Golda Meir, the former prime minister of Israel, used to tell a joke about how Moses must have made a wrong turn in the desert: “He dragged us 40 years through the desert to bring us to the one place in the Middle East where there was no oil.”
As it turns out, Moses may have had it right all along. In the last couple of years, vast amounts of natural gas have been found deep under Israel’s Mediterranean waters, and studies have begun to test the feasibility of extracting synthetic oil from a large kerogen-rich rock field southwest of Jerusalem.
Israel’s swing of fate is just one of many big energy surprises developing as a new generation of unconventional fossil fuels take hold. From the high Arctic waters north of Norway to a shale field in Argentine Patagonia, from the oil sands of western Canada to deepwater oil prospects off the shores of Angola, giant new oil and gas fields are being mined, steamed and drilled with new technologies. Some of the reserves have been known to exist for decades but were inaccessible either economically or technologically.
Put together, these fuels should bring hundreds of billions of barrels of recoverable reserves to market in coming decades and shift geopolitical and economic calculations around the world. The new drilling boom is expected to diversify global sources away from the Middle East, just as the growth in consumption of fuels shifts from the United States and Europe to China, India and the rest of the developing world.
“Use whatever hackneyed phrase you want, like tectonic shift or game-changer,” said Edward L. Morse, global head of commodity research at Citigroup. “These sources will dramatically change the energy supply outlook, and there is little debate about that.”
This striking shift in energy started in the 1990s with the first deepwater wells in the Gulf of Mexico and Brazil, but it has taken off in the last decade as a result of declining conventional fields, climbing energy prices and swift technological change.
The United States may now have the means to reduce its half-century of dependence on the Middle East. China and India may have the means to fuel the development of their growing middle classes. Japan and much of Europe may have the chance to reduce dependence on nuclear power. And, at least theoretically, poor African countries might be able to lift themselves out of poverty.
For consumers around the world, the new fuels should moderate future price increases.
But giving new life to fossil fuels is a devil’s bargain, probably making solutions to climate change, and the development of renewable energy, even more difficult. “Not only are you extending the fossil fuels era,” said Daniel Lashof, director of the climate program at the Natural Resources Defense Council, “but you are moving into fossil fuels that are dirtier and release more carbon pollution in the process of extracting and using them.”
James Burkhard, a managing director of the energy consulting firm IHS Cera, said that competition between fossil fuels and renewable energy development was driven by the price of oil and gas as well as by government policy.
“The unconventional boom will guarantee that the competition is strong for years to come,” Burkhard said. “If oil costs $200 a barrel, that would provide more headroom for electric vehicles. But if oil is at $90, alternative, renewable energy will need to compete better on an economic basis.”
THE DEEPWATER RESERVES
The future is now when it comes to deepwater offshore drilling, which has already measurably increased oil and gas supplies around the world.
In 2000, fewer than 20 vessels in the world could drill deepwater wells. Now there are nearly 200, and more almost every month. Global deepwater oil production leapt to roughly 7 million barrels a day in the last 11 years, up from 1.5 million barrels, and now provides about 8 percent of the world’s oil supply. That production could double by 2020, according to experts.
Most of the drilling is in the Gulf of Mexico, off Brazil, Australia and India, and along the west coast of Africa. But only about 10 percent of the world’s deepwater oil and gas fields have been extensively explored and drilled.
In recent years, advances in computer processing power have allowed geologists to make sense of seismic data 15,000 feet or more below the ocean floor. Three-dimensional imaging and seismic mapping are now possible even below thick layers of salt, which used to blur views of untapped reservoirs. Superstrong alloys allow drill bits to go into hot, high-pressure fields.
Even with the advances, risks remain, as the BP Deepwater Horizon disaster last year demonstrated. Regulations became somewhat tougher worldwide, yet they caused little more than a pause in drilling. Even in the United States, drilling was almost back to pre-Horizon levels a year after the accident.
Drilling has begun in the deep waters off Ghana, and experts believe fertile fields exist all the way down the west coast of Africa to Namibia. The potential for new wealth could give Africa a better chance for development, although the history of Nigerian oil development is a cautionary tale of corruption, environmental degradation and strife.
