American Oil Growing Most Since First Well Signals Independence

12 19, 2012 by Bloomberg

The U.S. expanded its oil production this year by the most since the first commercial well was drilled in 1859, upending a belief that Americans were increasingly hooked on foreign crude.

Domestic output grew by a record 766,000 barrels a day to the highest level in 15 years, government data show, putting the nation on pace to surpass Saudi Arabia as the world’s largest producer by 2020. Net petroleum imports have fallen by more than 38 percent since the 2005 peak and now account for 41 percent of demand, down from 60 percent seven years ago, moving the U.S. closer to energy independence than it has been in decades.

Seven years after President George W. Bush declared “America is addicted to oil, much of which is imported from unstable parts of the world,” the country has so much crude that it was able to join Europe in choking off exports from Iran without pushing U.S. benchmark prices over $100 a barrel. And refining capacity helped make the U.S. the world’s largest fuel supplier. Even in Venezuela, where Exxon Mobil Corp. (XOM)’s assets were seized, more and more cars run on gasoline made in America.

“The U.S. has a huge lead in the 21st century in maintaining its superpower status,” said Ed Morse, global head of commodities research at Citigroup Inc. in New York. “There was absolutely no way to anticipate the level of growth in the oil supply.”
Faster, Cheaper

America’s latest oil rush was spurred by new technology that has made drilling faster, cheaper and better at unleashing oil from rock formations, even as it has raised alarms among environmentalists about the potential danger to drinking-water supplies and intensifying greenhouse-gas emissions.

Producers, eager to profit from prices that have remained above $75 for more than two years, deployed as many as 1,432 rigs, the most in records going back to 1987. Trucks bearing pipe traversed Wyoming’s high desert plains and Oklahoma’s back highways, geologists pored over well logs from Colorado to New Mexico, and landmen trying to secure mineral rights crowded into courthouse record rooms from North Dakota to the Gulf Coast.

The U.S. will produce an average of 6.41 million barrels a day this year, a 14 percent increase from 2011, according to a Dec. 11 report from the Department of Energy. It’s the biggest annual gain in the number of barrels since the industry began when Pennsylvania’s Drake well ignited the first American oil rush in 1859, department data show. Saudi Arabia pumped 9.7 million barrels a day in November, according to data compiled by Bloomberg. The Paris-based International Energy Agency said last month the U.S. is on track to become the top producer in about eight years.
‘New Thing’

“The shale oil revolution is a new, new thing,” said Francisco Blanch, the head of commodities research for Bank of America Merrill Lynch in New York. “It has come out of nowhere in the last year and a half.”

The nation’s stockpiles increased by a record 13 percent this year, and U.S. refiners are paying less for crude than much of the rest of the world. Landlocked by export restrictions and limited transportation, the glut of U.S. light, sweet crude -- cheaper to process than the high-sulfur, sour grades pumped by Saudi Arabia and Venezuela -- pushed domestic prices down to as much as $28 a barrel less than Brent, the European blend that sets prices for more than half the globe’s oil.

That discount handed Gulf Coast refiners an advantage over competitors and helped the U.S. become a net fuel exporter last year for the first time since 1949, surpassing Russia as the world’s largest. Venezuela quintupled its imports from the U.S. this year to a record 196,000 barrels a day in September, according to Energy Department data.
Global Clout

Rising output from the U.S. has also increased the nation’s sway in the global market by forcing the Organization of Petroleum Exporting Countries into an unpalatable choice: Increase production to bring prices down and maintain market share; or keep prices high to sustain state spending, and thereby subsidize the competition from U.S. producers, which can provide crude to domestic refineries at a lower price.

The unprecedented gains came so quickly that the industry is rushing to regroup. The 500-mile Seaway pipeline, which was reversed last year and now carries U.S. crude south to Gulf Coast refineries instead of moving imports north, will expand to 400,000 barrels a day as early next year from 150,000 now.

Northeastern fuel makers, on the verge of insolvency a year ago, have begun replacing foreign cargoes shipped by tanker from Africa, Europe and the Middle East with cheaper domestic oil brought in by rail. A pipeline shortage has boosted profits at tank-car maker American Railcar Industries Inc. and at BNSF Railway Co., owned by Warren Buffett’s Berkshire Hathaway Inc.
Exports Limited

Even if there were enough pipelines to carry more crude from swelling storage hubs to the coasts, oil exports are limited by rules imposed by Congress following the 1973 Arab oil embargo.

Exports may be necessary to avert a surplus that would depress prices and discourage drilling, said Bank of America’s Blanch. West Texas Intermediate oil, the U.S. benchmark contract, could fall to as low as $50 a barrel within the next two years unless the rules are eased to relieve the glut, he said. Until prices drop, it may be difficult for politicians to persuade the American public to allow expanded exports.

