The Influence of Technological Changes on the Cost of Gas Supply

W O R K I N G P A P E R

THE INFLUENCE OF TECHNOIDGICAL CHANGES ON THE COST OF GAS SUPPLY

M. S t t u b e g g w S. Messner

September 1986 WP-86-38

I n t e r n a t i o n a l I n s t i t u t e for Applied Systems Analysis

NOT FOR QUOTATION WITHOUT THE PERMISSION OF THE AUTHORS

THE

INFLUENCE OF TECHNOLOGICAL CHANGES ON THE COST OF GAS

SUPPLY

M. S t r u b e g g e r S. Messner

September 1986 WP-86-38

W o r k i n g P a p e r s a r e interim r e p o r t s on work of t h e International Institute f o r Applied Systems Analysis and have r e c e i v e d only limited review. Views o r opinions e x p r e s s e d h e r e i n do not necessarily r e p r e s e n t those of t h e Institute o r of i t s National Member Organizations.

INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg, Austria

Foreword

In s p r i n g 1986 a Task F o r c e Meeting on The M e t h a n e Age w a s jointly organized by IIASA and t h e Hungarian Committee f o r Applied Systems Analysis t o define t h e d i r e c t i o n s of r e s e a r c h f o r IIASA's Methane Study, a n a c t i v i t y inside t h e TES (Technology, Economy, S o c i e t y ) P r o g r a m . One of t h e issues r a i s e d in t h i s meeting c o n c e r n e d t h e c o s t s t r u c t u r e of supplying n a t u r a l g a s t o t h e final consumers.

This p a p e r analyzes t h e cost of supplying n a t u r a l g a s to a v i r t u a l consumer in C e n t r a l E u r o p e from a l l p r e s e n t l y conceivable s o u r c e s . The sensitivity of t h e p r i c e of supplying t h e g a s to c h a n g e s in t h e cost of single components i s a l s o in- vestigated. The a u t h o r s could p a r t l y build on t h e d a t a b a s e c o l l e c t e d d u r i n g t h e IIASA I n t e r n a t i o n a l Gas S t u d y , which included t h e economic a n d t e c h n i c a l f e a t u r e s of supplying n a t u r a l g a s in Europe--although o n a lower level of disaggregation.

Contents

I n t r o d u c t i o n

H i s t o r i c a l P e r s p e c t i v e s

The C o s t of N a t u r a l G a s S u p p l y T h e E f f e c t of Cost R e d u c t i o n s i n t h e

G a s S u p p l y S y s t e m

Taking t h e Methanol or Gasoline R o u t e D e e p Gas: A New C h a n c e

Final R e m a r k s B i b l i o g r a p h y

The Influence of Technological Changes on the Cost of Gas Supply

M. S t r u b e g g e r and S. Messner*

Introduction

Since t h e e a r l y 1950s t h e importance of n a t u r a l g a s as a p r i m a r y e n e r g y s o u r c e h a s been growing steadily. P r e s e n t l y (mid-1986) i t supplies n e a r l y 20% of global primary e n e r g y consumption, constituting t h e t h i r d l a r g e s t s o u r c e of e n e r g y a f t e r c r u d e oil a n d coal.

Technological innovation and improvements in performance during t h e previ- ous c e n t u r y have made this high d e g r e e of g a s use both possible and economically viable. In t h e s a m e way, t h e f u t u r e r o l e of n a t u r a l g a s will b e influenced by developments in g a s technology. In t h i s p a p e r w e t r y to investigate t h e e f f e c t s of technological improvements on t h e g a s e x t r a c t i o n and t r a n s p o r t system. The focus i s on n a t u r a l g a s supply options for Western E u r o p e , considering p r e s e n t l y feasi- ble, but not n e c e s s a r i l y economical, supplies from known g a s fields a r o u n d Europe.

Historical Perapectivea

An e a r l y example of a technological push o c c u r r e d in t h e Appalachian region, USA. After g a s production t h e r e had r e a c h e d i t s peak, a r o u n d 1917, t h e subse- quent decline lead to a doubling of g a s p r i c e s within five y e a r s . This stimulated f u r t h e r technological development in g a s t r a n s p o r t a t i o n systems, to make g a s from o t h e r fields accessible to t h e consumption c e n t e r s in question. A s a r e s u l t , about a dozen pipelines of m o r e t h a n 20 c m in diameter and longer t h a n 200 miles were built in t h e USA between 1927 and 1 9 3 1 (Tussig and Barlov, 1984). The longest pipe- line c o n s t r u c t e d a t t h a t time connected t h e Panhandle/Hugoton Field with Chicago, Ill., covering a distance of 1100 miles.

* _{W e} thank Dr. M. Korchemkin f r o m t h e E s t o n i a n SSR Academy o f S c i e n c e s , USSR, f o r h i s valuable comments and h i s help i n compiltng t h e c o s t data f o r t h e S o v l e t g a s supply s y s t e m .

More r e c e n t developments are t h e p r o d u c t i o n of n a t u r a l g a s from r a t h e r hos- t i l e a r e a s , s u c h as t h e N o r t h Sea or p e r m a f r o s t r e g i o n s in t h e USSR, a n d i t s t r a n - s p o r t o v e r long a n d d i f f i c u l t r o u t e s b y pipelines or e v e n as liquid n i t r o g e n g a s (LNG). The r e l a t i v e youth of t h e technologies involved makes u s c o n f i d e n t in f o r e - c a s t i n g f u r t h e r t e c h n i c a l improvements and t h u s cost r e d u c t i o n s .

To assess f u t u r e cost developments, t w o phenomena h a v e to b e s e p a r a t e d : ( a ) cost r e d u c t i o n s d u e to t e c h n i c a l improvements, economies of s c a l e , a n d grow-

ing e x p e r i e n c e , a n d

(b) cost i n c r e a s e s d u e to t h e n e c e s s i t y to u s e g a s e x t r a c t i o n s i t e s at m o r e u n f a v o r a b l e l o c a t i o n s

-

in t e r m s of geology, climate, a n d d i s t a n c e to t h e con- s u m e r .

Figure 1 shows t h e s e t w o e f f e c t s on t h e c a p i t a l n e e d e d f o r e x t r a c t i n g c o a l , oil, a n d g a s in d i f f e r e n t c o u n t r i e s . Whereas, with growing e x p e r i e n c e , t h e capital-output r a t i o f o r oil a n d g a s p r o d u c t i o n d e c r e a s e d s t r o n g l y in areas with similar geology

-

in t h e FRG i t d r o p p e d b y more t h a n 6% p.a. between 1 9 6 0 a n d 1 9 7 4

-

i t i s c o n s i d e r - a b l y h i g h e r at h o s t i l e l o c a t i o n s , s u c h as t h e N o r t h Sea. However, t h e t r e n d in t h e c a p i t a l r e q u i r e d to p r o d u c e a n additional amount of oil or gas i s s i m i l a r to t h e development e x p e r i e n c e d in t h e FRG. I t i s a l s o i m p o r t a n t to n o t e t h a t t h e l o n g e r a technology h a s b e e n in o p e r a t i o n , t h e s m a l l e r t h e cost d e c r e a s e s become.

C u r r e n t l y , Norway e x p e r i e n c e s t h e h i g h e s t unit cost r e d u c t i o n s p e r y e a r .

In c o n t r a s t to t h e c a p i t a l - o u t p u t r a t i o f o r oil a n d g a s p r o d u c t i o n , t h e s p e c i f i c c a p i t a l n e e d s f o r c o a l mining are i n c r e a s i n g in a l l c o u n t r i e s , as shown in F i g u r e 1.

The long t r a d i t i o n of coal mining in t h e s e c o u n t r i e s n e c e s s i t a t e s t h e e x p l o i t a t i o n of c o a l from areas with t h i n n e r seams, p o o r e r q u a l i t y , a n d g r e a t e r d e p t h s

-

r e s u l t i n g in a n i n c r e a s i n g c a p i t a l intensity. But also t h e s h i f t to o p e n c a s t mining a n d , e v e n more, t h e automation of u n d e r g r o u n d mining h a v e l e a d to h i g h e r investment needs.

