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
"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
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."
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
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,
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
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
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
"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