The world's oil and gas industry development – Wärtsilä's

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					   Industry overview

   The world’s oil and gas industry
   development – Wärtsilä’s view
   by Pauli Jumppanen, Doctor of Technology, Senior Advisor to Wärtsilä



Oil and gas will be the world’s main
fuels for decades to come. But
alternative and substitute fuels will
take an increasingly prominent role,
driven both by economic factors and by
active development of new technology.
Wärtsilä intends to maintain its leading
presence as a technology and solutions
provider to this vital industry.

Oil accounts for about 37% and natural
gas for about 24% of the world’s primary
energy consumption today. These shares
have remained fairly constant since the
decline in early 1980s, while the absolute
consumption figures have grown on average
by 2-3% a year, corresponding roughly to
world economic growth. So far economic
conditions in oil and natural gas production
have been governed by their good                       Fig. 1 – Proven oil reserves at end 2004, billion barrels.
availability and competitive price.
    A number of estimates have been
made of recoverable oil and natural gas
reserves, and the results have been quite
different depending on the technological
and commercial criteria used for the
hydrocarbon fields in the analysis.
According to the well-respected ‘BP
Statistical Review of World Energy’, known
conventional oil reserves amount to 162
billion tons and should be enough for
40 years at current consumption levels.
Known natural gas reserves amount to
180 billion cubic metres and would be
sufficient, correspondingly, for 67 years of
consumption. The EIA estimates original
recoverable oil reserves in the Earth at 320
billion tons, some 90% of which has been
recovered and already 50% produced.
    In addition to conventional oil and gas
reserves, there are further huge quantities
of hydrocarbons in extra heavy oils and
bitumen, oil sands and shale, and tight
gas sands and gas hydrate formations.
Moreover, many potential high arctic
reservoirs as well as deepwater fields are
not included in conventional recoverable
reserves due to lack of technology or the
commercial feasibility to exploit them in
the near term. However, new technology is
being developed for processing extra heavy
oils and extracting oil from oil sands and
shale and several pilot-scale plants are now
in operation.

Energy News – Issue 22                                                                                              7
      Industry overview




    Fig. 2 – Crude oil prices since 1861, US dollars per barrel.




                                                                               Alternative and substitute fuels
                                                                               Oil and natural gas are likely to maintain
                                                                               their dominating position as traffic
                                                                               fuels and also as primary fuels for power
                                                                               generation for several decades to come.
                                                                               However, production of alternative and
                                                                               substitute fuels are being developed, and
                                                                               these will gradually increase their share
                                                                               of the energy market and, specifically, of
                                                                               market growth.
                                                                                  Typical substitutes currently considered
                                                                               include coal gas and biofuels as well as
    Fig. 3 – Rotterdam oil product prices, US dollars per tonne.               wind power and hydrogen produced from
                                                                               renewable sources. The speed of their
                                                                               development will depend significantly on
                                                                               changes in the energy market and on global
                                                                               and national policies introduced for their
                                                                               development.

                                                                               Political and environmental factors
                                                                               As discussed above, the critical factor in the
                                                                               production and distribution of natural gas
                                                                               in the near and medium term is not the
                                                                               sufficiency of the reserves. The most critical
                                                                               issues today are of a political, geopolitical
                                                                               and environmental nature, as these
                                                                               significantly influence the world energy
                                                                               market and current fuel prices.
                                                                                  It is well-known that the majority of the
                                                                               known oil reserves (62%) are located in the
                                                                               Middle East area and the bulk of natural
                                                                               gas reserves in the Middle East (40%)
                                                                               and Russia (26%). The smallest reserves-
    Fig. 4 – Proved natural gas reserves at end 2004, trillion cubic metres.   to-production ratios, both for crude oil
                                                                               and natural gas, are found today in North

