By its very nature the petroleum industry must look to the future. There are no instant oil wells. Thus if the petroleum industry is to meet the demand it will face in the next 25 years, it must predict, right now, and with a fair degree of accuracy, what those demands might be.
By 1990, for example, some 150 million passenger cars will be roaring along the highways of the United States, according to one recently quoted industrial prophet. That is twice as many as there are now, and for the oil industry it raises important questions: what kind of cars will they be and what type of fuel will they run on? In spite of talk about monorails and "people tubes," it is unlikely that they will offer a serious challenge to the automobile for some time. As the chairman of one of the American "Big Three" auto manufacturers has said, "For most travel purposes, no vehicle has yet been developed or even is in prospect that can equal the automobile for speed, comfort, convenience, privacy, economy..." But in the light of current conjecture about the kinds of power plants that will move the car of the future, and in view of the serious air contamination problem for which the gasoline engine is sometimes blamed, the petroleum industry must still ask the questions and try to answer them now.
The future of the automobile is not, of course, the only subject which holds the attention of the oil industry of today. Its research and development departments are also pondering such questions as, will there really be two-helicopter families? Hovercraft transport? Throw-away clothes? Plastic skyscrapers? Or even Fly-Now-Pay-Later weekends on the moon? Some are likely, none is impossible, and all could have important effects on the consumption of energy. That is why oil companies have already begun to take a hard look at the factors on which all long-range economic forecasting is based: population growth and economic development.
Population growth is particularly important in estimating future demands. By 1990 there will be, according to a Fortune survey, 5.7 billion people in the world—twice today's total—all of whom will be struggling, not merely to survive, but to improve their standard of living. In some cases this many mean exchanging a nylon toothbrush for an electric toothbrush, in others merely moving up from rice to bread. Whatever the nature of the improvements they inevitably affect economics. For although man's needs do not change, his wants do. A primitive community needs food—any food—but a sophisticated community wants strawberries at Christmas. And when enough people want and can afford something beyond basic needs, the effect sends shock waves through the economy. Industrialists plan factories. Transport companies buy trucks. Businessmen enlarge shops. Sales increase. Orders soar. As the impact of growth crackles through an economy, employment increases and with it the purchases that can keep the cycle going. Refrigerators replace ice boxes and central heating replaces the kitchen range. Off the assembly line come, first, bicycles, then motor scooters, then automobiles. As appetites sharpen and expand, markets grow, and consumption soars. And so does the consumption of energy—without which none of it would be possible.
But to anticipate change is not enough. Even if companies can accurately predict that the population will double by 1990, it is just as important to make some intelligent guesses about what kind of a world they will live in. Will plastics shoulder steel and wood aside? Will factories be wholly automated? Will jets replace ships altogether? Will vertical take-off planes replace taxis? On holidays will a man be able tow a collapsible cottage to the shore? Go cruising on his own hydro-foil? Spend his vacation in Australia?
To all those questions the answer is probably, yes. But even if it is no the economists are sure of one thing: whatever the exact shape of this visionary 1990, the demands for energy will be enormous. In a talk given some months ago in Dhahran, a vice president and director of one of the companies that own the Arabian American Oil Company (Aramco) indicated just how big. The Free World's 1950 energy demands, regardless of how these demands were supplied, amounted to the equivalent of 28.5 million barrels of oil a day. By 1965, energy requirements had risen to the equivalent of about 53.5 million barrels. And demands for energy in the Free World, he said, will be increasing by two million barrels a day at least through 1970, which was as far into the future as the speaker ventured to look.
The secretary general of the Organization of Producing and Exporting Countries (OPEC), in a statement published early last February said that the share of petroleum as a source of energy in the Free World increased from 34 to 41 per cent between 1960 and 1966. And, according to the same official, 1966 was the year in which oil replaced coal for the first time as the world's single most important source of energy.
Economists cannot predict, of course, in what proportion total energy requirements will be supplied by oil and what by, say, water or sunlight in 1990. But taking all factors into account—such as the increased used of petroleum in petrochemicals—the experts still predict that the petroleum industry will have to deliver over the next 25 years about 480 billion barrels of oil. This is more than three times the total free world consumption between 1859, when the first well was drilled, and 1965. A consensus of shorter-term forecasts—of about 15 years—indicates an annual growth rate of from five to six per cent and a high executive in one oil company predicts a flat five and one-half per cent gain each year for 25 years. "By 1990," he said, "we shall need about three times as much oil and natural gas as now, a total equivalent in round figures of about 100 million barrels of oil a day."