Similar dynamics were e x p e r i e n c e d with oil a n d g a s p r o d u c t i o n in t h e USSR.

T h e r e t h e a v e r a g e capital-output r a t i o (in r o u b e l s p e r e n e r g y unit) f o r oil pro- duction i n c r e a s e d b y 15% a n d f o r g a s p r o d u c t i o n by 24% in t h e p e r i o d f r o m 1 9 6 6 to 1 9 7 5 (Smolik, 1981). F i g u r e 1 i n d i c a t e s t h a t , owing to t h e development of N o r t h Sea oil a n d g a s fields, a s i m i l a r t r e n d holds f o r Western E u r o p e as a whole. This t r e n d will c o n t i n u e when o i l a n d g a s p r o d u c t i o n moves f u r t h e r n o r t h to locations l i k e Haltenbanken or Troms off t h e Norwegian coast. However, technological p r o - g r e s s a n d growing e x p e r i e n c e will a g a i n d e c r e a s e t h e initially high c o s t s , o n c e t h e

move toward y e t untouched r e s e r v o i r s h a s b e e made.

Figure 1. Capital-Output Ratios f o r the Extraction of Energy Resources.

Source: Smolik, 1981.

14.9 United Crude Petroleum

Gas Extraction

C,

3 P

C,

z

3 _m

^{3.5 -}

.-

C,

J

P

3.0 -

(Mostly coal until 1970) 2.0 -

1.5 -

Coal Mining - ^{USA (BEA)}

1 .o

84' $ / BOE

1970 7 2 7 4 7 6 7 8 '80 8 2 '84

Year

Figure 2. Drilling Costs p e r Million boe of Oil a n d Gas P r o d u c e d , USA 1970-1984, in 1984 US$.

S o u r c e : Rose, 1985.

T h e s e cost r e d u c t i o n s , however, d o not hold f o r t h e t o t a l d r i l l i n g c o s t s . An investigation of t h e d r i l l i n g costs in t h e lower 48 states of t h e USA (Rose, 1985) shows t h a t a v e r a g e d r i l l i n g costs p e r f o o t rose c o n s i d e r a b l y d u r i n g t h e p e r i o d 1960 to 2983. F i g u r e 2 shows t h e t o t a l drilling casts p e r b o e l of oil a n d g a s p r o - d u c e d in t h e USA d u r i n g t h e p e r i o d 1970-1984 (API, 1986; OECD, 1984, 1986). The i n c r e a s e in total d r i l l i n g costs f r o m l e s s t h a n $1 to o v e r $6 p e r b o e i s mainly r e l a t e d to t h e time r e q u i r e d f o r drilling (Adelman a n d Ward, 1980). The i n c r e a s i n g d e p t h s a n d m o r e difficult geological formations r e q u i r e m o r e time p e r f o o t d r i l l e d a n d t h u s i n c r e a s e t h e a s s o c i a t e d costs. The s h a r p d r o p in costs at t h e e n d of t h e p e r i o d r e f l e c t s a c h a n g e d s t r a t e g y r e g a r d i n g drilling d e p t h s . The number of wells d r i l l e d to 15000-20000 f e e t d r o p p e d by n e a r l y half

-

^{f r o m 1140} in 1982 to 652 in 1984 - a n d t h e number of wells d r i l l e d to d e p t h s below 20000 f e e t f e l l from 138 to

'1 boe

-

¹ barrel of oil equivalent- 6.12 x 1 0 ' ~ .

37. Another r e a s o n f o r t h i s cost r e d u c t i o n was t h a t t h e f a l l in d e e p drilling activi- t i e s a f f e c t e d mainly g a s wells. This lead to o v e r p r o p o r t i o n a l cost savings, f o r g a s wells are usually d e e p e r t h a n oil wells

-

o n a v e r a g e by 40% in 1984. Moreover, t h e y are a p p r o x i m a t e l y 17% a n d 24% more e x p e n s i v e t h a n o i l wells at d e p t h s of 15000-20000 f e e t a n d below 20000 f e e t , r e s p e c t i v e l y . The l a r g e s t i n c r e a s e in t h e number of wells was e x p e r i e n c e d at d e p t h s l e s s t h a n 5000 f e e t , which are a b o u t 10 times c h e a p e r t h a n wells d e e p e r t h a n 15000 f e e t (API, 1986).

In c o n t r a s t to t h e r a t h e r s t r o n g c h a n g e s in capital-output r a t i o s e x p e r i e n c e d in r e s o u r c e e x t r a c t i o n , c a p i t a l n e e d s f o r g a s transmission a n d d i s t r i b u t i o n d r o p p e d by only 2-3% p e r y e a r . F o r comparison, changing conditions in t h e USSR, with t h e s h i f t of g a s p r o d u c t i o n from t h e E u r o p e a n to t h e S i b e r i a n p a r t of t h e c o u n t r y , r e s u l t e d in a t r i p l i n g of t h e g a s t r a n s p o r t a t i o n costs between 1970 a n d mid-1986.

The cost of d i s t r i b u t i n g n a t u r a l g a s to t h e final consumer

-

today usually t h e d e a r e s t component of a g a s s y s t e m

-

was r e l a t i v e l y low d u r i n g t h e f i r s t p h a s e of i t s introduction in E u r o p e . In densely populated areas i t w a s o f t e n possible to t a k e a d v a n t a g e of e x i s t i n g g r i d s , which were built e a r l i e r f o r t h e d i s t r i b u t i o n of 'town g a s ' p r o d u c e d f r o m coal. In many o t h e r areas t h e g a s g r i d could b e c o n s t r u c t e d simultaneously with t h e development of new housing areas. This p h a s e came to a n e n d d u r i n g t h e 1970s. when a l l t h e areas damaged d u r i n g World W a r I1 had b e e n finally r e c o n s t r u c t e d a n d t h e e r e c t i o n of s a t e l l i t e towns s t a g n a t e d .

Table 1. P r i c e S t r u c t u r e f o r t h e Supply of N a t u r a l Gas a n d Oil P r o d u c t s in Aus- t r i a ( X ) .

S o u r c e : Safoschnik, 1985 P r o d u c t i o n

T r a n s p o r t

Distribution/Storage/Refining Taxes a n d P r o f i t s

Table 1 shows t h e cost s t r u c t u r e of supplying n a t u r a l g a s to t h e end-user i n Austria f o r 1984, a n d c o m p a r e s i t with t h e supply of r e f i n e r y p r o d u c t s . This exam- ple shows t h a t , in 1984, 30% of t h e t o t a l cost of g a s supply (i.e., price l e s s t h e

Gas Oil

7 7

24 7

4 9 26

20 60

t a x e s a n d p r o f i t s shown i n Table 1 ) was n e c e s s a r y to t r a n s p o r t t h e g a s to t h e c e n t e r s of consumption and t h a t a n o t h e r 60% was used f o r s t o r i n g a n d d i s t r i b u t i n g i t . Only 1 0 % of t h e o v e r a l l cost i s i n c u r r e d in e x t r a c t i o n . I t was mainly t h e s e high costs f o r t r a n s p o r t a t i o n and d i s t r i b u t i o n t h a t l e f t just 20% of t h e selling p r i c e of g a s f o r p r o f i t s a n d taxes. F o r c r u d e oil, on t h e o t h e r h a n d , p r o f i t s and t a x e s a c c o u n t e d f o r 60% of t h e selling p r i c e in 1984. This high i n t r i n s i c value was, how- e v e r , only valid f o r oil p r o d u c e r s in t h e Middle E a s t . F o r t h e N o r t h Sea t h e pro- duction costs are obviously much h i g h e r , r e s u l t i n g in a s m a l l e r i n t r i n s i c value.

Thus, t h e oil p r i c e d e c r e a s e of 1 9 8 6 f r o m o v e r $25 to a r o u n d $10 p e r b o e made many N o r t h Sea g a s a n d oil p r o j e c t s uneconomic a n d r e s u l t e d in a r e e v a l u a t i o n of investment plans.