8                                                                                                 Energy News – Issue 22
                                                 taken by alternative and substitute fuels.      Wärtsilä’s focus
                                                 Future increases in oil and gas production      Wärtsilä is the leading global supplier of
                                                 should take place especially in Latin           ship power equipment and of solutions
                                                 America and Africa, and possibly still in the   for decentralized power systems based
                                                 Middle East.                                    on medium-speed piston engines and
                                                    We expect more exploration and               supporting services. Therefore oil and
                                                 production in the arctic regions of Russia      natural gas based fuels, their availability,
                                                 and North America, a good example of            cost structure and technological
                                                 which is the new consortium formed              development are of great importance to us.
                                                 for the giant Stockmanovskoye gas field          Wärtsilä constructs integrated and packaged
                                                 in the Barents Sea. Oil and natural gas         power systems based on medium-speed
                                                 consumption is likely to grow fastest in        diesel, gas-diesel and gas-piston engines,
                                                 China and India, but also faster in other       and its technology is known for its high
                                                 EMEs (emerging market economies) than           reliability and performance.
                                                 in the OECD countries.                              For several decades, emissions reduction
                                                    The development of future oil and gas        research has been a significant part of
                                                 technology should lead to better security       Wärtsilä’s product development, and special
                                                 of operations and improved economy              attention has been paid to NOX reduction,
                                                 of projects. The former includes both           for which Wärtsilä has introduced several
                                                 the security of supplies and the safety of      new innovative solutions. Besides the ship
                                                 operations against various environmental        power and onshore power production
                                                 hazards, and the latter the development         applications, Wärtsilä is developing power
                                                 of all business segments both upstream          systems and solutions for the oil and gas
                                                 (exploration and production) and                industry, which are reviewed shortly below
                                                 downstream (distribution and marketing).        and described in detail elsewhere in this
                                                 For example, oil production economy             issue of Energy News.
                                                 can still be improved by using a higher             Since the early 1990s, Wärtsilä has
                                                 percentage of associated gas to produce oil     delivered a number of power systems for
                                                 field energy.                                    both onshore and offshore oil and gas
America, Western Europe and Asia-Pacific.                                                         industry construction projects. The main
    In addition to geopolitical imbalance,       Impact of high prices                           focus areas have been oilfield power, crude
many areas with significant hydrocarbon           High oil prices followed by rising prices of    oil pumping, and natural gas compression
reserves are hampered by local political         other fuels have a direct, short-term impact    for gas distribution and storage.
and ethnic conflicts, or have insufficient         on the global energy market and most                Wärtsilä units have demonstrated good
infrastructure for operations and                national economies. One should remember,        availability, high efficiency and excellent
investments. Such areas and countries are        however, that the price of oil in 1979          flexibility in the selected applications, as
found especially in Latin America, West          reached US$ 80 per barrel at today’s rates      well as sufficient capabilities for burning
Africa and the Caspian region, although          due to the Iranian revolution, and then         available fuels including heavy oils, crude
conditions in many of those areas are now        stayed above US$ 40 per barrel for one and      oils and field gases from natural gas or the
gradually improving.                             a half years.                                   production of associated gas. The projects
    The latest challenge for oil and natural        High oil prices will encourage the           have been implemented in co-operation
gas exploitation and associated energy           development and use of alternative fuels in     with compressor, pump and other oil and
production results from their influence on        the marketplace. As the average price of oil    gas industry manufacturers and vendors,
the environment and the world climate.           was as high as US$ 38 per barrel in 2004,       and have proved to be technologically
Local environmental problems have already        coal consumption rose by 6.5% and the           successful and economically viable.
been observed during the past two to three       consumption of natural gas by 3.5%, one             As discussed above, the oil and natural
decades, and also partly solved, but the         percentage point more than for several years    gas industry now lives in a changing climate
influence on global warming and global            earlier.                                        characterized by fluctuating fuel prices,
weather patterns is quite a new and hotly           High natural gas prices are also likely to   political instability, environmental concerns
disputed issue.                                  spur the development of LNG (liquefied           and competition from substitute fuels. This
    This concerns, of course, not only oil and   natural gas) and its trading, which will        is creating concerns about what is going to
natural gas, but also other fossil fuels. Much   further diversify the energy market; in         happen to the world energy market, and is
research will be conducted in this area during   2004 alone, LNG supplies to the USA             also posing new challenges for the industry’s
the years to come, but regardless of its final    increased by 30%. Existing new technology       performance.
outcome, events like hurricane Katrina will      projects for the development of substitute          The introduction of new technology,
significantly influence both technological         fuels include coal gasification with CO2         development of better infrastructure
solutions and commercial conditions in future    sequestration, hydrogen production in gas       and co-operation inside and outside the
oil and natural gas development.                 fields with CO2 pumping into the reservoir,      industry will evidently become important
                                                 large-scale production of gaseous and liquid    issues in future oil and gas exploitation.
Development trends                               state biofuels, and hydrogen production         Power production is and will be an
Wärtsilä’s vision of future energy               from wind, solar and renewable sources.         important part of the industry. Wärtsilä is
development includes a strong long-term          However, full commercialization of many         interested in participating in this business
role for oil and natural gas in the world        of these new technologies could take 20-30      and providing new technology and
energy mix with a gradually increasing role      years, or even more.                            solutions for its further development.

Energy News – Issue 22                                                                                                                      9