If all this comes true the impact on the Middle East could be enormous. The Middle East has not only the largest reserves of any oil-bearing region in the world but also 70 per cent of the Free World's estimated total. Furthermore, the total reserves have been growing despite heavy withdrawals. Thus, barring political upheavals or violent increases in production costs, production is quite likely to increase steadily. Some economists say flatly that in any event the growth rate will be at least five to six per cent. In comparison with the eight to nine per cent growth between, 1961 and 1966 that may seem small. But the prediction is deliberately conservative and even then means that by 1990 Middle East will produce 33 million barrels per day—about four million barrels more than the entire Free World used each day throughout 1966.
To produce oil in these quantities is a tremendous task. It is also fantastically expensive. Projecting today's cost figures, one economist states that the oil industry will have to lay out about $14 billion by 1990 in order to meet the estimated 33 million barrels per day demand. And since the Middle East produces just over 50 per cent of all oil moving into international trade, oil companies and allied businesses will have to ante up another $95 billion for tankers, pipelines and other necessary facilities. The total will be an estimated $109 billion—compared, for instance, to a $61 billion capital outlay for all U.S. industries in 1966. In the Free World as a whole the total investment needed will reach in the neighborhood of $360 billion. As one prominent oil executive from the United States told a Dhahran audience recently, "We have an industry that is an enormous consumer of capital."
To feed this obviously gargantuan appetite for capital would seem to be a colossal challenge. Yet actually the oil industry is 95 per cent self-financing—that is, it already finds 95 per cent of its capital from depreciation provisions and retained earnings. The question now is: with costs rising and demands for capital at unprecedented levels, can the industry continue to finance itself and if so, how?
Four years ago the gross investment required to produce one barrel of oil in the Middle East—i.e. find it, get it out of the ground and move it to a refinery or port—was $350. Now, according to the Chase Manhattan Bank, it is about $565. Costs, obviously are rising, and if they continue to do so petroleum companies may have to look elsewhere for capital. To put it another way, if the petroleum industry is to continue to finance most of its own growth, it must improve production and cut costs.
Many leaders in the industry say that most of the fat has already been trimmed. They argue too that increased sales volume will reduce unit costs by spreading overhead and, to that extent, they're right. But in the Middle East, which is essentially a producing area, the major expenditures are for such uncertain, if vital, operations as exploration and drilling. As suggested earlier, finding oil is expensive: in 1965 Middle East companies spent about $40 million—a tenth of their total expenditures—on just lease rentals and geological and geophysical surveys. What this means is that there are strong incentives to improve exploration techniques—as, for example, the Arabian American Oil Company's marriage of advanced scientific knowledge with modern electronic data-processing.
Aramco was one of the first companies in the Middle East to start collecting seismic data suitable for computer processing. In 1956 its exploration parties began their first reproducible recordings of seismograph data. Seismic work involves the placement of small sound receivers, called geophones, in the sand of promising areas and linking them to a recording truck. When experts explode charges, shock waves bounce off subsurface structures deep in the earth. The geophones pick up the shock waves and convert them into electrical energy, which is routed to the truck. When these impulses are being magnetically recorded, they are transcribed directly onto a disc or tape. Later, Aramco analyzed this information in an analog processing center in Texas, and, eventually, provided geophysicists and geologists with graphic data on profiles of the sub-strata.
In November 1964, however, Aramco began to record the seismic data in digital form—a system in which an infinite variety of number symbols represents mathematically different variations of the electronic energy. Since these data could be processed on a computer, the system was faster and more sophisticated and reveals much more subtle variations in the profiles of the earth. It also gives the geophysicist much more detailed information, particularly of deep structures, on which to base his interpretations of the subsurface. To speed it up even more, Aramco has installed a complete digital seismic computer system right in Dhahran, thus eliminating the need to send the data away and making it possible to return processed data to exploration parties in the desert a few days after they have recorded it. This not only saves time but increases the probability of finding oil.
