New York Times
November 2, 2007
Tapped Out, but Hopeful: A Break in Texas’s Oil Decline
By CLIFFORD KRAUSS
CRANE, Texas — The North McElroy oil field here in West Texas has long been a tableau of rusty tanks and worn-out pump jacks. “Not in Use” is painted across broken electrical panels affixed to an abandoned building.
With oil prices setting records, years of neglect finally appear to be coming to an end. The Apache Corporation is drilling new wells. Workers are flocking to sparsely populated West Texas, living in motels and trailer parks. Dishwashers and teachers are fleeing their jobs for $60,000 gigs in the fields.
But for all the new wealth and activity, the best the industry can hope to accomplish is to slow the decline of American oil production. The good times here are not nearly as good as they were in the last big oil boom in the 1970s and 1980s — and nobody expects they will get that way, how ever high prices rise.
“Nobody’s drinking Champagne or even beer out of cowboy boots this time,” said Daniel Yergin, an oil historian and industry consultant. “There’s a sense of limited possibilities.”
The big problem: the nation’s oil fields are mostly tapped out. While modern technology is giving workers the ability to squeeze more crude out of wells in North McElroy and other oil patches around the country, overall output is on an intractable slide. In the United States, oil production has fallen in every one of the last six years, according to the government, even as prices quadrupled.
Last year’s production of 1.86 billion barrels of crude oil was the nation’s lowest since 1949, and production, at best, will level off this year.
“It’s not a pretty picture,” said Boone Pickens, the billionaire Texas oilman who has seen his share of booms and busts. “People are making money and there are lots of jobs, but let’s face it: we are in decline.”
Not even an offshore oil boom in the Gulf of Mexico has been able to reverse the trend. New oil coming from there simply cannot replace the production being lost in played-out fields onshore.
Oil prices have been soaring, repeatedly setting records in recent weeks, and $100 oil looks plausible if not inevitable. That means the American industry has plenty of incentive to do what it can to slow the decline. Spending on exploration and development in the United States has tripled in recent years, to $90 billion a year, according to John S. Herold, an energy consulting firm.
High in the Colorado Rockies, long-deserted towns are coming back to life amid a drilling surge. In Louisiana, sugar farms are having trouble finding workers because oil companies are snapping them up.
But even as old fields are revived, others peter out. The United States now imports about two-thirds of its oil, and the proportion keeps rising as Americans burn as much gasoline as ever.
These days, industry people still look back fondly to the 1970s and early 1980s, when surging oil prices unleashed a frenzy in the oil regions. Even with the rest of America on the economic ropes then, Texans counted their cash and displayed their pride.
“Freeze a Yankee, Drive 75” was a popular bumper sticker, the line lifted from a song that went on, “Cram them Yankees into little bitty cars while we drive around in limousines.”
A bust followed the boom, of course, sending a lot of cocky Texans to bankruptcy court in their limos.
Now, industry people are picking their way through a more complicated landscape, cognizant not only that the good times could end but also that the nation’s tenuous energy security depends in part on their success in staving off the decline of old fields.
“You will have trouble finding anyone out here who will use the word boom,” said Ben Shepperd, executive vice president of the Permian Basin Petroleum Association. “Everybody calls it the ‘B’ word.”
Oil is less a factor in the regional economy than it used to be. Texas remains the country’s biggest oil producer, representing 20 percent of national output, but production has been declining steadily, from 444 million barrels in 2000 to 397 million last year.
The nation’s total oil production peaked at about 10 million barrels of day in 1970 and is now about half that. Recent declines have been most spectacular in Alaska, where production is half what it was a decade ago.
With an expected boom of deep water production in the gulf and the re-engineering of old wells onshore, the Energy Department hopes that production could go as high as 5.94 million barrels a day in 2016, from 5.1 million today, but projects that it will decline from there.
