On April 26 and 27, petroleum engineers from around the world will gather in San Antonio for the Society of Petroleum Engineers' first research and development conference. They will meet with a broad cross-section of professionals from other disciplines, including chemical engineers, mechanical engineers, chemists, metallurgists, bioengineers and microbiologists.

The conference hopes to break fresh ground and form alliances across disciplines to address the sources of the world's future supply of oil. It is envisioned as a platform on which SPE members and others in the upstream business can learn about common threads and compelling challenges in R&D. Attendees are expected from major oil companies, service companies, independents, national oil companies and academia.

Throughout history, the peoples of the world have consumed a trillion barrels of oil. It's the next 2 trillion barrels that the SPE conference seeks. Where will this oil come from, and what technologies must be developed to extract it?

The conference is convening at a crucial time. There is a widely held perception in the U.S. that the industry does not require continued R&D support from the federal government. The U.S. Department of Energy (DOE), which has directed many worthwhile programs and funneled funds into academic institutions throughout the U.S., will soon cease funding R&D in the traditional oil and gas sector.

In response, the industry is to pull together to drive research forward, and this conference is to begin drawing the road map.

Oil and Gas Investor sat down recently with several leaders on the R&D committee. Participating were Barth E. Whitham, president and chief executive of Denver-based E&P company Enduring Resources LLC; Don W. Green, chaired professor, University of Kansas, and director of the state-funded Tertiary Oil Recovery Project; Vikram Rao, Houston-based senior vice president, technology, Halliburton; and Salt Lake City-based Arnis Judzis, vice president and general manager, data and consulting services, Schlumberger.

Investor Let's begin by looking at the R&D committee and its goals.

Rao The SPE formed the R&D committee in 2002. Our message is that R&D is more important now than it, perhaps, has been in the past. We see several areas that need more focus if the industry is going to find and produce the next 2- or 3 trillion barrels of oil. Conventional production is just not going to be enough.

Judzis It's easy to talk about future R&D challenges, but bringing together a group of people under the auspices of the SPE is significant and a great initiative. It's a wonderful opportunity to gather together professionals and scientists in various disciplines with classic petroleum engineers. We're encouraging cross-fertilization of ideas.

Investor Existing fields are obviously a key component of future oil supplies. What is the role of enhanced oil recovery, and what is happening in R&D in that area?

Whitham There is a vast amount of oil left in place. The industry has moved from primary to secondary to tertiary methods. We originally tried to modify mobility, and now we're trying to modify miscibility.

In the U.S. we have many defined reservoirs with wellbores in them, and we are working to improve recovery factors. For example, Denbury Resources is introducing polymers to make CO2 placement more effective. Companies are starting to drill horizontal wells as part of enhanced oil-recovery operations because these wells can aid in placement of chemicals and in pattern recoveries.

Recovery of bypassed oil will be important, also. EOG Resources has introduced the idea of subtle seismic. In this, cell size is decreased, velocities are increased and more data are captured. This enables imaging of pockets within reservoirs that were not influenced by existing well patterns.

In the Rocky Mountain region, one of the problems with tertiary recovery is that some reservoirs are contaminated with lime or calcite materials. These have an affinity for the polymers that are used to change mobility to displace oil. Now, companies are taking some of the drilling-fluid nanotechnologies that are being developed for high-temperature environments in South Texas and the Gulf of Mexico and beginning to use that to encapsulate polymers near the wellbore.

These nano-technologies have the potential to create a more resilient polymer base that could be used in reservoirs that previously had too much affinity for polymer effectiveness.

Green In a mature area like the Midcontinent, EOR opportunities abound. In Kansas, the Arbuckle is by far the most prolific formation, and the CO2 miscible process would seem ideal. However, there are limitations on the pressures that can be achieved in the Arbuckle, and these pressures are just below what we need to make CO2 miscible.

We are researching ways to modify the CO2 process, or other gas processes, for effective EOR recovery. If we can do that for the Arbuckle, we've made a huge resource available.

Investor Harsh environments are another component often touted as important for future oil supplies. What areas are the most promising, and what types of research are being done?

