Drilling Expansion Could Ease Minds of Oil Speculators

Mon July 28, 2008 - National Edition
Giles Lambertson



The United States didn’t find itself on the short end of the oil dipstick overnight. It took decades for the situation to develop and, unfortunately, will take years to rectify. Consequently, there is no quick fix for construction companies struggling with high fuel prices.

Geologists are confident that oil measured in the billions of barrels is puddled under America’s soil and off its shores, but there are no natural spigots that can be turned on to let the crude oil pour from the earth and into refinery tanks. Drilling is required and drilling is an expensive, years-long process.

Other factors also affect the price of fuel, of course, including environmental caution, political gamesmanship, armed conflict in oil-producing countries and investor speculation. Yet when fears and financiers have boogied the market to the full extent of their power, the volume of crude oil in the system remains the key to oil pricing.

The supply-and-demand balance in the crude oil market became seriously skewed toward demand earlier this decade when some emerging economic powers — notably, China — began to skim off a larger share of the commodity, leaving the rest of the industrialized world to do with less. In the economic world, lessened supply always translates into higher prices.

So drilling once again is in vogue.

“There is always a certain amount of drilling going on,” said Kermit Witherbee, an energy resources manager in the Bureau of Land Management of the U.S. Department of Interior, “but it tends to follow a boom and bust cycle.”

Oil exploration boomed in this country in the early 1970s when the nation suffered major economic dislocation as a result of an oil embargo. It busted in 1986 when oil wildcatters went broke as the price of oil halved, crude falling all the way to $20 a barrel. It was so cheap that some oil experts speculated the Organization of Petroleum Exporting Countries (OPEC) would disband.

That didn’t happen. However, with little financial incentive to drill, domestic oil companies did cut way back on exploration. Consequently, by the year 2000, U.S. dependence on foreign sources of oil had risen from about a quarter of total consumption to more than half. Today, nearly 70 percent of oil burned in the United States is imported and the country is playing catch up again.

With the price of crude oil topping $145 a barrel before a recent slide, oil companies once more have plenty of incentive to explore. What hasn’t changed much is the places open to them for exploration. Political and environmental opponents of oil production and consumption continue to resist a wave of public support for drilling in promising areas.

The negative view is pretty well summed up by comments made in June by Sen. Harry Reid, majority leader. In an interview on Fox Business News, Reid complained about the unseen costs of carbon-based fuels, “the costs that you don’t see on the bottom line. That is, coal makes us sick, oil makes us sick, it’s global warming, it’s ruining our country, it’s ruining our world.”

Nonetheless, with about 70 percent of polled Americans now in favor of opening up areas to drilling, Reid and other opponents of drilling, mainly Democrats, are wavering. Notwithstanding oil’s “unseen costs,” they have indicated they are amenable to compromise on the drilling issue.

That is a welcome shift in the opinion of construction industry advocates like Associated Builders and Contractors. ABC Communications Director Gerry Fritz observed that “the industry as a whole needs to lessen our dependence on foreign oil and certainly would like to see drilling opened up within the U.S.”

The big question for Congress is where to drill. The most familiar place name invoked in the debate is the Arctic National Wildlife Refuge in Alaska. Under the refuge’s coastal plain lies an oil formation estimated to contain between 6 billion and 16 billion barrels of crude oil, which is equivalent to about half of the country’s existing proven reserves.

The overall refuge contains almost 20 million acres (8 million acres), but drilling would be confined to 2,000 of the coastal plains’ 1.5 million acres (607,000 ha). Still, objections to industry despoiling 2,000 of 20 million acres have been loud enough to shelve the project for two decades. A congressional bill to drill in the refuge was tabled in 1981. Had it been approved, the American Petroleum Institute estimates 1 million barrels of oil a day still would be flowing from the refuge.

President Lifts

Executive Ban

Offshore drilling along coastal states in the lower 48 also has been placed off-limits for the most part. That might change if Congress follows the lead of President Bush. In July, Bush lifted the executive order banning new offshore wells. His father, President George H.W. Bush, imposed the ban in 1990 and Congress has annually reaffirmed the view by imposing its own moratorium.

Yet advocates of drilling who clamor for more offshore opportunity say things have changed. Specifically, they cite offshore platform technology that proved itself trustworthy in recent hurricanes. They want to open up areas of the Gulf of Mexico and the Atlantic Ocean’s continental shelf.

Two years ago, some 8 million acres (3.2 million ha) in the Gulf were opened to exploration, with coastal states being given a larger share of the revenue as an inducement. Now more than 40 senators — led by minority leader Sen. Mitch McConnell — have introduced a bill to let exploring companies lease large blocks of the continental shelf 50 mi. (80 km) offshore.

Opponents still object. They argue that millions of acres already have been leased offshore and that those areas should be thoroughly explored before any others are opened to oil companies. As Sen. Christopher Dodd recently put it: “For years, oil companies have been sitting on millions of acres — doing nothing to develop them for drilling — while hardworking Americans grapple with skyrocketing prices at the pump.”

Witherbee at the Bureau of Land Management is more inclined to believe companies are drilling where it is good business to do so.

“Petroleum geology is as much an art form as anything else,” he said, with companies only persisting in their efforts where initial testing confirms a geologic model. “My sense is that companies are actively exploring.”

