Ending the End of Oil
Tight supply and soaring prices have some experts predicting the demise of the petroleum age. But those very economic forces are also spurring innovation that could keep us in black gold for years to come.
By Matthew Maier

(Business 2.0) – The petroleum age dawned on a Texas hill called Spindletop more than 100 years ago. The first predictions of the demise of oil weren't far behind. Today's talk of looming oil scarcity and permanently high prices echoes the dire forecasts of earlier eras: Experts predicted the "end of oil" in the early 1920s, again after World War II, and most famously in the 1970s--not long before oil prices collapsed from $38 a barrel to $9. In each case, what doomsayers underappreciated was the powerful impetus that rising prices give to innovation and technology; when prices surge, petroleum prospectors become uncannily good at figuring out new ways to suck hydrocarbons out of the ground.

That's happening again today. Oil prices are hovering at about $60 a barrel and aren't likely to go down much in the short term. The high prices are catalyzing experiments with new methods that promise a revolution in the energy business. Some are old approaches that have been given new economic life; others rely on massive computing power that simply wasn't available before. Researchers at the U.S. Geological Survey estimate that the energy sources and technologies we discuss on the following pages could produce 4 trillion barrels of oil--more than all the world's proven petroleum reserves right now. The end of oil will surely come someday, but if these approaches pay off, it won't come nearly as soon as some people fear.

SUPERDEEP OFFSHORE DRILLING

The hurricanes of '05 have made clear how important offshore wells in the Gulf of Mexico are to oil production. Before the storms hit, offshore rigs were responsible for 30 percent of U.S. production. As of the end of October, nearly a third of the gulf's rigs or pipelines were down, cutting production by 20 percent. Globally, nearly half of annual production comes from rigs boring into the seabed.

Most petroleum engineers believe that there's plenty more juice out there in the vast oceans. Now, thanks to the use of advanced fiber-optic technology, specially designed underwater drilling machines, and autonomous undersea robots, the hunt for hydrocarbons is reaching subsea depths it never could before. Using the latest technology, companies are tapping new reservoirs miles below the surface, off the coasts of Africa and Asia. Chevron and Transocean, a firm that owns deepwater drill ships, set a world record when they drilled a well almost two miles beneath the sea. "This is really one of the last frontiers for oil recovery," says Guy Cantwell, a spokesman for Transocean. All told, analysts at the U.S. Geological Survey estimate that nearly 300 billion barrels of oil still rest below the sea worldwide.

Exxon Mobil and BP alone have invested nearly $15 billion in the past decade in an attempt to harvest oil deep under the seafloor, bets that, as oil prices have risen, seem all the shrewder. One of the biggest challenges is to control the drills when they're nearly three miles down the hole, which has led companies like Schlumberger to develop innovative drills that can generate real-time video feeds of their environment, in addition to seismic snapshots that allow the drill to be adjusted on the go by technicians at a console on the rig. In the Gulf of Mexico, BP has already deployed a $1 billion rig that can drill nearly five miles down from waters more than a mile deep.

The harsh demands of superdeep drilling have already created a new field of robotic drilling technology. Among the leaders is Cybernetix, a French technology firm that has developed a series of underwater autonomous vehicles. Cybernetix is also perfecting a robot that will be able to fix undersea valves, pipes, and other elements of the production process.

THE PLAY Use new technology to tap previously undrillable terrain beneath the seafloor

PLAYERS ABB Offshore Systems, BP, Chevron, Cybernetix, Exxon Mobil, Schlumberger

POTENTIAL PAYOFF 300 billion barrels of recoverable reserves

OIL SANDS

According to the International Energy Agency, oil production is declining in 33 of the 48 largest oil-producing nations. But thanks to a 27,000-square-mile swath of largely untapped deposits in northern Alberta, Canada won't face that problem for decades. In fact, with an estimated 175 billion barrels of accessible oil buried in the tarlike sands scattered throughout the frigid region, Canada sits atop one of the largest known oil reserves in the world, two-thirds the size of Saudi Arabia's estimated 263 billion barrels.

