THREE PRICE PLUMMETS IN 12 YEARS: HOW SHOULD OIL AND GAS DEFINE ITS FUTURE?

A focus on developing advanced technologies that increase efficiency and reduce production costs is the only way to protect the future of oil and gas.

With the industry unprepared, global oil prices collapsed again in 2020, and this time, it dropped promptly to a historic low. Since the middle of March 2020, the international crude oil price has mostly been below 30 USD/barrel, during which time the oil price even dropped to a negative value. The last time the oil price dropped below 30 USD/barrel was in 2016.

A Giant Black Swan Arises

In recent years, the international oil price has become increasingly volatile. In the past 12 years, there have been three drastic plunges.

• In 2008, the oil price fell from 147 USD/barrel to a minimum of 40 USD/barrel caused by the financial crisis.

• In 2014, the oil price fell from 100 USD/barrel to a minimum of about 30 USD/barrel due to the development of shale oil in the United States.

• In 2020, the Covid-19 pandemic augmented the pressure of the global economic downturn, and the oil price dropped from 60 USD/barrel to -37 USD/barrel.

These oil price plummets have brought impacts to the oil and gas industry, each of which was more intense than its predecessor. In 2008, the oil price plummet went on for nearly one year; in 2014, it lasted for nearly three years; in the week of May 22, 2020, the number of active oil and gas drilling rigs in the United States fell to 318, this level was last seen during the Second World War.

How much will the oil and gas industry lose in 2020?

According to a report released by the International Energy Agency (IEA), global demand for crude oil is likely to decrease by 9% in 2020, returning to 2012 levels. Meanwhile, demand for natural gas is expected to decrease by 2%. The decrease of both energy demand and price will lead to the sharp decrease of enterprise income. According to a research by Rystad Energy, an energy consulting company, global oil and gas exploration and production revenues will drop by about one trillion USD in 2020, a 40% year-on-year drop. This means that the income of many oil producers is likely to halve this year.

Looking ahead, it remains unclear when oil prices will recover. In the short term, it is very difficult to restore oil and gas demand before the global pandemic has subsided. Some of ​the research institutions predict that, the global oil and gas exploration expenditure may continue to decline even in 2021. Taken together, the market is full of uncertainties, and the oil and gas industry will find it hard to fully rely on the possible bounce-back of future oil prices.

A Grey Rhino Gets in the Way

For many oil and gas producers, the downturn in oil prices is not the only challenge in front of them. In order to ensure national energy security, China's oil and gas industry launched a round of "oil and gas battles" in 2018. Although oil and gas production is in a critical period of stable production and production increases, at the same time, ever-growing cost is a challenge. In recent years, hard-to-develop resources such as shale gas, tight oil and other resources have accounted for a large share of newly-proved oil and gas resources in China.

According to data released by China Mineral Resources 2019, in 2018, the proven resource reserves of shale gas in China increased by 8.9% year-on-year, compared with 4.9% year-on-year increase of conventional natural gas and 0.9% year-on-year increase of oil. In 2019, Qingcheng oilfield, the only one-billion-ton oilfield newly confirmed by China, is also a shale oil field with a high difficulty of effective exploitation. Shale oil ​​and gas production costs are relatively high. Many oil and gas developers in China have tried to take a shortcut, hoping to replicate experiences from North America to realize low-cost development of shale gas in China. The fact is that the conditions of China's shale oil and gas reserves are quite different from those of North America's shale oil and gas, in terms of geological and geomorphic characteristics, and this poses unique challenges.

China's main shale gas reservoirs are buried more than 3000 meters deep, whereas many shale gas reservoirs in the United States lay only 1000 meters deep. And most of the shale oil and gas fields in the United States are located in plain areas, while in China, most shale oil and gas fields are located in mountainous areas, which makes it difficult to transport and place the equipment, bringing a higher operational cost. Finally, the current output of shale gas in China is far below the original target. Even if oil and gas prices could rise in the future, it is likely that many oil producers will not be able to bypass this Grey Rhino named "high cost".

Hard-Core Equipment is Born

Under the double pressure from Black Swan and Grey Rhino, the oil and gas industry is quietly shifting to a new direction. More attention is being paid to efficiency and cost control, instead of blindly expanding production. This is especially evident when it comes to the development of oil and gas technology. New technologies that improve efficiency are being popularly adopted across the globe.

For example, the Electric Frac solution, which is highly praised in the industry, has emerged to overcome a major obstacle.In the process of shale gas development, there is a key phase - Hydraulic Fracturing; during which large quantities of high-pressure base fluid is injected into the rock strata thousands of meters beneath the surface. This complicated operation come at an extremely high cost. Research has pointed out that the cost of hydraulic fracturing in North America accounts for about 15% - 40% of the total cost of a shale well. If the efficiency of hydraulic fracturing can be improved, the production cost of shale will be significantly reduced.

However, the cost of Frac operation is often higher in China, as China's shale oil and gas fields are mostly located in mountainous areas, with narrow mountain roads and limited operational space. It is extremely inconvenient to transport and install Frac equipment there, and there is the added cost due to a need for higher stability of the equipment because of the location and climatic conditions. Even global energy giants with strong financial and technology resources have been unable to provide the required equipment and experience that meet the unique needs of China's shale gas exploration.