Judzis As we move into waters more than 10,000 feet deep, in many cases we encounter higher pressures and temperatures than ever experienced before. A considerable amount of research needs to be done to learn how to drill, complete and produce some of these reservoirs.

Whitham There are enormous Cretaceous-age structures in the Gulf of Mexico that are at depths greater than 30,000 feet. We think the reservoirs could be productive, but attempts to drill have been thwarted by physical conditions we couldn't overcome with current technology.

Now the industry is experimenting with nanosize carbon molecules to stabilize and disperse some of the heat in reservoir temperatures of more than 300 degrees. We have to draw on mechanical engineers and metallurgists to help solve these issues.

Also, projects in the deepwater Gulf of Mexico have been delayed because of challenges on the metallurgy of seafloor structures. In Norway, companies are changing the metals they use to improve stabilities in subsea production facilities. This is ground-breaking research that needs to be continued.

Investor What are your forecasts for the role of unconventional resources? What is being done, and needs to be done, in this segment?

Judzis Shale gas and, to a lesser extent, tight sands will form a big part of the composition of resources in the next 2 trillion barrels (equivalent). Already in the U.S. and North America we are seeing high activity in shales such as the Barnett and Fayetteville. These are economic and attractive gas plays for long-term production and hold great volumes of gas in place. And, shales are available elsewhere in the U.S. and around the world. Improvements in productivity, completions and stimulations are avenues for very good research.

Whitham The U.S. Geological Survey has defined 314 trillion cubic feet of recoverable unconventional gas resources inside the U.S. Obviously a huge portion of that is in the Rocky Mountain region. We're trying to grasp the technology that will make these resources become reserves.

In the Piceance Basin, economic development has been confined to the overpressured section. We're starting to push out of the originally defined cell boundaries into normally pressured and underpressured areas. It's due to better frac techniques, including improvements in fluids, proppants and methods to place proppants.

Operators are also figuring out how to add smaller intervals to production, such as coals and shales. And, we are combining horizontal drilling with unconventional completion techniques that we've been developing with new fluids and new chemistries.

R&D efforts in such areas as drilling chemistry, completion fluids, reservoir modeling and microseismic techniques are rapidly bringing more resources into the reserves category, and we expect to continue that trend.

Investor How important is heavy oil going to be as part of the next 2 trillion barrels?

Rao The likelihood of heavy oil being a significant proportion of daily production is extremely high. The question is how much and how fast. In 2020, heavy oil could easily be 10% of daily production, and if good R&D is done, it could reach 15%.

The challenges of heavy oil are its mobility and molecular make-up. It doesn't move easily, either underground or on the surface, and production risk is considerable. But, exploration costs are negligible and we know most of it is in the Western Hemisphere.

Heavy-oil recovery is very expensive. In Canada, processes use 1,000 to 2,000 cubic feet of gas to create the steam to recover each barrel of oil. Eliminating the use of natural gas is high on the list of R&D challenges. Reducing the use of fresh water is another important research thrust.

The greatest challenge lies in the chemistry of heavy oil. Almost all of the hydrogen needed to process heavy oil comes from natural gas. Research for the future will be to convert the oil by in-situ methods such as bioremediation. If we can understand microbes and how to manipulate them, we might discover ways to make molecular or chemical transformations downhole.

Investor A longer-term resource is oil shale. What are your thoughts on this?

Judzis Recovery processes have been studied for many years for oil shale, and they have some of the same problems as heavy oil. The resource volumes are very great in this country, but project economics are challenging.

Rao Oil shale contains kerogen so it has to be heated to be useable. In-situ conversion is going to be critical. Both Chevron and Shell have announced that they are working on maturing oil shale underground.

Investor Where does coal gasification fit in?

Rao Gasification of carbonaceous materials will be a solution to our energy crisis. It's simply a matter of how soon the gasification of coal and petroleum coke or asphaltene becomes widespread. Syngas, a mixture of carbon monoxide and hydrogen, is produced when these substances are gasified. Syngas is a basic building block and can be converted into anything, from transportation fuels to fertilizers to fabrics, and it can also be burned directly for power.

