New year clouded by uncertainty but filled with technical promise

Jan. 6, 2003
The oil and gas industry enters 2003 uncertain about geopolitical events, doubtful about markets, yet equipped with technology advancing rapidly on many fronts.

The oil and gas industry enters 2003 uncertain about geopolitical events, doubtful about markets, yet equipped with technology advancing rapidly on many fronts.

A picture of this lumpy basis for a new year emerges from the individual assessments of 15 professionals dedicated to observing and communicating industry activity: the editors of Oil & Gas Journal.

From chances for war in Iraq to development of expandable tubular technology, from prospects for a gas-to-liquids (GTL) trade to clean-fuels technologies, subjects central to industry operations regularly pass through the minds and word processors of OGJ editors.

For this special report, staff members responded to questions from the editor about trends in their areas of focus. Their answers—arranged here with general subjects first, technical ones later—provide a comprehensive if complex framework for thinking about the year to come.

A nervous business

A succinct assessment of the oil and gas business at the beginning of 2003 comes from Robert G. Lawson, senior editor-technology.

"Everyone is nervous about the unknown."
Bob Lawson
Senior Editor-Technology
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"Everyone is nervous about the unknown," he says. Industry workers are "apprehensive about what's just out of sight around the corner. They're afraid of being blind-sided by unknown and unseen forces beyond their control."

While uncertainty has always been a factor in business, Lawson notes, it's more intense now. And it's not just about terrorism. "It goes for crude prices, gas prices, insurance costs, litigation threats, and environmental extremism."

Uncertainty extends to prospective members of the industry work- force, Lawson says, noting the low population of American college students in US petroleum engineering schools. "Students don't want to get involved in an insecure career."

Around Tulsa, where Lawson works, there were "a lot of sighs of relief as Republicans regained control of the Senate" last November and a strong sense of need for a national energy policy.

Lawson acknowledges that the industry and the country have faced energy challenges before, often through cooperation between the industry and government.

"The difference now, I hear people in industry say, is that we could be in very serious trouble if we continue to lock up the Arctic National Wildlife Refuge and many offshore areas," he says.

"And too many politicians continue to use the petroleum industry as the fall guy for all the country's woes. 'If the oil industry wants it, it must be the wrong thing to do.' This could come back to haunt us quickly."

Security, governance

Members of OGJ's Houston-based news team expect increasing emphasis on security and corporate governance.

"More companies are establishing or enhancing their security departments."
Judy Clark, Associate Editor
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And that's not energy-supply security, which has always been a concern, but security of personnel, facilities, and intelligence, which gained priority after the terrorist attacks in the US on Sept. 11, 2001.

"More companies," says Associate Editor Judy R. Clark, "are establishing or enhancing their security departments; devoting more of their budgets to additional security precautions; educating personnel to new threats; expanding health, safety, and environment beyond the traditional scope of those responsibilities; sharing knowledge and techniques with others in the industry; and consulting antiterrorist experts to develop action plans."

Clark expects governments to address industry security through such measures as dedicated tanker lanes and establishment of more government entities responsible for preventing terrorist attacks.

Security partly explains another trend Clark has noticed: making information technology the explicit responsibility of oil and gas company officers and board members. Among reasons for the trend are the advancement and protection of company technology and intelligence.

"The oil and gas industry has only seen the start of something that will transform it completely."
Steven Poruban, senior staff writer
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Steven Poruban, senior staff writer, expects strong attention in 2003 to the issues of corporate governance, company financial transparency, and stockholder trust.

"With the number of government investigations currently under way," he says, "I definitely think that the oil and gas industry has only seen the start of something that will transform it completely.

"In the near future, when OGJ is writing a story about a certain company and has to contact its headquarters with a question, I sense that more and more it will be the CEO who comes to the phone."

The big stories

Among stories Poruban expects to be following closely this year are floating production, storage, and offloading (FPSO) facilities in the Gulf of Mexico and energy trading in the aftermath of Enron Corp.'s scandal-ridden bankruptcy.

"It will be interesting to see which companies are first to take the plunge to develop a viable FPSO scheme in the gulf" now that floating systems have received general US government approval, Poruban says.

And he expects controversy over energy trading to continue shaking oil and gas companies.

