The Future Looks to be Gas-Fired

Funding, Talent Big Concerns

Oh, oh, it's a dangerous world … Everybody duck and cover …

The message is so today, yet the patron saint of Margaritaville first crooned these ominous lyrics back in 1999. Since then the fear factor has increased exponentially.

The angst is palpable worldwide, including the commodities arena where nervous market-makers keep tacking higher premiums on crude oil as they watch the international drama play out and ponder the possibility of oil-supply disruptions.

No one is immune to the ramifications of such a situation should it occur.

"Oil disruption anywhere affects all — even if you're self-sufficient, because there are still problems," said Stephen Gallogly, director, Office of International Energy and Commodity Policy, U.S. State Department, during his presentation at the North American Resource Symposium: "The Future of Oil and Gas in North America," held during the recent annual GCAGS meeting in Austin.

"The hard facts of the energy situation are that two-thirds of the proven oil reserves are in the Middle East and two percent in the U.S.," Gallogly said, noting that these numbers likely would reverse if one ran them for SUVs.

The good news: The times they are a-changin', according to the message heard at the Austin gathering.

"In organizing the symposium, the goal was to represent a variety of perspectives," said Scott Tinker, director of the Bureau of Economic Geology and state geologist of Texas, who chaired the event. "This included the federal perspective from both a policy stance and a resource stance, as well as that of our neighbors Mexico and Canada, to show the reality of the oil and gas situation there."

He also drew from the spectrum of independent, consulting and major oil companies.

"It was interesting that people talked mainly about natural gas, even though they were not specifically asked to do so," Tinker noted, "and it really showed the reality of transitioning solely to a natural gas economy."

Image Caption

Figure 1
Electricity generation by fuel, 1970-2020 (billion kilowatt hours).
Data courtesy of Energy Information Administration

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Oh, oh, it's a dangerous world … Everybody duck and cover …

The message is so today, yet the patron saint of Margaritaville first crooned these ominous lyrics back in 1999. Since then the fear factor has increased exponentially.

The angst is palpable worldwide, including the commodities arena where nervous market-makers keep tacking higher premiums on crude oil as they watch the international drama play out and ponder the possibility of oil-supply disruptions.

No one is immune to the ramifications of such a situation should it occur.

"Oil disruption anywhere affects all — even if you're self-sufficient, because there are still problems," said Stephen Gallogly, director, Office of International Energy and Commodity Policy, U.S. State Department, during his presentation at the North American Resource Symposium: "The Future of Oil and Gas in North America," held during the recent annual GCAGS meeting in Austin.

"The hard facts of the energy situation are that two-thirds of the proven oil reserves are in the Middle East and two percent in the U.S.," Gallogly said, noting that these numbers likely would reverse if one ran them for SUVs.

The good news: The times they are a-changin', according to the message heard at the Austin gathering.

"In organizing the symposium, the goal was to represent a variety of perspectives," said Scott Tinker, director of the Bureau of Economic Geology and state geologist of Texas, who chaired the event. "This included the federal perspective from both a policy stance and a resource stance, as well as that of our neighbors Mexico and Canada, to show the reality of the oil and gas situation there."

He also drew from the spectrum of independent, consulting and major oil companies.

"It was interesting that people talked mainly about natural gas, even though they were not specifically asked to do so," Tinker noted, "and it really showed the reality of transitioning solely to a natural gas economy."

This will require access to a sizeable bunch of new molecules and the added/upgraded infrastructure to transport them.

Current domestic natural gas consumption is about 22 Tcf/year, according to Energy Information Administration numbers presented at the symposium by Donald Juckett, director of natural gas and oil, U.S. Dept. of Energy. Demand is expected to increase to the low 30 Tcf range in 2020 and to 35 Tcf on an annual basis in 2025. One-half of the projected demand growth is in the power sector alone. See FIGURE 2

Mexico and Canada are often touted in some corners as the solution to the escalating demand for gas, but this is more fiction than fact:

  • Mexico has the resource but will need a substantial cash infusion to bring sufficient supplies to market just to meet its own needs. Annual consumption is above 1 Tcf now, and the forecast is for more than 3 Tcf in a decade.
  • Recent EIA forecasts show Canadian imports to the United States must rise from the current level of 3+ Tcf a year to more than 5 Tcf in 20 years or so. Most folks tend to agree this is over the top, Tinker noted, with Canada anticipated to be a steady source in the 3-4 Tcf/year range.

"The message in Canada is 'steady as she goes,'" Tinker said, "and there's no gas to be coming in from Mexico because they need it all plus the money to develop it."

Unconventional Sources?

With so much attention being focused on unconventional gas supply sources lately, it might be tempting to become complacent and assume these will connect the dots in the demand picture given enough time, technology and money. The potential does exist for these sources to play a significant role.

