Value of Hydrocarbons

What would a world without oil and gas look like? How would our lives be impacted if we simply left oil and gas “in the ground,” as some have suggested?

“Dark and polluted,” remarked Jim Wicklund, Managing Director of Energy Research Credit Suisse. “If I could claim that coal was a carbon, rather than a hydrocarbon, that’s about all we would have to use other than whale oil.

“And if we had the energy consumption we had today using only crude oil, the air quality in Beijing would be good compared to here,” added Mr Wicklund, whose resume also includes experience as a geologist and petroleum engineer.

“So leave it in the ground sounds fine,” he said. “Renewable sources exist, but you can’t replace the amperage, the horsepower, the capability of fossil fuels in a lot of uses. So without producing it, leaving it in the ground, you would have exorbitant utility bills and we would live pretty close in the industrial age of 150 years ago.

Most of us can’t begin to fathom a world without electricity, running water, motorized transportation and all our modern conveniences.

Thanks to the Industrial Revolution of the mid-1700s, we are fortunate to live in the age of hydrocarbons, the most abundant, affordable and reliable energy source on the planet, significantly enhancing our longevity and quality of life.

More than 90% of the energy used on earth comes from fossil fuels, either coal or hydrocarbons, such as oil and natural gas.

Coal is a black or dark brown mineral composed of carbonized vegetable matter. It is a powerful fuel, but is highly polluting and can be hazardous to miners’ health.

Petroleum and natural gas also derive from ancient plants and other decomposed organic matter.

However, unlike coal, petroleum and natural gas form when the carbon atoms bond with hydrogen. This powerful chemical combination can catenate, or link with other carbon-hydrocarbon combinations to form immensely long chains. These compounds are extremely versatile, not only as a fuel, but as feedstock to create plastics and other materials that are used to manufacture many of the products and tools we are accustomed to in modern life.

Together, oil and gas represented two-thirds of global energy consumption in 2013.

“Oil and gas is one of the most important, if not the most important set of fuels offering primary energy to the world,” observed Ms Farrell, Vice President of IHS Markit. “If you look at 2015, where does primary energy come from? And by primary energy, I mean what we use in our cars, what we use for power generation. Electricity is a secondary source of energy, not a primary.

“The primary energy sources are oil, gas, coal, hydro, nuclear, renewables, biomass and so forth,” she added. “So if we look at 2015 as a starting point, oil and gas accounts for a little over 50 [percent], in fact 54 percent of world primary energy use. So it’s really important, the most important combination of sources.”

Thanks to ongoing and significant advances in drilling and production technology over the past century, the extraction of these hydrocarbons is providing power to billions of people across the globe. These advances in drilling technology have made consumer pricing for fossil fuels extremely affordable.

“Eight years ago I had 1,600 drilling rigs out there scattered across the country drilling for natural gas, and today I have less than 100 and production is up and that’s the benefits of technology in the modern world, not only its use but its application with oil and gas,” Mr Wicklund said.

Because of these technological advances, reserve estimates for these hydrocarbons are not decreasing, but increasing! Enough to sustain our planet – at 7 billion people and growing! -- well into the future.

Billions of barrels of proved crude oil reserves are technically and economically recoverable in much of the world today, along with trillions of cubic feet of natural gas.

In the US, production from tight oil and shale gas formations has driven an overall increase in the abundance of oil and natural gas. Proven US oil and liquid reserves are now estimated at around 40 billion barrels; proven US natural gas reserves are close to 400 trillion cubic feet, enough to last nearly 100 years.

“At five dollar oil, we would probably run out fairly quickly,” Mr Wicklund predicted. “At $500 a barrel oil, you have all you could ever need.

“Somewhere in there is equilibrium, with the discoveries fostered by unconventional resource extraction, the shales,” he added. “In oil we now beat Saudi Arabia in terms of crude oil reserves. So we’ve got 50 years at least of crude oil reserves at current prices.

“Natural gas is even better, he observed. “Natural gas prices have come down from averaging $13 in 2009 to less than $3 today, and we are still oversupplied with at least 100 years of supply of natural gas.

And so prices  -- always in any commodity – [is] the gating factor, but as prices go up and as technology improves, the life span of those reserves will just increase, so during my lifetime and yours we won’t run out, and our grandchildren won’t be challenged.”

Advances in multistage hydraulic fracturing and horizontal drilling techniques are enabling US households to enjoy significant savings on energy through lower natural gas prices. In 2012, annual household savings, based on a calculation of gas use times lower prices, was estimated to be $1,200 per household.

Hydraulic fracturing and horizontal drilling techniques have slashed oil imports into the US. And in 2013, production from US shale oil plays saved consumers between $63 billion and $248 billion in energy costs on gasoline and other refined products.

As the chart shows, in 2013 oil prices would have been almost $40 a barrel higher and petroleum product prices for consumers nearly $1 a gallon higher if oil from shale formations had not been produced using horizontal multistage hydraulic fracturing.

