White House Chronicle

News Analysis With a Sense of Humor

The Politicos Know for Sure Where the Oil Is

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Lemuel Gulliver is back! You remember him – he’s the hero of “Gulliver’s Travels,” a satire written by Jonathan Swift, first published in 1726.

Many adventures befall Gulliver, but the one most remembered is that he's captured and pinned down with innumerable strings by the tiny Lilliputians. By their standards, he was a giant, but they tied him down so well that he was helpless.

That, according to those seeking the Republican presidential  nomination, is the state of the U.S. energy industry – by energy, they mean oil and gas.

According to Newt Gingrich, who's echoed by frontrunner Mitt Romney and his two rivals, the oil and gas industries have been cruelly tied down by government, which imposes onerous environmental regulations and restricts drilling in the most hopeful parts of our ocean shelves and on federal lands.

If these lands and ocean sites were just opened to drilling, the Republican hopefuls argue, the United States would become the world’s greatest energy producer, as it was in the 1940s and 1950s. Drill, baby, drill and a gigantic cornucopia of energy awaits; energy for the United States and the world.

Jack Gerard, president and CEO of the American Petroleum Institute, the take-no-prisoners trade association that represents nearly 500 oil and gas companies, is a vocal advocate of more drilling in more places. He's a Gulliver theorist.

From Republicans and the oil industry, this is a new optimism born of an old idea. The old idea is that if you drill enough holes in enough places, oil will be abundant.

That optimism has existed more in the fringe world of wildcatting than it did in the big oil companies, which knew that there were limited reserves of recoverable oil and gas in the United States. They also knew that once a reserve is in production, you can calculate the point at which it will decline; as has happened with the North Slope of Alaska, where less than half the 2 million barrels a day produced at its peak is flowing today.

Then came the new technologies, largely developed by the despised government. Now in full deployment, these technologies have incontrovertibly changed expectations for natural gas but their impact on oil is debatable.

The first of these  is  3-D seismic mapping. Advanced physics enables the companies to determine very accurately how much hydrocarbon a particular formation underground might contain. Gone are the days when the hard-drinking wildcatter followed his gut and mysterious patterns in the tumbleweed.

Next, is the hole itself. At one time, a well was a well – drilled straight down, looking for a pool of oil, a cavern of gas or both. Fracturing – the process in which water, chemicals and other substances are injected down the hole to break up rock in proximity to the hole – has been used to release more of the good stuff. With time fracturing, also called “fracking,” has become more sophisticated.

What has made the euphoria of the politicians and oil lobbyists possible is the miracle of horizontal drilling, which allows as many as eight holes to be spread out for miles from a single shaft. This and better fracking has changed the prospects for gas out of all hope, and has somewhat improved oil expectations.

Much of the enthusiasm for new drilling has come from the success of the new technologies in North Dakota, which has overnight become the the fourth-largest oil-producing state in the Union. But beware. This isn’t Texas circa 1945.

Oil from North Dakota's Bakken Field isn’t cheap. Its “lifting cost” is among the most expensive there is: It costs about $50 a barrel to bring North Dakota oil to the surface, compared with about $15 in Russia and Saudi Arabia. Is it oil or incense?

API’s Gerard told reporters in a telephone conversation, designed to preempt President Obama’s “all of the above” energy recommendations, that technology in its inevitable advance would keep the oil flowing for many generations.

Only the government, in Gerard’s view, stands between the American people and abundant oil.

However, fields that have peaked – like the North Slope and much of Texas, Louisiana and the North Sea –  have seen declining production and no technology has been enough to revive them. All the oil has been removed. Gone, baby, gone.

More drilling has already improved domestic oil production. But will unfettered drilling really make a new Saudi Arabia of the. United States? Can the resource base stand the exploitation? Can Gulliver actually stand up?

The next generation of technology won’t put more oil in the ground. – For the Hearst-New York Times Syndicate

Oil Industry’s Deep Well of Fear

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There is an open secret in the oil industry that dare not speak its name: peak oil.

Well, two did speak its name and gained no acclaim for it. One, M. King Hubbert, died years ago. The other and the more controversial, Matthew Simmons, died Aug. 8 at his Maine summer home.

The peak oil idea is simple: Oil is a finite commodity and one day we are going to use up all of it.

Hubbert, a geologist, began speculating on the effects of the gradual decline in worldwide production in the 1950s. He expressed this in a simple graph, known as “Hubbert’s pimple.”

He tended to draw the graph freehand, and it looked more like a Rubenesque breast than a pimple. It was so simple that he drew it over and over again to illustrate his points for journalists and politicians. Later, he would draw lines through the pimple to demonstrate where we had been and where we were going, based on the then-known reserves and rate of depletion.

For his scholarship, Hubbert was eased out at Shell Oil Co. in 1964. He took a job with the U.S. Geological Survey and continued his speculative research — until he was thrust into national prominence by the 1970s oil crisis.

Simmons, in contrast, was a much more apocalyptic predictor than Hubbert. His illustration is a stark tower of a graph, more like the Empire State Building. He saw all the oil on Earth savagely used up in just two centuries, the 20th and the 21st, resulting in international catastrophe probably by 2040.

In one television interview, Simmons sounded like a survivalist. He said he was stocking his home with all kinds of supplies to survive the food and fuel shortages that would accompany the decline in oil availability, and the impending international chaos and hostility.

In the energy industry, which has a definite aversion to bad news and hard questions, Simmons was an agent provocateur and an effective one — effective because he was of the industry, not outside it.