The supply cost of n a t u r a l g a s , i t s composition, a n d possible f u t u r e develop- ments i s investigated in t h e following s e c t i o n s , giving a f i r s t o r d e r approximation of t h e r e l e v a n c e of technological improvements in t h e coming d e c a d e s .

The C o a t o f N a t u r a l G a s S u p p l y

The following a n a l y s i s f o c u s e s on supplying a consumer i n C e n t r a l E u r o p e with n a t u r a l g a s f r o m v a r i o u s s o u r c e s . These d i f f e r e n t supply s o u r c e s include t h e Norwegian p a r t of t h e N o r t h S e a , t h e USSR, Africa, a n d t h e Middle E a s t . Domestic supply from conventional s o u r c e s i s n o t t a k e n i n t o a c c o u n t , s i n c e a n i n c r e a s e in production s u f f i c i e n t to match additional demands seems unlikely. Also, t h e influ- e n c e of p r o f i t s a n d / o r t a x e s o n t h e p r i c e of g a s i s n o t examined. W e only analyze t h e cost s t r u c t u r e of g a s supply a n d t h e influence of cost-reducing technological c h a n g e s along t h e e n t i r e g a s chain.

E z t r a c t i o n

Table 2 g i v e s a n overview of t h e costs of producing n a t u r a l g a s from v a r i o u s fields. The e s t i m a t e s of p r o d u c t i o n costs2 f o r n a t u r a l g a s r a n g e from ~ ~ $ 9 / 1 0 0 0 m ~ in t h e Middle E a s t to ~ ~ $ 1 0 0 / 1 0 0 0 m ~ f o r g a s p r o d u c e d in t h e n o r t h e r n N o r t h Sea.

The production costs at t h e high end of t h e r a n g e r e p r e s e n t some ~ ~ $ 1 4 / b o e , ~ which makes t h e r e l a t e d p r o j e c t s uneconomic at t h e oil p r i c e prevailing in mid- 1986.

S f not stated explicitly, c o s t figures s r e expressed in 1984 USS.

'lboe m 190 ma of Dutch gas, 164 m3 of S o v l e t gas, or 137 m of Norweglan gas.

Table 2. N a t u r a l Gas Fields a n d P r o d u c t i o n Costs (1984).

Field P r o v e n Depth 1984 E x p o r t s to Costs ($/I000 m R e s e r v e s Western E u r o p e

in 1985 P i p e LNG c a p i t a l a ) O p e r a t i n g Total

[1oem3]

rrn]

^[loem

^'3

NORWAY

S t a t f j o r d 400 145

- -

^{31.2 7.4 38.6}

Ekofisk 216 68

- -

24.2 11 .8 36.0

Valhall 20 70

- -

^{36.9 18.1 55.0}

Gullfaks I 12 180

- -

74.3 32.2 106.4

Heimdal 31 120

- -

70.4 19.4 89.8

S l e i p n e r 140 100

- - - -

69 .O

Troll 480 350

- - - -

75.0

Troms 250 200

- - - -

65-92

Total 1548

-

12.6 0.0

- - -

NETHERLANDS

Groningen 1422

- - - - -

^11.0

Offshore 338 40

- - - -

^16.0

Total 1760

-

^{37.4 0 .O}

- - -

USSR

Urengoy 10000

- - -

-

-

^22.0

O t h e r ~ . ~ i b . ~ ) 20000

- - - - -

26-30

Total 30000

-

^{33.2 0.0}

- - -

AFRICA

Algerla 3155

-

6.6 11 .O

- -

^10.2

Nigeria 1370

-

0.0 1.1

- -

12-15

Total 4525

-

6.6 12.2

- - -

MIDDLE EAST

Pers.Gulf 22394

-

0.0 0.0

-

- 9 .O

TOTAL 60227

-

89.8 12.2

- - -

')capital costs are d i s c o u n t e d with 10X p.a.

b ) ~ n c l u d e s Yamburg, Yamal, MedvezhOye, Vyngapur a n d o t h e r fields In N o r t h Western S l b e r l a .

S o u r c e s : Petroleum Economist ( v a r i o u s i s s u e s f r o m 1978 to 1986); L o r e n t s e n et a l . , 1984; S t e r n , 1984.

Compared with costs f o r o t h e r e n e r g y c a r r i e r s , e.g., domestic c o a l or biomass fuels, t h e a v e r a g e costs f o r e x t r a c t i n g n a t u r a l g a s

-

as given in Table 2

-

are in most cases modest (a cost of $30/1000m3 i s equivalent to $5/boe). However, a major problem f o r t h e g a s i n d u s t r y i s t h e l a r g e initial investment needed to start u p a new field. F o r t h e development of t h e Viking field (with r e s e r v e s of 9 2 b ~ m ) , ~ in t h e most s o u t h e r n p a r t of t h e N o r t h S e a , c l o s e to G r e a t Britain, t h e c a p i t a l r e q u i r e m e n t s w e r e $250 million a n d f o r t h e Frigg field (226 bcm), in t h e c e n t r a l p a r t of t h e N o r t h S e a , t h e y were e v e n a b o u t $3600 million. The investment costs f o r developing t h e S l e i p n e r a n d east Troll fields ( f o r a planned e x t r a c t i o n of 450 bcm) are estimated to b e in t h e r a n g e of $6 to $8 billion. Similar costs are r e p o r t e d f o r t h e development of t h e S o v i e t Yamburg g a s field (7500 bcm)

-

4 bil- lion r o u b e l s , equivalent to some $5 billion (1984 c u r r e n c y units) (Shamrayev, 1984). But a l s o t h e annual o p e r a t i n g c o s t s , most of them independent from produc- tion level, a r e c o n s i d e r a b l e . F o r t h e Frigg field t h e y are of t h e o r d e r of $235 mil- lion p e r y e a r (all N o r t h Sea cost d a t a from L o r e n t s e n , st al., 1984).

A p a r t from t h e s e l a r g e c a p i t a l n e e d s , f r e q u e n t l y t h e initial e s t i m a t e s of costs a n d field p e r f o r m a n c e d i f f e r s u b s t a n t i a l l y from t h e costs e x p e r i e n c e d o n c e a field i s in o p e r a t i o n . A comparison of o r i g i n a l cost e s t i m a t e s a g a i n s t a c t u a l costs w a s p e r f o r m e d f o r 2 3 N o r t h Sea fields in 1 9 8 4 (Castle, 1985). I t shows t h a t t h e invest- ment costs were o v e r e s t i m a t e d f o r only 3 of t h e s e 2 3 fields. On a v e r a g e , t h e a c t u a l investment costs were 95% h i g h e r t h a n t h e o r i g i n a l e s t i m a t e s , with t h e highest o v e r r u n by n e a r l y a f a c t o r of 10 f o r t h e Cormorant Field. Similarly, e s t i m a t e s f o r field production t h r o u g h 1983 were n o t r e a c h e d by 2 1 fields; o n a v e r a g e , produc- tion w a s 38% lower t h a n originally estimated. In t o t a l , a r e e v a l u a t i o n of a l l 2 3 fields yielded a 624% o v e r r u n f o r t h e o p e r a t i n g costs o v e r t h e e x p e c t e d life of t h e fields.

A p a r t from t h e costs f o r g a s e x t r a c t i o n , t h e c o n s t r u c t i o n of t r a n s p o r t a t i o n pipelines o f t e n r e q u i r e s e v e n h e a v i e r investments. P r o b a b l y t h e l a r g e s t invest- ment so f a r w a s t h e pipeline system linking West S i b e r i a n gas f i e l d s to E u r o p e a n USSR a n d to West a n d E a s t E u r o p e . The costs f o r t h i s system are estimated at $30 billion, enabling t h e t r a n s p o r t of 1 3 0 bcm p e r y e a r o v e r d i s t a n c e s of up to 4800 km. New plans are made f o r a n o t h e r multibillion d o l l a r g a s p r o j e c t in t h e USSR

-

^a

pipeline system, planned to t r a n s p o r t some 250 billion m3 p e r y e a r (Kirby, 1984) from Yamburg to t h e western b o r d e r of t h e USSR; costs initially estimated a t some 4bcm

-

b i l l i o n m 3

=

10'm9

-

^{37.26 PJ.}

$40 billion ( R a v d a , June 1 9 , 1986). Not only is t h e t r a n s p o r t a t i o n of g a s via pipe- lines a r a t h e r c a p i t a l intensive undertaking; s o is t h e t r a n s p o r t of LNG. The investment costs f o r a LNG chain a b l e to t r a n s p o r t 11 bcm p e r y e a r from t h e Mid- dle East t o E u r o p e are of t h e o r d e r of $7 billion (in 1981 US$) (IEA, 1982).

