Page 1


orldwide usage of oil reached nearly 85.9 million b/d in 2007, according to t h e E n e rg y I n f o r m a t i o n A d m i n i s t r a t i o n (EIA). Comparing those numbers with the amount of oil produced in 1990 (66 million b/d) and the a m o u n t p r o j e c t e d t o b e p r o d u c e d i n 2 0 3 0 ( 11 7 . 7 m i l l i o n b / d ) , t h e a p p e t i t e t h e w o r l d h as for oil is clearly not decreasing. “There’s a percentage or chunk of increase [in prices] that is comprised solely on political developments occurring, so there’s a psychological component on changes in market – the political market,” said Glenn Dubin, business development manager for Hart Energy Consulting. “Another component is the increase in demand – like the old adage says, if every citizen in China took one egg globally that we would

run out of eggs on the earth. Same concept with oil.” Where the world goes from here, then, depends on a variety of factors: refining capacity and production, economic conditions as well as the transportation sector, sustainability issues and public policy. Refining Hart Energy Consulting’s World Refining and Fuels Service (WRFS) 2008 projects reserves and production will be adequate to meet demand in 2025. The big problem in the near future will be limited refining capacity. “I think that 2008, in terms of increased or improved refining capacity, globally, if we see anoth-

er increase of 130,000 b/d to 200,000 b/d by year end, I think that would be all we’re g o i n g t o s e e , ” s a i d D r. R i c k C h i m b l o , m a n ager of global business development at Genoil and former head of exploration and chief geophysicist of Saudi Aramco. “Those projects are planned out so far in advance, five and 10 year projects, the capacity we’re seeing added now was b a s e d o n p e o p l e ’s d e c i s i o n s f i v e y e a r s ago when the price of oil and where it w a s g o i n g w a s o b v i o u s l y a l o t l o w e r. ” Production for just 2008 is projected to be about 88 million b/d – as is consumption, according to the EIA. So the next issues to consider is from where all the oil to be refined w i l l c o m e . Wi t h r e s e r v e s o f l i g h t sweeter crudes dwindling, the use of heavy sour crudes will increase as demand for oil continues. “[Light sweet crudes] are premium crudes and they dwindle for a variety of reasons,” Chimblo said. “Those are the crudes that they’re really talking about

when you see that US$92/bbl. On the refining side, they’re very attractive to refiners because when you cook that oil, you get more high ends, you get more light distillates, which means you have more gasoline, you get more jet fuel and you get more diesel, and those three transportation fuels from light sweet crude constitute about 70% to 75% of the barrel.” However, to make this switch over to heavier crudes, new technologies will be necessary. Heavy crudes simply do not yield as much as light crudes. Improving recovery by means of horizontal drilling, better seismic techniques and steam flooding, to name a few existing technologies, will help, Chimblo said. He also believes crude upgrading technology such as hydroconversion will then be key to improving crudes processed by refineries. “We have talked to major refiners around the world, in China, in Saudi Arabia, in the United States, and they all agree that in order to meet the demand for transportation fuels that heavy oil is going to have to be upgraded before it goes to conventional refineries,” he said. Refiners will have serious coking problems and much higher maintenance needs when putting heavy sour crudes through refineries, Chimblo added. “What they are preferring to do is clean [crude oils] up and upgrade it in merchant plants or in units that would be built inside their fence before