But extracting the bitumen--a gooey, viscous form of petroleum that can be further refined to produce a synthetic form of crude oil--from the Albertan sands is a costly and environmentally punishing process. First the oil sand is dug out of the earth in a massive strip mine using 30-foot-high dump trucks. The sand is then crushed and separated in huge extraction plants before being diluted with naphtha, a highly toxic and flammable liquid that thins out the raw bitumen. The pricey equipment and laborious process costs the producers roughly $20 per barrel of crude, despite recent technological advances.

When oil prices hovered around $25 a barrel, as they did for much of the past decade, oil sands projects were considered prohibitively expensive. Suncor extracted crude oil from the Albertan sands 35 years ago, but it wasn't until recently, when oil prices spent months above $60 a barrel, that oil sands became one of the petroleum industry's most important targets. "The current prices have moved projects from the possible to the probable column very quickly," says Suncor spokesman Brad Bellows. The oil sands region of Alberta already produces nearly 1 million barrels a day, a figure expected to double in the next five years.

THE PLAY Exploit a plentiful gumlike form of hydrocarbons

PLAYERS Chevron, Shell, Suncor, Syncrude

POTENTIAL PAYOFF 175 billion barrels of recoverable reserves

1 DIG Oil sand is scooped out of a giant mine and deposited onto massive, 400-ton trucks.

2 CRUSH AND MOVE Bitumen-rich sand is ground in an ore preparation plant before being sent by pipeline to the primary extraction plant.

3 EXTRACT During the primary extraction process, the oil sand is placed in a giant tank where raw bitumen is separated from sand and water.

4 DILUTE Bitumen is mixed with naphtha, a chemical solvent, to remove remaining minerals and water.

5 UPGRADE To create synthetic crude oil, the bitumen is heated to 900 degrees in giant furnaces, a process that removes excess carbon. Hydrogen is added to prepare it for industrial use.

Source: Suncor

INTELLIGENT WELLS

To understand how advances in computing technology are affecting the petroleum industry, look no further than the Pod. Designed by Landmark Graphics, a unit of Halliburton that specializes in developing software for oil companies, the Pod is an Imax-style viewing room powered by a supercomputer. With a 45-foot screen and a 64-bit Unix-based operating system designed by Silicon Graphics, the Pod enables oil companies such as Shell and Chevron to create astonishingly accurate 3-D seismic models that highlight strata where oil and gas pockets lurk, taking much of the guesswork out of the drilling process.

Specialized software from companies like Landmark and new, low-cost supercomputers are bringing petroleum exploration and recovery closer to being an exact science. In the North Sea, Norwegian petroleum giant Statoil is using the latest software to help it position wells for optimal recovery from deposits at the bottom of the ocean. Statoil estimates that its IT initiatives will bring in an additional $400 million from its existing wells while saving $20 million in drilling costs over the next several years.

Advances in sensor technology and seismic surveying are also helping drillers find new oil, making the extraction process more efficient by orders of magnitude. Pressure and temperature sensors are beginning to supply companies with accurate profiles of wells and reservoirs to help them optimize the rate at which oil is withdrawn.

THE PLAY Apply cutting-edge IT to find new deposits and exploit existing ones

PLAYERS Landmark Graphics, Paradigm, Schlumberger, Silicon Graphics, WellDynamics

POTENTIAL PAYOFF 150 billion barrels of recoverable reserves

OIL SHALE

Legendary American geophysicist M. King Hubbert famously predicted in 1956 that U.S. oil production would peak in the early 1970s. Though ridiculed at the time, his prediction--today known as "Hubbert's peak"--came true, and domestic production has declined ever since. In the coming decade, however, American oil production could be on the upswing again. It isn't likely to be the controversial proposed drilling in the Arctic National Wildlife Refuge that does the trick, though that would boost production. The bigger kick could come from oil hidden in sedimentary rock known as oil shale found in vast quantities throughout western Colorado and parts of Utah and Wyoming. Government scientists have estimated that the United States is sitting on 2.6 trillion barrels of reserves in oil shale form, spread across an area of nearly 16,000 square miles of federal and privately owned land. The oil-rich terrain is the single largest untapped petroleum reserve in the world.