Table 3. Transportation Costs (US$ 1983/1000m3) and Distances (km) for Select- e d Gas T r a n s p o r t Routes.

" ~ a s e d on t h e costs f o r t h e f i r s t s t a g e of t h e Urengoy-Uzhgorod pipeline. Costs will b e r e d u c e d by

-

10% when, during t h e second s t a g e , t h e c a p a c i t y will i n c r e a s e f r o m 26 to 55 bcm p e r y e a r ; CE is Central Europe.

S o u r c e s : Runge, 1983; Benzoni, 1985; Astakhov and Subbotin, 1985.

Ekofisk-Emden Valhall-Emden Statfjord-Emden Gullfaks-Emden Heimdal-Emden Troll-Emden Troms-Emden Sleipner-Emden Emden-CE Groningen-CE NL offshore-CE

~ r e n ~ o ~ - ~ ~ ~ ) West ~ i b e r i a - C E ~ )

Algeria-Italy-CE ALg .-Fos-sur-Mer-CE Nigeria- Alg

.

-Spain-CE Nigeria-W'haven-CE Gulf-Turkey-Italy-CE Gulf-Turkey-Yug-CE Gulf -Syria-Triest-CE

Table 3 summarizes t h e g a s t r a n s p o r t a t i o n costs f r o m t h e areas considered to Central Europe. They lie in t h e r a n g e of US$? p e r 1000m3 for o n s h o r e pipelines in relatively e a s y t e r r a i n t o US$l30 p e r 1000m3 f o r pipelines in hostile environ- ments, such as t h e p e r m a f r o s t areas in S i b e r i a , or for LNG schemes. Thus, t h e t r a n s p o r t a t i o n costs f o r n a t u r a l g a s are at t h e same level as t h e e x t r a c t i o n costs.

Pipe- Lique- Regasi- S e a Total line faction fication Transp. Costs

16.0

- - -

16.0

17.0

- - -

17.0

40.0

- - -

40.0

41.0

- - -

41.0

23.5

- - -

^23.5

42.0

- - -

^42.0

8 0 .O

- - -

80.0

20.0

- - -

20.0

7.0

- - -

7.0

6.5

- - -

6.5

10.9

- - -

^10.9

95.3

- - -

95.3

1 0 2 .O

- - -

^102.0

66.4

- - -

66.4

8.5 64.7 17.9 7.2 98.2

98 -7

- - -

^98.7

11.8 57.9 15.3 45.1 130.1

91.0

- - -

91.0

80.0

- - -

80.0

41.7 57.9 13.6 17.0 130.2

Length Land S e a

442.

-

470.

-

1140.

-

1160.

-

790.

-

1100.

-

2700.

-

690.

-

<

^1000.

-

< 1 0 0 0 .

-

<

1000.

-

5000.

-

6000.

-

3000.

-

600. 500.

6000.

-

500. 4500.

5600.

-

5265.

-

2400. 1450.

Storage and Distribution

Whereas c o s t estimates f o r n a t u r a l g a s e x t r a c t i o n and t r a n s p o r t a t i o n c a n b e compiled from d a t a on s p e c i f i c p r o j e c t s , such a n undertaking i s much more diffi- cult f o r t h e c o s t of s t o r i n g and distributing gas. F o r s t o r a g e t h i s i s because t h e composition of g a s consumers

-

and t h e r e f o r e t h e daily and seasonal load varia- tion

-

d i f f e r s widely between c o u n t r i e s and even between r e g i o n s in a country. The need f o r s t o r a g e depends:

-

on t h e t y p e of c o n t r a c t s between t h e e x p o r t e r s and i m p o r t e r s (i.e., take-or- pay c l a u s e s o r seasonal variability in t h e c o n t r a c t s ) ,

-

on how much of t h e p e a k s in g a s consumption f o r domestic s p a c e heating c a n b e compensated by i n t e r r u p t i b l e c o n t r a c t s with industrial consumers, and

-

on how much domestic supply t h e importing c o u n t r y uses f o r peak shaving.

The c o s t s of storage s y s t e m s d i f f e r widely because d i f f e r e n t storage t y p e s have completely d i f f e r e n t investment costs and performances. Gas c a n b e s t o r e d , depending on geological conditions, in depleted oil o r g a s fields, a r t i f i c i a l c a v e r n s in s a l t domes, or aquifers. Sometimes i t is a p p r o p r i a t e to store g a s in t h e form of LNG or to use liquid petroleum g a s (LPG) for peak supply. Table 4 provides a n overview of t h e costs of some g a s s t o r a g e systems.

Table 4. Costs f o r Different Gas S t o r a g e Systems.

Typical sizes f o r European installations.

b, Includes liquefaction plant.

') F o r weekly load shaving.

Storage Type S a l t Caverns

Depleted Gas Fields Aquifers

LNG b,

Gasometer )

S o u r c e : Monig , 1984.

s i z e '1 Capacity Specific Cost

loam

^a l o a m '/day US$/1000m a

1.-22. .2 -5. .60-1.00

50. -3000. .05-2.

-

-05-.50 .3-1.6 .40

-

.80

15.-75. 2.-10. 1.4-3.50

.005

-

24.3-34.8

Gas s t o r a g e c a p a c i t y in E u r o p e amounted to only 18.1 bcm in 1984, i.e., s o m e 8% of 1984's g a s consumption. The maximum daily offtake w a s 361.4 million m a . For comparison, t h e s t o r a g e c a p a c i t y in t h e USA r e p r e s e n t s 43% of t h e annual g a s con- sumption in t h e s a m e y e a r . This l a r g e d i f f e r e n c e in how supply and demand a r e matched i s not s o much a reflection of d i f f e r e n t storage c o s t s in t h e two regions.

On t h e one hand, i t is t h e r e s u l t of t h e d i f f e r e n t distances between t h e a r e a s of production and consumption. On t h e o t h e r , i t is historically caused by institutional regulations in t h e US g a s market, which favored investments in g a s s t o r a g e facili- t i e s a n d called f o r constant e x t r a c t i o n rates (IEA, 1986). The s t o r a g e needs will also grow in E u r o p e , a f t e r t h e fields with flexible production rates in t h e s o u t h e r n North S e a and t h e Groningen field have been exhausted. The main supplies of n a t u r a l g a s will then b e provided by g a s t r a n s p o r t e d o v e r long distances or from fields with r a t h e r inflexible production rates in t h e c e n t r a l and n o r t h e r n p a r t s of t h e North S e a .

The a v e r a g e costs of g a s distribution are even m o r e difficult to estimate than are s t o r a g e costs. Different e n e r g y consumption densities and topographical f e a t u r e s substantially influence t h e cost of t h e distribution g r i d

.

As mentioned e a r l i e r , c h e a p options have a l r e a d y been taken; thus, with i n c r e a s e d g a s utiliza- tion, t h e distribution costs will r i s e . This i s mainly because regions with a lower e n e r g y consumption density a n d m o r e areas with a n existing building s t r u c t u r e will have to b e added to t h e system. This i s also t r u e f o r c o u n t r i e s t h a t h a v e not y e t introduced g a s , like Sweden, Norway, Turkey, or G r e e c e . In North E u r o p e t h e areas of high e n e r g y density are l a r g e l y supplied by d i s t r i c t h e a t , leaving only limited demand f o r n a t u r a l gas. In t h e south, e n e r g y consumption density for residential use is, due to climatic conditions, much lower t h a n in t h e n o r t h .