Geologists say they believe the fields of West Africa fit like jigsaw puzzle pieces with prospective fields in South America, because the two continents were connected hundreds of millions of years ago. Total and Royal Dutch Shell recently made a major discovery along the coast of French Guiana, and neighboring Suriname is likely to become an important producer, too. Some analysts say they think more offshore fields may be discovered along the Brazilian coast and south to Argentina.
The coasts of East Africa are rich in gas, and China, Indonesia, Malaysia, Australia and the Philippines also have significant deepwater potential. And India’s deepwater prospects could provide much of its gas needs as its economy grows.
“We are just at the beginning of this story,” said William Colton, Exxon Mobil’s vice president for strategic planning. “It’s only likely we will find more deepwater resources.”
OIL SANDS
Oil sands have already transformed Canada into an energy superpower, and they have shifted American dependency from the nations of the Organization of the Petroleum Exporting Countries to a friendlier and more stable source. Oil sands have been around for decades, but they were too expensive to produce at large scale. Then rising oil prices altered the economics in their favor – attracting multibillion-dollar investments from international oil companies, including those in China.
Since 2000, production has expanded to more than 1.5 million barrels a day of synthetic oil from 600,000, making Canada’s oil sands the most important source of oil imported to the United States. (Canada also exports considerable conventional oil to the United States.)
“It’s one thing to find oil, and another thing to find oil in a very safe, secure place like Canada,” said Colton of Exxon Mobil. “From a U.S. energy security standpoint, it’s a very attractive proposition to U.S. consumers that we have this friend next door who has all these oil resources.”
Canadian oil sands production is expected to increase by as much as 200,000 barrels a day every year for the next two decades. Current estimates of how much is there already top Iraq’s total reserves, guaranteeing Canada’s place as a premier oil producer for many decades. IHS Cera projects $100 billion in investments in the oil sands over the next decade.
The only thing holding back production of Canada’s oil sands are environmental concerns. Much of the oil sands come from carving mining sites out of large sections of the boreal forest, an important depository for containing carbon and a breeding ground for many bird species. Refining of the oil sands, which requires the burning of natural gas, is more carbon-intensive than refining of most other crude oils, despite a 40 percent reduction since 1990 in carbon emissions for each barrel produced.
Technological improvements in recent years have streamlined the burdensome refining process for bitumen, the feedstock in synthetic oil production. Recovering reserves from deeper underground using steam injection, rather than mining, has reduced the footprint of operations and some environmental damage to the forests.
But opposition remains strong among U.S. and Canadian environmentalists who are fighting to stop pipelines to the United States and western Canadian ports. Without those pipelines, oil sands production capacity would most likely struggle to grow. That resistance has forced the oil companies to invest heavily in research to reduce the footprint of extraction and carbon emissions.
The Obama administration has been considering a proposed 1,711-mile, $7 billion pipeline to connect Canada’s oil sands production to terminals in Oklahoma and refineries on the Gulf Coast. The State Department recently gave the project a passing grade in an environmental impact statement, increasing the likelihood of approval. With the pipeline, Canada would move an additional 700,000 barrels a day.
The synthetic fuels now go almost entirely to the U.S. and Canadian markets, but China and other Asian countries are increasingly interested in the oil sands. Chinese companies have invested more than $15 billion in Canadian oil sands projects over the last two years, even though there is not yet a way to get the fuel to China.
The Canadian company Enbridge is proposing a pipeline from Alberta to Kitimat, British Columbia, near the coast, where tankers could load for trips to Asia. SINOPEC of China is helping to finance the $5.5 billion project. The pipeline could be completed by 2017 but faces various regulatory hurdles and opposition from Native Canadian groups.
China wants to obtain 15 billion to 20 billion additional barrels of foreign oil reserves over the next few years, so it also has its eyes on an enormous heavy oil field in the Orinoco Belt, in the northeast part of Venezuela. Production started in recent years, and several projects that have been announced could produce up to 2 million barrels a day by 2020.
SHALE
The biggest wild card for the future of both oil and gas may be shale and other tight rocks. Finding and producing hydrocarbons from these rocks has taken off in the United States with such velocity that it has already significantly altered government and corporate energy expectations. At the beginning of the last decade, the United States was believed to be burning quickly through its gas resources, and a flurry of construction began to build liquefied natural gas import terminals.
