Fracking-led oil revolution turns U.S. into Saudi America

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Posted: Monday, December 16, 2013 12:00 am

MIDLAND, Texas — All along the highway that leads into this city in West Texas, the rows of black 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 this city's long status as the heart of America's petroleum industry. Even when U.S. oil production was dropping and many feared the Permian Basin, which feeds Midland's oil economy, was all but exhausted, the pump jacks continued their work.

Now, their up-and-down motion seems all but unstoppable, a symbol of an energy revolution that seems likely to transform the globe.

A surge in U.S. oil production has in just a few short years propelled the United States from a country largely dependent on oil imports to one that soon could 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 to be within grasp.

The revolution has taken place almost unnoticed — and in a way that few foresaw less than a decade ago, when the emphasis on breaking America's foreign oil dependence was almost entirely on persuading Americans to drive less, turn the thermostat up or down and 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 United States shoot up 40 percent, after declining every year for the previous 20. The International Energy Agency predicts the United States will overtake Saudi Arabia as the world's top oil producer by the year 2015. America already has become the largest producer of natural gas.

In October, the United States 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 current 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, said at this year's Deloitte Energy Conference in Washington.

Questions remain about how quickly the U.S. fields will decline and whether the boom can last. The production surge is owed in large part to use of a controversial drilling process known as fracking — hydraulic fracturing — in which high-pressure water and chemicals are pumped underground to break up shale rock and release the oil and gas trapped inside.

Environmental groups argue it poses a threat to air and water. Deep disposal of fracking waste has been linked in some studies to small earthquakes. Four cities in Colorado voted to ban fracking earlier this month. New York and North Carolina don't permit the technique, and other states are still debating the subject.

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 energy alternatives.

“Those who might have relied on the fact that we would run out of this resource and therefore be forced by lack of available resource 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 U.S. fracking bonanza offer powerful arguments in its favor. They include resurgence in American manufacturing and a reshaping of U.S. relationships around the world, where 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 new jobs. That compares with just a 1 percent increase in total private-sector jobs over that time.

The surge has also played a role in keeping U.S. gasoline prices under control. While those prices 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 the U.S.-backed sanctions on Iranian oil sales.

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 United States oil industry. Twenty-five percent of all drilling rigs in the world are working in Texas, according to the rig count compiled by the oilfield services company Baker Hughes.

Workers fled from Midland in the 1980s after the last big bust in the Permian Basin oilfields. Equipment rusted, office buildings emptied and West Texas oil was pronounced dead. Now, Midland is booming. Developers have proposed a 53-story luxury hotel and office building in a town where the county population is 150,000.

“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.”

The energy revolution also has been a boon to American manufacturing. Dow Chemical CEO Andrew Liveris told Congress this year that America's natural gas bounty is a once-in-a-generation opportunity, and the resource is “the first indispensable ingredient for everything that is made and consumed in this country.” Natural gas prices in the U.S. are at near-record lows, far cheaper than in Europe and Asia.

Natural gas is used for manufacturing and electrical generation, and the cheap price is persuading utilities to switch to it from the more polluting coal.

America's energy surge is already allowing it to flex muscles internationally, according to analysts. The U.S. production surge helped the United States convince European allies, for example, that petroleum sanctions against Iran wouldn't create a global oil shortage and force price spikes.

Expanded American energy production also creates issues for Russia, which wields tremendous economic and political power by supplying Europe with natural gas via pipeline. The expansion in U.S. supplies means that countries that had planned to export natural gas to the United States are instead selling it to Europe, giving competition to Russia, according to Ken Medlock, senior director of the Center for Energy Studies at Rice University.

How far this boom might go is still anybody's guess. Many states contain rock formations that are ripe for fracking.

Drilling and fracking are expensive, and shale wells tend to decline quickly, so new drilling is constant, according to a Harvard University study. Only the United States, with 60 percent of the world's supply of drilling rigs, has the wherewithal to maintain the pace. For comparison, the Harvard study noted, the U.S. completed 45,468 oil and gas wells last year; the rest of the world outside of Canada completed just 3,921.

“We are the only country in the world where individuals own the property rights down to the center of the Earth on land they sit on,” said Joseph Stanislaw, who helped found the consultancy Cambridge Energy Research Associates. “It's an economic advantage that doesn't exist anywhere else.”

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 kind of fracking and horizontal drilling techniques pioneered by Texas driller George Mitchell, who drew on years of federal research.

“We drilled a couple of wells and one came in at 6 million cubic feet a day. It just shocked us,” said Wilson, who went on to make a major discovery in Texas' Eagle Ford shale. He's now CEO of Halcon Resources in Houston.

Analysts and drillers warn, though, that there is no guarantee the boom will last and plenty of room for problems.

Wilson said he's noticed many of his fellow operators drilling wells closer and closer together at the major fields in Texas and North Dakota. That makes money quickly, he said, but then the wells start competing for the same oil and decline quickly.

In Midland, they've seen booms go bust before.

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