Figure 3 shows t h e cost variations f o r t h e construction of a new g a s distribu- tion system in areas with existing housing stock and in areas under construction (STOSEB, 1981). These t w o g r a p h s show c l e a r l y t h a t t h e introduction of n a t u r a l g a s will be limited by t h e exponential i n c r e a s e of costs f o r t h e construction of a distribution system in less densely populated areas. This is especially so when new g a s g r i d s are to b e introduced i n t o areas a l r e a d y inhabited.

The costs f o r s t o r a g e and distribution are estimated to b e $170 p e r 1000 m 3 for Germany (Monig, 1984) or $150 p e r 1000 m 3 for t h e Austrian g a s system (Safos- chnik, 1985). In o u r subsequent analyses w e use $160 as t h e cost f o r s t o r i n g and distributing 1000 m 3 of n a t u r a l g a s to a domestic consumer. F o r l a r g e s c a l e indus- t r i a l u s e r s or t h e g e n e r a t i o n of e l e c t r i c i t y a n d / o r d i s t r i c t h e a t t h e c o s t s are estimated to be in t h e r a n g e of $10-630 p e r 1000 m3, depending on t h e distance from t h e g a s main line and annual consumption. This cost differential between large- and small-scale u s e r s shows t h a t t h e a v e r a g e cost of delivering g a s to t h e end-user will depend l a r g e l y on t h e composition of t h e g a s u s e r s . The m o r e g a s t h a t is used in industry or f o r e l e c t r i c i t y generation, t h e c h e a p e r will t h e a v e r a g e m of g a s be.

F i g u r e 3. Costs for Constructing New Gas Distribution Systems in A r e a s ( a ) with a n d ( b ) without Existing Housing S t r u c t u r e .

Techno Logical Improvements

Reductions in drilling costs will b e d r i v e n mainly b y information o n t h e a c t u a l s i t u a t i o n at t h e bottom of t h e b o r e hole. P r e s e n t l y , s u c h information i s r a t h e r lim- i t e d , as

-

d u e to insufficient s p a c e a n d g e n e r a l l y u n f a v o r a b l e conditions

-

on-line measurements are v e r y d i f f i c u l t to u n d e r t a k e a n d q u i t e e x p e n s i v e . I t i s only re- c e n t l y , a f t e r d e c a d e s of drilling a c t i v i t i e s , t h a t initial measurements (Varnado, 1986) h a v e shown a s t r o n g v e r t i c a l oscillation of t h e drilling b i t , which r e d u c e s t h e efficiency of d r i l l i n g . If s u c h p r o b l e m s c a n b e solved, a f u r t h e r r e d u c t i o n in drilling costs seems a c h i e v a b l e .

Similarly, if t e c h n o l o g i c a l p r o g r e s s r e d u c e s t h e high cost of long-range t r a n s p o r t , t h e cost of supplying E u r o p e with Nigerian or Middle E a s t g a s will b e c u t c o n s i d e r a b l y . One o p t i o n c e r t a i n l y would b e t h e c o n s t r u c t i o n of pipelines i n s t e a d of using LNG t a n k e r s to t r a n s p o r t t h e g a s to E u r o p e . However, e a c h possi- b l e pipeline r o u t e r u n s t h r o u g h a number of c o u n t r i e s a n d t h u s r e p r e s e n t s a r i s k to s e c u r i t y of supply. Additionally, t h e LNG r o u t e could p a v e t h e way to a s p o t - m a r k e t f o r g a s , r e d u c i n g t h e need f o r long-term, b i l a t e r a l c o n t r a c t s .

According to Runge (1983) i t s e e m s unlikely t h a t cost reductions beyond 5%

c a n b e achieved in pipelines and LNG operations. This would r e s u l t in a reduction of t o t a l costs by s o m e 2% and would t h u s not change t h e situation dramatically.

However, for pipelines running f r o m Western S i b e r i a to Europe cost reductions of up to 15% may b e achieved, once full c a p a c i t y h a s been utilized and t h e gas-driven compressors are r e p l a c e d by e l e c t r i c ones.

An improvement of t h e o r d e r of 5% to 10% c a n b e achieved f o r m o s t of t h e o p e r a t i o n s along t h e gas chain by, e.g.:

-

increasing t h e size of t h e g a s pipes f r o m 1400 mm to 1500 or even 1600 mm,

-

increasing t h e p r e s s u r e in t h e g a s pipes f r o m a maximum of 8 0 b a r to 100 b a r , (e.g., planned f o r t h e f i r s t 500 km of t h e pipeline from Yamal in N o r t h e r n S i b e r i a ) o r , l a t e r , e v e n to 200 b a r ,

-

using e l e c t r i c a l c o m p r e s s o r s instead of g a s ones,

-

improving pipe laying through a h i g h e r d e g r e e of standardization, or

-

increasing t h e load f a c t o r s of t h e t r a n s p o r t a t i o n systems.

Gas distribution will, a p a r t from t h e introduction of plastic tubes to r e p l a c e cast iron, not become much c h e a p e r in t h e f u t u r e . Minor improvements could s t e m from t h e automation of pipe laying, but t h e y will b e offset by t h e worsening of con- ditions, as mentioned before. F o r areas t h a t r e q u i r e v e r y expensive distribution systems, i t may even pay t o c o n v e r t g a s into e l e c t r i c i t y and utilize t h e existing e l e c t r i c i t y distribution system to supply e n e r g y to t h e end-user, especially when h e a t pumps c a n b e used to produce low-temperature h e a t . Even if t h e existing g r i d i s not sufficient, a n upgrading would often b e c h e a p e r t h a n t h e introduction of a new g a s g r i d .

The Effect of Cost Reductions in the Gas Supply Spstem

Compiling t h e costs i n c u r r e d in supplying a Central European consumer with n a t u r a l g a s from t h e areas considered yields a cost r a n g e from $177 to $350 p e r 1000 m (see Table 5). The costs f o r delivering t h e g a s to t h e region (i.e., without costs for distribution) r a n g e from $17.5 to $160 p e r 1000 m3 ( o r $0.5 to $5 p e r MBTU). Comparing t h e l a t t e r value with t h e mid-1986 e n e r g y p r i c e situation shows t h a t m o s t of t h e cost f i g u r e s e x c e e d mid-1986 c r u d e oil import p r i c e s (- $12/boe

=

$2.07/MBTU). Gas p r i c e s f o r t h e residential consumers

-

$360 p e r 1000 m3 in Aus- t r i a , June 1986, equivalent to $265 in 1984 c u r r e n c y 5

-

are a l r e a d y approaching ''In converting from 1986 t o 1984 US$ the decrease in exchange r a t e s (from 20 AS t o 15.5

AS per US$) and the US$ lnflatlon (5.2%) were taken Into account.

t h e c u r r e n t delivery costs (see Table 5). However, t h e c o n t r a c t signed in June 1986 f o r g a s from t h e Norwegian Troll and S l e i p n e r fields is, with $3.6/MBTU (equivalent to $2l/boe) (Petroleum Economist, 7, 1986), well a b o v e t h e mid-1986 e n e r g y p r i c e s . In f a c t t h a t p r i c e indicates t h a t t h e buyers' consortium is expect- ing a n oil p r i c e of a b o u t $29 p e r boe in t h e l a t e 1990s.

Table 5. Total Costs and Cost S t r u c t u r e f o r Gas Delivered from Various Loca- tions to Central Europe.

