Volume 6: Oil and gas

Analyzing the prospects for exploration and development

D.C. Ion

 

Overview

 

 

Exploration for and development of oil and gas are fraught with considerable risk and uncertainty. Although developing countries harbour significant proportions of the world's oil and gas reserves, they face substantial technical challenges in realizing the development of their indigenous resources. Fortunately, solutions are available, and with the appropriate knowledge, expertise, and international support, developing countries can optimize resource development. However, the key is to access these technical solutions in a manner that ensures that clearly set domestic objectives, which satisfy the needs of the people, are met.

Analysis

There is substantial interest in exploration for and development of petroleum resources (both oil and gas) in developing countries. Excluding the (former) communist countries, the non-OPEC (Organization of Petroleum Exporting Countries) developing countries harbour about 10% of the demonstrated reserves of crude oil and an estimated 26% of the undiscovered recoverable natural gas in the world. In 1976, a few years into the energy crisis, oil companies were active in 71 non-OPEC developing countries. By the early 1980s, the industry was quite active all over the world and was expanding into the South Pacific, Western Asia, sub-Saharan Africa, Central and South America, and the Far East. China in particular was a centre of attraction.

Technical Challenges and Solutions

The first challenge is to isolate the likely conditions under which petroleum was originally formed and subsequently migrated. Because of its viscous nature and the porous nature of subsurface strata, it is not unusual for petroleum to migrate hundreds of kilometres before it becomes trapped. Sophisticated mathematical models have been constructed over the past 10 years to describe this behaviour, and they have assisted in the identification of likely petroleum sites. Complex geological surveys and analyses also contribute to our understanding of petroleum formation and accumulation.

Additional challenges arise when the petroleum is produced. Conventional production methods at best produce no more than 30% of the oil in place. Enhanced methods of oil recovery that use water, solvents, steam, or other agents can significantly increase these recovery rates.

Other challenges associated with the full-cycle development of resources can be successfully addressed by new technical developments. Aerial surveys, remote sensing, radioactivity surveys, and computer-based image processing all assist exploration activity. Sonic logs, radioactivity logs, and advanced methods of coring provide important insights into optimal reservoir development. Directional drilling technologies have contributed to lower-cost operations, improved recovery, and decreased disturbance of the environment.

Inherent Uncertainty and Risk

Although technology has been steadily improving, exploration and development are subject to significant exploration uncertainty and production risk. Likely areas for exploration may hold water instead of hydrocarbons, or if there is oil present, it may be of a quality or quantity that does not warrant commercial development. Daily production from wells may range from as low as 10 barrels to as high as 20 000 barrels ( I barrel - 0.16 m³). Exploration costs for drilling also vary tremendously (for example, a single well on the Alaska North Slope cost 130 million USD to drill). Economic uncertainty (because of price fluctuations) poses a particular risk for developing even well- delineated deposits of oil shales or oil sands. These heavy oils rely on sophisticated extraction techniques that themselves require a great deal of energy. Even if oil prices rise, the commercial feasibility of these prospects may not be improved because of the energy needed to produce the oil.

Accessing Technology to Optimize Prospects

A major challenge for any developing country is to gain access to the technology that is capable of finding and producing the hydrocarbons, while minimizing the degree of risk exposure. Up-to-date technological expertise is often absent in developing countries, and most approaches to exploration and development have relied on various cooperative arrangements with outside organizations or industries. The most successful approaches have been those that relied on either a risk-sharing agreement or a strict nonrisk technical services contract. Long-term concessions for petroleum development are no longer common. Important aspects of any of the these approaches include a delineation system or grid to define tenure, an incentive framework that provides operators with adequate financial incentives to look for and develop the resource, a regulatory system that is consistent with the operating customs and practices of the industry, and a business and institutional arrangement in which confidentiality of information can be ensured. These factors have contributed to successful exploration and development programs in developing countries.

Role of Local Expertise

Local experts play an important function in providing an assessment of domestic needs and priorities, although to be effective these people must also have a sound understanding of the technical conditions and risks. Furthermore, to ensure that a receptive environment is established for technology transfer and resource development, the local experts must understand the needs of the industry. An effective way to achieve this is to conduct in-country modeling and forecasting exercises to identify priorities and options in the energy sector. This provides a basis both for developing expertise and for energy planning.

Suggestions for Further Research

To ensure that developing countries can exploit their indigenous petroleum resources (both crude oil and natural gas), additional research support is urgently needed at the local level. In any given country, this research support should concentrate on

· The development of local programs to establish a team with adequate technical expertise to monitor the work of hired specialists, and

· The development of a model of future long-term energy needs that places domestic options in a global context, allows for regular monitoring, and provides some mechanism to assist with decisions about energy.

