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Petroleum: The Gift That Keeps On Giving

In 1798, Thomas Malthus, an English cleric and scholar, published An Essay on the Principle of Population. The central thesis was that population would grow exponentially, while food production would do so linearly, leading to catastrophic famine beyond the cross-over point. He did explore interventions on population growth, but the linearity of food production was not seriously challenged until a century later.

In 1909, Fritz Haber invented a means to produce industrial-scale ammonia (later perfected in collaboration with a BASF colleague, Carl Bosch, yielding the Haber-Bosch process) by reacting hydrogen from natural gas with nitrogen from the air. For this he received the Nobel Prize in 1918, although not without controversy due to his wartime role in the production of chlorine as a chemical weapon. Ammonia-based fertilizer, primarily in the form of ammonium nitrate and urea, transformed agricultural production, resulting in complete avoidance of the “Malthusian catastrophe.” This was the first dramatic contribution of the petroleum industry for the betterment of the human condition.

For sheer impact, in touching the lives of virtually everybody on the planet, Haber-Bosch is hard, if not impossible, to beat. While food (together with water) is arguably the most important human need in terms of sustaining life, affordable energy is an important determinant of the quality of that life. Low-cost energy is the tide that lifts all boats of economic prosperity. Innovation in the petroleum industry has, in the past decade alone, created widespread low-cost energy that appears to be here to stay.

It began with shale gas. The first decade of this century saw wild fluctuation in the price of natural gas. Few parameters dampen the enthusiasm for capital investment more than uncertainty in the price of key consumables. Unlike oil, gas pricing is regional. The chemical industry fed by natural gas, such as methanol production, fled from the US to countries with cheap gas. Then, a combination of the technologies of horizontal drilling and hydraulic fracturing led to the exploitation of gas in geologies previously considered intractable: shale gas deposits. An explosion of drilling resulted in gas priced under $3/million BTU. The volumes eliminated the need for imported liquefied natural gas (LNG). In fact, the US became an exporter of LNG. The net effect was that natural gas prices dropped and stabilized worldwide, although at higher levels than in the US. And increased availability of LNG in Europe resulted in gas no longer being considered as a potential weapon of political will.

Shale gas single-handedly accounted for the emergence of the US from the last recession. Natural gas is either a critical raw material (e.g., for ammonia or methanol synthesis) or is a source of energy for a reaction such as in steel making. Cheap and plentiful natural gas catapulted the growth of the associated industrial processes.

The effect of shale oil production was even more profound. It helped cut the price of oil in half in 2015 and prices have, by and large, stayed in that range. Net importing nations such as India were able to spend the savings on other domestic priorities. OPEC lost most of its ability to manipulate prices. The US Strategic Petroleum Reserve has become passé; the oil in the ground is the reserve, because of the ability to produce quickly from new wells. North America is now essentially energy secure, and a bright line can be drawn between energy security and national security.

What are the chances that gift will keep on giving? Very good, for the following reasons. The shale oil production that rocked the oil pricing world has continued unabated. Many properties changed hands, and the supermajors are now seriously in play. Innovation allows shale oil to be profitable even at depressed prices, which, in my opinion, are here to stay awhile longer.

Now for an interesting statistic. Shale gas drilling rigs have declined by 87% over the past decade, and yet shale gas production has increased by 58%. The reason lies in the increased oil production over the same period, from 5 million B/D in 2008 to 11.6 million B/D in 2018. The bulk of this is shale oil. Being light (made up of relatively smaller ­molecules), it has significant associated ­natural gas. In the Permian Basin, currently the hottest play, every ­additional million B/D of oil produces 2.2 Bcf/d of associated gas. More oil, a virtual certainty now, means more natural gas. Low to moderate gas prices are here to stay.

Finally, hydrocarbon-fed petrochemicals, as a class, have changed the lives of people forever. In the 1967 movie The Graduate, Dustin Hoffman’s character is given the advice to go into “plastics” as a career. Back then such advice was either prescient, ill-informed, or simply in jest. Today, we cannot do without them. They are inexpensive, have a multiplicity of uses, and are enduring replacements for glass and metal in many applications. I doubt anybody wishes for the days before disposable syringes, medical instruments in sterile packaging, and a host of other medical applications. In most cases, the starting material to produce the plastic is a component of natural gas.

The last hundred years were bookended by two petroleum industry-driven events that had a major impact on the populace and the time in between was interspersed with a stream of innovations and materials that markedly improved quality of life worldwide. The gift does, indeed, keep on giving.

Vikram Rao is executive director of the Research Triangle Energy Consortium (www.rtec-rtp.org), a nonprofit in energy founded by Duke University, North Carolina State University, RTI International, and the University of North Carolina at Chapel Hill. Its mission is to illuminate US national energy priorities, and those of the world by extension, and to catalyze research to address these priorities.

Rao has advised the nonprofit RTI International, venture capitalist Energy Ventures AS, and firms BioLargo Inc., Global Energy Talent Ltd., and Integro Earth Fuels Inc. and served on the Science Council of Royal Dutch Shell. He retired as senior vice president and chief technology officer of Halliburton in 2008. He also served as chairman of the North Carolina Mining and Energy Commission. His book, Shale Gas: the Promise and the Peril, was released in 2012 by RTI Press. Rao holds a bachelor’s degree in engineering from the Indian Institute of Technology in Madras, India, and a master’s degree and doctorate in engineering from Stanford University. He is the author of more than 50 publications and has been awarded 40 US patents and foreign analogs.

Petroleum: The Gift That Keeps On Giving

Vikram Rao, Research Triangle Energy Consortium

01 March 2019

Volume: 71 | Issue: 3

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