Oil Consumption Impacted More by Price than Deteriorating Economic Conditions

The fall in oil consumption was most dramatic following the escalating price of crude oil to $145.16 per barrel on July 14, 2008 then at any other point over the last several years. Price elasticity, a key concept in Economics 101, which measures the impact of price change to changes in unit volume sold, is helpful in determining which products have readily available substitutes or which, like oil are inelastic with no real substitutes.

As illustrated by Benjamin Graham and David Dodd in their book Security Analysis, 1940 edition, during the 1930’s the economy had a dramatic impact on spending and consumption particularly on discretionary items such as travel. In one illustration, the change in demand was most pronounced in railroad revenues where tickets purchased for railroad travel, declined 51% from 1929 to 1993 as measured by gross receipts for the railroad industry. Over this same period, spending on the consumer staples (inelastic demand), such as electricity encountered a decline of only 9%.

While almost everyone would agree that the current economic climate is one of the most challenging since the 1930’s, a quick review of oil consumption over the last several years illustrates that demand has not significantly contracted, suggesting driving habits only changed when prices escalated to over $100 per barrel. Oil consumption dropped only 4.9% from January 2008 through January 2009.

Figure 1 Oil Consumption Oil

As seen from Figure 1, the sharp drop in oil consumption in September 2008 of 8.3% appears as an aberration when measured over the whole year. The fact there are no real substitutes for oil in the transportation industry illustrates two important points: 1) structural changes to driving patterns are required to see appreciable changes to oil consumption and 2) how vulnerable we are as a nation with no readily available substitutes for oil in the transportation systems.

Figure 2 Oil Demand in China and India Wood Prices

With China and India undergoing significant structural changes as they rapidly migrate towards motor vehicles for transportation suggests the demand for oil should continue to grow relatively unabated. Until the price of oil climbs back over $100 per barrel, we will not see the structural changes necessary to develop alternatives to oil in the transportation market.

The bottom line: energy and in particular, oil has not experienced a dramatic drop in demand during 2008 suggesting driving patterns were influenced more by the price of oil then the struggling economy. We must begin to shift emphasis to alternative energies such as solar as well as hybrids and electric vehicles.

Here is the original: Green Econometrics

Getting to All That Shale Oil

Chinese researchers have identified a catalyst called NiMoW, for the hydrotreating of the refined diesel distillate fraction from the Fushun shale oil deposit.

Shale oil has high levels of nitrogen, sulfur, and unsaturated hydrocarbons, limiting its potential use to supplant or replace crude oil.  Coming up with economical cleaning systems would get shale oil more competitive.

There is a lot of shale oil out there. Using a the Fischer Assay, which yields a heating value, across the planet’s known reserves turns up numbers like 3.3 billion tons with 2.8 billion, more than 78% in the U.S.  Most of that is in the Green River Formation out in Colorado.  It’s a huge reserve.  No other known reserve exceeds 20% of the Green River deposit and most come in under 10%.  Not that those others are small, the Green River deposit very conservatively holds more than 200 years of U.S. needs at current use rates.

Close-up of fractured oil shale specimen from the Uinta Basin, Utah, showing weathered (white) and unweathered (black) surfaces. Photo courtesy of Argonne National Laboratory.

The first problem is that shale oil is actually kerogen.   Kerogen is a mixture of organic chemical compounds with the soluble portion is known as bitumen, the stuff of the Canadian Oil Sands.  Not all of the organic chemicals come up as bitumen.  The problem is what’s missing – hydrogen.  Kerogen is carbon rich, but hydrogen poor.

Extraction then is quite costly and energy intensive.  Heat is needed to raise the viscosity and the heat would be applied to the rock that contains the kerogen.  Lots of heat is needed.  Then the kerogen needs refined and cleaned.  Adding solvents or adding back hydrogen can improve the oil product results.

Some processing methods yield considerably more useful product than the Fischer Assay would indicate. The Tosco II method yields over 100% more oil, and the Hytort process yields between 300% to 400% more oil.  There could be an enormous supply of petroleum products if the extraction, hydrogen enrichment and cleaning problems get solved.  All it takes is ingenuity and money in a high enough crude oil price environment to get investment on board.