"The US public is never going to approach investing in energy firms the same again," he says. "What will this mean for oil and gas companies?"

"Declining production of natural gas will create supply problems, which will boost natural gas prices and drilling activity for years."
Paula Dittrick, senior staff writer
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Paula Dittrick, senior staff writer, expects to write about a US drilling increase in 2003. Declining production of natural gas will create supply problems, which "will boost natural gas prices and drilling activity for years," she says. "I expect that to start in 2003."

To Dittrick, the most important oil and gas news story at present is "the unresolved question of whether Iraq will comply with United Nations inspectors and whether there will be military action there."

She also notes a troubling uncertainty: last year's "disconnect" between relatively high oil and gas prices and "oil companies' willingness to increase capital budgets."

Continuing influence

Sam Fletcher, senior writer, expects three stories important at the end of 2002 to retain their influence in 2003.

The general strike in Venezuela, whatever its outcome, heralds a "prolonged period of turmoil" between supporters and opponents of President Hugo Chávez, the strike's target, Fletcher says. Petroleos de Venezuela SA's consequently crimped oil production, refining activity, and export levels "will have a major effect on the US going into the winter peak market for heating oil and on PDVSA's operations in the future."

"OPEC is playing to the perceptions of futures market traders rather than the realities of supply and demand."
Sam Fletcher, senior writer
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Another late-2002 story with ramifications for this year, Fletcher says, is the December agreement by the Organization of Petroleum Exporting Countries to raise the production quota and reduce overproduction.

"Looks to me like OPEC is playing to the perceptions of futures market traders rather than the realities of supply and demand," he says. In 2002, much OPEC quota cheating amounted to production aimed at making up supply missing from Iraq, which frequently limited output for political reasons.

"If world demand for oil increases in 2003 as expected, if non-OPEC production declines as sharply as many are projecting, and if war or just Saddam Hussein's surly nature knocks out Iraq's production for an extended period, then the markets may be scrambling for more oil by spring instead of doing the normal seasonal reduction," Fletcher says.

Like many of his colleagues, he worries about US gas supply in 2003, noting that cold weather has reduced gas inventories, gas drilling has been stagnant, and early indications are that producers won't greatly increase spending this year.

With production from the US and Canada falling while North American gas demand is rising, Fletcher says, "The market is going to feel a sharp pinch from supply and demand fundamentals."

Focus on GDP

Gas-supply questions appear high on Economics Editor Marilyn Radler's list of important questions about energy markets for 2003. Others are whether there will be war in Iraq, OPEC's responses to shifts in supply and demand, incentives to drill, and economic growth.

"GDP is the thing."
Marilyn Radler, economics editor
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"GDP (gross domestic product) is the thing," Radler says. "Consumer confidence and spending, travel, transport of goods, and a decline in unemployment will put momentum back into the economy and take pressure off storage levels."

In addition to GDP, she says, important numbers to watch in 2003 are non-OPEC production growth and inventories.

How are petroleum economists dealing with the difficulty of forecasting oil and gas prices?

"Procrastinating," Radler answers, "or closely watching drilling, production, and storage numbers, weather forecasts, and the futures strip."

"Mergers with both majors and middle-size independents will make our OGJ200 continue to decrease in size."
Laura Bell, statistics editor
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For Statistics Editor Laura Bell, further industry consolidation ranks high as a concern for 2003.

Bell compiles the annual OGJ200 ranking of oil and gas producers in the US and OGJ100 list of producers outside the US.

"Mergers with both majors and middle-size independents will make our OGJ200 continue to decrease in size," she says.

Bell also worries about growing reluctance or inability of companies to make available the statistics she collects for OGJ.

"It seems that companies don't want to give out additional information unless it's required by law," she says.

"In 2003, many international state-owned oil companies will be increasingly forthcoming about their operations and allow details of those operations to be documented in the media."
Jeannie M. Stell,survey editor
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Survey Editor Jeannie M. Stell hopes new emphasis on transparency will improve responsiveness of companies to her inquiries.

"In 2003," she says, "many international state-owned oil companies will be increasingly forthcoming about their operations and allow details of those operations to be documented in the media."

Among key trends Stell sees in OGJ's two annual Worldwide Construction Updates is an emphasis on refining processes related to new fuel specifications, particularly hydrodesulfurization, hydrotreating, and hydrogen production.