But a surge in production in shale fields across Pennsylvania, Texas, Louisiana and several other states over the last five years has produced such a glut that the price of natural gas has plummeted, and energy companies are proposing to convert their empty import terminals into export facilities.
The new drilling was made possible by a mixture of new and old technologies. Hydraulic fracturing, or fracking – the shooting of water, sand and chemicals at high pressures to fracture hard rock – has been done for decades. Now, combining that practice with horizontal drilling – directionally guiding a drill bit through a shale reservoir, as opposed to conventional vertical drilling – has taken advantage of fields that were practically useless in the past.
Shale gas production in the United States is more than five times as great now as in 2006, and the country surpassed Russia as the world’s leading gas producer in 2009.
A variety of environmental groups oppose the surge, saying the chemicals in fracking fluids can pollute water supplies. Temporary or permanent fracking bans have been put in place in New York, New Jersey and Maryland. Other states are toughening drilling regulations, and the industry is responding with tighter wastewater management, while the Environmental Protection Agency is expected to complete a study on fracking next year. Nevertheless, gas shale drilling appears likely to continue at a fast pace in the most important gas-producing states.
The rest of the world is watching. Moratoriums have been put in place in parts of France, Germany, South Africa and the Canadian province of Quebec; Britain, Ukraine and other countries are moving cautiously forward. Still, the Energy Department projects that gas from shale could account for 14 percent of global supplies by 2030, with as many as 32 countries having production potential.
Poland is likely to be the next big shale player, with the government eager to lessen its gas dependence on Russia, which provides half of Poland’s energy. Already more than 8 million acres have been leased by Chevron, Exxon Mobil, ConocoPhillips and other large international companies. Drilling success in Poland could lead to more drilling in shale fields in Germany, Norway, Sweden, France and Ukraine.
Europe now imports about 60 percent of its gas, roughly half of that from Russia. With many Europeans wanting to reduce their energy dependence on coal-fired generation and nuclear power, there should be a strong impetus to increase domestic production, at least in some countries.
China is also moving fast. With a goal of satisfying 10 percent of its gas demand from shale by 2020, it held its first shale gas auction in June. China has a big incentive to develop shale gas, because it is poised to become the world’s largest importer of natural gas and it wants to reduce its dependence on coal to clean up the air of its cities.
In the last five years, as engineers advanced their techniques, shales have begun to produce oil as well. The Bakken field in North Dakota and Montana now produces 400,000 barrels a day, up from a trickle in 2007, and oil executives predict production could soar to a million barrels a day by 2015. The first well was drilled in the Eagle Ford shale field in south Texas three years ago; the field now produces more than 100,000 barrels a day, with 420,000 expected by 2015.
There are 20 other shale and similar tight rock fields across the United States that could make states like Ohio and Michigan major producers.
Exploration of such fields outside the United States and Canada is barely in its infancy, although there are major shale fields across Europe, China, Australia, Africa and South America. “It could change production forecasts around the world,” said Bobby Ryan, Chevron’s vice president for global exploration. “But we are still at the point of the spear. We have to shoot the seismic first to find out.”
Chinese, Norwegian and other foreign companies have already entered into joint ventures in shale oil and gas exploration in the United States to learn fracking techniques. China is moving fast to study its shales, although so far there seems to be more gas than oil. Argentina also looks promising for oil and gas, with American companies including Apache, Exxon Mobil and EOG Resources making large investments in shale in the Argentine province of Neuquen.
But there are constraints, including political opposition. Geological analysis of shales globally has barely started, and there are limits to the equipment and skilled manpower available for drilling. This has delayed fracturing jobs and raised costs in developed fields. Africa and the Middle East appear to have promising reserves, and Saudi Arabia has begun studying its shale fields, but the water requirements for fracking will be a high hurdle absent a technological breakthrough.
HIGH ARCTIC
The last frontier, at least for the foreseeable future, is the high Arctic, most of which is still unexplored by oil companies. High winds, months of darkness and icebergs have long stymied dreams of finding vast quantities of oil and gas in the northern reaches of the globe.
A 2008 assessment by the U.S. Geological Survey estimated that roughly a quarter of the world’s remaining undiscovered conventional oil and gas is in the Arctic, more than 80 percent of it in forbidding offshore areas. Again the United States is the big potential winner, with an estimated one-third of the total undiscovered oil, according to the survey.
