gas in electricity generation have already reduced US carbon emissions substantially. In fact, the US is well on track to reach the Kyoto targets for its carbon emissions.

Injection of CO2 for enhanced oil recovery is a carbon-neutral practice that expands our domestic oil reserves while contributing to carbon management.

However, the larger question is: What would we substitute for oil and gas? Petroleum (oil and gas) supplies about 60% of world energy needs. Energy is essential to our lifestyle and our economies. Growth in population, food production, life expectancies, and quality of life are all directly tied to energy supply. Changing to low-carbon energy-generation technologies and the accompanying infrastructure is a multigenerational endeavor.

While renewable energy sources will continue to grow, we have to confront the fundamental issues of scale and reliability. For instance, consider energy payback ratios (EPR), or how much energy is required to extract a resource compared to how much energy the resource creates. This is a life-cycle analysis—the well-to-wheels analysis.

So how much energy does it take to extract a barrel of oil, pound of coal, or megawatt of electricity from a windmill? The EPR of coal is between 2 and 5, nuclear is 14 to 16, solar panels have a factor of 3 to 6, windmills have a return between 18 to 34 times, while the EPR for the best Middle Eastern wells is 100. Coupled with the fact that we currently cannot effectively store the power generated by wind and solar, we have no real substitute for oil and gas in the near term. Someday there will be a game-changing technological substitute for petroleum, but until then petroleum remains a key player in the energy business.

References

BP Statistical Review of World Energy 2012, June 2012 www.bp.com/statisticalreview.

El-Banbi, Ahmed H. 2010. Technology and Innovation: Do We Do Enough in Our Industry? Paper SPE 128485 presented at the North Africa Technical Conference and Exhibition, Cairo, Egypt, 14–17 February.


Ahmed El-Banbi is a professor of petroleum engineering at Cairo University. With 21 years’ diversified international experience in reservoir and petroleum engineering, El-Banbi spent 12 years with Schlumberger where he held a variety of technical and managerial positions in five countries. He has considerable experience in managing multidisciplinary teams and performing integrated reservoir studies. Previously, he held shorter assignments with a major oil company and a consulting company, in addition to academic research and teaching. El-Banbi has authored or coauthored more than 40 technical papers and two book chapters. He has served on numerous SPE committees and as a technical reviewer for SPE Reservoir Engineering & Evaluation journal.
Geoffrey Thyne is a registered professional geologist specializing in applications of geochemistry to Earth systems, working since 2012 as a private consultant for Science Based Solutions in Laramie, Wyoming. He has served on the Scientific Advisory Board for the US Environmental Protection Agency’s current hydraulic fracturing study. Early on, Thyne worked as a research geochemist at the Arco Oil and Gas research facility in Plano, Texas, turning to academia in the 1990s as an assistant professor at California State University–Bakersfield in the department of physics and geology. He then joined the department of geology and geological engineering at the Colorado School of Mines, while also serving as project manager for the Colorado Energy Research Institute. He joined the Enhanced Oil Recovery Institute at the University of Wyoming in 2006 as a senior research scientist. The author or coauthor of more than 50 peer-reviewed scientific papers, Thyne was recognized by the American Association of Petroleum Geologists with the A.I. Levorsen Memorial Award in 2006. He holds a BA in chemistry and zoology from University of South Florida, an MS in oceanography from Texas A&M University, and a PhD in geology from the University of Wyoming.