Iraqi question

Executive Editor Bob Williams, who manages news coverage on OGJ Online and in OGJ's nontechnical pages and writes the weekly Market Hotline feature, calls the Iraqi question the biggest story for 2003.

"Corporate social responsibility goes beyond environmental good behavior and sponsoring hometown Little League teams."
Bob Williams,executive editor
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For the oil market, war in Iraq could be "a huge story briefly before settling back into cleanup-aftermath mode" lasting for months. Or it could be "something that transforms not only oil markets but the shape of the world for generations to come."

The transforming story could be negative, such as through expansion of the conflict to other Persian Gulf countries. Or it could be more subtle and positive, with the regime change in Iraq happening swiftly, followed by massive reconstruction.

"That in turn sows the seeds of a modern democracy in a major Persian Gulf nation, which consequently spurs other nations in the region to step up change as well if for no other reason than to quell restive locals," Williams says.

A possible story in 2003, he adds, is "one none of us likes to think about, but it seems inevitable: massive terrorist attacks on oil industry facilities." He worries most about the possibility of such an attack in Saudi Arabia.

Market share battle

Williams expects the battle for crude oil market share between Russia and OPEC to dominate market news this year.

"The last time we saw such a standoff," he says, "it was Saudi Arabia vs. Venezuela, and Mexico stepped in to mediate—a success that can be seen as the birth of OPEC's successful management of the market the past several years.

"Despite the new-found strength of Russia's oil giants, there is no overcoming the Saudis' advantage of holding a vast majority of the world's available surplus oil capacity and the world's lowest lifting costs.

"The question then becomes: Who will mediate between Moscow and Riyadh? Mexico again? Iran?"

Like other OGJ editors, Williams sees gas supply in the US as a crucial question for 2003.

US and Canadian producers are trimming capital budgets. The US lacks the infrastructure needed to raise imports of LNG quickly by amounts likely to be needed. And industrial demand for gas will rise if the economy resumes steady growth.

"I'm stepping out on a limb here," Williams says, "but 2002 may be the last year we see US natural gas prices fall below $3/MMbtu—even briefly."

Like Poruban, Williams thinks Enron's implosion will profoundly affect the oil and gas industry. He cites changes already made in company disclosures and accountability and implementation of new checks and balances in corporate governance.

"But this change will go even further. The giant collapse in stocks has not only shaken investors' confidence in markets but also forced a reassessment of what kinds of stocks to invest in." Oil companies must respond, Williams believes.

"The focus from now on will be on creating value for the long termUThe industry mantra will be: We are all blue chips now."

Toughened project scrutiny will result in fewer wells drilled, Williams says. Enhanced and improved oil recovery, as well as novel approaches to enhancing revenue, such as carbon credits from sequestration, will gain allure.

Among other key trends cited by Williams are:

A "leftward lurch" by governments in South America. Disappointing exploratory results already had stalled interest in the region, says Williams, who also is editor of OGJ's Spanish-language affiliate OGJ Latinoamerica. New leaders will have to convince foreign investors that they're not mavericks like Venezuelan President Chávez.

Growing emphasis on corporate social responsibility (CSR). "CSR goes beyond environmental good behavior and sponsoring hometown Little League teams," Williams says. "Especially in the developing world, CSR will mean companies taking on more quasigovernment roles in supporting the local economy and population and becoming more involved in local politics—much to their distaste, perhaps, but unavoidable."

Persistence of the climate change issue. Even with the Kyoto Treaty on Climate Change awaiting ratification, governments and companies worldwide have programs to reduce emissions of greenhouse gases. A "watershed," Williams says, is ExxonMobil Corp.'s $100 million donation to Stanford University to study climate-friendly energy and emission-control technologies. The gift, he says, "at least signals that the world's biggest oil company is willing to consider there might be niche opportunities in this global warming thing."

The view from Washington

Concern about security will remain a political priority this year, says Washington Editor Maureen Lorenzetti.

"Without endorsing some type of green measure, the White House risks looking too extreme and—horrors!—probusiness."
Maureen Lorenzetti,Washington editor
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An immediate issue for the oil and gas industry is implementation of the new Department of Homeland Security.