Costs Cost S t r u c t u r e (X)

Excluding Including

~ i s t r i b u t i o n ' ) Distribution E x t r a c - Trans- Distri- C$/MBTUl [$/I000 m

'1

tion p o r t bution ^b,

Groningen 0.50 177.5 6 4 90

NL of f s h o r e c ) 0.76 166.9 9 6 86

Ekofisk 1.67 219.0 16 11 73

Algeria 2.17 236.6 4 28 68

Valhall 2.24 239.0 23 10 67

Statf jord 2.42 245.6 16 19 65

Pers.Gulf 2.52 249.0 4 32 64

S l e i p n e r 2.72 256.0 27 11 63

Pers.Gulf '1 2.83 260.0 3 35 62

Algeria* 3.07 268.4 4 37 60

Nigeria 3.18 272.2 5 36 59

Urengoy 3.32 277.3 8 3 4 58

Heimdal 3.41 280 -3 32 11 57

Troll 3.51 284 .O 26 17 56

O t h e r W.Sib. 3 -68 290 .O 10 35 55

Pers.Gulf 3.94 299.2 3 44 53

Nigeria* 4.07 303.6 4 43 53

Gullfaks 4.36 314.1 34 15 51

Troms ) 4.87 332.0 26 26 48

Tromse ) 5.01 337.0 25 27 47

*Gas is t r a n s p o r t e d as LNG.

hat

i s , delivery costs to C e n t r a l E u r o p e (multiply by 35.31 to c o n v e r t into

$/1000m ').

b ) ~ o s t f o r distribution are $160/1000m3 f o r a l l p r o j e c t s .

"NL

=

Netherlands.

* ) ~ r a n s ~ o r t e d by pipeline via Yugoslavia.

" ~ r a n s ~ o r t e d by pipeline via Italy.

as

from Troms t r a n s p o r t e d via o n s h o r e pipeline a c r o s s Sweden to Hamburg.

as

from Troms t r a n s p o r t e d via o f f s h o r e pipeline to Emden.

Since t h e cost s t r u c t u r e depends heavily on t h e location of t h e g a s field, t h e f i g u r e s given in Table 5 d i f f e r widely. Whereas t h e e x t r a c t i o n costs f o r fields in Algeria, Nigeria, o r t h e P e r s i a n Gulf r e p r e s e n t a b o u t 5X of t h e t o t a l c o s t of delivering g a s to t h e end-user, t h e y a p p r o a c h 10X f o r new fields in Western

S i b e r i a , a n d e v e n e x c e e d 30% f o r new fields in t h e N o r t h Sea. The t r a n s p o r t of g a s from areas with c h e a p p r o d u c t i o n costs to C e n t r a l E u r o p e i s q u i t e c o s t l y , r e v e r s - ing t h e cost s t r u c t u r e in r e l a t i o n to fields in t h e North Sea. These costs c a n amount to 35% of t h e t o t a l costs f o r pipeline t r a n s p o r t a t i o n a n d e v e n to more t h a n 40% f o r LNG r o u t e s .

Given t h i s cost s t r u c t u r e a n d assumptions o n cost r e d u c t i o n s f o r e a c h element of t h e g a s d e l i v e r y c h a i n , we e s t i m a t e t h e m e c t of technotogicat i m p r o v e m e n t s o n t h e t o t a l costs of d e l i v e r i n g g a s to t h e end-user. P r o p o s i n g t h a t c a p i t a l costs for drilling in t h e N o r t h Sea c a n b e f u r t h e r r e d u c e d by 7% p e r y e a r

-

as indicated in F i g u r e 1

-

a n d t h a t Troms will b e developed 2 0 y e a r s from now, t h e following c a n b e concluded:

-

investment costs would b e r e d u c e d to 25% of t h e mid-1986 e s t i m a t e ,

-

t h e e f f e c t o n t h e t o t a l e x t r a c t i o n cost

-

of which investment costs f o r drilling r e p r e s e n t a b o u t 60% (Lorenlsen et a t . , 1984)

-

would b e a 45% r e d u c t i o n ,

-

t h e cost of g a s d e l i v e r e d to C e n t r a l E u r o p e , a n d t h u s t h e cost of supplying l a r g e consumers, would b e r e d u c e d b y 23%, a n d

-

t h e t o t a l cost of g a s p r o d u c e d from Troms a n d d e l i v e r e d to a domestic consu- m e r would b e r e d u c e d b y 12%.

Thus, g a s from s u c h r e m o t e s i t e s would b e 1 2 % or 23% more competitive t h a n t h e mid-1986 cost e s t i m a t e s s u g g e s t . This i s , compared with t h e r e d u c t i o n in invest- ments in drilling equipment, a r e l a t i v e l y small e f f e c t f o r domestic consumers.

Major e f f e c t s could only b e e x p e c t e d from c h a n g e s in d i s t r i b u t i o n costs. S u c h c h a n g e s are n o t f o r e s e e a b l e with t h e technologies used today. so a real innovation i s r e q u i r e d .

Taking the Methanol or G a s o l i n e R o u t e

Techniques to r e d u c e t h e c o s t s of t r a n s p o r t i n g n a t u r a l g a s o v e r long dis- t a n c e s could b e b a s e d o n i t s c o n v e r s i o n i n t o methanol, gasoline, or t h e middle dis- tillates. A number of s t u d i e s w e r e u n d e r t a k e n to i n v e s t i g a t e t h e s e o p t i o n s (e.g., Jawetz, 1984; Kliman, 1984; Musgrove, 1984). Most of t h e s t u d i e s conclude that t h e production of a liquid f u e l from n a t u r a l g a s i s a viable option. This might b e t h e case when high-priced imported oil p r o d u c t s are compared with r e l a t i v e l y c h e a p domestic n a t u r a l g a s s u p p l l e s

-

as f o r New Zealand a n d Australia. This Is a l s o t r u e when g a s , which i s c u r r e n t l y f l a r e d i n t h e Middle E a s t , i.e., i s r e g a r d e d as having n o value, Is used as f e e d s t o c k f o r t h e production of methanol, gasoline, or t h e

middle d i s t i l l a t e s (gas oil, k e r o s e n e , naphtha). The l a t t e r o p t i o n may b e v e r y valu- a b l e f o r t h e developing c o u n t r i e s , w h e r e e a s i l y t r a n s p o r t a b l e a n d s t o r a b l e fuels are needed u r g e n t l y to r e p l a c e c r u d e o i l imports, a n d where t h e implementation of a g a s i n f r a s t r u c t u r e i s t o o costly. The production of k e r o s e n e could a l s o help to ease t h e s h o r t a g e of f i r e wood, a s e v e r e problem in many c o u n t r i e s .

The costs of gasoline or middle d i s t i l l a t e s p r o d u c e d from n a t u r a l g a s are estimated to b e $337 or $318 p e r ton of product6 ($7.9 or $7.5 p e r MBTU) r e s p e c - tively ( T h a c k e r a y , 1986). The production of methanol would cost some $2.5 p e r MBTU.

The major drawback of s u c h o p e r a t i o n s i s t h e high loss of the o r i g i n a l t h e r m a l c o n t e n t of n a t u r a l gas: the efficiency of producing methanol from n a t u r a l g a s is 60%, t h a t f o r producing gasoline as low as 50%. This means t h a t 30-50% of t h e o r i - ginal e n e r g y c o n t e n t of n a t u r a l g a s 1s l o s t (Jawetz, 1984; T h a c k e r a y , 1986), w h e r e a s only 1 7 % or 7% of t h e g a s originally e x t r a c t e d i s l o s t with LNG c h a i n s or pipeline systems, r e s p e c t i v e l y [example t a k e n f o r g a s t r a n s p o r t e d from Algeria to E u r o p e (IEA, 1982)l. The c o n v e r s i o n of g a s i n t o middle d i s t i l l a t e s or gasoline will p r o b a b l y b e r e s t r i c t e d to domestic p r o j e c t s f o r t h e r e a s o n s outlined a b o v e . The f i r s t c o u n t r y following t h i s r o u t e i s New Zealand, where g a s i s c o n v e r t e d i n t o gaso- line at a p l a n t n e a r Motunui. F o r i n t e r n a t i o n a l t r a d e t h e methanol r o u t e may r e p r e s e n t a f e a s i b l e option when methanol i s used in t h e t r a n s p o r t a t i o n sector.