Crane is a small town in the middle of the most important oil region in American history, known as the Permian Basin, after the geologic period, more than 250 million years ago, when the oil-bearing rocks were laid down. In the early 20th century, the region produced oil geysers of the sort depicted in the James Dean movie “Giant.” Oil from the region powered the Allies in World War II, when the United States was the world’s biggest producer by far.
But there has been no geyser in these parts in decades. Oil fields can produce only so much before decline sets in, and that point is long past for most American fields. Across West Texas and into eastern New Mexico, wells that produced 200 barrels a day 40 years ago now manage only five or 10 barrels.
During the oil spike of the late 1980s, Rolls Royce had a dealership in nearby Midland. It is gone now. The days when dentists dropped their practices to buy oil wells, and anybody who was anybody around these parts collected race cars and owned a plane, are over.
But there are definite signs of recovery. At the North McElroy field here, production fell from 12,700 barrels a day in the 1970s to 2,800 barrels today. Suddenly, though with new investments by Apache, the decline has stopped.
“It was pretty lonely out here 10 years ago with $8 oil,” Tom Voytovich, an Apache vice president, declared the other day as he gazed across a landscape of cactus, mesquite, tumbleweeds and drilling rigs. “But at $80 or $100 a barrel, it’s a cash cow.”
The big oil companies that drove past booms have only modest interests left here. Their primary exploratory efforts are abroad these days, despite the political risks of drilling in places like Angola and Russia, because that is where the big, new fields are. Picking over the leftovers of past booms are independent companies like Occidental Petroleum, Apache, XTO Energy, Devon Energy and Range Resources.
They rework old fields by drilling deeper, drilling sideways and repositioning wells. They shoot sound waves into the rock to create three-dimensional underground maps. They pump water or carbon dioxide into the ground to repressurize fields and recover more oil.
Occasionally they get lucky. Range Resources spent $30 million in 1997 on an old field outside Andrews, Tex., and found that in past decades Conoco drilled a water injection well in the wrong place and then neglected to drill new producing wells in the right places.
Range Resources fixed the problems and has increased production markedly, from 290 barrels a day to 3,500 barrels. The expansion is part of a broader recovery around Andrews marked by rising housing prices, new restaurants, a new furniture store that specializes in rural Italian décor, and so many new service businesses that one trucking company in town has named itself “Just Another Trucking Company.”
“I’m very happy with the oil prices,” said Arabella Flores, owner of Bella Interior and Lighting, whose Tuscan tables and cabinets are the newest addition to West Texas style. “I wouldn’t mind if they go higher.”
The workers at the Range Resources field are grateful too, of course, but cautious in their optimism. Richard Cortinas, a 41-year-old production supervisor, said he would happy if the price stays stable for 20 years so he can retire. He used his stock options to buy a used Hummer eight months ago, but not before he agreed to a demand by his wife that he first pay off the mortgage.
“If oil goes down to $8 and I lose my job,” he said, “I’ve got a place to stay.”
New York Times
November 2, 2007
A War Game Supposes Scarce and Risky Oil
By JOHN M. BRODER
WASHINGTON, Nov. 1 — War in Iran. Gasoline rationing, at $5 a gallon. A military draft. A Chinese takeover of Taiwan. Double-digit inflation and unemployment. The draining of the Strategic Petroleum Reserve.
This is where current energy policy is leading us, according to a nightmare scenario played out as a policy-making exercise here on Thursday by a group of former top government officials.
Two bipartisan business-supported groups sponsored an elaborately staged role-playing game called Oil ShockWave that tried to dramatize the impact of American dependence on oil imported from unstable and unfriendly parts of the world.
The organizers have an agenda: They hope to prompt Congress to act on energy legislation and to push the issue into the presidential campaign.
The game was set in the spring and summer of 2009, under a new administration that has inherited current energy policy.
The match that ignited the conflagration was $150-a-barrel oil, brought on first by instability in Central Asia and then a military and political confrontation with Iran and Venezuela.
The president’s senior advisers — played by former White House aides, military leaders and cabinet officers, met urgently to try to fashion advice for the president to cope with the political, economic, social and military effects of the oil shock. The president, of unspecified party affiliation, remained offstage throughout but was consistently referred to as “he.”