"Industry successfully avoided having parts of the Environmental Protection Agency oversee chemical plant security," Lorenzetti notes. "American Petroleum Institute and other trade groups are keeping a careful watch to make sure things are done on a voluntary and not prescriptive basis."

She says industry representatives expect Congress to support cabinet status for EPA. The White House might also support the change, hoping to deflect criticism from environmental groups for its support of oil and gas leasing of federal land and adjustment of clean-air rules.

"Without endorsing some type of green measure, the White House risks looking too extreme and—horrors!—probusiness," Lorenzetti says. "That could hurt reelection chances."

She characterizes environmentalism as a "wedge issue," however—influential most when, unlike the start of 2003, voters aren't worried about security and the economy.

Environmental groups "found this out the hard way in the last election," she says. "People were too worried about their safety and getting a paycheck to care about the caribou in Alaska."

Views are mixed on pros- pects for resurrection of comprehensive energy legislation, which the last session of Congress developed but never passed. API says the bill might be reintroduced early in the new session. Lorenzetti says industry lobbyists are less certain.

API wants Congress to deal with energy comprehensively rather than issue by issue. Critical to its members is the clean-fuel group of issues, including the status of the oxygenate methyl tertiary butyl ether.

Lorenzetti says API remains committed to the deal it made last year under which it supported a volumetric mandate for sales of fuel ethanol in exchange for freedom from a requirement for oxygen in reformulated gasoline.

Other issues

For the upstream part of the business, other issues on the regulatory and legislative agenda this year are royalty reform, access to federal land, and groundwater protection.

Downstream issues include ultralow-sulfur diesel, changes to reformulated gasoline (including treatment of MTBE), retooling of clean-air enforcement, the Superfund mechanism for cleaning hazardously polluted industrial sites, and the new-source review program.

Geopolitical issues Lorenzetti is watching are sanctions policy, how Iraqi nation-building would affect future oil deals, political stability in Saudi Arabia, investment by US companies in Saudi gas projects, and encouragement of voluntary carbon emissions reporting "to keep the climate change issue in check."

OGJ's Washington editor thinks White House spending caps will limit tax incentives for domestic drilling.

And she sees little change on industry lobbying efforts from the campaign-finance reform law passed last year, which limited "soft-money" donations—those to political parties rather than individual candidates.

"There are already several ways around the new ban," Lorenzetti says.

Outside Washington, DC, state and local budget shortfalls might hurt industry interests this year. Fiscal problems, for example, will lower prospects for state-tax incentives for drilling, Lorenzetti says. And weakened environmental enforcement by state governments strapped for cash will raise pressure on the federal government to rule with a heavier hand.

Exploration trends

In the worldwide search for oil and natural gas, two crucial developments are the opening of territory formerly closed to exploration and a proliferation of ideas about where to look, says G. Alan Petzet, chief editor-exploration and economics.

"[Some plays] grew from modest initial discoveries to present importance during 10-20 years of technological evolution and drilling."
G. Alan Petzet,chief editor-exploration and economics
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Expansion of the industry's access to acreage was important throughout the 1990s and continues in 2003, helped by the resolution of border disputes. An important example: the Nigeria-Sâo Tome Joint Development Zone in the Gulf of Guinea.

Exploration success depends on more than access to acreage, however. Petzet points out that it also depends on "the ability of oil companies and governments to agree on mutual benefits and appropriate tax and fiscal regimes" and on political stability.

Contradicting the worldwide trend, the US has increased the amount of unevaluated acreage off-limits to exploration.

Access issues such as a ban on leasing of much of the eastern Gulf of Mexico and refusal to lease even a small part of ANWR do nothing for US exploratory allure.

Except for the deepwater Gulf of Mexico, results of new-field exploration in the US have been "lackluster" for several years, Petzet says. At present, exploratory drilling is near its historic low.

Worldwide, however, explorationists are showing their ingenuity.

Petzet quotes Houston geologist Michel T. Halbouty, who wrote in AAPG Memoir 74 published in 2002, "It is my opinion that there have been more conceptual ideas in geoscience in the last 10 years than were promulgated in the preceding 50 years. The next few years will contribute even more breakthroughs to solving today's so-called impossible problems."

Halbouty wrote that explorationists pay too little attention to subtle traps.

