What does the future hold? The experts answer.

"The best thing about the future is that it comes one day at a time," said Abraham Lincoln. In energy, that's a very good thing, because the world's ponderous energy framework changes slowly. But when years stack upon years, the changes can be dramatic. In 1981, according to statistics published by the Independent Petroleum Association of America, 91,553 wells were drilled in the U.S.; the seismic crew count was 8,172; and 3,970 rotary rigs were active. In 2005, 40,807 wells were drilled, and an average 55 seismic crews and 1,381 rotary rigs were active. Operators of record fell precipitously from 13,000 in 1981 to some 2,500 in 2001. Yet, energy use has burgeoned in the U.S. The population has grown from 233 million in 1981 to 298 million at present, and oil and natural gas consumption have shot from 8.9 billion barrels of oil equivalent (BOE) to some 11 billion in 2005, according to the U.S. Energy Information Administration. Clearly, oil and gas exploration and production remains a vital business, with a long and likely contentious future. In the years to come, oil will remain the dominant fossil fuel. But it will become heavier, as tar sands and oil shales join the mix. Natural gas use will surge, and far-flung gas deposits will become commercial through liquefaction. Gas-to-liquids conversions will climb. Alternative sources such as solar, wind and tides will yield new volumes to hungry markets. Sustainability will be the watchword of the future. Sequestration of greenhouse gases in depleted reservoirs, with the happy by-product of incremental oil or gas production, will grow. Explorers will push toward the deepest sediments in the Gulf of Mexico, and into ever-deeper waters. Efforts to tap unconventional resources will dominate the industry. Get ready to embrace a future full of change and challenge, with the excitement of great gas discoveries, explosion of fresh technology, and the inevitable disappointments and setbacks. This month, as Oil and Gas Investor celebrates its 25th birthday, we talk to industry experts about topics that range from energy-use forecasts to offshore drilling prospects. It's been a wild ride for anyone that's been in oil and gas for the past quarter century, and that's one trend we can confidently forecast will continue in the years ahead. Fossil Fuels: The Source Now, Tomorrow Natural gas will shoulder much of the future growth in energy consumption in the U.S. and worldwide. Gas, coal and oil will remain the heavy-lifters among energy sources in this century, both for transportation fuels and for the generation of electricity. "There is a lot of misunderstanding about energy: electricity can be generated from nuclear or wind sources, but the only major source for transportation fuels is oil," says Amos Salvador, professor emeritus at the University of Texas at Austin. World oil production will peak around mid-century, stretched out to that time mainly through discoveries and reserves growth in known fields. While discoveries will be made, the heady days of blockbuster giant finds are over. Initially, reserve estimates tend to be cautiously low. As fields produce, revisions are often made upward. "There are many places in the world where fields could support infill wells, and wells could be recompleted and drilled deeper. Reserve growth from known fields will add important volumes of oil." The old giant accumulations have been reevaluated many times and the subsurface is increasingly understood. Operators will still be able to chalk up meaningful natural gas discoveries, however. "The search for gas is fairly recent, and in many places deeper drilling and drilling in gas-prone basins previously avoided will find gas. I think a great deal of gas will be discovered in the future." Too, major known gas fields are not yet being produced, because the gas is stranded far from markets. A sector very much on the move should be transportation fuels made from coal and natural gas. "There is a tremendous amount of coal in the world, and the technology to convert coal to transportation fuel has been around since World War II," says Salvador. "The technology is expensive and not terribly efficient now, and that's where we need research. We need to make the processes more efficient and cheaper." Massive amounts of fuel can also be generated from gas. Gas-to-liquids (GTL) conversions will accelerate, and GTL products will move strongly into the transportation sector in the future. "Again, the technology has been developed, but it needs to be improved." Renewable and alternative energy sources will contribute an increasing share of the world's energy mix, but they will continue to be dwarfed by oil, gas and coal. In most developed countries, the prime sites for hydroelectric power generation have already been developed, and nuclear power has faced entrenched opposition. Sources such as wind, solar and biomass are expensive, and require enormous land areas to generate significant amounts of electricity or transportation fuels. "Currently, most alternative energy sources are subsidized. Wind power is growing rapidly, but still produces around 1% of the world's electricity. I don't see it reaching levels of 10%." The U.S. has limited options beyond importation of more foreign oil and gas, mainly LNG. Even with a flood of imports, the nation may have to rely increasingly on coal. "We have a lot of coal, and oil production is irrevocably declining. We also seem to be running out of conventional gas, and the increases we have seen in gas production have been from coalbed methane, shales and tight