Simmons was an oil man and his firm, Simmons & Company International, was founded in Houston in 1974. It grew to be one of the world’s most influential energy investment banks, with offices in Houston, London, Aberdeen, Scotland and Dubai, United Arab Emirates. It has been responsible for hundreds of billions of dollars of merger and acquisition activity.

The industry loved the deals Simmons made possible, but not his talk of doom and chaos.

In particular, Simmons distressed Saudi Arabia by analyzing production data and detailing what he concluded was a decline in the rate of drawdown on the Ghawar oil field, the world’s largest. This was the thrust of his book, “Twilight in the Desert,” and it incensed the Saudis and their oil company, Aramco. It also forced them to increase their field management efforts and make their operations more transparent.

Where Hubbert, who died in 1989, was a gentle seer of trouble ahead, Simmons was the knock on the door before dawn.

Ultimately, both have been betrayed by time and, in Hubbert’s case, technology. But their arguments have not been invalidated.

Hubbert did not foresee the enormous technological advances in exploration and drilling, including greater depths, horizontal wells and 3-D seismic.

Simmons saw all these things and concluded nonetheless that world demand for oil is so high that the end is near. He believed that once global production peaked and the 86 million barrels a day now consumed cannot be provided, oil will rise in price steadily to $200 a barrel and going as high as $500 a barrel as chaos and fear spread.

In recent months, Simmons became even more controversial. Correctly, he estimated that BP spillage in the Gulf of Mexico was many more times than what the company had first claimed. He was almost spot on. But he also said that BP would be forced into bankruptcy and that a nuclear device was the only way to stop the leak. BP responded by ending its relationship with Simmons’ bank. And Simmons ended his lingering involvement with it, as well.

Simmons was a perfect storm of a man, raging against the myths and self-satisfaction of the oil industry. In his absence, there will be a certain quietude in the petroleum clubs of Houston, Denver and Edmonton, Alberta, and elsewhere.

But in their hearts, they fear he was right.

New Oil Discoveries Threaten Obama’s Energy Strategies

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“When an irresistible force such as you

“Meets and old immovable object like me

“You can bet just as sure as you live

“Something’s got to give …”

— Johnny Mercer

When Johnny Mercer penned those words, he was speaking of love not politics, and not the politics of energy. But he could have been.

In energy, there are two great forces that collide: public policy and the market. Despite the love affair of recent decades with markets, neither is always right.

Consider the struggle between old energy –market-tested and with a mature infrastructure — and new, alternative energy.

Public policy, under Republicans and Democrats, has sought to discourage the nation’s ever-greater dependence on imported oil (about 60 percent). But the market has sung a siren song, tempting us to more oil consumption.

Back in the 1970s, when we imported only 30 percent of our oil, the country was frightened into making great efforts in research and development to find alternatives to oil. Most of those concentrated on oil substitution and new ways of making electricity. None of the new ideas penetrated the market in any serious way, with the possible exception of wind, and that took many years to gain general acceptance and to overcome institutional and technical issues.

The Big Enchilada, oil, proved to be recalcitrant. President Jimmy Carter wanted to make it from coal; a nascent ethanol industry was tentatively testing the forbearance of government in seeking tax breaks and subsidies.

The search for a way out began after the Arab oil embargo of 1973-74, and reached a zenith with the Iranian Revolution of 1979. Many well-intentioned programs were undertaken, concentrating primarily on coal — coal as a gas, coal as a fluid and the improved combustion of coal.

But it was then, as it is now, a wild time for new entrants. Dozens of projects were funded including magneto-hydrodynamics, in situ coal gasification, garbage to electricity, battery research, cryogenic transmission research and energy storage in fly wheels.

Some, if not a majority, of the projects were pure science fiction.

The energy establishment favored not so much the new as the duplicative. Its members leaned to coal, oil shale, more oil and gas leasing and more nuclear. The old Mobil Oil Company paid a whopping $212 million for a Colorado oil shale lease without regard to how it could be worked.

Across the Southwest, banks lent to every energy project that came through the door. Natural gas got short shrift because it was wrongly thought to be a depleted resource.

Then in the mid-1980s, Saudi Arabia opened its oil spigot all the way (10 million barrels a day) and the market annihilated expensive energy from new sources. With gasoline cheap again, SUVs hit the roads in giant numbers; a string of Southwest banks collapsed; and the energy debate turned not to changing consumption but to deregulation, facilitating profligate use across the board.

The market spoke and it shouted down concerns about national security or technological substitution. Public policy surrendered to the market. Despite fine speeches from secretaries of energy on the danger of exporting our security and our money, the market continued its advocacy of excess.

The George W. Bush administration identified our vulnerability in oil and identified a looming crisis in electricity. But it faltered when it came to government coercion of markets; for example, getting more nuclear plants built.

Bush himself fell for the temptations of ethanol from corn and the possibility of switch grass. Now these are under threat from new discoveries of oil off Brazil and far greater estimates of oil production from Iraq. In fact, Iraq is being touted as a rival to Saudi Arabia with Brazil right behind it.

The Obama administration is hell-bent on getting off old energy. It loves “alternatives” and it’s committed to doing something about global warming.

But in research, money does not equal results. While the Department of Energy is chock full of money for new energy research and development, cheap natural gas and new potential oil from unexpected quarters may do to Obama’s new energy hopes what it did to Carter’s: undermine and expose them to ridicule.

Public policy may again be pushed around by the irresistible force of the market, even if it is not serving the national interest.