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Cold-cracking May Stimulate E&P and Refinery Stocks

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

New major oil finds are rarer today than they were just two decades ago. Add the fact that a new Greenfield refinery hasn’t been built in the U.S. since 1976, and you can imagine demand for finished products such as gasoline, heating oil and jetfuel are high, even during a recession. So while refiners struggle to modernize new plants, E&P companies have benefited from the wide-spread adoption of fracking oil and gas wells in recent years. Sure fracking has tremendously helped improve the supply of domestic energy resources, which have been offsetting dependence on foreign oil, but ultimately at what cost to our environment? That’s the real elephant in the room that will likely result in the regulation of fracking and legislation aimed at lowering greenhouse emissions.

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Therefore, despite it not being a very popular initiative, we believe cap-and-trade legislation is needed in order for the U.S. to meet 2020 carbon goals. Considering the EIA said this past June, “Of the total amount of U.S. greenhouse gases emitted in 2010, about 87% were energy-related and 91% of those energy-related gases were carbon dioxide from the combustion of fossil fuels,” this has us examining whether cold-cracking’s time may finally be now.

Breaking down heavy oil, largely ignored by oil companies due to the complexity to reach it and bring upstream, is truly game-changing. I hate to use the word “disruptive” because we feel like that word is used too frequently these days. However, cold-cracking (the use of high energy electron beams, not radioactive materials) through Electrically Enhanced Oil Recovery (EEOR) has several advantages over steam-assisted gravity drainage (SAGD) based technologies which really can be disruptive in the E&P space.

Why? For one thing, cold-cracking does not produce greenhouse gases such as methane caused by fracking. Also, cold-cracking through EEOR doesn’t require any water supply. Think about that: Advancing oil recovery without the use of abundant water means millions of gallons of water can be saved, a reality lost on those who are pro-fracking. Let’s not forget while SAGD requires much energy to pump it down the well and pump it back up, that favored steam process is actually limited by the inability to be successful below 2,000 feet.

However, EEOR has no depth limitation. We find the lack of depth limitation from cold-cracking an oil well very intriguing since half of the 68 million barrels of heavy oil in the country are sub 2,500 feet. This may be why in 2005, through Section 1406 of the Energy Policy Act (EPACT) the Department of Energy (DOE) more closely began studying the application of radiation to petroleum at a standard temperature and pressure to refine petroleum products ultimately with a higher economic yield from each barrel of oil, a theory being poked around unsuccessfully since the 1950’s.

So while E&P companies can surely gain from cold-cracking through increased penetration of older, deeper heavy oil wells, we believe the benefits of cold-fracking can also be seen in the refinery sector. Why? Bottom of the barrel refinery recovery technology, namely microwave/ultrasound centric, has been challenged due the lack of effectively breaking down molecular bonds of oil. Using electron beams could change that since cold-cracking is being tested to lighten oil in order to make it easier to refine into high margin products. This means cold-cracking could help older infrastructure refineries enhance throughput as well as capacity at a far cheaper rate than adding new cat crackers to a Brownfield refinery.

Also, cold-cracking would greatly allow for reduced greenhouse gases since cracking oil could be conducted at close to room temperature. This is an important factor to consider since the EPA may finally show its merit and impose restrictions on carbon emissions from refineries in an effort to keep the U.S. on track to meet its 2020 carbon goals. According to a 2010 Scientific American article, “Collectively the nation’s roughly 500 fossil fuel-fired power plants and 150 oil refineries emit some 2.4 billion metric tons of carbon dioxide (CO2) and other greenhouse gases per year—nearly 40 percent of total U.S. emissions.” That statement is supported by the EPA whose website reads, “Fossil fuel-fired power plants are responsible for 67 percent of the nation’s sulfur dioxide emissions, 23 percent of nitrogen oxide emissions, and 40 percent of man-made carbon dioxide emissions.”

Who will be the leaders in implementing cold-cracking? Considering the sheer size of the Canadian oil sands (175 billion barrels of proven oil reserves and perhaps a total of 2 trillion buried deep in the earth—that’s potentially 8 times the oil in reserve than the Saudis have), it makes sense for our neighbors to the north to adopt cold-cracking which has greater depth success than SAGD. This could bode well for Suncor (NYSE: SU), a company that has been a leader in oil sands development. 

For years I’ve heard (and actually believed) tar sands in Canada could hold much promise if somehow they could be more economically and environmentally extracted from the earth. However, despite tar sands being quite difficult to tap and transport, the Chinese have invested over $13 billion into the space and that should not be overlooked by investors. Therefore it is my belief the Chinese, led by China Petrochemical (NYSE: SNP) and CNOOC (NYSE: CEO), will push for cold-cracking over SAGD if the technology shows greater efficiency and yield. That view is further supported by CNOOC looking to close its high-profile $15.1 billion acquisition of Nexen, a company that has had massive operating/production issues at its Long Lake oil sands operation in Alberta. Why would CNOOC want to draw such global attention to itself by buying Nexen and then fail with the world watching? That’s not the Chinese way (see 2010 BloombergBusinessweek article). 

Right now the pure play on cold-cracking, ElectroPetroleum, is private. However, I believe recent pilot tests in Canada by the company will gather positive attention in 2013 that will become very hard to ignore. Therefore the Chinese may be tempted to partner with ElectroPetroleum. Similarly, I’m intrigued by the potential for Statoil (NYSE: STO) to consider cold-cracking. The company’s website says,

“We’re among the absolute front runners for applying technology. That’s because our oil and gas resources have always presented major challenges.”

That statement has me thinking Statoil could be very willing to try cold-cracking in its Peregrino field located in Brazil, the company’s largest heavy oil field. Another company that could utilize cold-cracking is Total (NYSE: TOT) considering their Jubail refinery, in partnership with Saudi Aramco, is thought to boast the most technological innovations but also require significant capital to breakdown the heavy crude oil.

With legislation to regulate fracking and curb carbon emissions from refiners & power plants seemingly imminent during the first half of President Obama’s second term, E&P companies and refiners will have no choice but to embrace new technologies in order to increase throughput efficiency while also lowering carbon footprints environmentalists increasingly are criticizing. To us, that makes cold-fracking a hot topic whose time may finally have come.

bluephoenixinc has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Statoil (ADR) and Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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