Monday, Apr. 09, 2012
By Bryan Walsh
The waters of the Atlantic Ocean 180 miles east of Rio de Janeiro
are a cobalt blue that appears bottomless. But it only seems that way.
Some 7,000 ft. beneath the choppy surface lies the silent seafloor, and
below that is 5,000 ft. of salt rock, deposited when the continents of
South America and Africa went their separate ways 160 million years ago.
Underneath
it all is oil. By one count, the presalt reservoirs off the central
coast of Brazil hold as much as 100 billion barrels of crude; that's
another Kuwait. It's why former Brazilian President Luiz Incio Lula da
Silva called the presalt finds a "gift of God," and it's why the massive
Cidade de Angra dos Reis floating oil-production facility--operated by
Petrobras, Brazil's state-run oil giant--is anchored in the Atlantic,
pumping 68,000 barrels of crude a day from one of the deepest wells in
the world. The platform deck is so big you could play the Super Bowl on
it, if not for the nest of interlocking pipes and valves that circulate
oil, methane and steam throughout the ship. As I tour the deck in an
orange safety jumper, a Petrobras engineer named Humberto Americano
Romanus urges me to put a hand to one of the oil pipes. I can feel it
pulse like an artery, the oil still warm from the deep heat of the
earth. "It's 50 barrels a minute passing through here," he says over the
din of the platform. "That's a lot of oil."
But not enough.
Demand for oil is still rising--set to grow 800,000 barrels a day this
year despite a still sluggish global economy. Meanwhile, production from
places like Russia, Iran and Kuwait seems to be plateauing. The rigs
that have gathered along the coast of Brazil are drilling deeper than
ever before, through layers of salt rock, in some of the most complex
and risky operations the industry has ever seen. "This reservoir is very
heterogeneous, very challenging," says Jose Roberto Fagundes Netto,
general manager of research and development for Petrobras. "But we know
an accident is unacceptable." A well blowout like the one that caused
the BP oil spill in 2010 would be even harder to contain in the deeper
presalt waters.
This is the new world of extreme oil. Petrobras
can afford to push the frontiers of offshore drilling because the price
of Brent crude, a benchmark used by oil markets, is more than $120 a
barrel, and last year it averaged $111, the highest average cost since
the Drake well in Titusville, Pa., began spewing wealth in 1859,
launching the petroleum era. From that time on, even despite J.D.
Rockefeller's attempt to monopolize it, oil has experienced a 150-year
price slide, interrupted by periodic spikes. The prices of all
commodities fluctuate, but oil's irreplaceability--it's the fuel that
makes us go--ensures that those spikes hurt. Last year oil soared in
part because of geopolitics, especially the threat that Iran would block
the Gulf of Hormuz and cut supplies. That uncertainty contributed to a
risk premium of perhaps $20 or more a barrel. A promise by Saudi Arabia
in late March to bring spare oil production onto the market has done
little to calm prices.
In the U.S., consumers face an extreme-oil
paradox. We need more oil to achieve energy independence--and we're
producing it in places like the Bakken shale formation in North
Dakota--even as we are using less of it. A combination of recession,
conservation and improved auto efficiency has helped the U.S. shed
demand impressively. But demand in China, India and other developing
nations has replaced it.
Result: plentiful but expensive oil that
translates into painfully high gas prices. Last year the average cost
for a gallon of unleaded was $3.51, the highest on record, up from $2.90
a year before. On March 26 the national average was $3.90. That takes a
chunk out of household budgets and threatens an already underwhelming
economic recovery.
In an election year, gasoline prices can
ignite volatile political debate. That's one reason President Obama
showed up in Cushing, Okla., the main terminal for oil produced in the
West and Canada, to promote a new pipeline that will deliver crude from
Cushing to refineries along the Gulf Coast. "We're drilling all over the
place right now," he said, defending his energy policy. Obama does not
want to slip up on oil.
Not that long ago, the big worry about
fossil fuels was how rapidly supplies were waning. Now new and
unconventional sources of oil are filling the gaps.