New developments in t h e e n e r g y s u p p l y system may improve t h e economics of methanol p r o d u c e d from n a t u r a l g a s . One option i s to u s e nonfossil h e a t from n u c l e a r or s o l a r s o u r c e s in a s t e a m reforming p r o c e s s to p r o d u c e methanol. Such a system could p r o d u c e 8 0 0 P J of methanol from 1 0 0 0 P J of n a t u r a l g a s . I t would additionally p r o v i d e 300 P J of h y d r o g e n , utilizing 740 P J of nonfossil high t e m p e r a - t u r e h e a t (Hafele et al., 1984). Processes like t h i s would b e s p e c i f i c a l l y s u i t e d f o r c o u n t r i e s in which o t h e r s o u r c e s of c a r b o n are available. Coal or h e a v y c r u d e s could b e u p g r a d e d using t h e hydrogen p r o d u c e d b y t h e p r o c e s s .

Deep Gas: A New Chance

The discussion as to w h e t h e r h y d r o c a r b o n s are of biogenic or abiogenic o r i - gin h a s been r e v i v e d r e c e n t l y . This question was discussed as e a r l y as t h e nineteenth c e n t u r y , when a number of s c i e n t i s t s (e-g., A. v. Humboldt a n d D. Men- d e l e e v ) a r g u e d t h a t h y d r o c a r b o n s are a p r o d u c t of methane outgasing from t h e

$ased on a g a s price of $1.00 per MBTU and capital charges of lo%, using 1985 US$.

c e n t e r of t h e e a r t h and do not s t e m from animal and plant d e b r i s (Graf, 1925). Dur- ing t h e following decades the l a t t e r explanation became a c c e p t e d . Only recently, new findings on t h e formation of t h e e a r t h and t h e detection of l a r g e amounts of methane in s p a c e gave new momentum to t h e old ideas as to t h e origin of oil and gas (Gold and S o t e r , 1980; Gold, 1985). A by-product of t h e t h e o r y of a n abiogenic ori- gin of hydrocarbons i s t h e proposition t h a t huge amounts of methane c a n be found at g r e a t e r depths. Currently, a number of drilling activities, aiming at depths between 6 and 15 km, a r e underway to test this hypothesis and obtain more infor- mation on t h e geological and physical conditions at such depths. Amongst them i s a p r o j e c t in Siljan, Sweden, which w a s established explicitly to find abiogenic gas, and p r o j e c t s in t h e USA, t h e FRG, and t h e USSR, which p a r t l y s e r v e purely scien- ti f ic purposes.

However, w e d o not intend h e r e t o investigate whether such g a s i s available and c a n be produced. Given t h e assumption t h a t d e e p gas e x i s t s , w e simply want to indicate those conditions under which i t could be competitive. If abiogenic g a s s t e m s from t h e c e n t e r of e a r t h , i t c a n be assumed to b e found at many locations, i.e., much c l o s e r to t h e point of consumption t h a n many fields mentioned e a r l i e r in this p a p e r . Transportation costs, in t h e r a n g e of $20 t o $120, could be saved (see Table 5). Compiling t h e c o s t s f o r supplying a n industrial u s e r , t h e r e l a t i v e savings would, due to t h e low distribution costs, b e much higher than f o r residential consu- m e r s .

But how competitive i s t h e drilling operation itself? The t h r e e main f a c t o r s t h a t determine t h e cost of producing d e e p gas are t h e depth and size of t h e deposit and t h e amount of g a s produced p e r well p e r day. A formula f o r estimating drilling c o s t s is given by Holmes st d. (1984):

where t h e depth is given in 1000 f e e t and costs in $1000. Given t h e p a r a m e t e r s L and m, which were estimated f o r 13 regions in t h e USA, t h i s formula yields, f o r a depth of 30000 f e e t , drilling c o s t s of between $4.6 and $27 m i l l i ~ n . ~ However, t h i s formula seems to underestimate at g r e a t e r depths. A comparison with a c t u a l dril- ling c o s t s (API, 1986) shows, f o r depths below 15000 f e e t , 20-30% h i g h e r costs than t h e highest value obtained by t h e above equation. An estimation using t h e equation

7 ~ i r s t value for parameters estimeted for North Eestern Luidena (1-1.637, m-2.732), second for North Texas (1-3.412, m-4.329).

( d = d e p t h in 1 0 0 0 f e e t , c = c o s t p e r w e l l in US$ million) with t h e 2 4 2 d a t a points given in API (1986) yields a v e r y good r e s u l t (ra

=

0.906) u p to a d e p t h of 22500 f e e t . Based o n t h i s formula t h e costs f o r a 30000 f o o t w e l l would b e $55 million.

This i s p r o b a b l y a n o v e r e s t i m a t i o n , as t h e d e e p e s t wells included in t h e d a t a set a r e , f o r r e a s o n s e x p l a i n e d e a r l i e r , s t i l l v e r y e x p e n s i v e . But d r i l l i n g costs are a c t u a l l y also a function of time

-

as e x p e r i e n c e grows, costs g o down

-

t h e r e f o r e , a m o r e r e a l i s t i c e s t i m a t e f o r t h e cost of a producing d e e p well could b e of t h e o r d e r of $40-$50 million.

Assuming a s i m i l a r field p e r f o r m a n c e as e x p e r i e n c e d o n a v e r a g e in t h e N o r t h S e a , i.e., 300m3 p e r d a y p e r well, a n d a n a v e r a g e p r o d u c t i o n of 1 0 y e a r s p e r well, annualized c a p i t a l costs would b e in t h e range of $60-$70 p e r 1000 m3.' If all t h e assumptions used to c a l c u l a t e t h i s value are close to r e a l i t y , i t c o m p a r e s f a v o r a b l y with t h e costs f o r g a s p r o d u c e d f r o m S l e i p n e r or Troll, some $110 p e r thousand c u b i c m e t e r s , including t r a n s p o r t a t i o n a n d o p e r a t i o n a n d maintenance costs (seeg As t h e o p e r a t i o n a n d maintenance costs are presumably much s m a l l e r f o r a n on- s h o r e d e e p g a s well t h a n for a N o r t h Sea off-shore o p e r a t i o n a n d as additional investments are only minor, g a s p r o d u c e d from d e e p wells could well b e competi- t i v e with g a s p r o d u c e d f r o m difficult N o r t h Sea fields.

Final Remarka

N a t u r a l g a s , e v e n if e x t r a c t e d f r o m f i e l d s at u n f a v o r a b l e l o c a t i o n s , became i n c r e a s i n g l y a t t r a c t i v e d u r i n g t h e era of high crude-oil p r i c e s . I t s m a r k e t s h a r e g r e w s t e a d i l y as technological p r o g r e s s made e x t r a c t i o n f r o m p r e v i o u s l y unattain- a b l e l o c a t i o n s a n d t r a n s p o r t o v e r e v e r l o n g e r d i s t a n c e s f e a s i b l e . Despite t h i s technological p r o g r e s s , it will always b e a more c o s t l y o p e r a t i o n to s u p p l y a n end- u s e r with g a s r a t h e r t h a n o i l p r o d u c e d u n d e r s i m i l a r conditions. The costs of t r a n - s p o r t i n g . s t o r i n g , a n d d i s t r i b u t i n g g a s c a n n o t , mainly b e c a u s e of t h e d i f f e r e n t

%iscounted o v e r 1 0 y e a r s w i t h a 10% d i s c o u n t r e t e .

%he annualized c o s t s , c a l c u l a t e d a s e b o v e , f o r t h e i n i t i e l i n v e s t m e n t s (St3 billion), a r e 155 p e r 1000 ma.

e n e r g y contents p e r volume, m e e t those of c r u d e oil and i t s products. On t h e o t h e r hand, i t i s often more efficient and c h e a p e r to use g a s in end-use technology t h a n o t h e r fuels, especially when costs stemming f r o m environmental damage are t a k e n into account.

However, f u r t h e r technological improvements along t h e e n t i r e production and supply chain will r e d u c e t h e cost of g a s supplies and make i t m o r e competitive, even at c r u d e p r i c e s of around $20/boe. For t h i s and o t h e r r e a s o n s , s u c h as sup- ply s e c u r i t y or ecological considerations, n a t u r a l g a s might well become a n even m o r e important e n e r g y c a r r i e r during t h e coming decades t h a n today (mid-1986).

