Sensitivity of Accelerated Depletion to Rates of Technology Improvement --NEMS incorporates assumptions about the rate of technological change into its projections of future energy use. Technology enters the OGSM in three major ways:
Future costs are reduced. Drilling, lease equipment, and operating costs incorporate the separate impacts of drilling to greater depths, the level of drilling activity, and technological progress.
For drilling costs to decline, technological improvement must offset the upward pressure on costs due to drilling to deeper depths and increased drilling activity.
In general, projected future drilling costs decline incrementally with each additional year, along with equipment costs and lease operating costs. This represents the oil and gas industry's continuing innovation in techniques that reduce production costs.
Drilling is more accurate. The success rate for exploratory wells increases, as technology reduces the ratio of dry holes to total drilling activity.
Drilling becomes more effective. The amount of reserve additions per well (or finding rate) captures the impact of technological improvement (as well as the effects of price variations and declining resources).
In the absence of technology and price impacts the finding rate declines, reflecting the natural progression of the discovery process from larger, more profitable fields to smaller, less economical ones.
Technological improvement helps to offset the natural decline in the finding rate. The effects of technology on production are modeled differently in each submodule of OGSM, but each module captures the effects of technology on production costs and drilling activity.
In the conventional oil and gas module, technology enters as a parameter in the cost equations and finding rate equations.
In the unconventional module, which is play-specific, technology determines the years in which certain plays may be opened for development, how quickly the best producing locations in a given play can be identified, when certain techniques will become available, and at what rate costs will decline.
(A play is defined as a set of oil or gas accumulations sharing similar geologic, geographic, and temporal properties.)
The focus of this part of the analysis is to consider how changes in assumptions about future technological development change the effects of accelerated depletion on U.S. oil and natural gas prices and production. For oil, the analysis considers only how technological change influences U.S. production.
The world oil price is assumed to follow the same path in these sensitivity cases as in the Reference Case.
Rapid and Slow Technology Cases.
As a first approach to assess the effect of varying the rate of technological development on prices and production in the Accelerated Depletion Case, the drilling success rates, finding rates, and changes in costs were adjusted in the conventional modules, with corresponding changes in the unconventional production modules.
The assumptions for the Rapid and Slow Technology Cases are similar to those for the AEO2000 rapid and slow technology cases, with only minor differences .
The Accelerated Depletion with Rapid and Slow Technology Growth Cases are designed to highlight the uncertainty around the effects of technological development, but they should not be considered a formal confidence interval.
Faster growth of technology in the Accelerated Depletion with Rapid Technology Growth Case is accompanied by higher projected natural gas production .
Natural gas production in 2020 in the Accelerated Depletion with Rapid Technology Case is projected at 28.4 trillion cubic feet, as compared with 22.5 trillion cubic feet in the Accelerated Depletion Case, and is higher in every year of the forecast.
Faster improvement in drilling technology is also projected to result in lower wellhead prices . In the Accelerated Depletion with Rapid Technology Case, the price of natural gas is projected to be $2.37 per thousand cubic feet in 2020 (more than 40 cents lower than in the Reference Case), compared with $4.12 per thousand cubic feet in the Accelerated Depletion Case.
Like natural gas production, projected crude oil production in the lower 48 States is higher when rapid technology growth is assumed.
Production of more than 5 million barrels per day is projected for 2020 in the Accelerated Depletion with Rapid Technology Case, compared with 4.7 million barrels per day in the Accelerated Depletion Case.
With rapid technology growth, oil production is uniformly higher throughout the forecast than it is in the Accelerated Depletion Case or the Reference Case.
The wellhead price of crude oil in the lower 48 States changes only slightly, because the world oil price is independent of the technology assumption.
In the Accelerated Depletion with Slow Technology Case, the effects of accelerated depletion on prices and production are exacerbated.
By 2020, the wellhead price of natural gas is projected to be an additional 44 cents per thousand cubic feet higher and lower 48 gas production an additional 2.2 thousand cubic feet less than in the Accelerated Depletion Case.
Lower 48 oil production in 2020 is also lower by 700,000 barrels per day, or roughly 14 percent, than in the Accelerated Depletion Case.
Improved and Reduced Productivity Technology Cases
In addition to the Accelerated Depletion with Rapid and Slow Technology Cases, this analysis also considers Accelerated Depletion with Improved and Reduced Productivity Technology Cases, which are subsets of the technology sensitivity cases described above.
