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Oil companies see their fortunes in the sands

Oil companies see their fortunes in the sands

von Ed Crooks

Eni’s discovery of oil fields in the Congo shows how far groups are willing to go to tap alternatives to conventional crude – however developing these resources into usable fuel presents a huge challenge.

Unconventional oil is the future, both for the world’s fuel supplies and for western oil companies. The announcement yesterday from Eni, the Italian oil and gas group, that it had found a deposit of oil sands in the Republic of Congo that could contain many billions of barrels was a dramatic illustration of that.

 

The world has huge resources of oil sands and other forms of heavy oil, which does not flow easily and cannot be conventionally produced from oil wells.

Limited production rates

Yet developing these resources presents formidable challenges that are likely to set a limit on the rate at which they can be produced, putting a constraint on their commercial potential.

Crude oil reserves are running out - the world's attention is turning to heavy oil
 Crude oil reserves are running out – the world’s attention is turning to heavy oil

Interest in unconventional oil has mounted as the price of crude oil hassoared past $120 a barrel. Traditional oil regions in the west, such as the North Sea, are in decline, and access to resources in many oil-rich countries, such as Russia and Venezuela, has become difficult for a variety of reasons, generally political. 

Wood Mackenzie, the consultancy, believes conventional production from countries outside Opec, the producers’ group, will peak in the next decade. “For oil companies trying to grow, they will either have to go to Opec countries, which is not easy, or look at unconventional oil,” says Rhodri Thomas of Wood Mackenzie.

All the big international oil companies have some involvement in unconventional oil. Even BP, which held out for years after its rivals had committed to heavy oil, announced a joint venture in Canada’s oil sands with Husky Energy late last year.

Attempts to develop heavy oil have run into problems

Heavy oil projects are being pursued in places such as Madagascar, Albania, Romania and Tatarstan in Russia, where Royal Dutch Shell won a contract last year. By far the two biggest known resources, however, are in Canada and Venezuela, and in both countries the development of heavy oil has run into problems.

In Venezuela, the drive by President Hugo Chávez to renegotiatecontracts on the heavy oil upgrader projects, which process the oil into a form that can be readily sold on world markets, has prompted ExxonMobil and ConocoPhillips to pull out.

The Congo - wiht a huge coverage of rain forest, concerns have been raised about damage to the fragile environment.
 The Congo – wiht a huge coverage of rain forest, concerns have been raised about damage to the fragile environment.

Only Eni among the western companies has announced substantial fresh investment in Venezuela since those moves from Mr Chávez, with a planned commitment worth an estimated $4bn. Other investments welcomed by Mr Chávez are from countries such as China. 

“It is not that Venezuela’s resources are not there, it is just whether the strategic partners the country have been selecting have the technology to develop those resources in the short term,” says David Fyfe of the International Energy Agency, the developed countries’ energy watchdog.

Concerns about the environment

In Canada, there has been a flood of foreign investment, but there are concerns about the effect of developing the oil sands on the environment, especially because of their use of water and carbon dioxide emissions.

Canadian oil sands projects have also been hit by soaring costs because of shortages of staff and equipment.

Eni’s Congo development will have lower costs, the company says, and water is plentiful in the area. However, environmental constraints will bite here, too. The project is in the forest, and trees will be felled to clear space.

Eni says it will restore the forest once the oil has been extracted. But that will limit output to at most 200,000 barrels a day.

As Mr Thomas of Wood Mackenzie puts it: “The volumes are there. It’s a question of how quickly you can get them out of the ground in an economic fashion. And there are bottlenecks in a wide range of systems.”

© 2008 Financial Times Deutschland

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