Ultra-deepwater
reserves like those found off Brazil offer the promise of billions of
barrels. Technological breakthroughs have unlocked what's
known as tight
oil in the shale rock of North Dakota and Texas, reversing what seemed
like a terminal decline in U.S. oil production.
Alberta's vast oil sands
have given Canada the world's second largest crude reserves, after
Saudi Arabia's, and offer the U.S. a friendlier crude dealer. As global
warming melts
the Arctic sea ice, an unexpected dividend is access to
tens of billions of barrels of oil in the waters of the far north.
"We've seen a paradigm shift over the past decade," says Daniel Yergin,
chairman of the research group IHS CERA.
"You look at tight oil and oil
sands and deepwater, and you see the results."
Those results
could be the problem. While unconventional sources promise to keep the
supply of oil flowing, it won't flow as easily as it did for most of the
20th century.
The new supplies are for the most part
more expensive
than traditional oil from places like the Middle East, sometimes
significantly so. They are
often dirtier, with
higher risks of
accidents. The
decline of major conventional oil fields and the
rise in
demand mean
the spare production capacity that once
cushioned prices
could be gone, ushering in an
era of volatile market swings. And
burning
all this leftover oil could lock the world into dangerous climate
change. "I'm
less concerned about
the absolute disappearance of fossil
fuels than about the
environmental consequences of pursuing what's
left," says Michael Klare, an energy expert and the author of The Race
for What's Left.
There will be oil, but it will be expensive, dirty and
dangerous.
The Bakken Boom
If you want to find oil in the
U.S., or a job, for that matter, head to North Dakota. The Peace Garden
State is experiencing a remarkable oil boom in the midst of high gas
prices, with production rising from 98,000 barrels a day in 2005 to more
than 510,000 barrels by the end of last year--greater than the entire
national output of OPEC member Ecuador. Thanks to shale oil in the
Bakken formation, the petroleum workforce has risen from 5,000 in 2005
to more than 30,000 people.
North Dakota's unemployment rate is the
nation's lowest, 3.2%, and so many would-be roughnecks have flooded the
state that workers are housed in temporary "man camps" like Wild West
mining settlements. And North Dakota isn't the only state benefiting
from the boom.
Texas is pumping oil at rates that haven't been seen
since the days of Dallas. "You can go straight to those fields and get a
good-paying job," says Scott Tinker, the state geologist of Texas. "The
demand is there."
So is the supply, thanks to
innovations in
hydraulic fracturing and horizontal drilling that have opened up
reserves of oil previously considered unobtainable. Using a process
similar to one employed in shale-gas exploration, which has flooded the
U.S. with cheap natural gas, rigs drill down first and then horizontally
into shale layers before fracturing the rock to release the tightly
bound oil. "The same massive investment we saw with shale gas is now
happening with tight oil," says Seth Kleinman, an analyst with Citigroup
who recently wrote a research note on the potential of tight oil. "And
it's going to play out in the same massive way."
Tight oil has
helped revitalize the American drilling industry--there are now more
rigs operating in the U.S. than in the rest of the world combined--and
it could contribute significantly to global supplies, with the
International Energy Agency (IEA) projecting that
U.S. tight-oil
production could reach
2.4 million barrels a day by 2020.
Thanks
as well to greater efficiency, last year the U.S. imported just 45% of
the liquid fuels it used, down from a peak of 60% in 2005, and just 1.8
million barrels a day came from the Persian Gulf. If domestic oil
production continues to rise, the U.S. could actually approach a goal
that has long seemed a political fantasy:
energy independence.
But
just how much more the U.S. will be able to produce is up for debate.
While tight-oil reserves are plentiful, wells tend to dry up quickly,
which means a lot of drilling is needed to keep the oil flowing.
Even if
the U.S. can't achieve energy independence, the oil-sand resources of
Canada, already America's biggest oil supplier, could further reduce
imports from the Middle East. High oil prices have boosted
investment in
the oil sands, and the Energy Information Administration (EIA), the
analytical arm of the U.S. Energy Department,
projects that oil-sand
production will rise from 1.7 million barrels a day in 2009 to 4.8
million barrels in 2035--more than Iran's current output.