it goes into the refinery – they don’t have to deal with the sulfur anymore, they have less coking problems, and once again their throughput, including their yield, is much higher,” he said. In terms of the refining capacity, there is a move to build more refineries around the world – in China, for example. Saudi Aramco recently signed agreements with China to significantly expand capacity, Chimblo said. “ I n f a c t , O P E C [ O rg a n i z a t i o n o f P e t r o l e u m E x p o r t i n g C o u n t r i e s ] m e m b e r s a r e g o i n g to be adding nearly 6 million bbl of oil per day capacity of refining by 2011,” he added. Worldwide refining capacity and production, totaling about 85 million b/d in 2007, went up by 132,000 b/d. But the number of refineries, which stands at 657 as of the end of 2007, decreased from t h e p r e v i o u s y e a r i n t o t a l . To r e a c h p r o j e c t e d demand for 88 million b/d for just this year from last year’s 85 million, an additional 3 million b/d of oil would be necessary – that would mean increasing capacity by the equivalent of 23 new refineries, Chimblo said. And to reach the projected demand of 101 – to 102 million b/d by 2017, the equivalent of 123 new refineries would be necessary (double that number if the crude being used refined is heavy sour crude that has not been upgraded instead of light sweet crude). Obviously major investments would be required to bring this to fruition. “Eventually, planned expansions will ease the tightness in refining capacity,” said Terry Higgins, executive director of refining and special projects for Hart Energy Consulting and primary contributor to the WRFS. “For much of 2008, the market should not see much difference from the recent past, as refining expansions keep pace with growth in demand. But, toward year-end, a wave of major expansion projects is scheduled to come on line. These, along with high growth in biofuels, will begin to ease pressure on refining capacity. Of most significance is the 580,000 b/d Reliance refinery in India, scheduled for start up in late 2008. An additional 900,000 b/d of capacity will also be added in the Asia Pacific region in 2008.” Financial market/economy In a report titled The Middle East and Oil: Supply Challenges Ahead, Koceila Maames, Calyon Securities Inc.’s Africa and Middle East economist, wrote in late November 2007 that several factors are behind sustained demand growth, despite historically high oil prices above $60/bbl Middle East and North Africa and OPEC countries’ budgets. Those factors, despite the upward pressures in the last few months, a significantly lower interest rate environment, more Trans-Orient Petroleum is now a subsidiary of TAG Oil

efficient central banks in terms of policymaking, etc. But the main explanation lies in the fact that the latest oil price rally has been mainly fuelled by rapidly growing demand, whereas the past oil shocks were triggered by real (or fears of) supply shocks (oil embargo in 1973, Iran/Iraq war in 1980).” This may be applicable to the coming year as well. “The issue at the top of the list [from the economic perspective] is politics and policy in the Middle East. That could potentially have the biggest impact [on the oil industry this year],” Dublin said. “I d o s e e a r e c e s s i o n i n t h e U . S . , b u t i t ’s n o t j u s t because of oil. It has to do with the financial markets and the sub prime housing bubble bust. There’s the big issue of inflation and the weak dollar having an impact as well. And of course, since we’re a global economy, that does impact the big picture.” In addition to those concerns, the oil market continues to change heading into this year, and fuel

“But the main explanation lies in the fact that the latest oil price rally has been mainly fuelled by rapidly growing demand, whereas the past oil shocks were triggered by real (or fear of) supply shocks (oil embargo in 1973, Iran/Iraq war in 1980).” -Koceila Maames, Calyon Securities Inc.’s Africa and Middle East economist

buyers are facing new norms in that marketplace with “higher crude prices, tighter and more constrained supply options, and increased price volatility,” said Jim Kasier, senior vice president and chief s t r a t e g y o ff i c e r o f F u e l Q u e s t . According to an article in The Economist, published Jan. 3, 2008, when the price of crude oil surpassed $100/bbl Jan. 2, it became nearly five times more expensive than it was just six years ago. “ F i r s t l y, $ 1 0 0 o i l i s m o r e o r l e s s w h e r e w e a r e now, it’s not causing any huge [economic] crisis,” s a i d D r. D a v i d B e n n e t t , e x e c u t i v e d i r e c t o r o f Tr a n s - O r i e n t P e t r o l e u m L t d . “ I n f a c t , i t ’s n o t t h e highest in real terms that oil prices have ever been. After the second price shock in 1979-80, the price of oil got up to about $36/bbl, and inflated to present day dollars is $120-odd per barrel plus.” And what these high prices could do in the next f e w y e a r s i s h e l p t h e w o r l d w i t h i t s s u s t ainability efforts by encouraging new technology that would