The use of shale oil remains a puzzle.  Like Canada’s Oil Sands, kerogen from oil shale could be either dug up or extracted in place as in “in situ” processes.   Cheap hydrogen and low cost cleaning also need solutions.  Petroleum isn’t in short supply, easy to extract, refine and clean petroleum is, though.

So when the Chinese paper appeared in the American Chemical Society journal Energy & Fuels a certain acclaim is due.  From the abstract:

Because of high contents of nitrogen, sulfur, and unsaturated hydrocarbons in shale oil, its potential use as a substitute fuel is limited. In this paper, catalytic hydrotreating of the diesel fraction (200−360 °C) from Fushun shale oil was preliminarily investigated in a fixed-bed reactor. Hydrotreating experiments were carried out using various available commercial catalysts, including CoMo/Al2O3, NiW/Al2O3, and NiMoW/Al2O3, at different conditions of temperature, hydrogen pressure, liquid hourly space velocity (LHSV), and ratio of hydrogen/feedstock. The results showed that the NiMoW catalyst was most active for heteroatom removal, in comparison to other catalysts. Under relative mild conditions, it was possible to produce clean diesel from a Fushun shale oil distillate. The produced oil had low contents of sulfur, nitrogen, and alkene, reduced density, and increased cetane number, and it could be used as a more valuable fuel.

There’s a piece of the puzzle on the cleaning side.  Just how clean or clean enough isn’t yet clear.  China doesn’t give much care to CO² or other environmental matters. But the knowhow is now out on the catalyst discovery.

Numbers passed around have U.S. shale oil worthwhile at perhaps as low as $35 a barrel, a number that challenges the imagination. Canada’s Oil Sands gets into financial trouble as oil prices get close to $50 so its a sure bet that the kerogen to bitumen step is going push it higher.  But the reserves in shale are getting closer to market.  Big breaks in technology will only help.

But the hard price of crude oil isn’t there yet.  Today’s mid $70’s is a function of OPEC limiting the market.  Just what a barrel of oil is worth is something less than that.  The conditions for billions of investment aren’t ripe yet.

The technology is closer.  But the politics further.  There is considerable doubt that the world’s largest reserve will ever get to market as politics stand in the way.  The leftist politicians are betting technology and public opinion will get petroleum out of the energy market.  Keep in mind, they bet with your life – if they lose you lose.

From the most hydrogen rich petroleum, natural gas, to lesser hydrogen rich crude oil, heavy crude oil, bitumen, kerogen all the way to hard anthracite coal there are stunning amounts of carbon-based fuels around.  The biosphere is busily recycling carbon through plants attaching hydrogen back and releasing oxygen for us to breath.

The question for the thoughtful is, can the human species control itself such that the carbon cycle can keep up?  The answer is an obvious, yes, with energy inputs from solar, geothermal and nuclear fission and fusion – a happy carbon cycle is possible supporting a large human population and the plants and animals of the world.

Oil shale could have a role, soon if the technology develops at a good pace and politics pays attention to its responsibilities instead of its idealisms.

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Change Crude Oil to Natural Gas in the Oil Field

Dr. Steve Larter holds the University of Calgary’s Canada Research Chair in Petroleum Geology and has more than 30 years’ research experience in petroleum geology and geochemistry in both academia and industry.  Dr. Larter was named as one of the Top 10 Geologists in the U.K.in 2003, and has received numerous awards for his scientific contributions, including the Friendship Medal of the Peoples Republic of China.  When he speaks, the smart people pay attention.

Dr. Larter was the keynote speaker June 17 for the 2010 Goldschmidt Conference hosted by the University of Tennessee, Knoxville, and Oak Ridge National Laboratory.  In his presentation, “Can Studies of Petroleum Biodegradation Help Fossil Fuel Carbon Management,” Larter discussed microbes in the environment and their role in breaking down oil and generating natural gas.

