By SCOTT W. TINKER

A Commentary:

Oil and Gas Research at Critical Juncture

Editor's note: Tinker is director of the Bureau of Economic Geology, The University of Texas at Austin.

Energy Consumption by Fuel Type

Energy Dollars

Recoverable Portion of In-Place Gas Resource

Historical U.S. Composition of Total Oil Discoveries

This column addresses the proposed budget cuts to the U.S. Department of Energy's Fossil Energy Research and Development -- specifically the National Energy Technology Laboratory (NETL) and the National Petroleum Technology Office (NPTO) programs.

The oil technology budget was reduced from $56.2 million in 2002 to $42.3 million in 2003 to $15.0 million in 2004. The natural gas technology budget was kept level from $44.1 million in 2002 to $47.3 million in 2003, and reduced to $26.6 million in 2004.

Fossil Energy Consumption and Trends

The past 20 years (1980-1999) have seen:

• A steady and predictable decrease in the percentage of global energy consumption satisfied by oil (46 percent down to 40 percent) and coal (26 percent down to 22 percent).
• An associated increase in the percentage of global energy consumption satisfied by a combination of natural gas, nuclear and other renewables (28 percent up to 38 percent).
• Total global energy consumption increased by nearly 35 percent (from 282 quads to 379 quads) and shows few signs of slowing.
• U.S. total energy consumption increased 23 percent (from 78 to 97 quads).

In contrast to global consumption -- which shows a trend away from coal and oil to more efficient, abundant and environmentally sound natural gas, nuclear and renewables -- the U.S. energy consumption mix has remained flat for two decades, to a point where today it is nearly identical to the global energy mix (coal 22 percent, oil 39 percent and natural gas 23 percent).

To maintain a flat oil consumption curve, the United States bears the security risks associated with 60 percent and rising oil imports.

To maintain a flat coal consumption curve, the United States suffers the resultant air quality emissions from coal-fired electric plants.

Importantly, fossil fuels account for 84 percent of global and U.S. energy consumption today. More importantly (due to factors such as energy efficiency, environmental well-being, economic stability, health of the future energy work force, supply distribution, mitigation of an oil crises and national security), U.S. energy policy and associated legislation should encourage what Jesse Ausubel describes as "decarbonization" -- the changing energy mix toward natural gas, nuclear and other renewables.

The Changed Face of Industry: Permanent Decrease in Private Technology And Research

The oil and gas business is, and will remain, a technical one. Drilling and operational technologies have advanced to a point where:

• Virtually any land drilling location is technically feasible.
• Ocean water depth is less and less a limiting factor.
• Oil and gas fields can be developed using multilateral well bores from a single vertical well bore.
• Downhole logging tools provide remarkable information about the rock-fluid system.
• Seismic data have evolved to a point where some depositional systems, using certain attributes and inversion approaches, lend themselves to direct hydrocarbon detection.
• Reservoir modeling and simulation software continues to improve, aided by the seemingly endless improvements in computer -- speed, memory, disk, visualization and transfer -- capabilities.

These and other technological advancements have combined to improve efficiency across the oil and gas industry significantly. In fact, while manpower in the industry has decreased nearly 70 percent in the past two decades, global production of oil and natural gas has steadily increased.

There is a logical bottom to the efficiency reflected in the inverse relationship between required manpower and production, but the industry has not seen the bottom yet.

The oil and gas industry changed considerably in the last two decades. Historically, the lion's share of the research and development that resulted in the creation and application of advanced technology and enhanced efficiency was funded by the private sector. Private companies each had research -- later to be renamed technology -- labs, and they competed for the best intellectual talent from universities, and with each other to develop advancements that would provide differentiating competitive advantage and allow for more expeditious and economic discovery and development of oil and gas.

Those days are gone, as are most of the research labs -- Amoco, Arco, Conoco, Texaco, Chevron, Marathon, Mobil, Phillips and Unocal -- and much of the R&D spending by petroleum companies, which has fallen over 100 percent in the past decade.

Major companies and large independents can no longer afford to operate R&D facilities, because the payout time for commercialization of research -- commonly on the order of three to 10 years -- far exceeds what the capital markets and commodity price cycles will bear.

In order to meet the quarterly market demands, the private sector has had to focus every effort on reduced cycle time, replacement of reserves (largely through acquisition), quarterly return on investment and profit.

Oil and Natural Gas: The Need for Technology

Oil represents a bridge to the natural gas and hydrogen future. Increased production of known reserves (reserve growth) via enhanced oil recovery (EOR) projects will continue to account for more U.S. oil than new discoveries.

Efficient EOR requires advanced reservoir characterization and technology. These projects, in the United States, will be conducted largely by the independent producer, who does not have staff or resources for high-level R&D.

Federal policy and investment in oil research, technology and incentives should be directed almost exclusively toward the independent for EOR.

Is this corporate welfare? No more than investing in clean coal technology, wind turbines or fuel cells. It is simply a wise Federal investment in the U.S. energy future.

An environmental benefit of EOR is that no new lands will be impacted.

Natural gas, on the other hand:

• Is an efficient fuel.
• Has significant environmental advantages over coal and oil.
• Is more broadly distributed across the globe, which, once the transportation networks are established, will provide long-term price, economic stability, and security benefits.
• Will serve as feedstock for hydrogen in a hydrogen economy.

The global resource potential of natural gas is very large. To date, natural gas has been produced largely in association with oil, called conventional gas. About one-third of U.S. annual production of natural gas comes from sources not associated with oil called unconventional gas, such as coalbed methane, shale gas and basin-centered and tight gas.

Other unconventional gas sources include subsalt, ultra deep (>15,000 ft) and gas hydrates. Combined with conventional gas, these unconventional sources represent the future of the global natural gas supply.

Because their behavior and distribution are not as well understood, exploration and exploitation will require significant research and technology investment, both federally and privately.

Public-Private Partnership: A Better Direction

We have before us a remarkable opportunity for a public-private partnership that will lead the world into the natural gas economy.

For the foreseeable future, a balance in energy sources is critical to satisfy global demand. Stalwarts such as oil and -- to some degree -- coal, will remain prominent sources of global energy for at least the next several decades.

But these are sunset sources of energy, and federal technology investment should be couched accordingly. Dollars spent on new research initiatives in coal are dollars spent against natural global trends.

National oil independence is highly unlikely -- but energy independence is achievable with a balanced investment in a mix of energy sources.

Oil and gas research programs across federal agencies have been targeted for massive budget cuts each year for the past several years. The fiscal year 2004 DOE budget requested of Congress for research directed at major U.S. energy production and consumption represents 3 percent of the total DOE budget. Of that 3 percent, only 2 percent is for oil and 3 percent is for natural gas.

The remainder of the 3 percent is for coal (40 percent), renewables (39 percent) and nuclear (16 percent).

Let me say that a different way: Of the $23.4 billion DOE budget, only $26.6 million (0.1 percent) is for natural gas, and $15 million (0.1 percent) is for oil.

Oil and natural gas account for 65 percent of the nation's energy supply but only 0.2 percent of the proposed FY 2004 DOE budget for oil and gas research!

Combine these essentially nonexistent federal dollars with decreases in the private sector, and there appears to be no future for young people in the oil and gas energy field. University statistics reflect this, as U.S. geoscience and petroleum engineering enrollments are at a 35-year low.

For the next several years, federal investments must be redirected to focus on federal-private-university partnerships that help bridge the gap to a natural gas economy, including:

• The continued production of coal with some "clean coal" research dollars redirected to natural gas.
• Continued renewable and nuclear energy research.
• Enhanced oil recovery research in support of independent producers ($150 million).
• Research and technology across the upstream to downstream natural gas spectrum ($300 million).

It is not too late, but it is close.