improve on fuel efficiency and lower greenhouse gas emissions, such as the homogeneous charge compression ignition technology that engine manufacturers and automakers have been in the process of developing in recent years. “[High priced oil] sort of forces improvements in technology, it forces investments in alternatives, forces more efficient use of oil – and one has to say that many societies around the world have been extremely wasteful in their use of oil – so the high price actually forces a more rational use of the commodity and it forces the development of alternatives and those are good things,” Bennett said. Things should stabilize somewhat this year in regard to overall prices though, Chimblo said. “Because we’ve had this apparent slowing down and stagnation at least of both the U.S. and Asian economies just since the beginning of this year, I would expect that crude oil prices, if that continues, might actually back down a little bit – maybe as low as the $80-level,” Chimblo said. “As global demand for transportation fuels, which actually drives the price, decreases, it’s also going to allow the refining capacity to adjust for future higher oil production levels. So I think in the short term, maybe even for the entire year 2008, we’re going to see some backing down of the crude oil prices, only because the consumption and the demand for the refined products is going to go down.” And OPEC will watch these developments carefully, he added, though it is not going to increase or decrease production this year. “It’s not that the price of oil is going to drop, well, it may do in short-term fluctuations and in fact has in the past few weeks, but it’s really the case that investment, in looking for more conventional oil and in developing unconventional resources and so forth, really depends on investment in that sector [which] has been relatively low in the past decade,” Bennett said. “[Investment] is increasing now and we can expect to see further discoveries being made, but of course, that’s all predicated on the price staying up. So really what we’re looking at is not so much a shortage of oil – my view is that the world will not, as alarmists would have it, run out of oil as a supply/demand question, it will run out of the desire to use oil by substituting forms of energy, such as solar power, for example, or fusion power, which is likely to be commercial on the large scale in the next 20 to 30 years.” The EIA’s Short-Term Energy Outlook published Jan. 8, 2008, states that world oil consumption is expected to rise by 1.6 million b/d in 2008 and in 2009, compared with the approximate 1 million-b/d increase last year. Consumption will continue to grow during the course of the next two years, based Trans-Orient Petroleum is now a subsidiary of TAG Oil

on projections of continued strong world economic growth in many non-OECD (Organization for Economic Cooperation and Development) countries, such as China and several other nations in Asia and the Middle East. The impact of developing nations such as China and India likely will have a considerable impact on the oil industry heading into the next few years as well. “Refined product demand is projected to remain strong in 2008 (about 2.3% growth) driven by continu e d s t r e n g t h i n C h i n a , I n d i a a n d o t h e r d eveloping countries,” Higgins said. “According to the WRFS, growth in China and India refined product demand, which over the past five years has averaged 7.6%, is projected to continue at nearly 4%.” And in terms of where global economies are headed, Dubin sees two outlooks: “one is with the e m e rg i n g e c o n o m i e s o f A s i a , i n c l u d i n g I n d i a a n d China, as they are continuing to outpace themselves in terms of development, plus the utilization and demand for energy resources are rising quickly,” he said. “On the other hand, with the potential recession that is occurring in the U.S. and the effect that it’s having on other global markets, that it could slow

Trees as Feedstock


hile the food vs. fuel debate rages over corn ethanol, another viable source of fuel may be key to supplying future energy needs. Trees are emerging as an ideal feedstock for cellulosic ethanol production. Unlike corn, trees can be harvested at any time and tree plantations do not face the same oil degradation and water issues that corn farmers do. Excess material on forest floors left behind after timber is harvested, including branches and brush, could even be used in this process instead of being burned. Cellulosic ethanol is perhaps the most viable alternative to gasoline, partially because its emissions range from 80% to 100% less than gas (and 10% to 20% less than corn ethanol). The overall cellulosic process is not yet cost-competitive and there could be competition between producers and the paper and pulpwood industries for wood. Government money is funneled to cellulosic ethanol through research and development grants rather than subsidies, as is done with corn ethanol. The technology itself could be commercially viable in as little as two to 10 years. Four cellulosic ethanol plants are planned in the southern United States – one plant began operation in Wyoming at the end of January by KL Process Design Group. Source: Forest2Market