This is with an eye to the feasibility of recovering hydrogen, instead of oil, directly from oilfields undergoing natural biodegradation processes.  Larter is also examining the feasibility of using a related process, biologically assisted carbon capture and conversion of CO² to methane or natural gas via H² + CO² methanogenesis in the hydrogen-rich environments of weathering subsurface ultrabasic rocks, as a route to recycle carbon dioxide in flue gases back to methane.

In Situ CH4 Production Process Diagram. .

But the most interesting is the in field conversion of oil to natural gas.  If Larter can develop the idea into a working process much of the oil in place, or about 4 times the oil already pumped and used could be available in the form of natural gas.  It’s an astonishing concept.

Over two years ago Dr. Larter showed how crude oil in some oil deposits around the world — including in Alberta’s oil sands — are naturally broken down by microbes in the reservoir.  Larter is working on understanding how crude oil biodegrades into methane, or natural gas, opening the door to being able to recover the clean-burning methane directly from deeply buried, or in situ, oil sands deposits.

Currently a problem exists out of the media and public’s view – biodegradation of crude oil into heavy oil in petroleum reservoirs is a problem worldwide for the petroleum industry. The natural process is caused by bacteria that consume the oil, making the oil viscous, or thick, and contaminates it with pollutants such as sulfur. This makes recovering and refining heavy oil difficult and costly.  People don’t realize they’re competing with microbes for the oil.

Using a combination of microbiological studies, laboratory experiments and oilfield case studies, the University of Calgary team demonstrated the anaerobic degradation of hydrocarbons to produce methane. The findings offer the potential of ‘feeding’ the microbes and rapidly accelerating the breaking down of the oil into methane.

Larter is now working on an approach of capturing carbon dioxide and pumping it and special bacteria underground into alkaline rock formations where the carbon dioxide, a greenhouse gas, will be converted into natural gas.

Larter says the petroleum industry already has expressed interest in trying to accelerate biodegradation in a reservoir.

The business end has already started with Dr. Larter involved with Gushor, a Canadian consulting firm.  Gushor is focusing on heavy oil recovery, fluid mobility, biodegradation, and carbon management emissions.

To date Larter’s findings indicate that feeding the oil reservoir microbes rapidly accelerates the breaking down of oil into natural gas.  Larter says, “Instead of 10 million years, we want to do it 10 years. We think it’s possible. We can do it in the laboratory. The question is: can we do it in a reservoir?”

The matter now is the sense of urgency.  With ‘peak oil’ losing its public momentum, a great U.S. success from the Bakken formation in the Williston basin, a major oil well disaster in discovering a huge field in the Gulf of Mexico, and a series of discovery successes over the past two years around the world, the recovery techniques that Larter is proposing are getting pushed back into the less urgent category.

That might not be the best idea.  Petroleum hydrocarbons will be needed for centuries in declining amounts.  Natural gas isn’t particularly good as a motor fuel, but would certainly be useful for light transport substitution. But for making heat whether for a home on to producing steam, natural gas is a very desirable product.

The clean motive – less CO² also has a friend in natural gas.  The single carbon atom in methane (CH4) with the four-atom hydrogen set makes for a lot of heat for a minimum of carbon reaction with oxygen.  Methane also could have a big role in high efficiency fuel cells.

Larter’s work is getting noticed and consideration.  The move to commercial interest is underway.  It’s an idea well worth having in the world’s fuel production arsenal.

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Fracturing the Bakken Triples Oil Reserves

With the BP gulf floor oil leak making the news – all bad even if they get it stopped, some good news is worthwhile.  Especially when the Obama tribe has frozen the major U.S. controlled North American resources of oil development for political appeasement to ‘do something.”  Meanwhile the Bakken formation in the north of the U.S. and southern Canada is growing production and growing in importance.  Crescent Point Energy of Canada has tested their Bakken wells with fracturing and water floods tripling the recovery making the estimate move up to recovering 30% of the oil in place.