There are important synergies between gasification and heavy oil. The residue from heavy-oil processing is asphaltene, and its carbonaceous value is higher than that of the most premium coal. Something must be done with all the waste generated by heavy-oil processing, and gasification is a great solution. Also, gasification can be used to sequester the CO2 generated in the process, and it allows sulfur to be captured easily.

Lignite is also easily gasified. The FutureGen initiative, which is funded by the DOE, will take low-grade coal, gasify it, shift-react it to produce hydrogen and then sequester the CO2. It will be the world's first integrated sequestration and hydrogen-production research coal-fired power plant. This is an extremely important program and we need to make it work.

Syngas can also be converted to transportation liquids. The gasification process is relatively inexpensive, but the liquefaction process is very costly. From an R&D standpoint, we have to drive the cost downward.

Investor We've talked about EOR, unconventional resources and heavy oil as the near-term contributions to the next couple of trillion barrels. What about more esoteric sources such as gas hydrate?

Judzis Gas-hydrate reserves are known to be extensive offshore, particularly in northern climates. A number of companies, research consortia and academic institutions are doing volumes of work on their mechanical, electrical and other properties. Gas hydrates hold huge volumes of gas. But it's a long-term issue. Research is needed to determine how best to produce these, either offshore or from subsurface northern-climate sediments.

Rao Large-scale gas-hydrate production is far in the future. But, if we can find deposits that are in equilibrium with free gas, we could produce gas for some time before the hydrates started to melt. Once that point is reached, heat has to be injected to balance out the reaction. Finding and producing deposits that are commercially viable is the trick.

Investor What thoughts do you have about biofuels? This seems to be an area of energy supply that is outside the domain of petroleum engineering.

Rao Making ethanol from sugar is really not related to petroleum engineering; it's farming and process engineering. But when ethanol is made from cellulose, it involves chemistry and polymers. We have experience with polymer structures, which we use in fracturing. For instance, Halliburton is researching the modification of guar, a plant material, to make its composition more amenable for fracturing.

The problem with biofuels is that their manufacture competes with food for land and nutrients. Biofuels from sources such as switchgrasses are a different story; it doesn't compete with food crops. But research is needed to make these biofuels commercially viable.

Investor What is the status of research on carbon sequestration, and what can the oil industry specifically do?

Judzis When we look at the composition of the next 2 trillion barrels, geological sequestration is crucial to the future. Already in progress are studies of how to use flue gas and other sources of CO2 for enhanced oil recovery.

Rao We are the only industry that can address carbon sequestration today. Nothing else is practical. We have to solve the issue of how to use CO2 effectively, both from the standpoint of putting it away and getting additional benefits out of it.

Coalbed methane offers some interesting possibilities. When CO2 is injected into a CBM reservoir, it adsorbs onto the coal and releases methane. Between two and three times the amount of CO2 is adsorbed versus the amount of methane that is released. Research is required on what happens to the CO2 in the reservoir. It can swell the coal and change its permeability, and therefore destroy methane production later on.

Investor We've discussed the likely sources for the world's future oil supply. Let's talk about the path to that production. Is there a crisis in R&D in the oil industry today?

Judzis If you look at the absolute numbers, operators have reduced their spending on R&D more than 60% since the 1980s. In turn, the service companies have picked up their contributions, which have risen 60% to 70%. But we are woefully behind the dollars invested in R&D by other industries. Only about $3 billion is spent each year in R&D across our entire industry. Microsoft and General Electric devote $6- and $3 billion each year to R&D, respectively. These are individual companies, not an entire sector.

Rao In the U.S., the DOE has essentially stopped funding university research in oil and gas. It's a huge loss. Some 30% to 40% of some universities' funds are from the DOE, and they are badly hurt. The rest of the industry has to step in and sort this out.

Green For instance, the DOE's field-demonstration projects are being phased out along with the rest of the federal programs. The funding cuts have a very serious, negative impact on research at universities.

Whitham To continue to supply the nation's oil and gas, we need strong academic programs and strong research efforts. Our institutions need to be strengthened, focused and drawn into the R&D effort.

Rao On a positive note, during the last two years the R&D spend of the major oil companies has increased materially. There is a recognition that they may have gone too far in letting R&D lapse, but it's still nowhere near where it used to be.