Trans-Orient Petroleum is now a subsidiary of TAG Oil

down the stimulus of global economies and reduce demand at least temporarily.” Even though the numbers have supply and demand racing each other in a dead heat, Bennett does not see us hitting the proverbial wall in terms of oil supply. And oil is certainly not going to run out in 2008 or the very near future. “Maybe supply will become a bit more limited, which will push up price, maybe demand will fall away because we move to other technologies, which will drop the price, but I think in real terms you’re going to see oil around for a long time,” he said. “By a long time, I mean half a century or more. But we’re just going to see it not play as dominant of a role in the supply/demand equation and that’s going to be price driven. All these things are price driven. As the price of oil in real terms rises, which it will, other forms of energy become more cost-effective.” World oil demand, however, is still projected to continue to grow faster than oil supply outside of OPEC countries in 2008, according to the EIA. Global oil markets also are likely to remain tight throughout the year, though they may ease moderately in 2009. “According to the WRFS, demand will continue to grow at 2.3% annually, maintaining pressure on crude supply and refining capacity,” Higgins said. “There are no major developments on the horizon that will significantly alter the course of supply, demand or refining. Except for the possible impact of adverse political situations, market volatility should be moderate as markets adjust to higher price environments and prices come off of peak levels.” The EIA also reports higher non-OPEC production and planned additions to OPEC capacity should relieve some market strain, which is expected to lead to a surplus production capacity increase from less than 2 million b/d to more than 4 million b/d by the end of 2009. “With these first signs of global economic slowdowns, most oil executives are probably reassessing their companies’ five-year business plans to determine capital investments in exploration, production and refining activities,” Chimblo said. And there is considerable oil out there remaining to be found. The United States Geological Survey said undiscovered technically recoverable resources of oil in the United States alone were about 45 billion bbl, Bennett added. “Most expensive U.S. production is viable because price of oil is higher right now, “ Dubin said. “It’s likely that as long as the price remains high that production output remains viable too. If other economies around the world start to have some real problems or issues, depending where they are in

t e r m s o f e n e r g y, p e t r o l e u m c o u l d b e c o m e t o o expensive for those entities that are struggling with challenging economies.” Worldwide investment will be necessary as well; in the World Energy Outlook 2007, the International Energy Agency (IEA) predicted world energy needs will be more than 50% higher in 2030 than they are today with China and India accounting for 45% of that increase. Fossil fuels are going to continue to dominate during the next 20 years, leading to more carbon dioxide emissions and concerns about climate change and energy security. “In Saudi Arabia, projects worth almost US$70 b i l l i o n a r e p l a n n e d i n t h e e n e rg y s e c t o r o v e r t h e next five years, with almost half the amount dedicated to the oil sector,” Maames wrote. Transportation, Sustainability and Public Policy T h e d e m a n d f o r c r u d e o i l l e a d s t o o n e t h ing – the demand for transportation fuel. It is not the barrels o f c r u d e o i l t h a t t h e w o r l d w a n t s , i t ’s t h e t r a n s portation fuels that are produced from it. Gasoline prices in the United States reached $2.97/gal Feb. 4, 2008 – up to $0.78 from the same time one year ago, according to the EIA. Diesel also rose, the EIA reported, up $0.84 from last year to reach $3.28 Feb 4. Not only are average drivers affected, but so are shipping fleets that rely on fuel for business. “Large fleets or airlines will continue to struggle with price volatility and access to ratable and secure sources of fuel as markets are constrained,” Kaiser said. “Fleets and airlines will try to pass fuel costs directly to their customers in the way of fuel surcharge. Many of these organizations have risk management in the form of a hedge and/or price caps to control or fix their costs of fuel. These techniques provide rising prices protection, but no ability to benefit from valleys in price. “Transportation companies are working hard on

alternatives. UPS announced changes to the brown truck nearly 18 months ago,” Kaiser said. “I believe that new vehicles will emerge but technology that optimizes routes, pace and load will create much of the change.” But the need for alternatives is being pushed onward by the current supply/demand structure of the hydrocarbon market. “I think this will cause a rethinking of many of the often deemed less flexible modes of transportation,” Kaiser said. “Rail and mass transit have been largely ineffective in the U.S. compared to Europe. In the freight and industrial transportation space, rail, road trains and other large capacity movers have been less favored than individual trucks and these alternative modes may become more appealing.”

