Strategic Shifts in Energy Industry in the coming decades

 | June 06,2011 09:53 am IST

The entire value chain of energy industry is experiencing a dramatic upheaval and the coming decades will reflect how the restructuring in this volatile sector occurs. With the current forecast of proven recoverable resources, Crude Oil is expected to last for another 40 years from now at current rates of consumption and natural gas resources are expected to last for another 70 years!


The million dollar question today is what will be the source of energy in the future.

Renewable resources of energy will increasingly play a bigger role but they are not expected to contribute not more than 9% of world’s total energy consumption in future. Today, 80% of the energy contributed by renewable sources of energy is derived from Hydroelectric Power.


Transmission of electricity over long distances are some of the problems associated with renewable sources of energy like wind energy, geothermal energy etc. Dedicated renewable energy plants are not possible at current levels of technological innovation, e.g. electricity derived from wind energy may not coincide with peak demand period and may have to be supplemented with conventional sources of energy. Solar energy has the benefit of deriving energy that coincides with peak demand during the day but its current contribution is less than 2%. However, technological innovations in harnessing these renewable energy sources like wind, solar, geothermal, biomass, tidal, hydroelectric, bio-ethanol etc will likely increase their contribution to meeting world energy demand in future.


The important question that still remains is what will be the main energy source of the future.


Before we address this question, let’s discuss how we differentiate between proven recoverable sources of energy and available resources. Proven recoverable resources of energy are those that at current levels of technological innovation, are economically recoverable whereas available resources of energy are simply those which have been identified but cannot be economically recovered at current level of crude oil prices, in other words energy spent in recovering them is greater than energy content provided by them. As crude oil prices will increase in future, many of these available resources will become economically recoverable and hence contribute towards meeting energy demand. Hence, there is a blurred line between proven recoverable resources and available resources of energy.


There is another strategic shift that is currently happening in upstream exploration and drilling industry and downstream refining industry. With crude prices sky rocketing, refiners scramble to extract the last drop from bottom of the barrel and turn them into useful products. This has invariably led to increase in complexity of refineries and modern day refineries are divided into simple refineries, complex refineries, and very complex refineries – the classification owes to complexity of operations involved in processing of type of crude and conversion of crude into products like gasoline and diesel. While not delving into details of types of crude, the shift has been towards processing heavier crudes by complex and very complex refineries which increases their refinery margins owing to lower cost of heavier crudes as compared to lighter crudes. However, forces of demand and supply ensure existence of simple refineries to maintain the balance. For example, if refineries turn to complex and very complex, there demand for heavier crudes will increase and lighter crudes will decrease. This will lead to increase in price of heavier crudes and decrease in differential between lighter and heavier crudes. This will in turn reduce complex refineries margins and affect overall economics.


Even more dramatic shift will come in recovering oil and natural gas embedded in Shale deposits.


The difficulty with recovery from shale deposits is due to its very low permeability which affects its economics of drilling. With the invention of horizontal drilling technology, drilling from shale deposits is expected to increase in a big way in near future. It has been estimated that total energy resources embedded in shales are higher than the total crude oil resources available and hence they are considered as the next big energy resource. How the energy markets for development of Shale deposits fields will shape is still a matter of debate!


(The content above reflects purely authors views based on his years of experience with oil and gas industry)