Like oil sands, oil shale is witheringly expensive to exploit; such efforts in the late 1970s famously collapsed when oil prices dropped from the highs of the Iran hostage era. The technology for extracting oil from shale has improved drastically since those days; industry leader Shell has come closest to perfecting a commercial process but still remains several years away. Shell's process involves drilling a series of holes, each as deep as 600 feet, which are then filled with heavy-duty electric heaters that warm the rock to 700 degrees Fahrenheit. The heating process releases a combination of oil and gas that can then be pumped out of the well. "We're confident that high-quality crude can be produced from shale for roughly $30 per barrel," says Shell spokeswoman Jill Davis.

Shell, Chevron, and six other firms have recently descended on the western slope of the Rocky Mountains, submitting applications to the Bureau of Land Management, which manages most of the oil shale reserves, to drill test wells. The U.S. Energy Policy Act, passed in August, requires that the agency issue licenses for research and development by February. Prices will have to stay high for oil shale to pay off, but the upside could be enormous.

THE PLAY Extract hydrocarbons trapped in ancient rock

PLAYERS Chevron, Exxon Mobil, Kennecott Exploration, Shell

POTENTIAL PAYOFF 2.6 trillion barrels or more of recoverable reserves

1 BORE IN In a 30- by 20-foot field, a series of 600-foot-deep holes are drilled to reach oil shale--sedimentary rock containing hydrocarbons. The holes are spaced 5 feet apart around the perimeter and within the field.

2 FIRE UP Specialized heating tubes placed in the holes warm the rock to 700 degrees Fahrenheit, a process that can take anywhere from eight months to four years.

3 SPLIT OFF At the molecular level, the heat separates carbon--oil and gas--from the rock.

4 LIFT OUT The oil and gas are then sucked from the ground through holes equipped with pumps at the top.

Sources: Bureau of Land Management; Shell

REVITALIZING OLD FIELDS

One of the most promising areas of oil exploration involves a staggeringly simple insight: There are still hundreds of billions of barrels of oil stranded in existing reservoirs. When a major prospector like BP or Exxon Mobil discovers a promising field, it sets up its equipment and spends years extracting oil until the pressure in the wells ebbs and it becomes more difficult--and costlier--to force the stuff to the surface. Once the output starts to decline, the majors often sell off the asset to a smaller petroleum firm and move on to the next field. When they depart, these giants can leave as much as 70 percent of the well's resources untapped.

That realization has companies like Anadarko Petroleum, Newfield Exploration, and others scrambling to apply advanced oil recovery techniques to these aging fields. Their methods range from the straightforward (pumping water into the wells to force out the oil) to the truly inspired--like filling wells with bioengineered microbes that help release oil stuck in microscopic holes, making it easier to extract. Called microbial-enhanced oil recovery, this approach is being perfected by researchers at Caltech and the University of Kansas. Dane Cantwell, an area manager at Anadarko Petroleum, estimates that applying these secondary and tertiary techniques could raise production from existing oil fields tenfold. At the Forties oil field in the North Sea, Apache has boosted annual production by 100 percent to 80,000 barrels a day by installing new pumps to increase water flow.

The techniques aren't cheap--some can cost as much as $3 million per well--but with many analysts expecting oil prices to remain high for the foreseeable future, enhanced oil recovery methods are attracting a flood of new players. "Most people say the easy oil has been found," says Richard Ward, director of research with the Cambridge Energy Research Association. "So these techniques are not only attractive, they're absolutely mandatory to keep the oil flowing."

THE PLAY Use advanced extraction techniques to wring more crude from existing wells

PLAYERS Anadarko Petroleum, Apache, Caltech, Newfield Exploration, Whiting Petroleum

POTENTIAL PAYOFF 377 billion barrels of recoverable reserves

C02 FLOODING Employed widely in Texas's Permian Basin, this process uses carbon dioxide that is pumped into an oil reservoir, where it expands and pushes the petroleum to a well for extraction. Flooding reservoirs can boost oil production by 40 percent.

HORIZONTAL DRILLING When oil is deposited in layers between different strata of rock, a single horizontal well often produces more oil than several conventional wells. Horizontal drilling is used extensively off the coasts of Russia and Canada.

MICROBIAL INJECTION This system starts in a petri dish. Bioengineered "bugs" that produce a detergent-like substance are pumped into old wells to make the oil less viscous, enabling pumps to suck out more of a reservoir's hydrocarbons.

Sources: Caltech; Exxon Mobil; University of Kansas