Homogeneous Charge Compression Ignition Engines


omogeneous charge compression ignition (HCCI) engines combine the fuel efficiency of a compression ignition (CI) diesel engine and the lower emissions of a spark ignition (SI) gasoline engine in an alternative piston-engine combustion process. This technology has undergone development by engine manufacturers and researchers for a number of years, and was presented to the U.S. Congress by the U.S. Department of Energy in 2001. HCCI engines use lowpressure fuel injection, instead of high-pressure fuel injection like diesel engines, but have no ignition system, like SI engines. Fuel and air are in a homogeneous mix, resulting in reduced emissions – HCCI has lower nitrogen oxides and particulate matter emissions than CI. Since the charge is compression ignited, there are no throttling losses, leading to higher efficiency. Although the technology has a number of benefits, further research and development is needed before it can be used in commercial on-road applications. HCCI could be an ideal solution toward improved vehicle fleet efficiency and lowered emissions while using fossil fuels. Source: University of California, Berkeley HCCI Project and U.S. Department of Energy Trans-Orient Petroleum is now a subsidiary of TAG Oil

According to the WRFS, “crude oil will be displaced by some biofuels and GTL/CTL [gas-to-liquids/carbon-to-liquids], but the impact on crude oil will be relatively small. The contribution of crude oil to total supply will decline from 86% in 2006 to 83% in 2025.” “I do believe that real science and technology driven by economic need is going to come up with a combination of solutions,” Chimblo said. “Some of them may be conservation, and that would also mean being more frugal with the oil that we have left, so we use oil only for transportation fuel and even natural gas, we shouldn’t be consuming that for electricity.” In April 2007, the Associated Press published an article on the issue of increasing ethanol use and the potential impact it will have on construction of new refineries. In light of the recently increased Renewable Fuels Standard (RFS), this argument presents an interesting situation for the near future – if ethanol is to replace 9 billion gal of gasoline fuel just in 2008, increasing to 36 billion gas by 2022, the likelihood that U.S. oil producers will invest in refineries in the United States may be decreasing. But the overall solution is not likely to surface in 2008, as it will require far more than just ethanol. There’s also the issue of energy contest, as ethanol, for example only has an energy content of 83,333 Btu per gal, while a gallon of gasoline has an energy content of 124,000 Btu, according to the EIA. Further problems that lie with increasing demand for transportation fuels are emissions and climate change, which can be helped by alternative fuels usage. The overall increase in the use of hydrocarbon liquid oil in countries such as China and India, whose populations continue to grow exponentially, may create

more problems than can be solved through alternatives use: “China’s and India’s combined oil imports surge, from 5.4 million b/d in 2006 to 19.1 million b/d in 2030 [are equal to] more than the combined imports of Japan and the United States today,” according to the IEA’s World Energy Outlook 2007. Taking advantage of other sources of energy may lead to those better solutions. Michael J. McAdams, executive director of the Advanced Biofuels Coalition and executive director of government affairs of Hart Energy Consulting, when testifying before the U.S. Senate’s Energy Committee on Feb. 7, 2008, said: “Utilizing America’s vast cellulosic resource from agricultural waste to sustainable forest biomass, many of these technologies either directly or in partnership can produce superior performance and fungible fuels. Several of the biotechnology process companies are working on a solution that could be utilized in existing ethanol faculties to make diesel or jet fuel. Others could partner with enzymatic cellulosic companies in a second phase of the process of taking the sugars to a range of products.”