Large oil and gas discoveries began in Russia and Alaska in the 1960s, and more than 40 fields are now in production across Alaska, Russia, Norway and Canada. Shell has been trying for five years to drill in Alaska’s Chukchi and Beaufort Seas and has invested about $4 billion on 10-year leases. But regulatory agencies or courts have delayed its efforts, because of concerns that Arctic waters are vital breeding grounds for many aquatic species that are endangered or at risk and that a well blowout could cause a huge leak that would be difficult or impossible to fix.
A paper released by the national commission on the BP Deepwater Horizon spill warned that a serious leak in the high Arctic would be extremely difficult to clean up. That is partly because skimmers can become clogged in ice and spilled oil is unlikely to degrade in frigid temperatures.
But in August, Shell received conditional approval from the Interior Department to begin drilling exploratory wells next summer. The company estimates that 25 billion barrels of oil are in the Alaskan Arctic, mostly in the Chukchi Sea.
“We’re hopeful,” said Pete Slaiby, Shell’s vice president for Alaska, although the company still faces several regulatory hurdles and perhaps some legal ones, too. As for the rest of the Arctic, Slaiby acknowledged that drilling would require strong regulatory regimes and large companies with the experience and resources to drill in the most challenging environments.
“I’m confident, but it will require high bars, financial acumen and operational acumen,” he said. “You want companies that have financial resources and operational skills to develop the Arctic responsibly. It will be expensive.”
Other companies are moving forward in other Arctic countries.
Chevron is doing seismic work in Canada’s Arctic waters. Cairn Energy, a British company, has drilled several exploratory wells off Greenland in recent months, so far with little success. Exxon Mobil and Rosneft, a company controlled by the Russian government, have agreed to invest $3.2 billion in exploration in the ice-clogged Kara Sea.
Statoil of Norway and ENI of Italy are furthest along in the far northern waters of Norway, which has the advantage of being ice-free because of warm Gulf Stream waters. Statoil already operates a gas field, called Snow White, 340 miles north of the Arctic Circle in the Barents Sea, and several companies are drilling oil wells in the sea now. The operations accelerated after the discovery of an estimated 250 million barrels of retrievable reserves of high-quality sweet crude oil in the Skrugard field in April, the seventh-largest oil or gas find in the world this year.
“This is the premier next frontier,” said Tim Dodson, Statoil’s executive vice president for exploration.
POWER BALANCES
While many countries stand to benefit from the new energy resources, the United States may have the most to gain.
Before the 1960s, U.S. companies dominated Persian Gulf and North Africa oil resources and made lasting alliances with autocratic governments. By the 1970s, as the United States’ oil production peaked and OPEC and national oil companies took command of the world’s oil, the United States had to accept almost hostage status. Now the tables are turning.
“There is the potential to really rebalance strategic power in the world,” said David L. Goldwyn, former State Department coordinator for international energy affairs. “If we are able to manage significant incremental supply from Canada, from onshore U.S., from Brazil and friendly countries in West Africa, then we can significantly ameliorate the risk of a supply disruption in the Middle East or from other countries that might use oil as a weapon.”
While more energy sources could be a stabilizing factor, competition over the new fields could produce tensions. Already, in the South China Sea, China has warned India’s state oil company not to drill in waters it claims. Turkey recently warned Cyprus against drilling for natural gas without reaching an agreement with Turkish Cypriots over royalties. The political twists and turns are bound to be many. The devil’s bargain looks like a necessity for the United States, China and many other countries, as the continued extraction and use of fossil fuels will come with some environmental degradation. According to the most recent estimates of the Energy Department, world energy demand is going to increase by 50 percent by 2035, largely because of increased consumption in China, India and the rest of the developing world.
Renewable energy will rise as a percentage of energy used, to 15 percent from 10 percent, but that will not provide for the growing demand.
“The fossil fuel age will be extended for decades,” said Ivan Sandrea, president of the Energy Intelligence Group, a research publisher. “Unconventional oil and gas are at the beginning of a technological cycle that can last 60 years. They are really in their infancy.”
