It is the business of energy forms not now much in use to await technological breakthrough. Hydrogen as a major contributor to energy supply awaits a breakthrough enabling the cheap decomposition of water or hydrocarbons. Ethanol awaits the cheap decomposition of cellulose. Oil shale has awaited the cheap decomposition of kerogen for years. While these breakthroughs might someday occur, their timing is uncertain. Around the world, governments are spending money to accelerate technological progress for uneconomic energy forms. They have no assurance of success.
More certain is an imminent surge of technological progress for energy forms already dominant in the supply mix. Drivers for new breakthroughs in oil and gas technology are in place. They include:
- Cost reduction. Many modern oil field methods, including horizontal drilling, multilateral completions, and sophisticated seismic imaging, came into widespread use as cost-cutting tools after the collapse of crude oil prices in the late 1980s. Nothing stimulates the development and adoption of technology like the need to cut costs, which oil and gas prices lingering at abysmal levels into the mid-1990s made extreme.
Although oil and gas prices are hardly abysmal now, costs are leaping. Increased activity is pushing demand for services and supplies against system capacity limits. In its Annual Energy Outlook 2007, the US Energy Information Administration reports, “While iron and steel prices increased by 72% from May 2002 to June 2006, onshore drilling costs increased by 100% and rental rates for offshore drilling rigs by 200% or more.” Activity will abate in response; indeed, projects are being canceled and delayed. But cost pressures will stimulate technological development, as they did before. - Access to opportunities. As the article on p. 18 reports, international oil and gas companies must adapt in profound ways to the new activism and financial strength of national oil companies. Companies work increasingly as nonoperating partners with state-owned counterparts as providers of technology and capital. More than ever, therefore, leadership with technology is crucial for access to international upstream opportunities. Companies that appropriately see technology as a vital dimension of competitive advantage will spend money to acquire it.
- Regulation. No let-up is in prospect in regulation of the environmental performance of the oil and gas industry and its products. In response to government fuel specifications, refiners have found ways to sustain gasoline octane without adding lead, to reduce the sulfur content of gasoline and diesel, to remove toxic substances from fuels, and to slash vehicle emissions of various air pollutants. Similarly, upstream operators have cut air and water pollution associated with their work while diminishing surface disturbance from drilling and production. Technology produced many of the industry’s environmental gains, which can and must continue.
In some combination, technology and regulation also will answer concerns about greenhouse gases and climate change. Advances will be vital to future use not only of oil and gas but also of coal. Unless global economic development stalls for some reason, all three energy forms will be needed in growing amounts, along with nonfossil supplements. Real success in the moderation of greenhouse gas emissions depends on the extent to which regulation accommodates economic imperatives. It will result more from technological progress with all energy forms than from mandates about emission levels and consumption.
Technological breakthroughs with oil, gas, and coal will occur. They’ll make fossil fuels cheaper to produce and cleaner to use. And they’ll occur by building on past advances, sustained by the economic superiority of these fuels, in their major applications, relative to others.
Breakthroughs essential to hydrogen, ethanol, shale oil, and other energy forms requiring government subsidy might occur. Prudent investment by governments in this hope therefore makes sense. But “prudent” here means accommodating the risk that payoff in terms of commercial energy will be small, relative to total demand, or nonexistent within a reasonable investment period.
Altogether insensible would be policies that tried to retard progress for oil and gas to make way for nonfossil energy alternatives. Oil and gas advances won’t cease. Doubters will find the next few years interesting.
