THE significance of the question whether international oil majors can help in our search for oil is thrown into sharp relief by one statistical inversion. In the early 1980s, India imported 30% of its crude oil requirements; the balance 70% was met through domestic production. Today the opposite is the case. We import 70% of our consumption and domestic supply accounts for only 30%.

This situation has come to pass because of essentially two trends. One, our public sector oil companies, ONGC and Oil India, have had limited success in finding and developing new reserves. Bombay High was discovered in the mid-1970s but since then there have been few discoveries of significance. In consequence, domestic supplies have stagnated around 35 mtpa for the past decade or so. Second, our demand for oil products has grown sharply. In 1994 India consumed 67 mtpa of crude oil; today we consume in excess of 120 mtpa. The compound annual growth rate (CAGR) over this past decade has been 5.9%, which next to China’s rate of 7.5% is the fastest of all countries.

In consequence, India today confronts three major challenges: the challenge of energy security; the challenge of meeting oil demand; and the challenge of the environment. The first two hardly need an explanation. Our economy is highly exposed to the vicissitudes of the international oil market and the fallout of unexpected (but probable) disruptions in crude oil supply. And our consumers are continually battling the problems of affordability and/or shortages (LPG being the latest product in scarce supply).

 

The third does however require an explanation. There is today too strong a correlation between economic growth (which over the past decade has ranged between 5.5% and 6.5%), oil demand and air pollution. This is partly because of industrial growth and partly due to inefficiency in the usage of oil. The former is a positive; the latter has become an issue. We are now amongst the more inefficient users of oil in the world. For instance, for every USD 1000 increase in GDP we add an incremental 1.5 barrels of oil to consumption. The comparable figure for Italy, France and Germany is 0.5 barrel and for the US 0.75 barrel. A predominant share of this incremental demand is accounted for by transportation fuels (viz. gasoline and diesel).

The concomitant impact of exhaust emissions on the quality of air has been severe and particularly so in our metropolis. The Supreme Court has helped arrest the trend in Delhi and Mumbai by dictating emission norms. But the underlying issues have not been addressed. The current strong link between oil demand and air pollution exists because of the poor quality of the fuels. This link can be weakened by correcting the price, margin and subsidy distortions that incentivise the dealers to adulterate and also by adopting technologies for cleaner fuels.

In the face of these three challenges, the title question should perhaps be expanded. We should ask not just whether international oil majors can help in our search for domestic oil, but also, can they help us deliver cleaner fuels and in general move the eco-nomy towards a lower carbon future?

 

I would answer both questions in the affirmative for four reasons. One, international oil majors have leading edge but proprietary technology for exploration and production. Access to this technology would improve our chances of discovering new fields. And it would help increase the recovery of the hydrocarbons discovered. Today, according to the Directorate General of Hydrocarbons (DGH), we recover only 28% of the hydrocarbons in place compared to the average of 45-50% for fields of comparable geology internationally. The difference if bridged would add billions to our hydrocarbon wealth.

India is not sitting on a sea of oil. It is not a Kuwait or a Saudi Arabia. There is no doubt potential for increased domestic production. But given our track record of exploration it must be acknowledged that new discoveries will most likely be in difficult geologies and/or harsh terrains like deep waters or the Himalayan foothills. To find and then develop our indigenous hydrocarbon reserves will therefore not be an easy task. And once found, to ensure that we extract the maximum value will be an equally challenging goal.

The technology with oil majors can support both these objectives. Their investment in research and innovation has led to technological breakthroughs that have significantly improved the productivity of existing discoveries and facilitated access to resources from difficult and unconventional sources. Several examples from the work done by Shell will help illustrate this point.