Brazil,
with its deepwater resources, also looms as a friendlier and more
secure dealer, something that has become all the more important in the
wake of Arab Spring--related disruptions in oil-supplying countries like
Libya.
"We're seeing rapid and major changes in the geopolitics of
oil," says Fatih Birol, chief economist at the IEA--most notably that
the Americas, after years as oil customers, are poised to become sellers
again.
So does that mean the return of $2-a-gal. gasoline? Nope.
It's true that reducing oil imports is good for the U.S. economy.
Americans spent $331.6 billion--the size of the entire agriculture
industry--
on oil imports last year, up 32% from 2010. Cutting imports
keeps that money in the U.S., reducing a trade deficit that hit $560
billion last year. It's also, of course, good for international oil
companies like Shell and Chevron, which are increasingly being squeezed
out by massive state-owned companies.
You may not like Exxon because of
the
pump price or its oversize profits, but how
much love do you have
for autocratic petrostates like Iran or Russia? Exxon's growth trickles
down; the
oil-and-gas industry created 9% of all new jobs last year,
according to a report by the World Economic Forum, even as oil companies
booked multibillion-dollar profits.
But contrary to what the
drill-here, drill-now crowd says, oil companies could punch holes in
every state and barely make a dent in gasoline prices.
Even a more
energy independent U.S. can't control prices, not with a thirsty China
competing on the globalized oil market. "Energy security is fine, but it
doesn't have that much meaning in a globalized economy," says Guy
Caruso, a former head of the EIA.
"More production adds fungibility to
the world market, but we're still vulnerable to shocks in other
countries." The oil the U.S. uses may be American, but that doesn't mean
it will be cheap.
Boom and Bust
There is no substitute
for oil, which is one reason it is
prone to big booms and deep busts,
taking the
global economy along with it. While we can generate
electricity through coal or natural gas, nuclear or
renewables--switching from source to source, according to price--oil
remains by the far the predominant fuel for transportation.
When
the
global economy heats up,
demand for oil rises,
boosting the price
and
encouraging producers to pump more. Inevitably those high prices eat
into economic growth and reduce demand just as suppliers are
overproducing.
Prices crash, and the
cycle starts all over again. That's
bad for producers, who can be
left holding the bag when prices plummet,
and it
hurts consumers and
industries uncertain about
future energy
prices. Low oil prices in the 1990s lulled U.S. auto companies into
disastrous complacency; they had few efficient models available when oil
turned expensive.
The advantage of OPEC and especially Saudi
Arabia, with its vast, easily tapped oil fields, is that producers could
work together to manage prices, increasing production when demand rose
and throttling back when prices were about to fall.
It's not exactly the
invisible hand at work, but the promise is more predictability, which
helps consumers, producers and governments plan with confidence.
Those
days are gone. Today
major oil producers are
pumping flat out. The
Russians and Saudis, for instance, need expensive oil to power their
wobbly economies and placate their people. It suggests
more booms and
busts ahead, especially if the
global economy slows again. "If OPEC
can't play that price-stabilizing role anymore, then we can't banish
oil's natural volatility," says Robert McNally, founder of the Rapidian
Group and a former White House adviser on energy.
"That means we could
see prices ranging from $200 to $30."
We've already seen
something like it.
When the economy crashed, so did oil, falling from
$145 a barrel in mid-2008 to $30 by the end of that year. Now prices
have spiked again, high enough that economists are warning that oil
costs could endanger the economic recovery, which would send prices
spinning down again.
The True Price of Oil
Then there's
the environmental cost.
Oil has never exactly been clean, but the new
sources coming online
tend to be more polluting and more dangerous than
conventional crude.
