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Unconventional wisdom

Created:

13 January 2009

Written by:

Martin Li

With most of the world's 'easy' oil now held beyond the grasp of Western explorers in inhospitable Opec states, and speculation over whether the world has passed 'peak oil' (beyond which global production enters terminal decline), attention has in recent years turned to 'unconventional' hydrocarbons. These are oil and gas resources that can't be recovered by conventional well techniques and instead require more innovative recovery approaches.

By their nature, unconventional hydrocarbons are more expensive to recover than conventional oil and gas, and most aren't commercial at current oil prices of $40-$50 a barrel. However, with many analysts predicting a longer-term average oil price of $60-$80 a barrel, unconventionals should play a growing role in the global energy mix.

Unconventional oil and gas covers a wide range of resources. Some are already in commercial production; the development of others has proved more challenging and requires extraction technologies that aren't yet available. Coal-to-liquids, gas-to-liquids and coal bed methane are the most promising unconventional hydrocarbon sources and have already proved their commercial worth. In contrast, although much in the news recently, oil sands and shale oil require substantial development to improve their economics and, more importantly, allow their recovery without leaving a disastrous environmental legacy.

Coal- and gas-to-liquids

Coal-to-liquids (CTL) and gas-to-liquids (GTL) technologies produce synthetic liquid fuels such as petrol, diesel and rocket fuel. Dr Dougie Youngson, energy analyst at broker Ambrian describes them as "potentially the future of the hydrocarbons industry".

The Fischer-Tropsch process at the heart of CTL/GTL technologies pre-dates The Second World War, during which the Germans used it to produce synthetic fuels. South Africa also used the process to produce fuels during apartheid sanctions, and the country remains one of the principal CTL users. The differences between CTL and GTL technologies are negligible and Dr Youngson expects the two sectors to evolve in parallel.

CTL converts mined coal into gas which is then synthesised into liquid fuels. Sulphur and carbon dioxide produced during gasification can be removed and stored, which allows the production of clean fuels. The Alternative Investment Market (Aim) minnow, Spitfire Oil, has just produced first oil from a new test reactor in western Australia designed to convert low grade coal to oil. The company aims to convert its 500m tonne coal resource into 200m barrels of oil.

GTL is potentially even better for the environment, as it avoids the initial mining stage, which also makes it a lot simpler and slightly cheaper than CTL. ''What GTL requires for successful commercialisation is huge gas fields with low costs of extraction, such as in Qatar,'' explains Dr Youngson. The Arab Emirate is developing a number of large GTL projects to monetise its vast gas reserves, and these developments are increasing commercial confidence in the sector.

Coal bed methane

Coal bed methane (CBM) is natural gas - mostly methane - created during the formation of coal that has been trapped within the coal seam by water pressure. CBM is a green gas as it contains no sulphur compounds.

CBM is extracted by drilling wells into the coal seam to pump out the water and allowing the gas that was previously compressed onto the seam to flow to the surface. Seams used in its production need to be shallow to avoid the pressure of overlying rocks from impeding gas flow, which means CBM fields have inherently lower reservoir pressures than conventional gas fields. This requires operators to drill more wells, which makes it more expensive relative to natural gas, although drilling wells horizontally can access more of a seam with a single well and make the process more efficient.

The market for CBM is the same as that for natural gas. The US and Australia have been the most prolific developers of CBM projects, and CBM provides 10 to 15 per cent of the US's domestic gas production and almost two-thirds of supply in Queensland, Australia. These successes have prompted other countries to examine their CBM potential, including Russia, which has the largest global reserves, Canada, China, India and even the UK.

Calculating a country's CBM reserves can be geologically challenging, however, although analysts estimate that global gas could total around 277 trillion cubic metres. This is approximately 50 per cent greater (albeit estimated with a lower level of confidence) than the world's proved natural gas reserves, even though CBM production currently amounts to only a tiny fraction of natural gas production.

Oil sands

Also called tar sands, oil sands comprise bitumen (very heavy oil) and tar mixed with sand in a solid or semi-solid form, from which oil is extracted by forcing steam through the mixture. Around 80 per cent of the world's extractable oil sands are found in Canada, and its strategic location (near the US and far from the Middle East) adds to its appeal as an alternative hydrocarbon source.

Although oil sands have become big business over the last five years as a result of the rising oil price, they have many disadvantages. Extraction involves open cast mining on a scale so vast that excavation-scarred landscapes can be visible from space. The process is very expensive and potentially consumes more energy than it produces, and extraction releases more than three times the carbon dioxide of extracting conventional oil. The oil produced is of low quality and requires substantial refining - the volume of steam used to extract the oil diverts large amounts of fresh water, causing further environmental harm.

Estimated global hydrocarbon resources

Sources: International Energy Agency, Wood Mackenzie, Ambrian, Tristone Capital, BP

Shale oil

Not to be confused with oil sands, shale oil is a form of 'immature oil'. It is extracted from sedimentary rocks containing a high concentration of kerogen, which is organic matter that hasn't been subjected to sufficient temperature and pressure for full conversion into hydrocarbons. Shale oil represents a huge potential resource globally - Dr Youngson estimates that Jordan alone has billions of barrels in the ground - although many obstacles exist to extracting a product commercially.

Shale oil recovery is even more difficult and expensive than oil sands recovery. Major firms such as ConocoPhillips and Chevron have invested billions of dollars trying to commercialise the process. Novel techniques tried have included inserting electrodes into the ground to heat shales to very high temperatures and distil the oil to the surface, although such a process creates high greenhouse gas emissions. Given the technological challenges, Dr Youngson regards shale oil as 'a complete white elephant'.

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