And it all takes time. Witherbee noted that months or years can elapse before a company receives a permit to explore, having at that point jumped through both federal and state hoops. Local opponents of oil production then can raise obstacles — “not in my backyard stuff” — that delay drilling even longer. Most leases range from five to 10 years and Witherbee said the government honors the leases only when lessees can show they are actively working the areas.

“It’s not like a company can walk out of the office and say, ’Now I’ve got a lease and I can do what I want.’”

“Big Oil,” the giant international companies, are not the ones who do most of the exploring. Nearly 90 percent of actual drilling is undertaken by independent oil companies, ranging from small family wildcatting firms to Los Angeles-based Occidental Petroleum. They produce almost seven in 10 barrels of oil pumped in the United States, according to the Independent Petroleum Association of America.

The BLM currently has 49,000 onshore oil leases in effect, covering 44 million acres (17.8 million ha). Leases actually producing oil total about 22,000, covering some 12 million acres (4.9 million ha). Most of the remaining acreage either still is being explored or has been tested and found to be unsatisfactory. Witherbee noted that the drainage area of underground pools also can determine how many wells are sunk. Some formations allow one well to drain oil from under 40 surface acres (16 ha), he said, while another one might drain 600 surface acres (243 ha).

In any event, if a leased property isn’t actively investigated by a leaseholder in 10 years, the lease expires and is resold to another company. “There is a diligence requirement in keeping leases,” Witherbee said.

According to the Department of Energy, the United States has some 340,000 oil wells pumping product to the surface, with the average well yielding about 10 barrels a day. The average OPEC well, by comparison, produces about 700 barrels a day.

In the end, until a drill bit actually breaks through into an underground cavern of oil and the black stuff starts gushing to the surface, estimates of how much oil is down there remain just that — estimates. The pools are no more than perceived natural resources until exploratory testing can turn them into proven reserves. According to the American Petroleum Institute, there is no hierarchy of unproven oil formations.

“I don’t think I’ve ever seen a ranking of the most promising fields,” API spokesman Bill Bush said. “Companies that hold the leases rate their own prospects.”

But the Minerals Management Service of the Department of the Interior does identify the three top offshore planning areas with the largest amount of “undiscovered technically recoverable oil.” They are the Gulf of Mexico (40 billion barrels), the Chukchi Sea off the western coast of Alaska (15 billion barrels) and the Beaufort Sea, which abuts the coastal plain of ANWR (8 billion barrels). These resources compare favorably to Alaska’s Prudhoe Bay, where oil was discovered 40 years ago. In 2006, the field still produced 90 million barrels of oil.

Speculating About Speculators

While none of the underground pools can be tapped tomorrow or the next day to help restrain today’s oil prices, the act of leasing and exploration is expected to have a fairly immediate moderating influence. That’s because the same market speculation that quickly drives prices skyward — political tensions in the Mideast, hurricanes in the Gulf — drives prices downward when the long-term production picture changes.

Some industry observers believe the price for crude oil will drop back somewhere below $100 a barrel and stay there under normal conditions. More alarmist market specialists, on the other hand, predict $200-a-barrel prices still ahead, spawning 15 percent inflation and a worldwide depression.

The more lurid speculation seems keyed to two factors: (1) the slender margins by which world suppliers meet current demand for crude oil, and (2) the total amount of recoverable oil remaining in the ground.

Just 2 million to 3 million barrels of oil a day are being produced above what is consumed by oil-hungry industrialized countries. That amount of spare capacity does not give much wiggle room for disaster. Therefore, any catastrophic event — war, regional storms, anarchy — that might conceivably interrupt the supply of oil places a speculative premium on the commodity. So when Iran or Venezuela declares it is thinking about shutting down its production for whatever reason, or rebel forces blow up a pipeline in Nigeria or Russia, or a hurricane or other natural catastrophe stymies production in the Gulf, prices jump in the United States all out of proportion to the actual threat.

If new wells could bring into the system just an extra two or three million barrels a day, the economic tension would be reduced dramatically, economists say.

A Finite Resource

Some oil market experts — notably the late geophysicist M. King Hubbert — take another tack. They believe the oil inside Earth’s globe has begun to play out, that the production of oil has peaked. Coupled with industrialization of Third World countries, the dwindling flow of oil means suppliers never again will be able to keep up with demand.

Those who disagree with “peak oil” theorists do not dispute that a finite amount of the carbon-based fuel exists. But they point to new extraction technology that can raise to the surface huge amounts of oil now left in the ground by producers. Currently, because it cannot be cost-effectively pumped to the surface, sometimes as much as two-thirds of oil reserves are left in the ground when wells are capped and rigs are moved to greener pastures. That pattern of benign neglect would change with new technology.

Optimists also point to largely untouched oil shale and oil sands in North America that continue to tantalize entrepreneurial companies with their potential. It is oil in waiting.

And then there are the areas of the world that simply remain unexplored. Such areas cannot be accurately evaluated in terms of the oil beneath the surface until they are plumbed. Some of these areas of unknown potential exist in the United States and off its coasts.

“I don’t think Interior to my knowledge has put out a position paper on peak oil,” BLM’s Witherbee said. “Some think production has peaked. My personal view is that it probably hasn’t.”

He cited coastal Brazil as an area of great potential. He also sees new potential in Arctic areas that, ironically, are more penetrable now because of warming conditions.

“And if you look at Canada, in the water offshore from Nova Scotia,” he said, returning to the North American scene, “you see that production of oil suddenly stops where U.S. jurisdiction of the continental shelf begins. The oil is there, farther south, but…” CEG

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