x Abu Dhabi, UAEFriday 19 January 2018

Line between conventional oil and unconventional now blurred

Maybe it’s time to drop the conventional-unconventional distinction, or to reserve the term “unconventional” for truly speculative resources such as gas hydrates.

When everyone’s doing something unconventional, isn’t it conventional? As in monetary policy and in lifestyles, so in oil.

Since the turn of the century, so-called “unconventional” oil and gas has become an increasingly important part of global supply. The most high-profile is the US’s shale fields, which in 2012 provided 29 per cent of the country’s production and 40 per cent of its gas. The rest of the world has been slow to catch on to shale, but Canada, Argentina, Russia, China, Australia, the United Kingdom, Saudi Arabia and others are all promising.

Other unconventional sources of petroleum have also become significant – Canada’s oil sands; enhanced oil recovery using a variety of techniques to scrub out more oil from mature fields; converting coal and gas to liquid fuels; and biofuels made from sugar cane.

If energy prices remain strong over the next decade or two, other unconventional sources may make the jump into viability. Possible, if still speculative, candidates include gas hydrates, an ice-like substance found in the Arctic and deep seas; kerogen oil cooked from rocks rich in organic matter; fuels distilled directly from carbon dioxide in the air using sunlight; or advanced biofuels made from algae or waste.

Why have unconventional hydrocarbons boomed over the past decade? It is the result of three self-reinforcing factors. Restrictions by many countries on investment in their conventional fields drove up prices and forced international oil companies to seek new pastures. Higher prices made once unviable resources attractive. Two or three decades of prior research and tinkering now found scope for application, bringing down costs until “unconventional” became routine.

Unconventional oil has often been defined by the technology used to extract it. But this is a distinction without a difference to the consumer. The source of the fuel in their power station or car fuel tank is irrelevant – only quality, cost and reliability matter.

Unconventional petroleum is often more costly to produce than conventional – but not always. US shale gas has proved highly competitive, so much that prices have collapsed and remained low. And the more attractive shale oil plays are commercial at $40 to $50 per barrel, cheaper than development of small conventional fields in the North Sea or some deep-water projects.

So every large oil company has to master both conventional and unconventional resources. They might seek out one or the other, but cannot afford to be one-trick ponies. This applies even to the giant Arabian Gulf national oil corporations, which have huge conventional fields but increasingly have to think about enhanced oil recovery, heavy oil and shale gas. And unconventional techniques are being applied to conventional fields – such as the century-old fields in West Texas.

So maybe it’s time to drop the conventional-unconventional distinction, or to reserve the term “unconventional” for truly speculative resources such as gas hydrates. That would put an end to meaningless talking points from “peak oil” enthusiasts that output of some kind of narrowly-defined “conventional” oil is declining.

The surge in various kinds of new hydrocarbon resources results in greater diversity. More countries and subnational regions are becoming significant producers. A wider variety of molecules – with large volumes of extra-light crude oil and gas by-products – upsets traditional refining and trading models. Changing product flows reshape logistics, with US oil trapped inland, and refineries seeking out markets in Latin America.

Holders of conventional petroleum can still enjoy vast profits, but have to realise that consumers have other options, and will not pay any price. The incumbent producers – from the super-major oil companies to Russia, Qatar and Saudi Arabia – which once scoffed at their unconventional rivals as too expensive and marginal, now have to take notice of the upstarts.

Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis