Unconventional Fossil Fuel Feedstocks

In coming to grips with unconventional fossil fuel feedstocks, it is helpful first to enumerate the conventional feedstocks, which are principally coal, petroleum, and natural gas. These are the feedstocks upon which we rely for almost all of the energy produced in the world today. Incidentally, two of those resources, namely petroleum and natural gas, have been so extensively exploited that production may very possibly decline in the near future, hence the interest of both energy users and investors in the unconventional sources.

The unconventional resources defy easy categorization but tend to occupy two broad groupings, those that are basically variants of natural gas or petroleum, and those that are truly separate resources with distinct chemistries of their own.

The first group consists of the following: heavy oil, bitumen, and tar sand in the petroleum subcategory, and coal bed methane, tight gas, deep gas, and shale gas in the natural gas set. Methane hydrates may with some justification be placed in the natural gas subcategory as well because more or less pure methane in gaseous form is extracted from them in situ, but their chemical composition is unique and quite unlike that of all other natural gas resources, a fact which has led many authorities to place them within the second major grouping. Our inclination is to treat them separately, that is, apart from other forms of natural gas.

The second group is much smaller and consists of oil shale and, by some definitions, peat. We also put methane hydrates in this class.

Detailed descriptions of each of the unconventional resources are provided at the links below.

Buried Treasure or Boondoogle?

For many if not most of the unconventional fossil fuel feedstocks the word unprofitable could easily be substituted for unconventional, and obviously if these resources had been highly profitable in the past they wouldn’t be unconventional—indeed, they’d probably be the norm simply because they’re more abundant than their conventional counterparts.

So why is anything different now?

The short answer is $75 per barrel crude oil and natural gas prices that are multiples of what they were ten years ago. Given the expectation on the part of many geologists that these recent price escalations are only the beginning of a relentless upward trend, unconventional fossil fuels appear to merit a second look.

Still it must be said that the unconventional sources have their detractors including eminent geologists such as Kenneth Deffeyes, the author of Hubbert’s Peak, the book that helped to make the peak oil controversy fairly common knowledge. Unconventional sources are widely decried within the environmental movement as well, and are routinely attacked by proponents of alternative fuels from biomass.

Principally the arguments against the unconventional sources are three-fold: (a.) such sources are to be rejected because they will only exacerbate the global warming problem; (b.) such sources are uneconomical to harvest; and, finally, (c.) extraction itself is more damaging to the environment than conventional mining and drilling operations. In other words, one argument is largely economic while the others are essentially moral or political.

In as much as this is a business publication, we largely refrain from entertaining moral arguments except as they impact upon the regulatory environment in which an extractive industry has to operate. We are not suggesting that moral arguments carry no weight, but simply that we lack special competence in weighing them. Our intent is to project likely outcomes rather than desirable outcomes from any particular moral perspective—what will be rather than what should be.

That said, one only has to consider the following:

Will regulatory constraints ultimately cripple companies attempting to harvest unconventional resources?

Will the economics of unconventional resources improve sufficiently to permit massive exploitation?

Forecasting political developments is always difficult, but our prediction is that environmental concerns on the part of the government will continue to wane in the world’s largest economy, that of the U.S., and that they will not be such as to prevent exploitation of unconventional resources by the emerging giants, China and India. Put bluntly, such concerns are largely irrelevant in the mid term.

Determining the business case for unconventional fossil fuels is not so straightforward, however, and, in any case, involves somewhat different considerations for each of them. We will confine any detailed discussion of economics to the separate sections devoted to each feedstock, and confine ourselves here to questions of how the economic arguments should be framed.

Dollars and Cents and Unconventional Fossil Fuels

The general means of determining the cost competitiveness of unconventional fossil fuels are not appreciably different from those one would employ in evaluating any feedstock.

Essentially, one considers the following:

The heating value of the resource in terms of units of mass or volume; as is the case with conventional fossil fuels, the unconventional handily outstrip biomass in this regard, which is much to their advantage.

The cost of extraction with special reference to energy expended; if enormous quantities of increasingly costly conventional fossil fuels must be consumed to recover the unconventional resource, then the economics of resource extraction become dubious. And, unfortunately, all unconventional resources have proven costly in terms of energy to recover. That’s not to say they won’t be exploited, but the economics only become attractive when the prices for conventional fossil fuels reach beyond a certain point and stay there. Are we there yet? If oil remains over $50 per barrel for the next eighteen months, we’re there.

The cost of processing, again with reference to energy requirements; in most cases processing is less expensive than recovery or acquisition across the whole gamut of fuels, whether fossil or biomass based, but processing is still a very major issue, and certainly it is in the case of the unconventional fossil fuel resources. In the special case of oil shale, extraction and processing are so closely interlinked as to be essentially one process.

Here we might mention that unconventional natural gas is normally no more expensive to process than conventional because it is essentially the same substance. Both heavy oil and oil shale are significantly more expensive to refine than is conventional light crude, however.

The cost of transport; again this is highly variable, and here the economics favor the solid and liquid fuels which can be easily and economically transported by ship, rail, truck, or pipeline. Gases, on the other hand, can only be transported cheaply via pipeline, and, unfortunately, unconventional sources of methane are nearly always stranded, that is remote from gas pipelines. Extensive uses of gas-to-liquid conversion processes in the future could considerably change the equation, however.

Geographical constraints; no one is drilling for oil or mining coal in Antarctica despite the considerable presence substances of both on that continent. Similarly, oil drilling at depths of several thousand feet has not proven very profitable despite the existence of extensive untapped resources in abyssal regions. Some areas of the globe are simply so inhospitable that the costs associated with maintaining installations become prohibitive.

Interestingly, at least one unconventional resource, methane hydrates, is generally only found in deep water or above the Arctic Circle. That will have a bearing on its ultimate value as a resource.

Incidental costs associated with destructive extraction, processing, and transportation practices; everyone knows about the effect of oil spills on oil companies’ bottom lines, but the issue tends to become much more complicated for unconventional resources, some of which require enormous amounts of water to process and entail disruptive excavation practices which adversely impact surrounding communities and ecosystems. Companies involved in undertakings of this nature may find their own energies and financial resources diverted in costly cleanup and land restoration projects.