With production revolution, U.S. is quietly breaking its reliance on foreign oil
12/02/2013 9:27 AM
11/12/2014 3:32 PM
All along the highway that leads into this West Texas city, the rows of pump jacks seem endless, bobbing up and down as they pull crude oil from beneath the parched scrub desert.
The pump jacks have long been here, in good times and bad, a symbol of the city’s long status as the heart of America’s petroleum industry. Even when U.S. oil production was dropping and many feared that the Permian Basin, which feeds Midland’s oil economy, was all but exhausted, the pump jacks continued their work — even when the result seemed hardly worth the effort.
Now their up-and-down motion seems all but unstoppable, a symbol of an energy revolution that seems likely to transform the globe.
“Everything has changed,” said Jim Henry, 78, who has worked in Texas’ oil fields most of his life.
In just a few short years, a surge in U.S. oil production has propelled the United States from a country largely dependent on oil imports to one that could soon become the world’s top oil producer. The goal of North American energy self-sufficiency, the holy grail of American politics since the Arab oil boycott of 1973, seems within reach.
The revolution has taken place almost unnoticed — and in a way that few foresaw less than a decade ago. For years, the emphasis was placed almost entirely on persuading Americans to drive less, to turn the thermostat up in the summer and down in the winter, and to open protected areas to oil exploration.
No one, it seemed, foresaw what actually happened — a production revolution that in the past five years has seen the amount of crude oil produced in the U.S. shoot up 40 percent after declining every year for the previous 20.
The International Energy Agency predicts that the United States will overtake Saudi Arabia as the world’s top oil producer by 2015. America has already become the largest producer of natural gas.
In October, the U.S. started producing more oil than it imports for the first time since 1995.
The American energy turnaround isn’t expected to stop there.
Citigroup’s head of global commodity research predicts that by the end of the decade, the only foreign oil the U.S. might need will flow from Canada. Other analysts agree the potential is vast.
“New and unanticipated energy abundance is within our reach, and it provides a historic opportunity to solve some of our country’s most difficult economic challenges,” James Jones, a former national security adviser to President Barack Obama, declared at this year’s Deloitte Energy Conference in Washington.
Fossil fuel reliance
Questions remain about how quickly the U.S. fields will decline and whether the boom can last. The production surge is due largely to a controversial drilling process known as hydraulic fracturing, or fracking, in which water and chemicals are pumped underground at high pressure to break up shale rock and release the oil and gas trapped inside.
Environmental groups argue that it poses a threat to air and water.
Some studies have linked deep disposal of fracking waste to small earthquakes. Four cities in Colorado voted to ban fracking last month. New York and North Carolina don’t permit the technique, and other states are still debating it.
The drilling is also under attack from those who fear that the expansion of oil and gas supplies will simply increase the world’s dependence on fossil fuels, speeding global warming and cutting the incentive to find renewable alternatives. Cheap natural gas increases the challenge of attracting investment to develop solar and wind energy.
“Those who might have relied on the fact that we would run out of this resource and therefore be forced by lack of available resources to switch to something cleaner, this is not going to happen. Not in my lifetime. Maybe not even in my children’s lifetime,” said Amy Myers Jaffe, executive director for energy and sustainability at the University of California, Davis.
But the benefits of the fracking bonanza offer powerful arguments in its favor. They include a resurgence of American manufacturing and a reshaping of U.S. relationships worldwide. America’s thirst for oil has long been blamed for interventionist policies in the Middle East and elsewhere.
In a sluggish U.S. economy, oil and gas employment surged by 40 percent over the last five years, according to the U.S. Energy Information Administration, adding 162,000 jobs. That compares with just a 1 percent increase in total private sector jobs over the same period.
The surge has also played a role in controlling U.S. gasoline prices.
While they have remained high, many analysts argue that they could have gone much higher, caught between increased Chinese demand and a lower world supply caused by U.S.-backed sanctions on Iranian oil sales. Without the surge in U.S. production, these analysts argue, oil prices, which are set globally, might have skyrocketed.
A ‘crazy’ boom
The boom is returning places like Pennsylvania and Ohio to their historic roles as centers of the oil and gas industry, while production skyrockets in unexpected places like North Dakota.
Even in oil-producing states where the fracking boom has not delivered vast economic benefits, production is up. Kansas, for example, saw a 5 percent production increase last year, reversing 40 years of decline.
The surge is especially visible in Texas, long the core of the U.S. oil industry. Twenty-five percent of the world’s drilling rigs are working in Texas, according to the rig count compiled by the oil field services company Baker Hughes.
Workers fled Midland and neighboring Odessa in the 1980s after the last big bust in the Permian Basin. Equipment rusted, office buildings emptied, and West Texas oil was pronounced dead.