Producing oil from the
sands in northern Alberta can
be
destructive to the local
environment, requiring
massive open-pit
mines that
strip forests and
take years to recover from. The
tailings
from
those mines are toxic. While some of the
newer production methods
eschew the open-pit mines and instead
process the sands underground or
in situ, which is much cleaner, they still
require additional energy to
turn oil sands into usable crude. As a result,
a barrel of oil-sand
crude usually has a 10% to 15% larger carbon footprint than conventional
crude over its lifetime, from the well to the wheels of a car. Given
the massive
size of the oil-sand reserve--
nearly 200 billion recoverable
barrels--that's potentially a lot of carbon. It's not surprising that
environmentalists have loudly opposed the Keystone XL pipeline, which
would
send 800,000 barrels of oil-sand crude a day to the U.S.
"There's
enough carbon there to create a totally different planet," says James
Hansen, a NASA climatologist and activist.
Tight-oil production
isn't as polluting as extracting from oil sands, but it does make use of
fracking, which has quickly become the most
controversial technique in
energy.
Fracking fluids contain small amounts of toxic chemicals, and
there have been allegations in Pennsylvania--where
fracking has been
used to produce shale natural gas--that it
contaminates groundwater. The
federal government is considering stricter regulations on the practice.
"The federal rules have loopholes, and the state rules are too weak,"
says Amy Mall, a senior policy analyst for the Natural Resources Defense
Council.
"There are risks to groundwater, and there are risks to air."
So far, there have been
few complaints of water pollution from tight-oil
wells in North Dakota and Texas, though both those states have notably
oil-industry-friendly attitudes.
If tight-oil production spreads
to more
densely populated states like
Ohio and California, both of
which
have shale plays, we could see those states gripped by the
same
controversies that have come with
shale gas in Pennsylvania and New
York. Sparse North Dakota is struggling to deal with the
sudden influx
of workers and equipment as well
as the air pollution that results from
tight-oil production. Even the oil industry is realizing that it needs
to assuage public concerns.
"We cannot ignore parts of the public that
don't trust our industry and our ability to operate safely," Statoil CEO
Helge Lund said at a recent energy conference.
"This is a fundamental
issue affecting us all."
The offshore drilling in Brazil's
presalt reservoirs and in the Arctic waters being opened up by climate
change is cleaner, but as seen with the Deepwater Horizon spill, if
something goes wrong, it means catastrophe. If you think cleaning up an
oil spill in the Gulf of Mexico was tough, try doing it in the remote,
forbidding Arctic. But even greater than the
immediate environmental
danger posed by
unconventional oil is the
larger risk to the
climate.
One of the expected consolations of peak oil was the assumption that
running out of conventional crude would finally force us to develop
carbon-free alternatives such as wind and solar.
Extreme oil means there
will still be enough--more than 1 trillion barrels by one estimate--
to
keep cooking the planet if we decide to burn it all. Deborah Gordon, an
expert at the Carnegie Endowment for International Peace, says that
"21st century oil is not 20th century oil. New, unconventional oils are
going to
recarbonize global petroleum supplies."
So this is the
future of oil: as costly as it is polluting. But if we can't ensure
cheap oil, we can become more resilient when fuel becomes expensive.
That requires continued improvements in energy efficiency. The U.S. has
made some strides recently in that area (new vehicles get better mileage
now than ever before), but it still lags the rest of the world.
Obama's
push to increase corporate average fuel-efficiency standards for
vehicles to 55 m.p.g. by 2025 is vital. After all, doubling the mileage
of your car is the equivalent of cutting the price of gasoline in half.
Other kinds of energy alternatives must be developed to break the
monopoly of crude, for environmental and economic reasons. Diversifying
your energy supply is as wise as diversifying your portfolio.
"We've got
to develop every source of American energy, not just oil and gas but
wind power and solar power, nuclear power and biofuels," Obama said in a
recent speech.
"That's the only solution to this challenge."
From
Brazil to Bismarck,
human ingenuity (and tens of billions of dollars in
investment) has
extended the age of oil, as well as
our anxiety about
it.
There's no reason the same formula can't eventually bring it to an
end--on our terms.