It’s a good thing, because global hydrocarbon consumption is expected to grow significantly in the coming decades, particularly in the developing world. This graph shows projected demand under three price scenarios for developed nations, the OECD countries, and developing nations, the non-OECD nations. The US Energy Information Agency projects that demand for oil in the developing world is expected to increase even in the face of high prices.

In fact, EIA forecasts that the developing world will consume more oil at higher prices, presumably because their own economies are projected to heat up.

Demand for natural gas is projected to soar through 2040 in both the developed and developing worlds. Total global demand in 2040 for natural gas is expected to exceed 200 trillion cubic feet. That’s a forty percent increase.

Demand for clean-burning natural gas is projected to grow significantly over the next three decades, even as most other energy sources decline or flatten.

“Natural gas, on the other hand, is actually a clean-burning fuel, so our skies are clearer than those in Beijing,” Mr Wicklund said. “Natural gas has actually eclipsed coal as a primary source of primary in the US now. And so things run and we don’t live by whale oil because of oil and gas.”

When comparing hydrocarbons to renewables, it is important to understand the process of turning energy sources into usable energy on a mass scale.

The oil and gas industry has been operating for more than 100 years and has streamlined the process to make it efficient, with a highly-developed infrastructure to store these abundant hydrocarbons and deliver them to consumers. That makes them reliable, despite periods of volatility. Thanks in large part to advances made in the United States shale revolution, volatility is likely to subside further.

“Today the US is now the swing producer for crude oil,” Mr Wicklund remarked. “We can add production capacity faster than any country in the world. We grew production in 2014 by 1.4 million barrels a day for that year, which is the most any country in the history of the oil business has ever drilled.

“And so I understand that there will be volatility of commodity prices,” he noted. “We went from $100 in June of ‘14 to $27 this past February [2016]. And then it rose another 70% from that 27 number before entering a bear market.

“So oil prices are volatile, especially at the cusps, but the swing producer now being the US and the efficiencies wrought in the US exploration and production scenario actually means that we’ll be more responsive to speed-ups and slowdowns in demand,” Mr Wicklund explained. “So while commodity prices will stay volatile, with the US as the swing producer you should have that volatility of supply actually ameliorated over time.

Wind and solar, on the other hand, cannot be easily stored. The process for harnessing these renewables is expensive, requires the use of scarce rare-earth metals, largely controlled by China, and is not always available. Therefore, it must be backed up by – you guessed it – hydrocarbons like oil and gas.

Renewables are already displacing hydrocarbons, or at least carbons,” Mr Wicklund observed. “Today renewables make up a little over 10% of total energy consumption. That’s up from 3% just five or six years ago. Renewable growth has been on a 20% tear for the last five years, whereas total demand has grown by less than two, so it’s really made excellent strides.

“And everybody in the oil and gas business whose also a consumer thinks that positive,” he added.

“The problem is the displacement,” he explained. “Crude oil doesn’t really compete against renewables, unless you have an electric car, because it’s used for electrical power generation.

“So renewables don’t displace gasoline, or crude oil: they displace natural gas, or they would if it was economic, so working on down the food chain, what they displace primarily is coal. And as I mentioned, natural gas is now used more in power generation than coal for the first time ever. So renewables have a place, but there are places in replacing and displacing electrical generation hydrocarbons, which are natural gas and as a carbon coal. But crude oil doesn’t have a direct impact at all.”

The energy density of oil, combined with its convenient liquid phase under normal conditions means that it is easily transported from the well to the refinery by rail, thanks to an extensive rail network transports oil across the US.

Between 2008 and 2014 in the US, carloads of crude oil transported by rail skyrocketed, thanks to increased production from shale plays. In 2014, nearly 1,000 bbls per day were transported by multiple rail carriers over a network of nearly 140,000 miles.

Crude oil also is transported by offshore oil tankers from the well to refineries and from refineries to onshore hubs near consumer markets…

... or by truck. This is much easier and more practical than constructing grids across the landscape for solar and wind.

Natural gas, while gaseous under normal conditions, is sufficiently energy dense so that pipelines can easily accommodate the flow of gas economically.  

In the US alone, billions of barrels of crude oil and petroleum products are transported each year by an extensive network of pipelines, and the numbers are growing.

In 2014, US transmission liquids pipelines delivered a total of 16.2 billion barrels of petroleum products, including 9.3 billion barrels of crude oil and 6.9 billion barrels of refined products, such as gasoline, diesel, jet fuel and natural gas liquids, including propane and ethanol.

In 2014, pipeline operators reported nearly two hundred thousand miles of liquids pipelines operating in the US.

This represents an increase of 3.5% over 2013, a 9.5% increase over the last five years and a 19.5% increase over the last 10 years. This includes 66,649 miles for crude oil, 61,681 miles for refined petroleum products and 65,595 miles delivering natural gas liquids.

From 2010 to 2014, U.S. crude oil pipeline mileage increased by more than 12,000 miles or 22.0%.

Finally, gasoline, produced by refining crude oil, is efficiently and economically transportable from the refinery to the gas station, and available to you, the consumer, 24/7, while refined natural gas and oil power our homes, our places of work, our factories, and allow us to have fun.