In these more focused cases, the changes in the assumed rate of technological progress from the Reference Case are limited to advances in production technology only.
In the conventional model, only the finding rate, or the ultimate amount of proved reserves added with each well is adjusted.
The other parameters, specifically the effects of technological development on costs and success rates for drilling, are not adjusted in this case, which was designed specifically to capture changes in production technology by itself.
In the unconventional natural gas module, the adjustments for the Accelerated Depletion with Improved and Reduced Productivity Technology Cases are limited to performance technology assumptions, and not the assumptions about changes in costs or exploration technology .
Relative to the Reference Case, changes in prices and production in the Improved and Reduced Productivity Technology Cases are similar to those in the Accelerated Depletion Case but not as pronounced.
Higher production in the Accelerated Depletion with Improved Productivity Technology Case leads to a projected natural gas wellhead price of $2.99 per thousand cubic feet in 2020, compared with $4.12 in the Accelerated Depletion Case (Table 5) and $2.37 in the Accelerated Depletion with Rapid Technology Growth Case .
Total gas production in 2020 in the Accelerated Depletion with Improved Productivity Technology Case is 3.3 trillion cubic feet higher than in the Accelerated Depletion Case.
Changing the finding rate by itself is enough to bring total natural gas production close to the levels projected in the Reference Case.
Lower 48 natural gas production in the Accelerated Depletion with Improved Productivity Technology Case is slightly higher then in the Reference Case through most of the years of the forecast but slows to a level about 1 percent below the Reference Case level in 2020.
Lower 48 gas prices in the two cases differ by no more than 10 cents per thousand cubic feet until the last two years of the forecast.
Oil production is uniformly higher in the Accelerated Depletion with Improved Productivity Technology Case than in the Reference Case, suggesting that the effects of accelerated depletion could be partially offset by improving production technology alone.
The rate of technological growth assumed in the improved technology case is a composite of many individual expected improvements.
Projecting the specific technologies introduced - and the level of investment that would be required to develop the technologies - is not within the scope of this analysis.
Sensitivity of Accelerated Depletion to Increased Access to Federal Lands in the Rocky Mountain Region.
A large portion of the Nation's natural gas resource base is located on Federal lands (and in Federal waters) where development is restricted or prohibited.
These restrictions reduce the accessible resource base and limit industry's ability to exploit known resources.
The Rocky Mountain region is an area of high future potential for natural gas production. Environmental and other constraints currently preclude industry's access to about 45 percent of the resource.
The Rocky Mountain resource volumes and access restrictions are consistent with the findings of the recent National Petroleum Council study, which found that 40 percent of the natural gas resource located in the Rockies is either closed to exploration or faces severe restrictions on development.
Efficient development of the resource is further restricted by the complex nature of the reservoirs found in the Rocky Mountain basins.
Much of the gas resource is locked in coalbed methane, gas shales, and low permeability/low porosity ("tight") sandstone formations - reservoirs that require special characterization, drilling, completion, and production techniques to become economically feasible to produce.
Accelerated Depletion in Rocky Mountain Basins
In the Accelerated Depletion Case, a "current technology" recoverable unconventional gas resource base was assumed to be approximately 235 trillion cubic feet in the Rocky Mountain region at the end of 1998.
Of this, 108 trillion cubic feet is off limits because of development restrictions.
Essentially 45 percent of the technically recoverable unconventional gas resource is deemed currently unavailable due to environmental and access constraints.
Another 87 trillion cubic feet of resource is accessible but not economical to develop with today's technology and gas prices.
Given these restrictions and economic realities, the current production level of 2.1 trillion cubic feet per year from unconventional sources is projected to increase to only 2.7 trillion cubic feet by 2020.
Under the conditions of the Accelerated Depletion Case, only limited improvements in technology are assumed to be made with respect to reservoir characterization and well performance, while exploration technology experiences no improvements at all.
Optimization and cost reduction technologies are assumed to make some modest improvements, as in the Reference Case, and additional access is restricted under the Accelerated Depletion Case.
As shown in Table 6, the results of the Accelerated Depletion Case in the Rocky Mountain basins are as follows:
Natural gas prices in the Rocky Mountain region are projected to reach $3.69 per thousand cubic feet in 2020, compared with $2.40 per thousand cubic feet in the Reference Case.