sands." For those people who pin their hopes on future technology, the energy field is disappointingly stodgy. Internal combustion engines for transportation vehicles and turbines for the generation of electricity have changed little in decades. And, the much-discussed hydrogen economy is more wishful thinking than reality. Hydrogen doesn't occur in nature, so it must be generated, and it takes more energy input than it delivers in output. "Hydrogen is a source that can be used for both electrical generation and transportation, but its use faces huge challenges." It must be compressed or liquefied to be stored, and its widespread use would require an infrastructure similar to that used now for gasoline. "The hydrogen economy sounds very good, but people are realizing it's not so possible." The hard truth? "We have to conserve energy. Per person, Americans consume twice as much energy as people who live in Western Europe, Australia or Japan. Gasoline and electricity have been very cheap in the U.S., and those days should be over." THE ENVIRONMENT: A Mandate The U.S. economy, particularly the transportation sector, runs on oil. No other energy source comes close to matching oil's efficiency, economy and convenience. However, light-oil production peaked years ago in the U.S., and worldwide decline will begin within 20 years. The crude slate processed in the U.S. is growing increasingly heavy, and its sulfur content is rising. "We are running out of high-quality oil and we're dipping into oil that is more difficult to extract," says George Stosur, president of Bethesda, Maryland-based Stosur Consulting Inc. Natural gas will shoulder an increasing role in the U.S. energy mix, but the country is also burning up its cheap gas. Immeasurable quantities of gas are locked in very tight formations, coalbeds, and in methane hydrates, but most of this gas is neither accessible nor economic to produce. The U.S. is fated to be a net energy importer, and its imports will continue to swell. Renewable energy can contribute significantly to the domestic mix, but oil, natural gas and coal will remain the country's workhorses. "In the next 10 to 15 years, we probably will be producing not more than 5% of our energy from alternative sources." Where will the hydrocarbons come from? Fortunately, the world is endowed with abundant heavy oil and bitumen resources. The environmental impact of heavy-oil extraction has been extensive: in Canada's tar-sands region, mining for bitumen has generated millions of tons of waste and acres of settling ponds. Now, however, technologies such as steam-assisted gravity drainage (SAGD) promise to unlock these resources in a much more environmentally friendly fashion than in the past. The SAGD process, which uses steam and parallel horizontal wells, is being rapidly adopted. Additionally, Shell Oil is pioneering an in-situ thermal-recovery method to produce crude from kerogen-rich shales in the Western U.S. and China. Furthermore, the world positively fizzes with natural gas. Liquefied natural gas (LNG) imports from far-flung regions of the world are expected to burgeon, and tankers filled with LNG will plug the gap between demand and North American supply. "The time is ripe for LNG, given improvements in technology and worldwide gas prices," he says. Today's gargantuan projects are delivering economies of scale and pushing down costs. An intriguing twist is that many of the countries pushing forward with LNG projects are not OPEC members, changing the geopolitics of world supply. In the future, the direct conversion of gas to transportation fuels will become essential and routine. Although the gas-to-liquids (GTL) process is still expensive, its products are extremely clean. In Qatar, Shell, ExxonMobil and Chevron have committed $20 billion to the alternative technology. The majors are betting that they can produce gasoline and diesel for some $14 per barrel, and as their experience grows with large-scale GTL projects, costs should drop further. A much longer-range possibility is the production of gas from methane hydrates-a colossal resource that far exceeds that of conventional natural gas. "The amount of the resource is enormous, but currently it takes very much more energy to unlock the gas than it can produce." None of the concepts to free the gas from hydrates -such as chemical reactions or pressure changes-are close to economic at present. While the American public's hunger for energy is unabated, it is increasingly concerned about the environment and the impact of carbon dioxide emissions on global climate change. "It's hard to dispute that the earth's temperature has increased recently. But temperature has fluctuated sharply in ages past, and we don't know what is happening and why," says Stosur. Whether or not the industry agrees that human activity causes worldwide warming, CO2 sequestration offers oil and gas companies an opportunity to burnish their environmental records and to also produce incremental volumes of oil and gas. An emerging area of research involves the injection of CO2 into coalbed-methane reservoirs. Coal seams that can't be mined can accept huge volumes of CO2, and the CO2 can displace methane. Some indications are that coals can accept up to three times as much CO2 as the methane they contain. "The industry could jump on the bandwagon, because CO2 is one of the most successful recovery methods. There's a great opportunity to capture CO2 and inject it into reservoirs." GLOBAL WARMING: Carbon Sequestration One of the most demanding tasks the energy industry faces in this century is continuing to supply fuels to the world in a safe