“What I see is basically an inability to go out and explain to the public that we have to change the rules before the prices give us the signal,” Blanch said. “If you’re in the White House, why are you going to change the crude-export rules that the U.S. has right now when the country is still importing 8 million barrels a day of oil?”
Forestalling Glut

At least one member of the Obama administration has begun making the case that the U.S. is building toward a crippling surplus. Adam Sieminski, head of the U.S. Energy Information Administration, the statistical arm of the Energy Department, said limited transactions with other countries may help forestall excess supplies that could undermine prices and hobble the industry.

“That’s going to be a policy decision of the Congress and the administration,” Sieminski said. “It’s just a question of what the economics are.”

The surge in oil output, coupled with record natural gas production, allowed the U.S. to meet 83 percent of its own energy needs in the first eight months of 2012, on track to be the highest since 1991, Energy Department data show. The last time self-sufficiency was achieved was in 1952. While the U.S. still imported some petroleum then, exports such as coal more than offset foreign cargoes.
Overseas Shocks

That interconnectedness means U.S. consumers will still be vulnerable to supply shocks overseas, Sieminski said. An Energy Department forecast shows the country will import 10 percent of its needs in 2035. That doesn’t account for slowdowns because of new regulations, which may tighten because drilling has been linked to groundwater pollution and earthquakes, he said.

Then there’s the problem of how burning all these fossil fuels may contribute to climate change, said Anthony Swift, an attorney with the Natural Resources Defense Council in Washington.

“There’s a real environmental cost to investing billions of dollars in new sources of carbon-intensive fuels when we know we really need to be investing in clean energy,” Swift said. “It’s better for our environment, better for our economy and better for energy security.”

Tightened automobile-mileage requirements helped reduce consumption of petroleum products by 16 percent through September since peaking in August 2005, a drop of 3.5 million barrels a day, Energy Department data show.
Dakota Boom

The U.S. oil boom began in 2004 with a North Dakota well completed by Continental Resources Inc., which confirmed that a combination of two technologies could unlock profitable amounts of crude in pockets deep underground.

Continental paired horizontal drilling, in which the well is bored at an angle to run lengthwise along the richest slice of rock, with hydraulic fracturing. Better known as fracking, the process forces a high-pressure stream of sand, water and chemicals underground to crack apart the rock and free the crude. Since then, North Dakota’s oil production has increased to 728,000 barrels a day, surpassing Ecuador, an OPEC member.

Harold Hamm, Continental’s founder and chief executive officer, has called for expanding U.S. production. The company estimates the Bakken and other formations under North Dakota contain the equivalent of 27 billion to 45 billion recoverable barrels of oil. By comparison, Nigeria has an estimated 37.2 billion barrels of proven reserves, according to OPEC.
Wildcatters Compete

Hamm’s success set in motion an oil rush that spread across the U.S. as wildcatters competed to be first to new prospects. Chesapeake Energy Corp. made a deal in early 2007 to buy a million acres of Wyoming’s Powder River Basin, near the Teapot Dome formation that gave its name to the notorious bribery scandal of the 1920s.

Exploration intensified in Oklahoma’s Mississippi Lime, the Eagle Ford Shale in Texas, Ohio’s Utica formation, Louisiana’s Tuscaloosa Marine shale and New Mexico’s Bone Springs.

Competition grew heated as oil prices above $75 encouraged more drilling. In one Wyoming courthouse, the county clerk brandished a cattle whip to keep order among the crowds of landmen packing in to research mineral rights. Joe Thames, a Denver-based contract lease buyer who has worked for companies such as Chesapeake, said rivals once followed his best landman from his motel to try and find out where he was buying.
‘Big Gamble’

When results of EOG Resources Inc. (EOG) 2009 Jake well in northeastern Colorado leaked, lease prices quintupled in less than two months, said Bob Coskey, a Denver geologist. That play, called the Niobrara, turned out to be smaller than people thought, Coskey said. Overnight, acreage outside the best zones became almost worthless.

Hanging over this activity is the specter of past busts. The last boom in the late-1970s came crashing to a halt in 1985 when Saudi Arabia, in an effort to regain declining market share, flooded the world with crude and sent prices to $10 a barrel in 1986. U.S. production fell for 21 of the next 22 years.

“It’s a big gamble,” said Mike McDonald, an Oklahoma wildcatter and president and co-owner of Triad Energy Inc. “Everyone thinks it’s Beverly Hillbillies: You shoot a gun and oil comes out. It’s not.”

It was unclear until this year whether producers would be able to replicate Hamm’s results outside of the Bakken. The answer is yes. Texas pumped the most oil since 1988. Output from Wyoming grew 7 percent, the biggest jump in records going back to 1981, Energy Department figures show. New Mexico’s increased by 13 percent, and Oklahoma’s by 18 percent.

Morse, whose bullish predictions of U.S. energy self- sufficiency early this year met with skepticism, said North America will be able to meet its own needs by 2020. The pace of growth and the potential for worldwide gains driven by ever- improving technology toppled the theory that the world supply of oil had had peaked and begun an inexorable decline, he said.

“Peak oil is dead,” Morse said.