"We must turn more of our studies toward those not-so-obvious reservoirs of petroleum—those in stratigraphic traps, those lying below unconformities, those which are associated with buried geomorphological features, and those which may or may not be associated with structure."

Important plays

Among the most important exploratory plays in North America, Petzet says, are the deepwater and ultradeepwater regions of the Gulf of Mexico.

He adds to the list the Gulf Coast onshore Jurassic and South Texas gas plays.

Coalbed methane drilling—"to the extent this can be considered exploration"—is very important to the US, Petzet says. The action has spread to more than a dozen basins in at least a dozen states.

Other important activity has varying exploratory dimensions.

A number of plays that have raised oil and gas reserves and production in the US Rocky Mountains don't involve high-profile discoveries. Instead, Petzet says, they "grew from modest initial discoveries to present importance during 10-20 years of technological evolution and drilling."

Coalbed methane belongs in this category, he says, along with low-permeability gas sands and shales.

Important plays outside North America, according to Petzet, include the Gulf of Guinea and surrounding waters off central West Africa, the Atlantic off Angola, the east coast of central South America, Egypt, Libya, Kazakhstan and the northern Caspian Sea, the Atlantic margin off Northwest Europe, scattered areas of the Philippines-Indonesia-New Guinea archipelago, and Russia's little-explored basins and shelves.

Asked about plays that haven't yet drawn attention but might do so later, Petzet points to one outside and one inside the US.

India, he notes, has 26 basins, only seven of which produce oil or gas. Large discoveries in 2001-02 might increase international attention to the producing basins and create interest in the nonproducers.

In the US, the Trenton-Black River play and deeper horizons of the Appalachian basin "could be much larger than indicated the past 7 years," Petzet says.

Discoveries in western West Virginia and New York uncovered large potential, but there were many dry holes. The discoveries produced from less than 10,000 ft. Deeper potential is largely untested.

Technology advances

Whatever other uncertainties greet the oil and gas industry in 2003, the importance of technical advance remains a sure thing.

OGJ's technical staff expects progress in every industry area.

The motivation is clear. Technology evolves from problems. Of those, there will be no shortage this year.

Drilling step change

The drilling business always looks for ways to lower costs. In this area, Drilling Editor Mike Sumrow sees more than routine progress.

"Recent key technologies have enabled a step change to smaller and more-efficient well designs."
Mike Sumrow, drilling editor
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"Recent key technologies," he says, "have enabled a step change to smaller and more-efficient well designs."

Sumrow cites rapid advances in expandable tubular technology. "Many of the engineers who have worked on expandable tubular projects say the technology is further developed than the industry as a whole realizes," he says.

Companies often have used expandable liners to solve unexpected drilling problems. Until recently, however, they've been reluctant to make the concept part of normal well design.

Sumrow notes that last summer Shell Exploration & Production Co. used a technology called MonoDiameter to drill a well with a series of 95/8-in. liners run through each other. To complete the well, the company ran a conventional casing string through the nested liners.

The inner casing string served as the production casing. Engineers working with the technology think that by 2005 expandable casings will be considered production quality or the last string required in a well.

Shell plans the first offshore Mono- Diameter well this year in the Gulf of Mexico.

Offshore or onshore, Sumrow says, expandable technology promises to cut material usage, costs, and environmental effects of drilling.

Another area of rapid progress is the use of surface blowout preventers (BOPs) on floating drilling equipment in deep water. First used off Indonesia, surface BOPs reduce wellbore size, allowing the use of smaller and cheaper rigs.

Extending the capability to drilling environments harsher than offshore Indonesia will require advances in well design, risers, seafloor disconnects, and rig equipment, Sumrow says. The industry will work on these problems as well as address regulatory concerns in 2003.

"Expandable tubular technology combined with surface BOPs for floating drilling operations in deep water will yield very meaningful gains to lower well costs," Sumrow says.

He notes that emphasis may be shifting away from dual-gradient drilling, which separates circulating fluids used offshore at the seabottom.

"Expandable tubulars, drilling fluid advances, and the way operators conduct drilling operations have appeared to remove or lessen the need for dual-gradient drilling," Sumrow says.

Production improvements

Production technology, notes Production Editor Guntis Moritis, tends to develop not generically but in response to specific problems with particular accumulations of oil and natural gas.