and environmentally responsible manner. Central to this challenge is capping the growing levels of greenhouse gases in the Earth's atmosphere. No single dominant solution is likely to emerge for controlling greenhouse gases, because the problem is too large in size. Studies have shown that carbon sequestration is just one of the technologies required to stabilize the atmospheric CO2 concentrations between 450 and 550 ppm, says T.S. Ramakrishnan, scientific advisor, Schlumberger-Doll Research. Other advances will also be required in renewable sources, nuclear technology and hybrid vehicles. But, the requisite technology is currently in place to implement carbon sequestration. Numerous CO2 floods are already under way in West Texas and New Mexico. In Norway, Sleipner Field is being specifically used for sequestration. And Canada's Weyburn Field has a combined enhanced-oil-recovery and sequestration project. Carbon sequestration is in its initial stages, however: "The amount of carbon we pump underground is not even 1% of the emitted carbon," says Ramakrishnan. The amount stored is even less, because a significant portion of the CO2 is recycled. Indeed, the industry has not even scratched the surface in terms of dealing with the 25 Gigatonne per year (in 2003) of emitted CO2. Questions abound about such issues as casing integrity, cement stability, cap-rock leakage, CO2 migration and the location of effective monitoring points. A central concern is the sink location-can the sites be located close to emissions for centralized sources? "Clearly, the oil and gas industry is capable of addressing many of these issues at present, if not all," he says. Unfortunately, the economics of carbon sequestration are not entirely favorable at present. "We believe that once the cost of storage drops consistently below $20 per ton, carbon sequestration will be considered as a serious option to mitigate global warming. If the cost stays above $20 per ton, we have to wonder what other options to sequestration we really have." Lots of research is ongoing, in areas such as carbon monitoring, wellbore isolation, CO2 migration simulation, reactive flow of CO2 and thermodynamic modeling. "Public acceptance of carbon sequestration will require a high level of confidence that humans are not in danger. Much of the research effort in the national labs and private institutions is towards achieving this goal." UNCONVENTIONAL RESOURCES: The Way Forward As the world's supply of conventional resources finally peaks and goes on decline-sometime in the next few decades-and as the demand for liquid fuels continues its steady rise, the industry will turn more to unconventional resources to supply the world with fuel, says Steve Holditch, head of the department of petroleum engineering at Texas A&M University. The unconventional resources of most importance will be tight gas, gas shales, coal seams and heavy oil. At present, the U.S., Canada, Mexico and Venezuela lead the world in extraction of these resources. "In the U.S., we are already producing from many of the different types of unconventional reservoirs," he says. Obviously, oil and gas produced from unconventional resources are of great consequence to the U.S. economy. Of more importance, however, are the technologies that are developed to commercially produce these resources. "In the near future, the exportation of these technologies to other basins around the world will be a big business." Indeed, in every basin, as conventional reservoirs peak and begin to decline, unconventional reservoirs will be developed using the technologies of today. Currently, the two unconventional sources that produce the most useable hydrocarbons are tight gas and heavy oil. They will continue to grow in importance and volume worldwide. Tight gas is the most understood form of unconventional gas, and its future is bright. "The resource triangle suggests that gas is deposited in reservoirs with a log-normal permeability distribution. As such, in any basin with a large amount of conventional gas, one should expect to find even more volumes of unconventional gas," says Holditch. "We are just scratching the surface in our understanding of where unconventional gas reservoirs can be found and how to develop them." Heavy-oil production will fill much of the gap between demand and supply in the future, and great volumes of heavy oil will be produced in Canada and other areas. In-situ processes such as SAGD are working well today, and continued research will provide even better solutions down the road. And, gas production from shales and coal seams will also become significant on a global scale. "Coalbed methane is being developed in the U.S. because the costs are reasonable and the gas can be marketed. In many areas around the world, high development costs or lack of gas markets have precluded development, but in future decades, coal-gas production will be common worldwide." Oil shales are a much more speculative resource, however. "I'm certain if we need the oil, we'll find a way to produce oil shales, but cost-effective technology is decades away." One strong concern with surging unconventional resource development is its potential environmental impact. Because of their more diffuse nature, unconventional resources have required more wells and surface disturbances to develop than conventional accumulations. That will not hold true in the future, however. New drilling and stimulation methods will reduce the environmental footprint, says Holditch. Researchers at Texas A&M University are already looking at concepts such as "disappearing roads," which will help lessen the