The first example has to do with the drilling of wells. Traditionally wells are drilled like telescopes; pipes of decreasing diameter are inserted within each other as the well goes deeper. Thus the deeper the well, the narrower the bore of the pipe and hence the greater the limitation on the flow rate of hydrocarbons. The Shell solution has been to expand the pipe in the ground and to pass a tool through it after it has passed through the pipe above. With hindsight this solution might seem blindingly obvious. In fact the results have been revolutionary. Productivity has increased by up to 70% from some of Shell’s existing gas wells.

The second example has to do with the use of ‘smart tools’ for managing the production process in the reservoir. These tools have been used to separate water from the oil down hole in the wells so that the water never reaches the surface, to monitor the reservoir in real time, and to control the process remotely or automatically. These smart tools have helped Shell optimize production and have improved the recovery rate of oil/gas by as much as 8%.

 

Most significant perhaps is the application of Enhanced Oil Recovery (EOR) technologies. These technologies involve changing the nature of the oil in the reservoir with heat, gas or chemicals so that it can flow more easily. Shell is currently involved in several EOR projects. One is in the Zalzala field in the Harwee cluster in Oman. This project involves the injection of miscible sour gas at 450 bar pressure through 33 injection wells. The objective is to blend the gas with the oil and thereby carry it through to the producing fields. The key to success lies in ensuring that gas of correct molecular weight and composition is injected at precisely the right place, the right temperature and the right pressure and that to suit nine different reservoirs.

EOR schemes are complex and energy intensive, and from an engineering standpoint they require close multidisciplinary cooperation between geologists, reservoir engineers and chemists. The projects are also very expensive and it is a huge challenge to deliver them on time and budget. But if done properly they can cut unit costs, lower the decline in production from mature fields from the expected 15% to 4% per annum, and increase the recovery rates of oil in place by 15%-20%.

Shell has been a pioneer in accessing hydrocarbons from difficult locations and/or new sources. Two examples will illustrate. One, Shell has developed ‘subsea to beach’ technology that enables it to transfer gas and condensate it at reservoir pressures from unmanned platforms to onshore processing facilities and as a result generate economic value from fields that would otherwise be marginal. The Golden Eye field North of Scotland is commercial because of this innovative technology. Here gas is transferred from an offshore platform to St Fergus on land 105 kms away.

Second, Shell has technology for coal gasification. This technology provides for 99% carbon conversion efficiency and the integrated coal gasification combined cycle plant produces 10-15% less carbon dioxide emissions than the most efficient conventional coal generation plant. The technology is also cost effective relative to traditional coal fired power generation and equipped with the most modern clean up equipment.

 

My second reason for an affirmative response to the title question has to do with the work that oil majors are doing to develop and deliver clean fuels and renewable energy. We know that our economy will be dependent on fossil fuels for decades to come and that it will not be easy to switch tracks and move forward towards a non-fossil fuel energy system. However, that must not deter us from making the effort. The consequence of continued and increasing dependence on fossil fuel could adversely impact not just economic growth but also the environment. We have to work towards a low carbon future. It is in this context that I believe we need to co-opt the support of the oil majors. Here too they are in the forefront of technological progress.

For instance, Shell has proven technology and operational experience for converting gas to ultra clean liquid fuels (GTL). It has operated a 15000 b/d GTL plant in Malaysia for the past 10 years. And it is currently constructing a world scale 150,000 b/d GTL plant in Qatar. This technology produces fuels that are virtually free of sulphur and aromatics and have excellent combustion qualities. Moreover the properties allow for a better blend of lubricants. The end result is fuels that not only have lower local emissions than even conventional ultra low sulphur diesel but also improve the reliability of engines.

 

Shell is also working on several other ‘clean fuel’ projects. One has to do with the development of advanced bio-fuels – cellulose ethanol produced from using enzymes from waste straw rather than from food production. The initial results show that these fuels will produce 15% and even less of the carbon emissions of conventional petrol. The major challenge that has yet to be overcome before fuels can be produced on a commercial scale relates to the sourcing of material from large areas. The economic and environmental implications also require further study. Another has to do with the development of hydrogen fuel cells for powering vehicles and power generation. Recently the company opened an integrated gasoline and hydrogen service station in Washington D.C. This station provides all the normal services for a motorist but also hydrogen for a fleet of six General Motor’s fuel cell vehicles and other manufacturers like Daimler Chrysler, Toyota, Ford and Honda. Here too there are many technical and commercial hurdles to overcome but the progress is tangibly forward.