"The possible need to sequester carbon dioxide may lead to more enhanced oil recovery projects that include carbon dioxide injection for oil recovery."
Guntis Moritis, production editor
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Nearly always, the goals of technology development are to improve and accelerate recovery, to cut production costs, and to maintain safe and environmentally responsible operations.

Years of technical development are producing major results in the recovery of heavy oil and bitumen, Moritis notes.

"Large-scale, steam-assisted gravity drainage (SAGD) projects are finally under way in Canada after numerous pilots during the last decade showed the value of this technology," he says. Operators thus are beginning to produce the billions of barrels of bitumen in Alberta's Athabasca tar sands too deep to be mined.

The Canadian Association of Petroleum Producers added tar sands to its estimate of reserves this year (OGJ, Dec. 23, 2002, p. 113).

SAGD involves the drilling of a horizontal lateral for steam injection above a separate lateral that produces heated bitumen and condensed steam.

Improvements being tested involve adding gas to the steam and replacing steam with a miscible hydrocarbon.

Also in Canada, operators are beginning to upgrade heavy oil on site. At one SAGD project, the upgrader will furnish energy required to generate steam, taking uncertainties about gas prices out of project economics.

In Venezuela, horizontal and multilateral wells have made cold heavy-oil production economical in the Orinoco heavy oil belt. Projects there take advantage of such technologies as multiphase pumps and meters, which eliminate the need for separation near the well site.

Heavy-oil projects benefit from advances in geological and reservoir engineering models, which help target drain holes and determine heat requirements.

"For instance," Moritis says, "updates of reservoir models in some California steamfloods are providing some operators with enough knowledge to significantly decrease steam injection while still maintaining oil production rates."

Deepwater production

Like heavy oil, deepwater resources are spawning production technology.

"As the trend for lighter tension-leg platforms and spar designs continues, operators will be able to produce from very deep water with dry trees that facilitate downhole well remediation," Moritis says.

Advances in flow assurance enable operators to develop deepwater fields with ever-longer flowlines, he adds. The advances, many still under development, include new chemicals and electrified lines for preventing hydrates, asphaltene, scale, and paraffin deposition.

Several systems have emerged for controlling sand in deepwater reservoirs. They're especially important for the long horizontal holes frequently employed in deep water.

And advances in downhole monitoring and control are helping operators working in deep water and elsewhere to improve scheduling of well remediation. Moritis expects this trend to continue as costs fall and reliability improves.

Other important technologies cited by Moritis apply to:

Marginal wells. Probably exceeding 1 million in number worldwide, marginal wells offer potential for increasing production through application of technologies such as efficient pumping systems, well stimulation and repair, and enhanced oil recovery. Technologies based on the worldwide web are emerging as a low-cost way to monitor marginal wells remotely.

"The possible need to sequester carbon dioxide [as a climate change precaution] may lead to more enhanced oil recovery projects that include carbon dioxide injection for oil recovery," Moritis says. Economics of such projects would be based partly on sequestration credits.

Tight gas. The gas resource in tight reservoirs is large. Economics of developing it will improve through application of new stimulation designs and technologies established for other applications, such as multilateral wells.

Stranded gas. Another large resource with great development is gas now too far from market to be developed. Rapidly advancing GTL technology raises hope for the economics.

Some production technologies have been slow to develop, of course. And some aren't applicable everywhere.

Moritis points out that SAGD works well in the Athabasca tar sand but that operators producing heavy oil in other formations with slightly less viscous oil have come to favor cyclic steaming with vertical, horizontal, or multilateral wells.

Similarly, automation schemes, such as pump-off controllers on pumping units, have proven effective in large operations but too expensive to maintain for some smaller ones.

Moritis expects design changes to result from two mishaps off Brazil: the sinking of a semisubmersible production vessel and the severe listing of a floating production and storage vessel.

Refining trends

Clean-fuels regulations will be the strongest influence on refining technology this year, as they have been in recent years, says David N. Nakamura, refining/petrochemical editor.

"It would help refiners if new, less capital-intensive [desulfurization] processes are developed this year."
David Nakamura, refining/petrochemical editor
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The most important area for development, with refiners in the US and Europe having to meet toughening standards for sulfur content, is diesel desulfurization.