Lower 48 average wellhead prices in 2020 are projected to reach $4.12 per thousand cubic feet in the Accelerated Depletion Case and $2.79 per thousand cubic feet in the Reference Case.
141 trillion cubic feet (38 percent) of the resource is projected to be either not accessible or economically infeasible in 2020.
Production of natural gas is projected to remain modest, reaching 3.8 trillion cubic feet in 2020 compared with about 5 trillion cubic feet in the Reference Case.
Providing High Access to Rocky Mountain Basins
One potential approach to stimulating additional natural gas production (and countering the effects of accelerated depletion) is to provide increased access to resources in the Rocky Mountain natural gas basins.
A list of the basins where access is expanded in the High Rocky Mountain Access Case is given in . In this case, access to those basins is projected to increase steadily over the course of the next 20 years. (All other response levers are consistent with those in the Accelerated Depletion Case.)
The results of the Accelerated Depletion with High Rocky Mountain Access Case are as follows:
Total natural gas production from Rocky Mountain basins is projected to be 0.5 trillion cubic feet higher than in the Accelerated Depletion Case, at 4.3 trillion cubic feet per year in 2020.
Natural gas wellhead prices in the Rocky Mountain region are projected to be 30 cents per thousand cubic feet lower, at $3.39 per thousand cubic feet in 2020.
The great bulk of the Rocky Mountain unconventional natural gas resource is projected to become accessible, leaving only 18 trillion cubic feet without access in 2020.
About one-third of the unconventional resource made physically accessible is projected to remain uneconomical due to high costs and inadequate exploration and production technology.
Providing Rapid Technological Progress to Rocky Mountain Basins.
A second alternative for increasing production and arresting the effects of accelerated depletion would be to increase the rate at which technology is developed.
More rapid technology development would expand the technically recoverable resource base by increasing the productive areas of economic plays, increasing efficiency, and reducing the costs associated with the exploration and production of natural gas resources.
Improved Productivity Technology : To evaluate gas production in the Rocky Mountains in the Accelerated Depletion with Improved Productivity Technology Case, the reservoir characterization and well performance technology levers were changed as requested by the Office of Fossil Energy, so that the rate of change in productivity technology was 50 percent higher than in the Reference Case. Other types of technology growth were kept at the reference level.
The effects of the improved productivity technology assumption on Rocky Mountain natural gas resources in the Accelerated Depletion Case are summarized below:
Natural gas production from the Rocky Mountain basins in 2020 is projected to be 1.5 trillion cubic feet higher than in the Accelerated Depletion Case, at 5.3 trillion cubic feet of annual production.
The Rocky Mountain natural gas wellhead price is projected to be $2.45 per thousand cubic feet in 2020, $1.24 per thousand cubic feet lower than in the Accelerated Depletion Case.
The technically recoverable resource is projected to grow by 86 trillion cubic feet, yielding a total of 337 trillion cubic feet.
Despite improvements in exploration and production technology and considerable growth in the resource, 37 percent of the resource base (126 trillion cubic feet) is projected to remain inaccessible in 2020, because of the limits imposed by environmental restrictions on exploration and production.
Rapid Technology Growth:
To examine the impacts of the Accelerated Depletion with Rapid Technology Growth Case on Rocky Mountain gas production, all technology settings - including production technology - were set roughly 50 percent higher than the Reference Case settings.
Access was still assumed to be restricted, keeping this setting consistent with the Accelerated Depletion Case.
The effects of the rapid technology assumption on Rocky Mountain natural gas resources in the Accelerated Depletion Case are summarized below:
Natural gas production in the Rocky Mountain region is projected to be 6.5 trillion cubic feet in 2020, exceeding the projected production in the Accelerated Depletion Case by 2.7 trillion cubic feet.
Natural gas wellhead prices in the Rocky Mountain region in 2020 are projected to be $1.86 per thousand cubic feet, about half their level in the Accelerated Depletion Case.
The technically recoverable resource is expected to be 143 trillion cubic feet higher than in the Accelerated Depletion Case; however, 140 trillion cubic feet of the resource base is projected to remain inaccessible in 2020, with an additional 44 trillion cubic feet being accessible but not economically viable.
Providing High Access and Accelerated Technological Progress to Rocky Mountain Basins.