The group was led by the national security adviser, played by Robert E. Rubin, secretary of the Treasury during much of the Clinton administration. At one point, weighing a variety of unpleasant options, Mr. Rubin said in near despair, “This wouldn’t be this big a problem if the political system a few years ago had dealt with these issues.”
Carol M. Browner, the Democratic former head of the Environmental Protection Agency, who played the secretary of energy, chimed in, “Year in and year out, it has been difficult to get a serious energy policy.” She and others noted that previous Congresses failed to act on auto mileage standards, efficiency measures and steps to replace foreign sources of oil. Michael D. McCurry, President Clinton’s former press secretary, who played a senior counselor to the fictional new president, said that energy issues were barely discussed in the 2008 campaign.
That is the moral of the story, according to its organizers. Congressional inaction and political inattention could lead to dire, yet completely foreseeable consequences.
“Once a crisis actually hits, policy tools are largely ineffectual,” said Jason S. Grumet, president of the Bipartisan Policy Center, one of the event’s sponsors. “The participants recognized that Congress has to get out in front on oil security before events overtake it.”
The other sponsor was Securing America’s Future Energy, or SAFE, an action-oriented group committed to reducing the nation’s dependence on oil. It is led by Frederick W. Smith, the chairman of FedEx, and retired Gen. P. X. Kelley, former commandant of the Marine Corps.
Both groups have issued numerous reports on American oil policy and have urged Congress to act quickly to reduce the demand for oil, increase supplies from reliable sources and reduce economic dependence on fossil fuels.
Thursday’s exercise, the organizers acknowledge, was a bit of a stunt to publicize the issues and nudge Congress and the presidential candidates.
All the former policy makers recruited for the cast got promotions, except Mr. Rubin. “Life can be cruel,” said he remarked.
Richard L. Armitage, deputy secretary of state in President Bush’s first term, moved up to secretary of state. Retired Gen. John P. Abizaid, former head of the Pentagon’s Central Command, played the chairman of the Joint Chiefs of Staff. John F. Lehman, secretary of the Navy in the Reagan administration, became secretary of defense. Gene Sperling, former national economic adviser to President Clinton, was the secretary of the Treasury. Philip D. Zelikow, executive director of the 9/11 commission, served as the fictional director of national intelligence.
The only leading participant not to have held a senior government post was Daniel Yergin, an expert on the oil industry and chairman of Cambridge Energy Research Associates.
The official surrogates sat in a mock-up of a White House situation room and considered the options for dealing with an uprising in Azerbaijan that had cut the flow of oil through the Baku-Tbilisi-Ceyhan pipeline. As oil prices rose past $110 a barrel, they discussed what the president should say and do. Ms. Browner, as the fictional energy secretary, suggested reimposing the national 55-mile-an-hour speed limit. The political advisers rejected that as an “eat your peas” proposal that would not go over well in Congress or with the public.
Surveying the financial markets, which were plunging as oil prices spiked, Mr. Rubin fell back on a favorite phrase as a top Wall Street executive and government official: “Markets go up and markets go down.”
Much of the discussion echoed the current debate over the run-up in real-world energy prices. “Is this a short-term spike or a long-term economic reality?” Mr. McCurry asked. No one had an answer.
When the group reassembled, it was a few months later, and the crisis had deepened. Iran had drastically cut its oil production in response to Western economic sanctions imposed because of its nuclear weapons program. The Venezuelan leadership of Hugo Chávez followed suit, driving prices beyond $150 a barrel. The Iranian nuclear program touched off talk of war. The military advisers urged redeployment of the bulk of America’s naval and air power to the Persian Gulf in anticipation of war, and urged reinstatement of the draft for young men and women.
Domestic policy advisers recommended limited releases from the Strategic Petroleum Reserve and mandatory fuel-saving measures, like gasoline rationing and limits to Sunday driving.