 

Ensuring exploration and production in developing countries

R.J.R Ross

 

Overview

Continued exploration for and production of oil and gas in developing countries are constrained by the fundamentally different perspectives of the governments of these countries and the transnational corporations that are engaged in the oil and gas sector. The objectives of governments focus on domestic concerns, whereas the objectives of industry focus on corporate profitability in a global setting. Governments are often constrained by a limited number of development options, whereas industry has the flexibility to invest in different parts of the world under potentially quite different regimes. These factors contribute to the markedly different strategies that governments and industries might have for oil and gas exploration and production. Reconciling these strategies requires careful cooperation between industries and governments. In many circumstances, it must be recognized that the strategies are so divergent that there is inadequate common ground for working together. To address these circumstances, alternative institutions are required to ensure that feasible oil and gas prospects are discovered and developed in developing countries. For example, a company might be established explicitly to explore for and produce hydrocarbons in developing countries and to concentrate on opportunities currently being neglected by transnationals.

Analysis

National governments and transnational corporations have quite different objectives in the exploration and production of petroleum. Governments require technical programs that can delineate the detailed extent and producibility of their resource base and pay attention not only to large-scale oil potential but also to small deposits and to natural gas. Transnationals, because of the diversity of global prospects, require a more general assessment of exploration potential and risk to establish whether a region warrants additional investment compared with options elsewhere. Transnationals concentrate on large-scale oil potential, and natural gas is usually not the primary target because of its limited marketability. Governments require commercial arrangements that provide adequate financing and transfer the risk to an external operator, but they do not give up control over the rate of development of the resource. Transnationals, on the other hand, require arrangements that provide expected financial rewards under fiscal, legislative, pricing, and production-sharing regimes that are comparable with those available elsewhere. Governments require that local personnel be trained, that local industry be developed, and that technology and information be transferred. Transnationals are often concerned with the confidentiality of information and technology and with their freedom to make decisions that would increase the operational success of the venture. Finally, governments are often concerned with ancillary objectives (for example, environmental impacts or conflicts between different sectors of development).

Limited Choices

In contrast to the many objectives that the government of a developing country might have, its available options for developing the resource are quite limited. Self-reliance is difficult even for the richest of nations. Reliance on foreign assistance is too often tied to the use of technologies that may not be appropriate. The development of a national oil company is not a realistic short-term option for most developing countries that do not already have one. Complete reliance on transnational corporations creates problems if the country does not have the means to attract and retain these companies in the first place.

Divergent Strategies

Because of these different objectives and constraints, governments and industries will typically adopt different strategies for exploration and development. To supply local markets or obtain hard currency from exports, the government will want to use whatever technology is available to recover the resource (however small). Industrial strategies, in contrast, will concentrate on using tried, tested, and trusted technologies to find and develop large prospects with readily marketable products. Different strategies for technology transfer, training, and information transfer will also be adopted. Governments often see these transfers as a source of power or wealth, but some experiences have shown that the transfer of inappropriate technology or the misuse of proprietary data can lead to further conflicts. These transfers should only be conducted if it can be demonstrated that the technology can be used and that the transfers realistically take into account the learning curve of 2-5 years that is often required.

Role of an Alternative Institution

If objectives, options, and strategies diverge so considerably, how can a developing country develop its modest hydrocarbon potential if it cannot attract and retain industry's interest? A cooperative, regional, or alternative institution could provide an appropriate mechanism. The role of the institution would be to assess when and how to use transnational corporations, to cooperate with several transnationals in certain ventures, to use medium-size oil companies as appropriate, to retain land, to structure arrangements to ensure appropriate technology transfer, and to meet local employment and industrial objectives. Tasks that such an institution would need to fulfill include exploration and development, marketing, provision of information about transnationals, local sourcing, financing, and research. Adequate financing of such a venture would be required to ensure flexibility and credibility and would best be sought from developing countries and from organizations that assist with development. To ensure its success, this type of institution would have to focus on South-South cooperation and continue to search for alternatives.

Suggestions for Further Research

To ensure that exploration for and production of reserves in developing countries proceed effectively, additional research needs to be undertaken to

· Develop methods to stimulate exploration and production in the Third World, especially in oil-importing developing countries,

· Enumerate the activities of transnational companies to identify the types of activities that are currently being left out and that might profitably be pursued by an alternative institution,

· Assess the feasibility of establishing a company that would explore for, and produce, 10-20 of the best opportunities that are currently being neglected by transnationals (gas and small deposits of oil would be accepted as good candidates), and

· Assess the feasibility of establishing a technology centre that would emphasize technology transfer, funding, and commercial applications.

 

Exploiting reserves of natural gas

Glenn W. Mortimer

 

Overview

Domestic reserves of natural gas are a potentially important resource in many developing countries. As reserves of crude oil are depleted and global demand for energy continues to increase, natural gas will be viewed increasingly as a substitute. However, these gas reserves pose special challenges because the commercial feasibility of any development of natural gas is often inextricably tied to the identification and capture of specific markets. Traditional markets for natural gas include domestic uses (power generation, industry, and space and water heating) and exports as liquefied natural gas (LNG) or as a feedstock for ammonia and urea. Developing countries can benefit from new market opportunities for natural gas as a transportation fuel and as an input in methanol production. Methanol has applications as a chemical product, a fuel additive, and an input to the manufacture of protein substitutes. If developing countries are to realize any of these new market opportunities or are to build on traditional markets, they will require knowledge and expertise to develop coherent supply strategies and policies for natural gas.