Now Midland is booming, ending last year with the nation’s lowest unemployment rate. Developers want to take advantage by building a 53-story tower, featuring a rooftop bar, a luxury hotel and spa, and office space in a county where the population is 150,000.
It could be the tallest building between Houston and Los Angeles, visible from 30 miles away in the flat desert of West Texas. Local critics say that it smacks of Midland trying to be the “Dubai of Texas” and that the tower would appear like a giant middle finger rising from the plains.
“I have seen a lot of booms and busts, but I’ve never seen a boom like this,” said Mary Hardin, who runs a social services organization in Midland. “It’s crazy.”
How far that boom might go is anybody’s guess. Many states contain rock formations that are ripe for fracking, including California, which was once at the center of the U.S. oil industry and could be again.
Competition for Russia
America’s energy surge is already allowing it to flex muscles internationally, analysts say. The boom helped the United States persuade European allies that petroleum sanctions against Iran wouldn’t create a global oil shortage and force price spikes. Those sanctions were largely responsible for Iran’s more compromising approach in recent talks on its nuclear program.
“Without this increase in U.S. supply, these sanctions simply could not have worked as effectively as they have,” said Daniel Yergin, a Pulitzer Prize-winning oil historian, author and analyst.
Expanded American energy production also creates issues for Russia, which wields tremendous economic and political power by supplying Europe with natural gas via pipeline.
Now countries that had planned to export natural gas to the U.S. are instead selling it to Europe, giving Russia competition, according to Ken Medlock, senior director of the Center for Energy Studies at Rice University in Houston.
The United States isn’t the only country with oil and natural gas locked in shale rock, but it’s the only one in a position to take advantage of it, analysts say.
In Europe, the environmental opposition to fracking is deep and wide. Elsewhere, most countries simply don’t have the technology or the infrastructure to exploit deposits that require fracking.
America is even helped by its property laws, which allow most landowners to retain subsoil mineral rights, giving them hopes of cashing in. In many other countries, oil and gas activity just means problems without rewards.
“This is unique to the United States and North America,” Deutsche Bank energy analyst Paul Sankey said at a recent Bipartisan Policy Center energy forum in Washington. “In my view, this revolution will not occur globally except possibly in the next decade and soonest in China.”
No one saw America’s energy revolution coming, including the people who helped make it happen.
Floyd Wilson remembers drilling the Fayetteville Shale in Arkansas, an area where the wells previously could not even produce 50,000 cubic feet of natural gas in a day.
Then he used the kinds of fracking and horizontal drilling techniques pioneered by Texas driller George Mitchell, who drew on years of federal research. Mitchell, who drilled for gas in the Barnett Shale in areas north of Fort Worth, died this year at 94.
“We drilled a couple of wells, and one came in at 6 million cubic feet a day,” Wilson said. “It just shocked us.”
Wilson went on to make a major discovery in Texas’ Eagle Ford Shale. He took his $60 million investment in Petrohawk Energy, sold the company for $12 billion and started a new firm.
Analysts and drillers do warn against counting on the surge to continue. The boom comes with no guarantees and plenty of room for problems.
“There are a lot of risks above ground and below ground and questions about costs,” Yergin said.
Wilson said many of his fellow operators are drilling wells closer and closer together in the major fields in Texas and North Dakota. That makes money quickly and satisfies shareholders. But then the wells start competing with one another for the same oil and decline quickly, he said.
The much-touted American energy self-sufficiency will be difficult to achieve, he said.
“On paper, you can do it,” Wilson said. “But I don’t know.”
The International Energy Agency predicts that the U.S. reign as the world’s largest oil supplier will last from 2015 to the early 2030s. But the agency also forecasts that America’s oil production will start its decline in the 2020s as the Texas and North Dakota “sweet spots” run out, though it does not foresee the return of U.S. reliance on Middle East oil.
‘All over the world’
In Midland, they’ve seen booms go bust before.
“This one they’re saying will last several years because the new technology made drilling more profitable,” said Paul St. Hilaire, executive director of the George W. Bush Childhood Home museum, a modest rambler near Midland’s downtown. “We’ll see.”
Henry, the Midland driller, said the boom will ease as soon as the price of oil drops and the $7 million cost of drilling a horizontal fracking well becomes too expensive.
But technological improvements will bring down the drilling cost, he predicted, and the oil will be waiting in the shale rock for the next big boom.
Fracking opened up a new world, he said, and it won’t close anytime soon. Henry reckons it’s doubled the amount of oil that drillers can reach.
“It’s like discovering a field as large as the whole United States,” Henry said. “And it’s not just the United States. It’s all over the world.”
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