With the rise of China and the slowing of oil supply growth, the world is pressed to find large quantities of incremental natural resources, including oil, gas and renewables. This will present opportunities for corporate venturing in energy technology development.
Growth in the oil supply stalled in 2004, leading to an oil shock in 2008. Global oil consumption is now about the 2008 average, and crude oil production capacity has increased by perhaps 1.75 million barrels of crude oil per day (mmbpd), with natural gas liquids constituting an additional 1.25mmbpd.
However, virtually all this capacity has been added among members of the Organisation of the Petroleum Exporting Countries, and cartel member Saudi Arabiaalone now controls three-quarters of global spare production capacity.
Further, national oil companies like Saudi Aramco, PetroChina and PDVSA control 80% of the world’s reserves, from which the international and independent oil companies are effectively excluded.
As onshore oil production is declining in most western countries, oil companies must therefore rely increasingly on oilfields that are offshore, more often in deep water or in arctic environments, remote from infrastructure, or they are unconventional sources such as oil sands, tars or shales, or any combination of these.
These are viable sources of oil and increasingly contribute material quantities to the global oil supply, but they all face challenges. Our analysis suggests the global economy cannot sustain oil prices much above $82 to $85 per barrel, rising by perhaps 3% to 5% in nominal terms each year.
As a result, incremental oil projects cannot be built around the assumption that the rapid oil price rises of recent years will be repeated – demand reduction is more likely.
Consequently, increased technical challenges are meeting market price constraints, resulting in pressures to deliver high-tech solutions in a limited budget.
In offshore oil, this calls for technologies such as specialised well intervention vessels, which displace more expensive drilling rigs like the ill-fated Deepwater Horizon for offshore well servicing.
Cost pressures are also leading to the use of sub-sea processing of oil streams, bypassing the use of more expensive but technologically less complex oil production platforms.
In turn, these innovative approaches to oil extraction and processing require new affordable materials able to withstand high pressure, high temperature and corrosive environments.
In addition, the industry requires technical advances in engineering design to produce and process oil from great depths reliably and durably. These technical innovations are well under way, but our model suggests the pressure will remain acute for years to come – a good place to fund innovation.
Related to these challenges is the need for more information. The nature of sub-sea equipment has been described by industry insiders as "agricultural", implying it is basic technology without significant data provision.
The BP accident in the Gulf of Mexico over the summer illustrates just how little information was available from the well or the blowout preventer, or for that matter in the water itself. Flow rates from the gushing well were subject to widely divergent estimates, reflective of the rudimentary state of sub-sea information technology.
Sub-sea IT will be a rapidly advancing area in coming years and will include remote monitoring and control, artificial intelligence and enhanced data gathering, including both near real-time field seismic and "downhole" (downthe- well) sensors.
Ironically, many of these advances will not come from the oil industry but from the IT sector. Again, materials science will play an important role, as sub-sea sensors must be able to withstand high pressures and temperatures. Batteries are a similarly critical.
Remote sensing and intervention, as well as downhole sensors, often rely on batteries for power. The capacity, size and durability of today’s battery technology establish limits on data provision and the possibilities for remote intervention in the offshore sector.
Power storage will be an important area for development but, again, the innovation will arise not in the oil industry, but rather from battery or materials science companies.
Environmental considerations are also becoming more important. Fresh water access and produced water from drilling operations are key issues limiting the growth of the unconventional oil and gas industry.
Sources such as oil sands, tars and oil shales – as well as gas shales – typically require vast volumes of water to aid production of the oil and gas resource.
The water used in hydrocarbon production becomes contaminated with oil, natural gas, hydrogen sulphide, carbon dioxide, drilling mud, drill cuttings and other natural materials and additives used in the oil production process.
The cost-effective treatment and reuse or discharge of production water is a central issue for incremental oil and gas exploration and production, and a hot topic in the industry.
It, and related topics such as water-quality monitoring and noise abatement, will continue to be focal areas for innovation. Renewables should expect an uphill battle in coming years. Solar energy remains expensive.
Geothermal energy is applicable only in certain regions and faces issues of cost due to abrasive and corrosive elements in hot brine from geothermal wells.
Onshore wind is competitive at $7 to $8 per mmbtu (1 million BTUs) of natural gas, but gas prices have held steady under $5 for the past two years, and technological advances in gas shale drilling techniques may prevent natural gas prices from rising to levels attractive for onshore wind for the next few years.
In addition, onshore wind will increasingly depend on major grid investments, both in Europe and the US, to wheel power from the production source to load centres such as cities. These investments are more difficult to justify in a weak economic environment and will require years to realise.
Offshore wind, although often close to major load centres, is quite expensive, with full costs – referred to as levelised costs, which includes the cost of fuel – running about four times that of natural gas-fired power plants.
Cape Wind, the first offshore project in the US, is facing downsizing due to an inability to sell more than half its output. Without a larger-scale project, Cape Wind’s viability may come into question.
A revival of interest in renewables will have to wait for a recovery of the advanced economies and the next oil shock – which might be anticipated for the 2012 to 2014 period.
Meanwhile, the challenges in engineering, materials science, and information and environmental technology in the oil and gas industry are enormous. Those companies providing innovative and cost-effective solutions stand to benefit.