Canada's sleeping giant is coalbed methane (CBM), according to symposium speaker George Eynon, GEOS Energy Consulting. "It's a resource waiting to be used," he said, "but there has been no commercial production yet."

In the United States, CBM production has increased exponentially in the last few years, most notably in the Powder River Basin, according to Chip Groat, director, U.S. Geological Survey, who discussed energy resource assessments and new supply opportunities in North America at the event.

Although the CBM focus has been on western coal basins, Groat noted there is also a significant effort under way in the Gulf Coast, which has a preliminary potential coalbed gas resource of 8 Tcf gas-in-place. The environmental impact of CBM development and production looms as a considerable challenge, among others.

Gas hydrates have come to the fore as the sexy unconventional gas resource du jour (see January EXPLORER). These cage-like lattices of ice, which encompass molecules of methane and other hydrocarbon gases, have become the focus of a number of ongoing research projects, and Groat noted estimates of global resources of natural gas hydrates range from 100,000 to almost 300 million Tcf. See FIGURE 1

He cautioned, however, that not enough is known about hydrates to know if they exist in sufficient concentrations to be economic, nor do operators know enough about the production technology.

LNG Enters the Picture

Another strong message from the symposium involves the use of liquefied natural gas (LNG) as a viable player in the domestic supply/demand picture.

"LNG imports more than doubled between 1998 and 2000," Juckett said, "and they are a growing part of U.S. imports. There are currently four existing terminals and 14 proposed, including the Bahamas, Canada and Mexico."

Ironically, the intensifying push to bring more gas to the marketplace has the majors set to follow the independents for a change instead of the now-commonplace practice of the smaller players piggybacking the big guys to get a toehold in a challenging area, e.g., the deepwater environs.

Look for the majors to scurry back to the onshore and the shallow offshore to make the big, deep (15,000-plus feet) gas plays being targeted in these areas. To do so, they must reassemble the large blocks of land that were broken up when the indies took over the action there, picking through the leftovers abandoned by their big brethren as non-essential.

There will be a need for some significant alliances to overcome the fundamental fragmentation in the leases, noted Chris Wright, senior vice-president at Unocal, during his talk at the Austin event.

Even though the transition to a natural gas economy gets a thumbs-up in most corners, it presents a number of challenges, Tinker noted.

"There are major differences in running a gas business instead of an oil business," he said. "There's a difference in how you move it, how you explore and produce it, where it is geographically, i.e., who sets the price.

"Another challenge is that technology is king," he added, "and we need talented people to come into the industry."

Where this talent will come from is the big unknown. Numbers presented during the symposium by William L. Fisher, Barrow chair and director, John A. and Katherine G. Jackson School of Geosciences at University of Texas, show a worsening situation in academia than many folks may realize. Besides the significant decrease in geoscience enrollment overall, there's a decrease in the percentage of enrolled students who are entering the oil and gas business.

"It's a two-headed snake," Tinker lamented. "We're getting double-dipped."

Finding the Funding

Another area of concern centers on who will fund the technology needed in the future.

"E&P technology is grossly underfunded at every level," said Tom Bates, managing director, Lime Rock Partners. "The only industry that spends less on R&D as a percent of revenue is the beer industry; their idea is if you brew it, someone will drink it.

"Each time the price drops out of the comfort zone, we cut R&D," Bates said. "The top 25 publicly traded oil companies in the U.S. over the last 10 years have gone from spending $800 million a year to $400 million annually, and when you factor mergers and inflation into the data set, they've actually cut spending by 75 percent."

The oil service companies took up the slack when the majors began abandoning their long-time role as R&D leaders. Lately, however, these companies increasingly want to play in the mature end of the product development spectrum, e.g., purchasing the rights to already-proven technologies.

Companies such as Shell, BP, Norsk-Hydro, among others, have formed venture capital companies for the purpose of seed-stage funding, and Bates said it's up to the private equity and venture capital companies to fund the growth cycle to transition from the seed stage to the mature.

Challenges are a way of life in this industry, and oil price volatility ranks way up there on the list. The slew of wild cards in the international arena tends to make oil price forecasting an exercise in futility. The word making the rounds at this particular moment is that some of the big hands in the industry anticipate a precipitous decline in oil prices as a result of a non-aggressive resolution to the Iraqi situation.

A note of caution: Don't expect the anticipated switch to a natural gas economy in North America to bring down the curtain on price fluctuations. There will still be cycles — just of a different nature.

"Gas has its own cyclicity, but it's mainly in deliverability," Tinker said. "The source may be there, but once you find it you have to get it to where it needs to go. The big instability in prices to date is that we're limited to surface transport, i.e., pipelines, but I think if it's crossing the ocean in ships, this has to be a stabilizing factor.

"We'll have access to a distribution of networks to tap into a resource globally and one that is not controlled by a cartel," Tinker said, "and we'll be able to forecast much better."

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