In our region of the world very little is known about unconventional oil resources because we are so well endowed with the easier produced and less costly conventional oil, at least as we know it.

Unconventional oil is that produced or extracted using techniques other than the conventional oil well drilling method. It includes extra heavy oil, oil sands, shale oil, biomass, coal, gas, etc. This column will comment on the first two categories only.

Extra heavy oil (less than 10 API degrees) and oil sands form the greater majority of unconventional oil production and require special processing since they contain more sulphur and heavy metals. Therefore, their refining may have to include many stages to render them into a state close to conventional oil. Only then can they be blended with or processed like conventional crudes.

The heavy oil is very viscous and difficult to flow and therefore the recovery factor from any field is usually less than 10 per cent as compared to between 30 and 50 per cent from conventional oil fields. At a recent project in Venezuela (Junin 5), the oil in the field is estimated at 35 billion barrels but the proven reserves are only 2.5 billion because extraction is difficult. Therefore, production of unconventional oil is costly in terms of investment and operating costs and has greater environmental impacts than that of conventional resources.

Recovery factor

Although the recovery factor from oil sands in Canada can be much higher (60 per cent to 90 per cent), its surface mining has tremendous impact on land and water resources and high risks of environmental damage. Transportation of such oils by pipeline over long distances is not possible without pre-treatment to turn it into synthetic oil.

Although unconventional oil reserves exceed conventional reserves several times over, the capital and operating costs and the cost of environmental damage mitigation are likely to dampen the production growth. Opec estimates unconventional production to increase from 1.8 mbd (million barrels per day) last year to 2.5 mbd in 2014 and 6.3 mbd in 2030 (excluding biofuels) and IEA (International Energy Agency) estimates are more or less the same.

Many projects related to unconventional oil were cancelled or delayed when oil prices collapsed in the second half of 2008 but some were restarted as oil prices recovered. In Canada alone, Opec estimates that "20 projects with a total capacity of around 700,000 bpd are scheduled to come on stream over the next five years".

Although the cost of production of unconventional oils have come down to somewhere between $15 and $20 per barrel (excluding capital cost), "critics argue that the focus on operating costs does not sufficiently address environmental issues" of "ravaged landscapes, despoiled rivers, diseased denizens, and altered atmospheric chemistry". Overall, an oil price of $70 to $80 per barrel is needed to encourage development of unconventional oil and almost all recent forecasts are based on such assumption.

The above developments have made Canada and Venezuela include unconventional oil resources in their reserves. Venezuela's reserves have increased from 80 billion barrels in 2005 to 211 billion barrels in 2009. Canada's conventional reserves have increased according to BP Statistical Review from 12 billion barrels in 1989 to 33 last year but reserves from tar sands are quoted separately at 143 billion barrels. Of course there are other countries with such resources including but not limited to Russia and China.

Technology factor

There is of course the possibility that technology may evolve in such a way as to improve the recovery factor from unconventional oil fields with an accompanied reduction in costs. But this is more likely to happen with conventional oil since recovery factors have always improved over the years especially with the development of enhanced oil recovery (EOR) methods.

Although conventional oil production worldwide is likely to stabilise at the current level, Opec crude oil production may increase from 29 mbd now to about 39 mbd in 2030 and therefore unconventional oil is in my view not a threat to Opec as some may like to tell us. On the contrary its high cost of development and production will act as a floor to oil prices as many analysts see.

 

- The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.