The Accelerated Depletion with High Rocky Mountain Access and Improved Productivity Technology Case and the Accelerated Depletion with High Rocky Mountain Access and Rapid Technology Case combine high resource access and more rapid technological progress assumptions. The effects on Rocky Mountain gas production and prices are summarized below.
Accelerated Depletion with High Rocky Mountain Access and Improved Productivity Technology:
In this analysis case, natural gas production in the Rocky Mountains is projected to be 5.7 trillion cubic feet in 2020, 1.9 trillion cubic feet higher than the level projected in the Accelerated Depletion Case.
Natural gas wellhead prices in the Rocky Mountain region are projected to be $2.25 per thousand cubic feet in 2020, $1.44 per thousand cubic feet lower than in the Accelerated Depletion Case.
In 2020, 64 percent of the technically recoverable resource is expected to be economical and accessible, leaving only 7 percent of the resource "off limits."
Accelerated Depletion with High Rocky Mountain Access and Rapid Technology.
In this case, natural gas production in the Rocky Mountain region is projected to be twice as large as it is in the Accelerated Depletion Case, reaching 7.6 trillion cubic feet of annual production in 2020, as more resources are open to development and more rapid introduction of technology lowers production costs.
Lower 48 gas production is projected to total 29.2 trillion cubic feet in 2020, compared with only 22.5 trillion cubic feet in the Accelerated Depletion Case and 26.0 trillion cubic feet in the Reference Case (Figure 15).
With higher production levels increasing supply, lower 48 natural gas prices are projected to be $2.22 per thousand cubic feet in 2020 - $0.57 lower than in the Reference Case and $1.90 lower than in the Accelerated Depletion Case.
The technically recoverable resource base in 2020 is projected to be 142 trillion cubic feet higher than in the Accelerated Depletion Case, with only 7 percent remaining "off limits."
As expected, the combination of high access to Rocky Mountain resources and more rapid technological progress leads to the highest projections of gas production and the lowest projected wellhead costs for natural gas.
Under these conditions the resource base is expected to grow significantly, and the large majority of it becomes accessible and economical.
The results of the two cases assuming more rapid technological progress suggest that the effects of accelerated depletion could be offset to some degree by increased access to natural gas reserves in the Rocky Mountains in combination with improvements in exploration and production technology.
Conclusion:
This study has shown that projections of future oil and gas prices and production are influenced by the assumptions that are made about the effects of depletion.
The NEMS OGSM incorporates the effects of depletion in its projections. In the Accelerated Depletion Case, the change in assumptions about the effects of depletion causes the projected production of lower 48 natural gas in 2020 to be 3.5 trillion cubic feet , or 13 percent, lower than in the Reference Case, with wellhead gas prices projected to be $1.33 per thousand cubic feet, or 48 percent, higher.
Changes in assumptions about world oil prices, the availability of natural gas imports, and the rate of technological innovation modify the projected effects of accelerated depletion on prices and production.
Higher projections of natural gas imports partially offset the higher prices projected in the Accelerated Depletion Case, but domestic gas production is also reduced.
Assuming a higher path for world oil prices does not return natural gas production in the Accelerated Depletion Case to its level in the Reference Case but does cause projected oil production to be higher.
Assuming a faster rate of technological innovation partially offsets the effects of accelerated depletion.
When increased access to Rocky Mountain natural gas resources is assumed, projected natural gas production is increased.
Combining the increased access and improved technological progress assumptions raises the projected production levels for natural gas above those in the Reference Case.
The projected real wellhead price of lower 48 natural gas in the Accelerated Depletion with High Rocky Mountain Access and Rapid Technology Case is less than half the projected price in the Accelerated Depletion Case.
These results suggest that at least in the short to medium term, the potential negative effects of accelerated depletion could be offset to some degree by more research and by expanding the areas where exploration and production is allowed.
The assumptions used to create the Reference Case specifically extrapolate from historical trends, whereas the assumptions used in the Accelerated Depletion Case were chosen to illustrate a scenario in which the effects of depletion are more acute then they have been historically.
Therefore, the Accelerated Depletion Cases, which illustrate how the effects of depletion may become increasingly important in the decades to come, should be seen as sensitivity cases rather than forecasts.
Source: United States Information Administration.
© 2000 Mena Report (www.menareport.com)
