Oil industry ready to gamble on alternative energy

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Miles from the nearest port, pipeline or airstrip, dense black oil emerges from a small stream near Bemolanga, in central Madagascar. Few people – even those in the energy industry – connect the Indian Ocean island with crude oil, but that will change in the next 15 years as the hunt for unconventional resources intensifies.

Extracting and refining unconventional oil and natural gas, such as the goo emerging in Madagascar, uses large amounts of energy. Nevertheless, from 2020 such extraction will be critical to the world’s economic health.

By that time, most of the globe’s easily accessible oilfields will be in decline. Production growth will keep up with demand only if fields such as Madagascar Oil’s Bemolanga are tapped.

Wood Mackenzie, the consultant, estimates the world holds such vast amounts of difficult-to-extract oil and gas that it undermines the argument the planet is running out of hydrocarbons.

But not all of Wood Mackenzie’s findings are so comforting. Its calculations show the transition to unconventional oil is coming more quickly than many had expected. Whether the shift will be smooth is far from certain.

Companies face massive challenges in extracting such hydrocarbons. In the case of Madagascar, the hurdles that have yet to be overcome include the remoteness of the fields, quickly-eroding ground that makes road construction difficult, and the environmental implications.

Oil prices would have to remain at about $60 a barrel to make a decent profit on the investment.

Analysts at Sanford Bernstein, the financial services group, say ExxonMobil, Marathon and Chevron of the US, and Europe’s Royal Dutch Shell and BG are making the bet. More than 30 per cent of their production will come from unconventional oil and gas by 2020.

International oil executives in China say they are being approached to import more heavy oil into the country while simultaneously exploring ways to extract the sizeable unconventional oil and gas resources within China’s borders.

Extracting extra heavy oil profitably is possible, as illustrated by the Alberta oil sand rush, but turning the tar-like substance into liquid uses a lot of natural gas and industry is worried that it will run out before the heavy oil does.

Hugo Chávez, Venezuela’s president, has seized control of the Orinoco tar belt projects, making their future far less certain. But heavy and extra heavy oil are not the only unconventional global resources.

Shale oil and gas hydrates account for most of the world’s unconventional reserves and require significant technological breakthroughs before they can be exploited. As in Madagascar, the remoteness and environmental sensitivity of many reserves pose problems.

But judging from Madagascar’s hotel lobbies, where frontier oil cowboys are being replaced by big-energy executives, the industry believes it is up to the challenge.

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