 

My third reason for recommending a closer relationship with oil majors has to do with the emergent project management and operational challenges that our companies are likely to face in the coming years as they embark on projects of increasing size and complexity.

Size and scale have always been a characteristic of the oil industry and our public sector companies ONGC/OIL have acquired considerable experience in managing large and complex projects. But the dimension of future projects are likely to be of an order of magnitude different from what we have seen in the past especially as we endeavour to meet our growing demand for oil/gas. The International Energy Agency (IEA) has for instance estimated that between now and 2030, the international oil industry will need to invest US $3 trillion, much of it in the developing world, to meet the growth in global demand. The challenge ahead will therefore be to acquire the requisite skills, finance and organizational capabilities for managing and executing multibillion dollar projects that cut across national boundaries, technical disciplines and corporate structures.

Oil majors have these capabilities. They have extensive operational experience in managing and executing not just one but several such projects simultaneously. They understand the risks and the possibilities, and they have strong balance sheets.

Shell is for instance currently involved in the development of the largest single project undertaken in the world so far. This is the Sakhalin 2 LNG project in Russia. This project involves the production of gas from ice bound platforms, by the flow of gas over 850 km by pipeline to the south, and the construction of a two tonne liquefaction plant. The project will deliver first Russian LNG from the end of 2007 and in time produce and ship 9.6 million tons of LNG per annum to markets in East Asia and across the Pacific to North American West Coast/Mexico. This is a multi-disciplinary project. It involves working closely with the coventurers and the host Russian government; its challenges cut across technical disciplines; its marketing team is global and the organizational structure is complex. But it is a herald of what lies ahead. The leverage of the combined balance sheets, technical and organizational capabilities of our public sector companies on one hand and the oil majors on the other would make it easier to bring such projects to fruition than if our companies were to act alone.

 

The final reason for responding affirmatively to the title question has to do with integration. Exploration and Production (EP) is, as has been repeatedly suggested, a highly risky and capital intensive activity. It involves an interlock of three sets of probability – the probability that a given geologic structure contains hydrocarbons, the probability that the hydrocarbons can be located, and the probability that once located the hydrocarbons can be commercially developed. All three uncertainties have to be overcome for an EP project to be successful.

As indicated, technology is a key factor in enhancing the probability of locating and once located in recovering the hydrocarbons. Integration will be the key for bringing the product to the market, primarily because of the remoteness from the market of likely new discoveries. Success will rest on companies working closely with staff and contractors across disciplines and geography, the alignment of partners and coventurers on strategy, processes and standards, and in general the creation of a seamless integrated relationship between the upstream (viz. exploration and production) and the downstream (viz. the refining, distribution, marketing) and through both, to the consumer.

 

Our oil companies have only recently embarked on international projects. They are not integrated entities. ONGC has limited trading and marketing capabilities; IOC has equally limited upstream experience. To maximize the value of their international forays, they should therefore consider partnerships with companies that have long experience of integrated functioning.

The challenge facing the Indian energy sector and in particular the oil industry is enormous; the stakes are high and the costs of failure could be great. The forces of globalization, liberalization and technology have compelled new paradigms of relationships and behaviour. This has been recognized and adopted by both the national oil companies and the oil majors. Today our government is actively soliciting the risk capital and technology of oil majors. And oil majors are showing renewed interest in participating in India’s search for domestic oil. The conditions for striking a win-win partnership have never been so good. We need to strike such partnerships and harness some of the benefits that this article has outlined.

 

* The views expressed are personal.