environmental impact of resource-play development. Other efforts are directed at technologies that allow multiple wells to be drilled, completed and stimulated at less cost from a smaller drillpad. In stimulations, work is being done to improve fluids, propping agents, imaging and diversion methods. "Even though hydraulic fracturing has been around 57 years, we still have more to learn about stimulation and how to create and prop long, conductive fractures that stay open and increase recovery." And, the technology for drilling multilateral wells that can be stimulated effectively also is being enhanced. "We must do the research and develop the technologies needed to produce the energy that mankind wants to maintain and improve our standard of living, while simultaneously protecting the environment." OFFSHORE: Maturity and Youthful Promise The Gulf of Mexico leads all U.S. regions in major discoveries and production volumes. It's a popular venue because it offers opportunities that span the risk and reward spectrums. Companies can pursue high-return, moderate-risk prospects as well as cutting-edge exploration at the very limits of technology. "We're oriented toward balancing return and risk, and the offshore provides us this opportunity," says Tim Parker, senior vice president, Dominion Exploration & Production. Dominion (and its predecessor CNG Producing Co.) has worked the Gulf of Mexico for more than 30 years. Throughout its tenure, fresh opportunities have continually presented themselves as the province has matured and evolved. "We have faced challenges and we've had to reinvent ourselves, identify new plays and improve our technologies, but it is a wonderful place to drill and produce," says Parker. At present, Dominion holds 111 shelf and 160 deepwater blocks in federal waters, and some 30 blocks in state waters. It produces more than 500 million net cubic feet per day from Gulf wells. "The maturity of the Gulf is entirely dependent on the plays, and they range from very mature in conventional, shallow bright spots, to frontier exploration in ultradeep wells and extremely deep waters." Wells have probed the shelf for more than half a century, but prospect sizes are still appealing, says Parker. "We've been able to maintain prospect size by stretching to greater depths and new prospect styles." Indeed, Dominion owns a piece of the ultradeep Blackbeard well, projected to 32,000 feet. ExxonMobil operates the highly watched test, located in 72 feet of water on South Timbalier 168. Dominion has also enjoyed good success in the intermediate-depth shelf play, between 15,000 and 22,000 feet subsea. Rapidly evolving seismic and interpretation techniques that deliver clearer images of previously opaque prospects drive this subtle play. Dominion's most recent find is a deeper-pool discovery in West Cameron 130, a shallow-water well that reached a total depth of 19,300 feet and encountered 250 feet of net pay. The deep water also offers a variety of opportunities. The older mini-basin play has matured: "Ten years ago, the mini-basin play was revolutionary. But today, prospect sizes are rapidly shrinking in portions of that play," says Parker. Ultradeep prospects below salt are now the hot ticket, and they can hold potentials in excess of 250 million barrels of oil equivalent. Dominion will be testing a number of these gigantic prospects in the next few years. And, the company has a new success in deep water. Together with Kerr-McGee Corp. and others, Dominion announced a discovery at the Claymore prospect. The well, in Atwater Valley Block 140, was drilled in 3,700 feet of water to a total depth of approximately 25,000 feet. It encountered more than 150 feet of net pay in multiple zones. At present, Dominion is drilling two operated shelf wells and holds interests in two outside-operated deepwater wells. This year, it plans a dozen wildcats in the Gulf, split equally between deepwater and shelf prospects. It's fewer than the company would like to drill, but it is chafing against the severe shortage of deepwater rigs. To remedy the situation, Dominion, in partnership with Kerr-McGee and Anadarko Petroleum, is building an ultra-deepwater semisubmersible, the Ensco 8600. The partners will trade drilling slots. "To a surprising extent, exploration strategy today is being shaped by who has rigs and who doesn't, especially in advance of the big lease sales scheduled for next year and the following year," says Parker. In addition to prospecting, Dominion is involved in the groundbreaking Independence Hub project in the Eastern Gulf. In 2007, the company will bring three fields on production through Independence Hub, a cooperative venture among a group of independents. "Independence will maximize returns for all of us. It's a wonderful transaction." More collaborations of this sort are likely in the future, as companies band together to build out needed infrastructure. It's a model that allows clusters of moderate-size discoveries, owned by different parties, to be quickly and cost-effectively brought to market. In concert with its established and emerging plays, the growing spirit of teamwork among operators and the brisk progression of offshore geophysical, drilling and production technologies, the Gulf of Mexico has plenty to offer, says Parker. "We're really pumped up about the future." And, that future could be even more luminous if new offshore regions were available for exploration. "If, as a nation, we decide to open more of the U.S. offshore, we certainly believe that we can add value, and we also know that we can operate in these regions in a responsible fashion."