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US developers see hope in abandoned oil wells

The US sits on 3 per cent of the world's proved oil reserves and accounts for more than a fifth of global consumption, making nonsense of the "energy independence" stances of both presidential candidates. But it has spare oil a-begging.

While no large discoveries have been made outside Alaska and the deep waters of the Gulf of Mexico for decades, there is a rich resource to be tapped in the form of abandoned wells, which experts estimate could hold 377bn barrels - more than double the cumulative US production to date.

Professor Kishore Mohanty at the University of Houston estimates that as much of two-thirds of the oil contained in mainland US reservoirs has been left behind because it has proved too difficult or expensive to extract.

But technological advances and a sustained run of high oil prices has attracted smaller companies to develop assets dropped and sold by the majors in states such as Texas, Oklahoma and Kansas.

"What is left behind would be their crumbs, but our seven-course meal," says Jeff Johnson, chairman and chief executive of Cano Petroleum, a small Texas-based independent that develops mature fields. "We can survive at $25 a barrel."

Oil is held within porous rocks rather than in convenient pools. Traditional flushing with water leaves much of the oil behind, stuck to fractured rocks.

The technology to improve extraction rates has been around since the 1960s. Heavier oils can be dislodged through heating, while gases such as carbon dioxide can be used to flush out oil more effectively than water. And chemical polymers can help seal rock fissures and allow oil to be pumped.

Production from "enhanced oil recovery" peaked at about 750,000 barrels a day in the early 1990s, and has fallen back slightly, with gas "flooding" now viewed as more economical than thermal methods, while chemical treatments have proved to be too expensive.

Mr Mohanty suggests it could make sense to site power stations in such mature fields, with greenhouse gases such as CO2 pumped into the ground to extract oil rather than into the atmosphere.

Mr Johnson believes Cano can recover a further 10-20 per cent of the oil left by legacy developers at its current projects, producing an additional 8bn-10bn barrels. The economics are improved by seismic records showing where the oil is, and associated infrastructure such as the wells themselves.

Cano expanded with the $8m proceeds of an IPO last June, and there are signs of further interest from equity investors.

"We've seen probably half a dozen companies looking for financing for shut-in properties," says George Ball, chairman of Sanders Morris Harris, a Houston-based investment bank.

Developers like Cano need investors prepared to bet on oil prices staying high. But reopening old wells has also highlighted a skills shortage in the industry. US oil companies laid off some 100,000 staff in the late 1980s and early 1990s. A $50 barrel doesn't bring them all back.

"Some companies are having difficulty finding people to fill positions," says Mark Rubin, executive vice-president of the Society of Petroleum Engineers in Dallas.

Mr Rubin says the problem is exacerbated by the "Big Crew Change", with the average age of petroleum engineers in the US creeping up to 49, compared with 42 in the rest of the world. "There is a question mark as to whether enough engineers are coming out of college to take their place," he says.

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