Current desulfurization methods are expensive. Methods effective with gasoline don't work as well with diesel, which has sulfur species more difficult to treat.

"It would help refiners if new, less capital-intensive processes are developed this year," Nakamura says.

Because requirements for ultralow-sulfur diesel take effect in the US in mid-2006, timing is important. "Refiners should start deciding on capital expenditures for these units in 2003," Nakamura says.

Catalyst manufacturers are researching fluid catalytic cracking catalysts able efficiently to remove sulfur. Much of the sulfur in diesel streams passes through FCCs.

Nakamura says US refiners are watching their European counterparts, which produce more diesel and some of which already make 10 ppm sulfur diesel.

Refiners also are looking for ways to increase reliability. Nakamura says they'll improve plant software, field instruments, and control systems and use digital plant architectures to raise plant uptimes and profits.

Another trend in 2003 will be conversion of MTBE units if the mandate for oxygen in reformulated gasoline disappears. Some California refiners already blend ethanol.

"It looks like there will be a lot of idle MTBE capacity," Nakamura says. Refiners will seek an inexpensive technology to convert MTBE units to oligomerization or dimerization capacity.

Low refining margins through most of 2002 made refiners reluctant to invest in plant improvements and capacity additions. Production of reformulated gasoline is behind schedule, which raises the prospect of price spikes this year, Nakamura says, noting that Premcor's shutdown of a 70,000 b/d refinery in Hartford, Ill., tightened the Midwest market.

Nakamura expects the petrochemical business to remain distressed, citing ethylene capacity additions due this year, especially in the Middle East.

"This should create some downward price pressures on a global basis," he says.

And supply of propylene is growing strongly, largely from refinery FCC units.

Gas processing

The business of gas processing, most of which is done in North America, depends precariously on the price of oil.

Warren R. True, chief technology editor-pipelines/gas processing, says economics have been good recently because oil prices and the prices of LPG have been high.

"How can the industry that is responsible for serving up the most critical component in continued development throughout the world continue to function when faced with such business uncertainties?"
Warren True, chief technology editor-pipelines/gas processing
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But natural gas prices have been high, too.

"Should oil prices drop and natural gas prices remain high," True says, "processors will face an all-too-familiar squeeze on their margins and likely witness a period, however long, of tight times and uncertain futures."

Producers sometimes suffer under those conditions as processors quit buying natural gas. This happened late in 2001.

Pipeline integrity

For pipelines, says True, "the single most important trend" in North America and the rest of the developed world is integrity management.

The subject covers a range of practices from increasingly aggressive and frequent inspections and monitoring to improvement of inspection and repair methods.

Recent accidents have toughened regulation in the US and helped push Congress to pass safety legislation last year.

"What has happened in the US will spread elsewhere that there are developed and intricate systems: Europe, for example," True says.

Also important to pipelines is the growing need to move isolated oil and gas to markets. Competition is intense, for example, between sponsors of different pipeline projects to move gas from Alaska's North Slope to the Lower 48. Similarly, the transportation system for oil and gas from the Caspian Sea remains far from a settled issue, although pipeline capacity is increasing and new projects have begun.

But pipelines face competition from other forms of transportation able to move hydrocarbons—especially natural gas—from remote locations. LNG transport, for example, is increasingly efficient.

"Supplying North America with LNG from regasification terminals offshore US or in Mexico could provide stiff competition for North Slope gas moving into Canada and augmenting supplies of gas from the Western Canadian Sedimentary basin," True says. "Here, as always, price is the key."

Water transport of compressed natural gas is under development. And GTL commerce seems imminent.

"Within the next 2 years," True says, "the keel of the first CNG tanker is very likely to be laid."

Broad trends

Growing displacement of oil by natural gas raises fateful questions, True believes: "How much of a future does this hydrocarbon (oil) have? By what, why, and when will it be displaced?"

Another broad trend of concern to True is one that has been under way for at least a decade: industry consolidation and the uncertainty companies face as numbers of potential customers shrink.

"How can the industry that is responsible for serving up the most critical component in continued development throughout the world continue to function when faced with such business uncertainties?" True asks.

And he echoes a worry of many OGJ editors: "Related to this [consolidation] is the question of whether the industry, certainly as it exists in North America, can continue to attract young talent to build the future."