Too valuable to burn
Will oil and gas become too valuable to burn in the future? That scenario may arrive sooner than expected - and interestingly enough - not because of environmental pressures or shortages.
We know the hydrogen component in hydrocarbons has a significant future as the primary fuel - hydrogen or methanol - in fuel cells. Fuel cells appear to be the front-runner in powering future ground and water transportation systems, as accessory power in air transportation, and potentially a main drive in space transport. The carbon component has long been considered a byproduct of the fracturing or combustion process, with far lesser value. But that may be changing, as a result of a revolution in materials research. For example:
- Hydrogen storage: Researchers have rolled up sheets of carbon atoms into fiber tubes that have a high ratio of surface area to volume. These porous nanofibers, which can store volumes of hydrogen, are made with high voltage current and catalysts/doping agents. The hydrogen storage per unit weight that would be needed to provide a regulated flow of hydrogen to fuel cells is under 10%, but researchers at Northwestern University (Boston-US) and elsewhere claim they have far exceeded it using undisclosed catalytic processes.
- Hard carbon fiber: Conoco researchers have developed a petroleum-based carbon fiber that can replace structural steel, ceramics, and other hard materials. The large-volume process uses low-value refinery product streams to upgrade carbon to a hard tough product.
- New crystalline combinations: Carbon compounds are among the materials being examined for new combinations of organic and inorganic molecules to create crystalline structures with useful combinations of strength, flexibility, and weight. One of the first combined products developed by the University of Toronto (Canada) is silicon with an undisclosed organic molecule to create a new semiconductor material.
These are a few of the many facets of materials research surfacing. Any one of several dozen projects in R & D could turn hydrocarbon's lowly element into a highly valued material, closing the differential between light and heavy crude ends and increasing the value of uneconomic reserves or heavy oil pools.
Serious about investment
Russia and China appear to be oblivious to the poor investment climate surrounding their petroleum industries. Multinational oil and gas producers are among those with stranded investments in the two countries, and as a result have become much more cautious and circumspect. These countries are not like Nigeria, Colombia, or some areas of West Africa, where risks are equally lofty, but reasonably transparent.
Much of the problem is structural - legal and business mechanisms are largely superficial. In Russia, a regulatory vacuum allows domestic firms with political clout and wherewithal to manipulate the system and absorb or seize cash flows, equipment, and holdings, or collapse equity values, with little difficulty. Western investors are lured in by proposals that feature legitimate language and lucrative investment returns, only to find all efforts to retrieve their principle are doomed.
In China, and also in India to some extent, the problem is bureaucratic absorption of investment, a common practice in socialistic economies. Even the creation of a Petro China, a debt-free "privatized" entity extracted from government-owned China National Petroleum Corporation (CNPC), has to concern investors. A grand total of 10% of PetroChina was offered on international equity markets recently, which leaves over whelming control to the national government's CNPC.
However well intentioned, CNPC is loaded with debt, excess staff, a multitude of social services, and little hope of bailing out, short of using the proceeds from the 10% stock offering, some of which should go to fund PetroChina's initial efforts. What happens to these proceeds may well determine whether PetroChina is a serious E & P vehicle, or simply a capital transfer mechanism.
Russia and China's governments need to demonstrate convincingly their seriousness in improving the investment climate, by passing laws that mean something and proper enforcement of contract terms. Anything less is a recipe for capital dissipation.
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