Analysis

Annual trade in natural gas is about 100 billion to 200 billion USD. However, natural gas has generally been regarded as a less desirable exploration or development target than crude oil. The collection, transportation, treatment, and distribution of crude oil and refined products are much cheaper than for natural gas on an equivalent heating basis. In addition, because much of the institutional structure is focused on solid and liquid fuels, conversion to natural gas can add further costs. Investments in natural gas infrastructure (pipelines, distribution systems, and liquefaction and regasification terminals) are substantial, and because it has very little flexibility after it is constructed, it can normally be justified only when a market has been established. In most developing countries, these challenges hinder gas development. Although potential reserves may be large, domestic markets may be inadequate to provide the required incentive to develop the gas. A key to successful exploitation of gas reserves is to focus on market development.

Development of Traditional Domestic Markets

Traditional domestic markets for natural gas rely on extensive uses in power generation, industry, and the commercial and residential sectors. Gas can be used in steam turbines, combustion turbines, or diesel units to generate electric power, and it can also be used in the overall power system to balance and optimize the loads from hydroelectric and thermally generated electricity. An attractive feature of gas-fuelled units is that they can be added relatively quickly and economically in small increments. Natural gas can also be used in most industrial applications that currently rely on coal or refined petroleum products. Conversion is technically straightforward, and after completion, the equipment accommodates multifuel use, which gives operators greater flexibility in the choice of fuels. In the residential and commercial sectors in developing countries, the most common applications for natural gas are for water heating and cooking (and for space heating in cooler climates). A major constraint to successful market penetration in the residential sector is that the poor (who are typically in the majority) cannot afford the modest capital outlay required to purchase gas burners. Subsidies for the gas or equipment have often been provided as an incentive to use gas.

Development of Traditional Export Markets

A traditional activity for developing countries is to export natural gas as LNG or to use it as a petrochemical feedstock to produce ammonia and fertilizers (for example, urea). LNG projects liquefy the gas, ship it through a cryogenic LNG terminal to a source where it is regasified, and then distribute it through conventional distribution systems for gas. About 20% of the global gas trade is LNG, but the feasibility of this trade relies on long-term commitments and contracts of 15-20 years. These arrangements underline the importance of establishing the existence of adequate reserves to meet the long-term obligations and of having low-cost gas available at the point of liquefaction to ensure that the project is commercially feasible. In contrast, ammonia or fertilizer exports are attractive because they are not tied to any single consumer and can be directed to a number of markets. Demand for these products grows as agricultural output grows, but the feasibility of any project depends on global demand and the availability of low-cost gas.

New Market Opportunities

New market opportunities are associated with natural gas as a transportation fuel and with the demand for methanol, which is produced from natural gas. Propane or compressed natural gas (CNG) can be used as a transportation fuel in engines that currently operate on gasoline. Its advantages are that it is cheaper than gasoline, less corrosive, and safer. Its disadvantages include storage problems, reduced power, and significant capital outlay for vehicle conversion. Methanol has a number of applications that provide important prospects for new markets. Its major chemical use is the production of formaldehyde, which is used primarily in the manufacture of resins and paints. As a fuel, methanol can be used directly in gasoline, diesel, or natural gas engines or boilers, upgraded to methyl tertiary butyl ether (MTBE) as a gasoline blending agent, slurried with coal, or upgraded to a synthetic gasoline. Some of these technologies are well developed, whereas others are still experimental. Finally, methanol has a potential food use when used to manufacture singlecell proteins (SCP). Commercial projects do exist to market SCP as an alternative to soybean meal and fish meal for animal feed.

Realizing the Opportunities in Developing Countries

The development of projects to take advantage of growth in traditional markets or to penetrate new markets will require considerable expertise and planning. Supply planning must be oriented to ensure that tax and royalty terms, joint ventures, production-sharing agreements, and service contracts encourage exploration for natural gas. Local knowledge and expertise must be developed so that policies for natural gas that account for both domestic needs and export opportunities can be formulated. Local capabilities are also needed in techniques of project valuation to assess the feasibility and risks of any natural gas development.

Suggestions for Further Research

To ensure that reserves of natural gas are exploited optimally in developing countries, additional work needs to be undertaken to

· Develop an educational program (on alternative production, transportation, and utilization technologies for natural gas) that is directed both to developing countries and to organizations that advise them,

· Establish, in developing countries, demonstration projects that use unconventional approaches to the production, transportation, and utilization of natural gas,

· Concentrate research on small-scale liquefaction of natural gas and methanol production, and

· Concentrate research on the development of vehicles that can use methanol and natural gas.