To solve this problem, in 2019, Yantai Jereh Oilfield Services Group Co., Ltd. (Jereh Group) launched the world's first self-developed complete set of Electric Frac spread for shale gas development, which brought new possibilities for the cost to be further squeezed down. In view of the special difficulties in exploiting shale gas in mountain areas, Jereh Group has made hard-core innovations with regards to two core devices of Frac equipment: first, the plunger pump is upgraded to cater to continuous operational conditions instead of previous intermittent operational conditions; second, in terms of power, Jereh replaced the traditional diesel drive with electric drive.

A Hardcore Plunger Pump

The plunger pump developed by Jereh Group has been used for many years in shale gas Frac operation in China, this has now been improved for continuous operation conditions, its service life and stability are also optimized so as to adapt to more demanding Frac operations.

Electric Replaces Diesel

Traditional hydraulic fracturing equipment requires more than ten diesel engines to drive at the same time, which leads to limitations in mountainous area because of the large amounts of space the diesel engines occupy. Therefore, Jereh Group developed the Electric Frac equipment with the design concept of high power density. Its power is more than twice that of the conventional diesel drive Frac equipment with a power density of up to 134kW/t, the largest in the world. This means that it only takes 9 Electric Frac units now to accomplish the same amount of work that required 18 sets of diesel-driven fracturing equipment to operate simultaneously. Thus, the operation needs not only less space for operation, but also less purchasing and maintenance costs for the equipment. It is worth mentioning that there are many residential areas near the shale gas fields in Sichuan. The loud noise from traditional Frac equipment severely affected local residents’ daily lives, making it difficult to operate at night and lowering the operational efficiency. For this reason, Jereh Group adopted the technologies of mute fans and frequency conversion control to keep noise under 85 dB, so as to meet the requirements of operation during night time.

​In addition, the electric equipment is equipped with an intelligent integrated control system. The system can transmit the on-site data to the base data cloud platform in real time through 4G, 5G and satellites, cooperate with built-in intelligent analysis and diagnosis, and provide technical guidance and early warning analysis for well site operation. In order to minimize the cost of Frac operation, Jereh Group made special designs for the fracturing manifold, sand blender and sand conveying equipment. For example, the working performance of the sand blender is 15% - 20% higher than that of diesel drive equipment of the same specification; the sand conveying equipment has transformed the traditional mode of crane hoisting and bag breaking, making the supply of Frac sand safer and more efficient.

The introduction of Jereh Group electric Frac solution has greatly improved the capacity of domestic shale gas production in China. Last year, in the Frac operation of Sichuan Wei 202H40 platform, Jereh Group's electric frac solution broke the record for shale gas Frac efficiency in Sichuan and Chongqing area. In the end, 5 shale gas wells achieved a production leap of 5 million m3 /d. Since then, Jereh Group's complete set of electric frac equipment "family" have been delivered to major oil and gas fields across the country, providing new support for safe, green, efficient and intelligent exploitation of domestic oil and gas fields.

Cost reduction is a protracted war

Thanks to technology innovators like Jereh Group, China's shale industry has been steadily advancing despite all the difficulties. In 2019, China's production of tight gas and shale gas hit a record high, reaching 40 billion cubic meters and 15 billion cubic meters respectively, where shale gas production increased by 38.9%.

In addition to Sichuan Basin, many oil and gas producing areas in China, including Changqing Oilfield, Xinjiang Oilfield, Daqing Oilfield, Dagang Oilfield, etc., began shale oil and gas development. In 2020, Jereh Group 10,000hp electric Frac trailor and 5000hp electric Frac skid participated in key shale oil projects across China, helping to create the "China Speed" of maximum fracking 11 sections a day in Bohai Bay. The shale oil field of Dagang Oilfield is planned to achieve an annual output of 500,000 tons of shale oil by 2025, becoming another important battlefield for China's shale oil and gas revolution. Looking ahead, the oil and gas industry obviously needs more innovators and innovations just like Jereh Group and its electric frac solution. In the long run, the Game between large oil and gas producing countries, geopolitical disputes, and the uncertainty of the world economic outlook all may lead to another sharp rise or fall of oil prices. In 2019, China's oil and gas imports reached a new high, with oil dependence reaching 70.8% and natural gas dependence at 43%. The high volume of oil and gas imports highlight the domestic energy security issues.

Whether in the past, at present or in the future, challenges, risks and market fluctuations have never been far from the oil and gas industry. In recent years, the frequent rise and fall of oil prices have brought greater pressures to the domestic oil and gas industry: the development of the industry cannot be entirely dependent on oil price. The best long-term path is to move forward by responding to constant changes through continuous technological innovation.

Jereh Group’s electric Frac solution adheres to this ideology. Through continuous and in-depth investment in the technical field, it has unlocked the gate for domestic shale gas development to embark on the path of independence. Although it is difficult to predict the future of oil prices, it is clear that technological progress will lower production costs. Even if the research and development processes involved in bringing new industry-transforming technologies to the fore may seem slow at time, it will eventually take us further.

About Jereh Group

Jereh is a global group specializing in oil & gas, power and environmental management. By leveraging the resources and capabilities of equipment manufacturing, technology services, turn-key engineering as well as investment and operation, we offer integrated solutions in a flexible, efficient way to help customers resolve the issues and challenges that they face.

We operate in more than 70 countries and regions across the globe. More than 5,000 outstanding employees worldwide, upholding the core value of "focus on customer needs, value employee dedication, continuously improving to be the best", are working closely with our customers and partners to build a better world.

For more information:www.jereh.com