Searching for new sources: Despite energy transition, world may face oil shortage

FORT WORTH, Texas—As much of the talk in the oil and gas market in recent years has centered on the energy transition away from petrochemicals, the sector actually will be in unfamiliar territory in the coming years: having to look for new sources of oil.

That's because there's a certain amount of oil that is no longer available to be produced each year, according to Neil Mendes, CEO of Fort Worth-based Alpine Polytech L.P., a materials and equipment testing firm that services the oil and gas sector.

"We lose about 6 million barrels a day due to attrition. Just the depletion of wells," he told Rubber News. "So we need about 6 million barrels a day that have to be drilled, completed and produced, through that whole cycle, just to keep even."

Over the past three decades, that really hadn't been a problem. Mendes said that in the past there used to be 10 times the amount of oil that was discovered in a given year than was actually needed. "So there's a surplus of known oil wells that have been charted, they'd been tested out. People were very confident in the ability to produce oil over a certain given period of time," he said.

But over the past five years that ratio has been less than 1:1. That means there isn't enough new oil sources being discovered to replace that 6 million barrels a day that will go off the market, which Mendes said accounts for about 6 percent of the roughly 100 million barrels of oil that is typically produced on an average day around the globe.

"There isn't that much known oil," he said. "People know there is oil out there. It can be found. But there are steps that go into finding it. What kind of oil is it? How easy is it to be produced? How the wells will be built?

"All this planning in order to bring that oil online takes time in the global market."

While offshore oil takes a long time to develop the wells to the point where they produce oil, it's a much quicker process in shale. Mendes said a shale well could be brought online in as little as six months in a pinch, but 18 months is a pretty easy turnaround. That's one of the reasons that shale has been so popular over the past 15 years or so.

The problem was the shale wells really don't make that much money. He said the wells generally break even when oil is at $58 a barrel. So with current prices for the benchmark grades—Brent and WTI—in the $78-$83 range, that's profitable.

"But if it drops down, it very quickly goes upside down," Mendes said. "Those shale players in it just to make shale really didn't return very much money to the investors, if at all. So over periods of time people stopped wanting to invest in it.

"And on top of it, political winds being what they are, shale plays are not popular in the U.S. political scheme with this administration."

These smaller producers, he said, didn't always go about things in a businesslike manner. They drill and complete wells, and produce oil. If it cost them $40 a barrel to produce oil, so be it. If it cost them $60, then $60 it was.

"And then they just hoped for a higher price than that so they make money. But over a long period of time, in the oil and gas business—or really any business—that's a recipe for disaster," Mendes said.

With investors being scared away from the smaller shale producers, the Alpine Polytech CEO said the giants of the oil industry started stepping in. That means firms like ExxonMobil, Chevron and Occidental Petroleum are buying firms in the next tier down from them and taking over the shale plays.

"And they are going to drill less but produce more," he said, "because they use technology, they use engineering, they use math, and they figure things out and optimize things."

What Mendes expects to see over the next three years is U.S. oil production staying pretty solid, even though the number of rigs in operation in the U.S. and North America will be roughly half of what they were pre-COVID. At that point, the rig count was close to 1,000, and now it's just a bit over 600, dropping 100 or so just over the last year.

"At some point, you can do things better, but it is a reservoir and that oil starts to deplete, and they'll have to drill some more," he said. "But we probably won't see 1,000 rigs for some time, or ever, in the U.S. We'll see more in the 500-600 range for the foreseeable future, because they're very disciplined."

Mendes forecasts the international oil market will continue to be fairly robust for now, and that the downturn in oil production and usage because of the energy transition won't be substantial until well into the 2030s.

"You can see a lot of people pulling back even today that don't necessarily want to, but (electric vehicle) sales in the U.S. have really flatlined," he said. "They're not anywhere near what people projected them to be."

The Alpine Polytech exec does expect sales of EVs and even hydrogen cars to rise, but it probably will be 2035 before there is a large decline in oil production. "Between now and 2030, oil probably will continue to grow—maybe not tremendously—but it will still continue to grow," he said.

Mendes tells his friends if they want an EV, get it because you like the car.

"They're good cars. If it works for you, get it. If you can charge it in your house, and have solar panels, then it's a good car," he said. "They're really fun to drive. They're incredibly fast. There's a lot of benefits to the car.

"But if you're trying to save the environment, it's really marginal, unless you're charging it at your house with solar panels. If you're using natural gas or coal, it's certainly not."

The other thing is that the break-even number on emissions with EVs can be difficult to determine because there's a bigger carbon footprint to build an EV. Thus, the impact of EVs today on global oil production is minimal.

"Only about 400,000 barrels of oil are off the market today because of EV use, out of the 101 million barrels a day," Mendes said. "So it's only four-tenths of 1 percent.

"That's a nice-sized oil well in the Gulf of Mexico. One. Just one well. That's what it saves per year. ... Until you get to a couple million barrels of oil a day, it's inconsequential in the oil markets."

Mendes expects 2024 to look a lot like last year, which is steady as it goes, something the oil market isn't used to. Unless there's heightened political unrest, he sees pump prices coming down. There currently is a premium of $5 to $10 a barrel because of the situation in the Middle East, so there is room for gas prices to dip a bit. Natural gas, though, is likely as low as it's going to get.

"From supply and demand, oil really should be in the $70s. It shouldn't be in the $80s," he said. "So there's already a premium baked in."

From a rubber polymers standpoint, those companies servicing the offshore businesses and using premium materials like HNBR, FKM and above should see their businesses remain steady to upward. He said the major oil firms are exploring and doing projects that require higher temperature, higher grade materials.

"As a laboratory, we really get to see the precursor to what's going on, because people are testing things that they are going to use. It's a pretty good indicator," Mendes said. "You can just see the types of materials that people are using. And the higher temperature materials, 250 degrees F and above, are becoming very much in vogue."

There may still be some wrinkles from PFAS, but he thinks that might not come until a few years down the road, if ever. He sits on three different PFAS committees, so he is able to gauge pending legislation from a variety of sources.

"It seems like the calmer heads are prevailing. A lot of people try to rush this legislation through, then once they found what the impact of that was, started to hit the brakes, realizing this is catastrophic," he said. "There is no energy transition without fluoroelastomers. There is no chip making without fluoroelastomers, zero.

"People don't realize that FKMs, and FFKMs, and PTFEs are in all of those systems. If you eliminate those, there would be no chip making. And without chip making, the global economies, everything starts to stop."

Mendes realizes that in the production of fluoroelastomers and fluoropolymers, some of the materials such as surfactants used in production need to be contained, but that's doable.

"You just have to make sure you have good actors," Mendes said. "I think that's what happened, we had some folks that weren't being good actors, and a lot of this got released into rivers. But our industry in and of itself should be of low concern."