As the world urbanizes, demand for oil could outstrip many nations' abilities to get it out of the ground. Most new discoveries have been made in difficult territory, where the costs of extraction dwarf inexpensive Middle Eastern crude. Consumers may have to get used to high prices at the pump, with or without the threat of conflict between two of the world's largest producers. There's risk for some, but great opportunity for many, so read on to discover what's happening and who's poised to strike a gusher as oil prices continue to rise.
Hanging in the balance
Saudi Arabia is the world's most prolific oil-producing state, pumping 10.5 million barrels out of the sand every day last year. That figure has been stable for several years, but the Saudi people have actually been using more oil themselves, leading to stagnant to declining production surpluses.
These are five of the world's six largest oil producing countries -- Russia is the other, holding steady with about 7 million barrels per day in surplus -- but none of the largest net exporters have substantially improved their balance in the past five years. New and expanded fields in Canada, the United States, Brazil, and other Latin American nations can inject more black gold into the world's veins, but it's unlikely that any can supplant the Saudis in terms of total output. If Saudi output were to decline, it could have dangerous consequences for global oil supplies. Even if Saudi output remains at the same level, it could be a big problem down the road as oil demand keeps increasing.
Fields of black gold
The crown jewel of Saudi oil production is the Ghawar field. The Saudi kingdom closely guards information on Ghawar, but many estimates place the super field's production in the range of 5 million barrels per day, roughly half the country's total output. Ghawar alone produces about as much oil as the nations of India, Oman, Colombia, Argentina, Malaysia, Egypt, and Australia together. It's also been at the epicenter of the peak oil debate for years, as research has uncovered increasing difficulty in getting oil out of Ghawar. Other Saudi fields have also been facing the same issues.
This is important because worldwide oil use has been growing steadily over the past 30 years without a commensurate increase in major new oil field discoveries. The Bakken shale formation, which became an exciting play because of new oil recovery technologies, only produces a tenth as much oil as Ghawar, and does so with greater difficulty. The Canadian oil sands produce about a fifth as much oil as Ghawar.
The harder it comes, the higher it costs
A major problem with most new oil fields is that extraction costs are much higher than they are in fields like Ghawar. Even cheap, easily accessible oil in other places is quite a bit more expensive to get out of the ground than Saudi oil. It's good to have a monopoly, as long as you can keep it running.
Source: News reports and government agency estimations.
The more the world relies on unconventional oil extraction, the less likely it is to ever see cheap oil again. The last substantial drop in prices came when everything else was crashing in 2008. Demand retreated in the midst of economic carnage, but it's a lot easier to manage reduced need than it is to cope with a need that simply can't be met.
Rise of the West
Cheap, easy oil is gone, but demand isn't going to go away. Alternative energy could become increasingly important, but it hasn't reached the point of fueling our transport system yet. Promising new oil fields are the best bet for the medium term and could offer substantial gains as production ramps up while the price of oil continues to appreciate. A number of major new oil projects (that we can invest in, anyway) have been in the Western Hemisphere, and many offer the promise of greater expansion. The Bakken shale area, for example, is hitting a wall not because of extraction difficulties, but because the transportation infrastructure isn't big enough.
Offshore discoveries are a bonanza for Brazil's Petroleo Brasiliero (NYSE: PBR ) , and for Seadrill (NYSE: SDRL ) , which is constructing several Brazilian deepwater rigs. ATP Oil and Gas (Nasdaq: ATPG ) also has numerous offshore operations, though the vast majority are in the Gulf of Mexico. Despite its solid presence, much of ATP's reserves remain undeveloped, so there's still opportunity for growth beyond the expectation of higher oil prices.
Canada's Athabasca oil sands have seen heavy development investment from Suncor Energy (NYSE: SU ) , and Penn West Petroleum (NYSE: PWE ) has fields in the Peace River sands. As a master limited partnership, Penn West offers higher yields than most and could be a good play for dividend-hungry energy investors. U.S. petroleum producers are varied, but one lesser-known company with the potential to perform is Samson Oil and Gas (AMEX: SSN ) , which has two Bakken-area holdings it has yet to fully develop. Another option might be SandRidge Energy (NYSE: SD ) , which operates in "easier" areas like Texas and the Midwest, and has been investing heavily in the infrastructure needed to ramp up its oil production.
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