Mr. McCurry said the president realized that he had no good choices. “He knows he’s a one-term president because of this,” he said.
Robbie Diamond, president of SAFE, said the exercise demonstrated the economic and national security costs of the American dependence on foreign oil.
“Now they have the opportunity on Capitol Hill to truly rise above ideology and enact a comprehensive energy bill that meaningfully reduces our oil dependence,” he said. “Without measures that address both supply and demand, they have failed the American people.”
NY Times the third
November 2, 2007
Citing Oil Prices, Asia Starts Reducing Fuel Subsidies
By HEATHER TIMMONS
NEW DELHI, Nov. 1 — Consumers in Asia are feeling the heat of skyrocketing oil prices — which rose above $96 a barrel Thursday for the first time — as governments start rolling back subsidies that have kept costs for gasoline and other fuel artificially low.
China raised gasoline and diesel prices by up to 10 percent Wednesday in an effort to curb demand and ease pressure on refiners, who are being squeezed between the soaring value of crude oil and fixed prices for fuel.
In India on Thursday, the ministers of finance and petroleum met to discuss higher oil prices, and some economists and government officials there now think an increase in consumer prices is inevitable.
In Malaysia, the trade minister, Rafidah Aziz, told the local news agency Bermama that the country might have to raise prices soon.
Retail prices of petroleum-based products like gasoline, kerosene and diesel are highly subsidized in many Asian countries, in part to make them affordable to citizens who earn lower wages than in the developed world. Governments absorb the costs directly or pass them along to oil exploration and production companies. India, for example, estimates that it will pay 500 billion rupees, or $12.7 billion, in fuel subsidies in the fiscal year ending in March 2008.
Confronted with higher fuel prices, consumers often curtail spending on manufactured goods or travel, which in turn can cool the broader economy. Among populations with high poverty, fuel price increases threaten to cause civil unrest.
Oil prices are up more than 50 percent this year, and light crude oil for December delivery leaped more than 1 percent in electronic trading Thursday, to a record $96.24, before sliding back to close at $93.49 on the New York Mercantile Exchange.
China raised fuel prices to “ensure the supply of domestic oil products and the promotion of energy conservation,” the National Development and Reform Commission said in a statement Wednesday. Fuel has been in short supply in China, leading to rationing and long lines.
India, which has been trying to phase out fuel subsidies for several years, may be next.
Gasoline and diesel in India are subsidized but are also taxed up to 100 percent, while prices of kerosene and liquefied petroleum gas, or L.P.G., are kept very low to make them affordable to the lower and middle classes.
State-owned upstream oil companies like the Oil and Natural Gas Corporation absorb some of the cost. The remainder is passed along to refineries, and offset by “oil bonds” that the government issues to these refineries.
India’s current fuel subsidies “could be unsustainable in the long term,” said Abheek Barua, the chief economist for HDFC Bank in Mumbai.
In the short term, the Indian government has been able to absorb subsidies, in part because revenue from corporate taxes is strong and there is plenty of cash flowing into the country from foreign investment. “If oil touches $100 and moves up even further, by early next year some adjustment in retail prices is inevitable,” Mr. Barua said.
Global oil supplies are being strained by the rate of economic growth in Asia, and the problem is likely to increase, energy experts say. The Indian economy is growing about 9 percent a year, and China’s economy expanded at an annual rate of 11.5 percent in the third quarter.
The Indian government first said it would eliminate controls and subsidies of petroleum products in February 2002 and would phase out subsidies on cooking oil and kerosene out over several years. The jump in oil prices has made that impossible, however. In the annual budget guidelines issued in March, the finance minister, P. Chidambaram, said that subsidies on kerosene and cooking gas would be extended indefinitely.
Reliance Industries, an Indian energy conglomerate, recently found large quantities of natural gas near the east coast of the country, raising hopes that India might become less reliant on imports in the future.
“Someone has to give serious thought to whether there is the potential to reduce dependency on crude oil,” said Rahul Singh, an analyst with Citigroup in Mumbai.