Another costly process is drilling. Despite all improvements in exploration, there is, so far, only one way to see if oil is there or not: drill down and see. And drilling wells is expensive. An analysis of recent annual oil industry capital investment compilations published by the Chase Manhattan Bank indicates that drilling activity accounts for about half of all oil capital outlays in the Middle East. Individual oil wells in the area cost between $300,000 and $500,000—whether they turn out to be producers or not.
To oilmen, however, the significant yardstick for drilling costs is the cost per foot. Over the last 10 years oil companies in the Middle East have succeeded in reducing the overall average cost per foot by about 30 per cent. This is quite an achievement when so much of their equipment has been affected by rising prices of raw materials, particularly steel. How have they done it?
Again it is a story of the innovation of technology and the application of modern industrial techniques. One example of technological change is the drilling bit. By studying drilling bits petroleum engineers have discovered how they behave under different pressures and temperatures through different subsurface structures, and how to regulate weight, rotation speed and the pressure of drilling fluid of a particular density. Now they can drill faster, yet make the bits last longer.
Other changes have been achieved by simply analyzing every step in the drilling process. They studied and timed every operation: site preparation, rig transportation, drilling itself, lining the well with cement and casing, and even to tidying up afterwards. Then, by improving training here, planning better there, they halved the time taken to construct an oil well.
Today, as a result, the efficiency of drilling in the Middle East is vastly improved. In fact, if the cost per foot is related to the yield of the well, the average productivity of Middle East wells is probably the best in the world. Oil wells in the Middle East produce an average about 4,300 barrels per day, compared, for example, with the United States average of 14. And on a cost-per-foot-per-barrel-produced basis, Middle East costs are incomparably lower.
In the early days of oil the driller was the king of the mountain. Then, when the oil industry was scrambling to keep up with demand, the explorationist was the key man. Today it is the marketer. But in the next decade, according to one respected oil journal, the important man may well be the man who can "recover" the oil, i.e., help get oil out of wells that until now had to be left.
Under natural conditions, the pressure in an oil reservoir will decline with production. If the pressure is allowed to drop to too low a level it will become necessary to pump the oil, and costs will increase drastically. With higher unit costs, ultimate economic recovery is reduced. By injecting gas, water or other fluids into an oil reservoir, production engineers can prevent the pressure decline and keep the amount of crude oil they can recover high. By injecting gas or water into its reservoir to maintain pressure, Aramco has been able to double the recoverable reserves in some of its oil fields.
In its relatively short history, oil recovery technology has already made remarkable advances. Over the past decade production engineers have developed increasingly accurate means of predicting how an oil reservoir will behave when different recovery methods are employed. Using computers, they have designed scale models that simulate the flow processes in oil-bearing strata so realistically that they can investigate the effect of various production and injection schemes and can select the method that results in the greatest ultimate economic recovery.
Whatever improvements in productivity and cost oil companies may take in exploration, drilling and oil recovery, however, they still have to move the oil to refineries or shipping terminals. And this grows more expensive almost by the well because as they develop new oil fields they have to build longer and often bigger pipelines. At the end of 1966, for example, the total gross investment in pipelines in the Middle East was over $1 billion. Only the United States had a higher figure.
Pipeline sizes and technology have advanced dramatically since the laying of the first line in the Middle East in 1934, when a 12-inch pipeline was laid 531 miles from Kirkuk, Iraq to Tripoli, Lebanon. Now, growing in size like runner beans, the usual diameter is 42 inches and Aramco's Safaniya pipeline demonstrates how important this increase in size can be. In 1965, Aramco started to construct a 42-inch pipeline from the Safaniya oil field to the shipping terminal at Ras Tanura, a distance of 130 miles. If they had not been able to install a line of that diameter they would have had to construct three lines with 26-inch diameters to provide the same volume. And the additional cost would have been $19 million.
These are just a few examples of what oil companies in a producing area such as the Middle East can do. Other such examples—cheaper and improved pumps, quicker loading at shipping terminals, cheaper maintenance, and so on—can be found, but they all add up to the same thing: the fact that oil companies in the Middle East are cutting costs and improving efficiency now in order to meet the challenges the future is sure to offer.
Keith Carmichael studied economics at Oxford and is now a free lance writer specializing in Middle East affairs.