Investor How can the efforts of major companies, independents, service providers and universities be unified?

Rao Collaboration is essential between industry and academia, and also within academia. Academic departments have to grow their level of cooperation with other departments.

Most service companies outsource much of the research they do, and substantial amounts of work go to industry and national labs. One effort Halliburton is making is to create a stronger network between universities. Some departments might have unique competencies that each university cannot possibly replicate. We need to create forums that foster collaboration. It's not as easy as it sounds because state governments have restrictions on intellectual properties, and these apply to their universities.

Green At the University of Kansas, we have recently started a small effort with Colorado School of Mines dealing with fracture systems. We are starting to work more with other universities.

One of the thrusts of our R&D committee is to promote interaction between universities, government and industry. In Kansas, we're fortunate because we've had state funding for more than 30 years, and external support from industry and from the federal government. Our main areas of research have been on gelled polymer technology for water control. We also work on CO2 miscible displacement processes.

We are essentially the technical arm of the Kansas oil industry, which is primarily comprised of very small oil companies. We conduct research we think will be applicable to their properties, and we convey that research to the industry through technology-transfer programs.

Kansas is not unique. Stanford University, Wyoming, New Mexico and New Mexico Tech also have R&D programs aimed at industry issues. We need to expand and grow these efforts.

Investor Is there a shortage of researchers today?

Judzis There is a shortage. The demographics are against us, especially as older people retire. We don't have enough young people coming in to keep pace with the challenges we face. It's quite important to have both undergraduate and graduate programs and research money for students pursuing masters and doctoral degrees. These are the people who will teach in the future and also research problems for operators and service companies.

And we need a multidisciplinary approach to supporting students. Petroleum engineers have always been important, but we need chemists, chemical engineers, mechanical engineers and others for the future.

Whitham Many industry research facilities have been phased out, and a lot of research talent has been dispersed. In the past, specialized R&D was captive within companies. Now we see that universities are one of the answers we have to push. For instance, Stanford University's integrated program grew after Chevron moved some of its R&D efforts there.

Green Until recently, it was difficult to attract high-quality doctoral candidates to oil and gas. They were more interested in areas with strong research support, such as biotechnology. We have to compete to get students into our programs.

Investor Independents seem to be a crucial component of the R&D picture.

Rao Uptake of technology is much faster by independents than by majors. Independents don't do a lot of research, but they adopt new ideas quickly. Tight gas, especially shale gas, was an independents' play. The Bakken and the Barnett plays were both started by independents. These companies are innovative and they foster and encourage new technologies.

Whitham Independents seek out the best ways to apply research. When ExxonMobil came out with just-in-time perforating, it partially licensed it to Halliburton. Four independents in Pinedale and Jonah fields in the Green River Basin immediately started working with coiled-tubing fracing on individual Mesaverde intervals.

Today, independents are pushing technologies such as microseismic and wellbore tomography. Companies working in the Piceance, Uinta and Green River basins are figuring out how to apply the right fluids, proppants and stages to stimulate very large gross-pay intervals. We've been able to create alliances with seismic and tool providers for 3-D frac mapping and modeling, and we've worked with universities to figure out how to record and interpret the volumes of data.

Operators are now talking about raising productive sands in completions from 30% to 40% to as much as 60% of what's in a wellbore. These results have flowed from geophysical ideas and research.

Investor What benefits can come from companies that actively participate in R&D, even if they are small independents?

Whitham The best example of collaboration between industry and services is Enventure Global Technology. Shell patented expanded tubular technology and created a joint venture with Halliburton to promote it.

The early adopters that proved up the technology were onshore independents in South Texas. A group of companies embraced the technology because it allowed them to drill an overpressured section and test several overpressured pays, and at the same time preserve adequate wellbore diameters. Several operators found that expandable casing allowed them to save as much as a $1 million on individual wells.

The days of relying on major oil companies to spearhead industry R&D appear to be over. And the federal government has dropped out of the game in the U.S., at least as far as conventional oil and gas are concerned. Universities, service companies and independents each have to pick up their participation to push science forward. Everyone needs to be working toward that next 2 trillion barrels.

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