The World Is Still Producing More Oil Than It Needs. Why?
As humanity’s love for automobiles grew, in turn pushing up the demand and therefore price of oil, supply side response came from offshore drilling to fracking of shale oil. That’s intuitively expected. However, when the world went into lockdown and demand for oil fell taking down prices to even negative territory as there wasn’t enough storage capacity, why didn’t the supply side response come with shutting down of oil wells. This piece explains the technical and the resulting economic challenges to shutting down oil wells.
“On Friday, members of the Organization of the Petroleum Exporting Countries, Russia, the US, and others will begin scaling back their production by nearly 10 million barrels per day. They hope that this will help stabilize prices and take some pressure off of producers and refineries that are scrambling to find a place to store the excess. But the rollback isn’t likely to be enough. Oil producers would have to reduce production by almost three times that amount to match the downturn in demand. So why don’t they?
The short answer is because temporarily closing or “shutting in” a well costs money—and potentially lots of money. It’s not just about the foregone revenue, which is less of a concern when prices are dipping into the negative. It’s about what happens when the well is opened back up.
…A well typically taps into a mixture of oil and water. Both are pumped to the surface, but the water is treated as waste. When a well is shut in, the ratio of oil to water is recalibrated, since there’s no longer a big pipe sucking on the fissures in the rock. Because the rock in shale wells isn’t very permeable, water may accumulate in the fractures. When the well opens up again, it may end up producing more water than oil, because the accumulated H2O impedes the movement of oil. Shale wells typically operate on thin profit margins, so even a relatively small loss in productivity could make the well unprofitable.
Van Oort says the amount of time a well is closed doesn’t really affect how much damage the shut-in inflicts on the reservoir. Once the well is closed, the damage is done. If producers have to repeatedly shut the well, the damage can compound over time and reduce productivity even more.
The situation is a bit better for the roughly 1,000 offshore oil derricks in the Gulf of Mexico. These are typically conventional wells where a pipe is drilled into the ground and oil is pumped up—almost like sucking a milkshake through a straw. Offshore oil producers are accustomed to temporarily turning wells off during hurricanes, and shut-ins don’t have as big of a negative effect on their ability to produce oil. The reason for this, says McLennan, is because the offshore reservoirs are more permeable, which allows the oil to flow more freely.
But even though offshore reservoirs might not sustain as much damage from shut-ins, McLennan says the wells are a bit more challenging to turn off. Some subsea pipelines may need to be protected if the oil contains waxy paraffins, which can solidify in pipelines at the bottom of the ocean, where temperatures are just a few degrees above freezing. So before an offshore well can be turned off, there’s often a lot of preventative maintenance that needs to be done, like flushing the pipes and filling them with a fluid that prevents wax formation.”