Electricity in the Oil Patch: The Power Costs of Production, CO2-EOR, Electric Lines and Onsite Generators

Outside of the oil and gas industry and their utility providers, it is not well known that the production of oil and gas requires large amounts of electricity. After the natural lifting energy and pressure of an oil field is exhausted, which is nearly right away for unconventional horizontal wells, artificial lift (pumping) must be put in place to continue producing oil. Most of the pumps placed in oil wells are electrically driven, with the total electricity use directly related to the depth of the well and the volumes of fluid that must be moved.

Even after the fluid and gases are brought to the surface, additional electricity is required; this includes purifying, processing, separating and pipeline transport for natural gas and natural gas liquids (NGLs), and crude oil. In the case of oil fields injecting CO2 for enhanced oil recovery (CO2-EOR), the CO2 must first be compressed by electric driven compressors, and once produced in the field, must be recompressed for recycling.

Even before any of these operations, additional utility distribution lines are constructed, often at the cost of the oil operator. Constructing these lines alone can cost $50,000-$90,000 per mile, plus additional expenses for right-of-way and maintenance.

Even ignoring the grid connection costs, the rising electricity rates in some oil producing regions such as Wyoming and North Dakota constitute a significant operating burden for legacy oil fields with increasing water production, and declining oil cuts. The combination of increasing power costs and lower oil prices can result in many oil wells being shut-in which would otherwise continue operating.

[FIGURE 1]

In the case of greenfield development in the shale plays, the severity and duration of the most recent dip in oil prices have forced many upstream companies to cutback significantly on capital investments, triggering a like response from distributors of natural gas powered generators. With lower prices for natural generators, along with the ability to utilize flare gas streams for power production, many operators are turning to onsite generation in place of line power altogether.

 In modelling the economic cases related to these issues, we address to two main questions:  First, using Wyoming as a case study, how large are the electric lifting costs of conventional oil production, and what is the associated impact on an wellÕs economic life? Second, in the face of rising grid tariffs, and robust distributed power solutions for flared gas, is grid-based line power still the lowest cost source of electricity for new oil developments?

 With respect to the first question, the average estimated cost of electricity per barrel of produced oil in prominent Wyoming fields can range from $7-18/bbl-oil, with the most marginal wells far exceeding those thresholds and being shut-in. It is not uncommon for WyomingÕs largest oil fields to spend millions per year on electricity expenses. When wells are shut-in, this results in lost production to the operators, lost severance for the state, and lost revenues for the utility.

[FIGURE 2]

 Considering the second question, we evaluate the cost of building electrical lines, and paying grid tariffs in 93 counties of six prominent oil producing states with 40 different utilities, and compare those costs to prevailing lease rates for onsite natural gas generators. In many cases for greenfield developments which are distant from existing distribution and must build power lines, the cheapest power solution appears to be onsite power generation provided sufficient gas is available. Of the 1,7928 distinct scenarios considered, 65.9 percent of the outcomes showed a cost advantage for generators. After excluding the case of infill drilling with existing lines, a full 78.9 percent of the modeled scenarios favor natural gas generators over grid based power.

 [FIGURE 3 Ð Field Expansion Frequency]