The oil and gas industry, facing a classic paradox of resource economics, needs to think in new ways about petroleum supply. The paradox is this: Crude oil, as conventionally defined, exists in nature in some finite quantity. Yet the more the industry produces of it, the more of it there seems to be.
Last week, an Oil & Gas Journal special report on reserves growth noted how conventional oil reserves have held steady worldwide despite slumping discovery rates. Inconsistency of definitions accounts for some of the buoyancy. So do reporting lags and deliberate exaggerations.
Ahead of decline
To some immeasurable yet very significant degree, however, knowledge keeps total reserves ahead of the theoretically inevitable point of permanent decline. As the industry produces oil, it learns how to improve recovery rates. It often learns that more oil lies in place than it first thought. What it learns increases reserves.
In similar fashion, technology adds unconventional hydrocarbons to economically producible volumes. Canada's oil sands industry is thriving and growing. Projects are under way to produce and process heavy crude in Venezuela's Orinoco oil belt.
Supply growth doesn't end there. Recent improvements to an old technology make it possible to produce middle distillates at a profit from natural gas. Liquid products don't create the handling and marketing rigidities that bedevil liquefied natural gas, the main long-distance transport option for gas discoveries pipelines can't reach. The world has lots of gas not developed because of location. Much of it, if technologies bear up in practical use, could become lots of liquid fuel.
At the Middle East Petroleum and Gas Conference last month in Abu Dhabi, executives of two companies commercializing gas-to-liquid methods described their processes and the possible effects on markets. Both processes build on Fischer-Tropsch (F-T) technology for converting synthesis gas into liquid fuels.
Pat Davies, group general manager of South Africa's Sasol Ltd., said a slurry phase reactor his firm has developed makes F-T synthesis cheaper and more efficient than it is with old tubular fixed-bed reactors. Capital investment required for a processing module based on the newer reactor and able to convert 100 MMscfd of gas into 10,000 b/d of distillate amounts to $30,000/b/d of capacity. At a gas price of 50¢/Mcf, feedstock and other direct cash costs are about $10/bbl of product.
Mark A. Agee, president of Syntroleum Corp. of Tulsa, said his company's process reduces capital costs of equipment that produces synthesis gas, which account for more than half the investment in traditional F-T projects. Syntroleum uses autothermal reforming with air instead of oxygen in a proprietary reactor. Its synthesis gas retains nitrogen, which its F-T equipment then uses to control heat without costly equipment needed in other systems.
Agee said capital costs for a 5,600 b/d plant based on Syntroleum technology may be as low as $17,300/b/d of capacity. Economies of scale bring unit capital requirements of single-train plants of 20,000-25,000 b/d capacity to $12,000-14,000/b/d, in line with normal refining investments.
Technology yields supply
The technology could turn otherwise unproducible natural gas into oil supply. In Alaska, for example, 25 tcf of gas known to lie under the North Slope might become synthetic fuels able to move through spare capacity on the Trans-Alaska Pipeline System. That's 2.5 billion bbl of potential oil supply that doesn't depend on future discovery.
The industry must certainly continue to explore. But it must not discount supply fast emerging through innovative technology. The market wants hydrocarbons in specific configurations and cares little about where they originate. In service to that need, the limit that matters most may not be physical resources, but human ingenuity, energetically employed.