Until solutions such as these become truly mainstream, focus will be set on exploration, production and refining of crude oil – at least in the coming year. “Several oil companies advertise that they are working toward this long-term [renewable energy] goal,” Chimblo said. “However, in 2008, we should not expect much progress or any significant breakthroughs. “Maybe there should be some research on a real synthetic fuel, something that is chemically created, not just a syncrude from extraction and upgrading and conversion, but something that can be produced in a lab where we can just make oil,” Chimblo suggested. “Or even better, let’s skip that process, let’s just make

gasoline. But [the solution for our oil needs is] not going to be squeezing corn.” Public policies are aiming to change worldwide need for fossil fuels as well. At the end of 2007, the United States government passed the Energy Independence and Security Act of 2007, which laid out several key provisions relating to fuels, including new corporate average fuel economy (CAFE) standards set at 35 mpg for a combined fleet of cars and light-duty trucks by 2020, a new RFS that will require 36 billion gal of renewables by 2022, and the repeal of oil and gas tax subsidies that will offset the estimated cost of implementing the new CAFE standards. In setting standards for better fuel efficiency and more renewables in transportation fuel, the U.S. government is essentially attempting to decrease the need for oil and the consequences of using oil (emissions). “Oil is very political. It always has been. It’s very political stuff. You only have to read things like Daniel Yergin’s book The Prize on the history of oil to realize that it’s intensely political. Even here in little old New Zealand, it is intensely political,” Bennett said. “And what happens is the sort of intimate connection between oil and public policy literally everywhere and the reason is pretty straightforward. Oil is the nice transportable form of energy – modern societies are built on energy. You’ve got to be able to control your source of supply or ensure your source of supply, so there will always be that linkage. “Laws are different in every countr y, a n d w h a t actually happens, be it above the table or below it, in any country you can rest assured th e r e ’s a v e r y strong mix between public policy and oil supply,” Bennett said.



ydroconversion, is a small pre-refining process that takes heavy sour crude oil and upgrades it by extracting sulfur and turning it into a lighter crude with higher American Petroleum Institute. When this lighter sweeter crude heads to refineries for processing, higher amounts of transportation fuel and higher ends will result. “Hydroconversion is becoming a key technology because in its ability to upgrade the oil and make it lighter, it does a couple of things,” said Rick Chimblo, manager of global business development at Genoil. “Number one, initially what it does is it allows the yield out of the refinery to stay higher. So the gasoline and diesel and jet fuel will stay at comparable levels to what we have right now with light sweet crude. The other thing that it will do in the long term is it will allow us to not have to build as many more refineries, yes we will have to build hydroconversion units, but they are smaller, less complex, they have very good throughput, and the cost of building them is a lot less and the cost of operating them is a lot less. “So with a smaller amount of effort in terms of construction and numbers, we can still maintain what we really want, which is transportation fuels – without having to build three times as many refineries or twice as many refineries to handle heavy crude oil, we can still get the products we want,” he said. Trans-Orient Petroleum is now a subsidiary of TAG Oil

“Laws are different in every country, and what actually happens, be it above the table or below it, in any country you can rest assured there’s a very strong mix between public policy and oil supply.” -Dr. David Bennett, Executive Director of Trans-Orient Petroleum Ltd.

Future Prospects The coming year will probably not end up in a gloom-and-doom state in terms of oil. But, short term market fluctuations will undoubtedly continue: on F e b . 1 9 , 2 0 0 8 , t h e N e w Yo r k Mercantile Exchange crude oil futures market for March 2008 closed at $100.01/bbl after a total increase of $4.51 in just one day. Futures prices actually reached $100.10 during trading – the highest intraday price reached since 1983 – all as a result of speculation that the OPEC will cut output at its meeting March 5, according to Bloomberg. Gas prices leaped up on the same day as well – New York wholesale gasoline for March delivery closed at a record $2.6031/gal. While prices will be higher than consumers would probably like, the economic impact could eventually be positive. Technology and innovation will be crucial in reaching refining production targets, with the demand for petroleumbased products set to increase even more in the coming months. “In the 1970s, when we had the first oil boom, we were supposed to be doing so much here in the United States,” Chimblo said. “We were supposed to be doing so much to solve our dependency on oil – not just foreign oil – just oil. We were supposed to come up with all these different systems and technologies and solar panels and everything else, and here we are 30 years later and we’re still putting off the inevitable. “Is oil going to run out in the next 10 years? Absolutely not,” Chimblo said. “Will it run out in this current century? Absolutely.”