A m o r e s u r p r i s e - f r e e f u t u r e in t e r m s of e n e r g y supply c a n only evolve when a s h i f t back to c h e a p OPEC oil i s avoided during a n oil glut. A s t r o n g sign of s u c h a policy w a s set by t h e c o n t r a c t to develop t h e expensive Troll field, signed in 1986 between Norway and t h e European consortium of b u y e r s lead by Ruhrgas.

Bibliography

API (1986), Basic Petroleum Data Book (American Petroleum Institute, Washington, D.C.).

Adelman, M.A. a n d Ward, G.L. (1980), Worldwide production costs f o r oil and gas, in Advances in t h e Economics of Energy a n d Resources, Volume 3 , J.R. Moro- ney, ed. (JAI P r e s s Inc., Greenwich, CT).

Astakhov, A.S. and Subbotin, G.E. (1985), Some Problems of Ll;rPective Development of Beyond-The-Polar Circle Gas f i e l d s of Western S i b e r i a , I n t e r n a l R e p o r t (International Institute f o r Applied Systems Analysis, Laxenburg, Austria).

Benzoni, L. (1985), L'dconomie mondiale du gaz naturel: logices d ' o f f r e et con- s t r a i n t e s d e demande, Revue d e lDEnergie 36(378):457-466.

Castle, G .R. (1985), Assessment of North S e a field performance, Petroleum Economist LII(10):358-359.

Go1d.T. and S o t e r , S. (1980), The d e e p e a r t h gas hypothesis, SWiss Assoc. of Petroleum-Geologists and -Eng. B u l l e t i n 46(111):11-35.

Gold, T. (1985), The origin of n a t u r a l g a s and petroleum, a n d t h e prognosis f o r f u t u r e supplies, in A n n u a l Review of E n e r g y , Volume 1 0 , J.M. Hollander, H.Brooks, a n d D. S t e r n l i g h t , eds. (Annual Reviews Inc., P a l o Alto. CA).

G r a f , G.E. (1925), Erdol, E r d o l k a p i t a l i s m u s u d Erd6lpoLitik (Crude Oil, C r u d e Oil C a p t i a l i s m a n d C r u d e Oil Politics) (Urania-Verlags-GmbH, Jena).

Hafele, W., B a r n e r t , H., Messner, M., S t r u b e g g e r , M., and A n d e r e r , J., The c o n c e p t of novel horizontally i n t e g r a t e d e n e r g y systems: t h e case of z e r o emissions, in S u s t a i n a b l e Development of t h e Biosphere, W.C. Clark and R.E. Munn, eds.

(Cambridge University P r e s s , Cambridge, MA) (in p r e s s ) .

Holmes, M., Beeks, W., and Major, T. (1984), Simple equation estimates drilling c o s t s , Oil a d Gas J o u r n a l 82(29):126.

IEA (1982), N a t u r a l Gas Prospects to t h e Year ulOO (International E n e r g y Agency, P a r i s ) .

Jawetz, P . (1984), Using N a t u r a l Gas to Open t h e Way for other f i t u r e Gas a n d Alcohol Sources, p r e s e n t e d at t h e International Gas Meeting (International Institute f o r Applied Systems Analysis, Laxenburg, Austria).

Kirby, S. (1984), Siberia a n d t h e Soviet Far East: Resources for t h e F L t u r e , Spe- cial R e p o r t No. 1 7 7 (The Economist Intelligence Unit (EIU), London).

Kliman, M.L. (1983), Methanol, n a t u r a l g a s , and t h e development of a l t e r n a t i v e t r a n s p o r t a t i o n fuels, E n e r g y 8(11):859-870. Reprinted as RR-84-10 (Interna- tional Institute f o r Applied Systems Analysis, Laxenburg, Austria).

Lorentsen, L., Roland, K., a n d Aaheim, A. (1984), Cost S t r u c t u r e a n d P r o f i t a b i l i t y of North S e a Oil a d Gas Ftelds, p a p e r p r e s e n t e d at a seminar on

"Macroeconomic P r o s p e c t s f o r a Small Oil Exporting Country" (Central Bureau of S t a t i s t i c s , Oslo).

Monig, W. (1984), I n t e r n a l Report o n E n e r g y Conversion a n d Delivery Costs (Kernforschungsanlage Julich GmbH, FRG and International Institute f o r Applied Systems Analysis, Laxenburg, Austria).

Musgrove, A.R. d e L. (1984), A l i n e r programming analysis of liquid-fuel production and use options f o r Australia, E n e r g y 9(4):281-302.

OECD (1984), E n e r g y Balances of OECD Countries. ZQ70-2982 (Organisation f o r Economic Cooperation a n d Development, P a r i s ) .

OECD (1986), E n e r g y Balances of OECD C o u n t r i e s , 1983-1984 (Organisation f o r Economic Cooperation a n d Development, P a r i s ) .

Rose, K.P. (1985), Economics of n a t u r a l g a s supply, Petroleum Economist LII(l):l3-16.

Runge, H.C. (1983), U n t e r s u c h u n g e n der w e s e n t l i c h e n t e c h n i s c h e n und wirtschagtlichen Faktoren d e s E r d g a s f e r n t r a n s p o r t e s u n d ihrer A u s w i r - k u n g a u f d i e Weiterentwicklung d e r i n t e r n a t i o n a l e n E r d g a s n u t z u n g (Investigation of t h e most important t e c h n i c a l a n d economical facts r e g a r d i n g t h e long-distant t r a n s p o r t a t i o n of n a t u r a l g a s a n d t h e i r implications o n t h e development o n t h e i n t e r n a t i o n a l utilization of n a t u r a l g a s ) (Mitteilungen a u s dem I n s t i t u t fiir T i e f b o h r t e c h n i k , Erdol- und Erdgasgewinnung d e r Tech- nischen UniversitAt Clausthal, FRG).

Safoschnik , R. (1985). Cegenwartiger S t a n d d e s E r d g a s f e r n t r a n s p o r t e s a u s technischer und wirtschqftlicher &ht ( P r e s e n t s t a t u s of t h e n a t u r a l g a s long-distance t r a n s p o r t a t i o n from a t e c h n i c a l a n d economical view) (Oster- r e i c h i s c h e Mineral01 Verwaltung (OmV), Vienna, Austria).

Shamrayev, G.A. (Chief E n g i n e e r of t h e Yamburg P r o j e c t ) (1984), I know t h e r e will b e a town, ECO, 2 (in Russian).

Smolik, E. (1981), Past t r e n d s in capital-output a n d investment r a t i o s i n t h e field of e n e r g y in t h e ECE r e g i o n , Proceedings of a n UNITAR (The United Nations I n s t i t u t e for n a i n i n g and Research) Conference o n Long-Term E n e r g y Resources, Vol. I , R.F. Meyer, e d . (Pitman, London).

S t e r n , J.P. (1984). I n t e r n a t i o n a l Gas n u d e in Europe

-

The Policies of Ezport- i n g a n d Importing C o u n t r i e s (Heinemann Educational Books, London).

STOSEB (1981), Regional E n e r g i p l a n (Stor-Stockholms E n e r g y AB, Stockholm).

T h a c k e r a y , F. (1986), Techniques f o r oil substitution, Petroleum Economist UII(2):52-54.

Tussig. A.R. a n d Barlov, C.C. (1984), The N a t u r a l Gas I n d u s t r y : E v o l u t i o n , S t r u c t u r e , a n d Economics (Ballinger Publishing Company, Cambridge, MA).

Varnado, S. (1986), E z p l o r a t i o n a n d Drilling, L e c t u r e held at a Task F o r c e Meet- ing on The Methane Age, organized jointly by IIASA a n d t h e Hungarian Commit- tee f o r Applied Systems Analysis, S o p r o n , Hungary, May 13-16 (International Institute f o r Applied Systems Analysis, Laxenburg, Austria).