Smarter oil is better than slicker oil

The Financial Express, New Delhi
It is technology and delivery, stupid. Thus might Clinton�s aphorism on the economy be modified to highlight two significant obstacles to overcoming our hydrocarbons challenge of volume and quality. The fact that the oil and gas business is technology-intensive is well known. The fact that there are huge opportunity costs in not optimising technology is perhaps less appreciated. In 2007, we must focus on the means by which these costs can be minimised.

Few people who buy petrol and diesel at the retail outlet have any idea of the complexity of the operations that precede this sale. Crude oil is extracted from the subsurface. It is then often transported over hundreds of kilometers for processing through refineries to produce a slate of familiar products (LPG, kerosene, petrol and diesel). The products are brought to within our reach by pipelines, ships, rail and road. There are always anxieties about the robustness and capacity of the oil production and supply chain, but in reality the industry has a strong track record of getting the product to the customer efficiently and safely.

The main issue is not simple chain management, but whether companies are maximising the value at each stage of transaction across the chain. Are they recovering as much of the hydrocarbons in a reservoir as is technologically possible? Have they the appropriate technical tools and processes to make the correct decisions? Have they the right performance metrics against which to judge their efficiency? These are some of the questions that they wrestle with. They all know that given the scale of their business, even a fraction of a percentage point improvement in operational efficiency can translate into billions of additional value. And they know that to secure such gains, they must keep abreast of technology�and implement it fast enough India�s directorate general of hydrocarbons (DGH) has acknowledged that the recovery rate of hydrocarbons discovered by our oil companies is on average 28%.

This means that for every 100 barrels of discovered oil reserves in a reservoir, we succeed in bringing only 28 barrels to the market. The balance remains underground. The DGH knows that the average recovery rates of fields of comparable geology worldwide are significantly higher�some even in excess of 50%. The reasons for the difference between the two averages can be several. But other than those that have to do with the characteristics of individual fields, it is generally related to the nature and delivery of technology. For example, there is the technology of �enhanced oil recovery� (EOR). The underlying thrust of this technology is to alter the nature of the oil in the reservoir with heat, gas or chemicals so that the oil can flow more easily.

The process requires close multidisciplinary coordination between geologists, reservoir engineers and chemists. It is also very expensive. But companies that have successfully used it have seen a material reduction in their unit costs� a lowering in the rate of production decline of their mature fields from the expected 15% per annum to around 4% per annum and an increase in the recovery rates by between 15% to 20%. These two examples highlight the potential for upstream value creation. Were we in India to raise our recovery rates from the current average to international levels through the deployment of such technologies, we could raise domestic production significantly. Technology also offers huge scope for added value creation in the downstream refining and marketing segment.

One example. The differentials in the price of the relatively less expensive heavy sour crude and the more costly lighter sweet crude has widened appreciably in recent years. This has meant that refiners can now derive huge economic benefits by selecting the right slate of crudes for processing through their kit (assuming they have the kit for running a flexible slate in the first place). The process of selection is not simple, though. First, the price of crude is volatile. Second, the supplies of different crude types are uneven.

And third, there are many options. Technical tools exist to facilitate the decision, but these are useful only in an environment that allows for risk-laden entrepreneuralism. They are of no benefit if crude contracts have to be tendered and bureaucratically vetted. Yet, given that the refining industry has a total annual value of over $2 trillion, a marginal gain in efficiency could conceivably translate into billions of added value. In 2005, Shell processed 219 different types of crudes. Of these, 92 were new to its individual refineries and 18 to Shell worldwide.

It�s a pity that the IIT alumni meet held recently in Mumbai to deliberate on how they could harness their material and intellectual resources for the well being of the country had no session on energy and technology.

India does, however, have a clear policy blueprint for energy. That said, there is also a clear disjunct between intent and reality. The gap between demand and supply is not reducing; the quality of energy services is poor and truncated; and the nexus between economic growth, energy demand and environmental degradation is still too strong. We need a �technology initiative�. It should be a public-private partnership with three broad objectives. First, to ensure our industry keeps abreast of �state-of-the-art� technology; second, to help develop feasible procedures for the timely delivery and implementation of such technologies. And third, to facilitate intense R&D efforts on �greening� our current energy basket and on developing competitive renewable alternatives to fossil fuels.