It’s worthy news.  This writer hasn’t addressed the BP gulf floor leak – you’ve noticed, and maybe won’t at all.  It’s simply a media frenzy and political positioning structure while the people and environment take the hit.  Blaming and leveling responsibility takes precedence over imparting resources, something the big oil industry has to do alone while coping with the public relations cost of stupid media and useless political power.  Enough for now – but that’s an idea of why the post hasn’t been written.

Scott Saxberg, chief executive of Crescent Point Energy Corp. told the company’s annual general meeting the application of water flooding, along with infill drilling, could allow the company to more than double reserves within five years.

Water Flooding Oil Reservior – A Simple Example. Click image for the largest view.

In an interview, Saxberg said two years of tests at an initial pilot project in the Bakken – and more recent results from a second test – show that injecting water into formations being tapped by nearby horizontal wells with multiple fracture stimulations can help boost recovery from about 10 per cent to 30 per cent of oil in place.

For Crescent that would mean, “These mainly untapped resource pools provide Crescent Point with over 5,000 drilling locations and the potential to add over 500 million barrels of reserves, which could potentially double our current net asset value,” Saxberg said.

Saxberg explains, “We’ve seen very strong results. What it’s done in the pilot over the past two years is give us flat production. Without it, it’s 10 per cent, and with infill drilling you might get to 20 per cent. And then with water flood it’s 30 per cent. That’s huge.”

It’s because normally, after an initial “flush” of production in the first year, Bakken oil output drops off by about 70 per cent.

But Analyst Kyle Preston of Canaccord Adams cautioned that Crescent Point’s water flood strategy is promising, but not necessarily proven in all areas of the Bakken saying, “This water flood technology is not really new. What’s new here is applying the water flood to a tight rock reservoir which, to my understanding, hasn’t been done very successfully in the past.”  Preston points out PetroBakken, the second-largest player in the Bakken, doesn’t believe in water flooding.

Here’s a look at how Canada treats new resource development.   Trent Stangl, Crescent Point’s vice-president of investor relations, explained the company’s strategy is to let a central well produce for about a year to take advantage of Saskatchewan’s royalty holiday on new horizontal wells before converting it into an injector well. Then forcing water into the well builds pressure underground to push more oil out of surrounding wells, a technique commonly used in conventional oil fields.

Saxberg adds, the company is also experimenting with cemented liners on the horizontal part of the wells instead of steel pipe, allowing adjustments in the number of fractures as the well ages. He added the company is pleased to hear about the Alberta government’s new royalty incentive plans, including lower royalties for deep wells and horizontal wells, but he has no immediate plans to spend money in Alberta.

We’ll see how long that lasts in Alberta.  One nation’s dumb move can be another’s windfall.  As the U.S. administration plays media politics and undermines the national economy the neighbors, bless ‘em, can make good use of the capital.  And why not?  Our Canadian neighbors can use the capital, jobs and economic growth as well or better than anyone else.

The only concern then is, can the Canadian effort stay profitable at lower oil prices?  With the Athabasca oil sands under political assault the Alberta and Saskatchewan provinces need a fall back.  The irresponsible and capricious political neighbor brings risks, as the U.S. economic recovery isn’t driving lots of oil consumption.

Crescent Point plans four more pilot projects throughout the Bakken field over the next year.  With U.S. offshore drilling at a standstill, the capital going inert, worker layoffs imminent, and a sure increase impact on the world price of oil, the BP leak looks to grow far beyond a single company’s disaster and ecological calamity.

Irresponsible and capricious political conduct might be media savy – but the impact will be long and costly for consumers the world over.  But hey, only about 75% of American’s are catching on – throwing in with BP to get the oil escaping contained, stopped and the ecology and economy protected, sustained and supported could have been the job.  But leftism doesn’t even think to cooperate with business. Leftism needs commercial disasters to participate in the economy.  Commercial disaster gone far enough is an ‘opportunity’ to bail something out and take over making the capital, jobs and eventually, the management their own.

The Bakken oil field and the Canadian firms leading the technology are refreshing in the current U.S. situation.  Thanks neighbors, we wish you well.  Thanks to the Calgary Herald for kicking up the story. Americans need a little good oil news about now.

Here is the original post: New Energy and Fuel