Oil boom pro­vides new edge for U.S. in en­ergy, diplo­macy

Na­tion ex­pected to sur­pass Saudi Ara­bia, Rus­sia in 2018 out­put.

Austin American-Statesman - - FRONT PAGE - Clif­ford Krauss ©2018 The New York Times

A sub­stan­tial rise in oil prices in re­cent months has led to a resur­gence in U.S. oil pro­duc­tion, en­abling the coun­try to chal­lenge the dom­i­nance of Saudi Ara­bia and dampen price pres­sures at the pump.

The suc­cess has come in the face of ef­forts by Saudi Ara­bia and its oil al­lies to un­der­cut the shale drilling spree in the United States. Those strate­gies back­fired and ul­ti­mately ended up ben­e­fit­ing the oil in­dus­try.

Over­com­ing three years of slump­ing prices proved the re­siliency of the shale boom. En­ergy com­pa­nies and their fi­nan­cial back­ers were able to weather mar­ket tur­moil — and the ma­neu­vers of the global oil car­tel — by ad­just­ing ex­plo­ration and ex­trac­tion tech­niques.

Af­ter a painful shake­out in the in­dus­try that in­cluded scores of bank­rupt­cies and a sig­nif­i­cant loss of jobs, a stead­ier shale-drilling in­dus­try is aris­ing, an­chored by bet­ter-fi­nanced com­pa­nies.

With the price of West Texas in­ter­me­di­ate crude above $65 a bar­rel, a level not seen in al­most three years, the United States is be­com­ing a dom­i­nant pro­ducer. It is able to out­flank com­peti­tors in sup­ply­ing grow­ing global mar­kets, par­tic­u­larly China and In­dia, while slash­ing im­ports from the Middle East and North Africa.

This year, the United States is ex­pected to sur­pass Saudi Ara-

bia and to ri­val Rus­sia as the world’s leader, with record out­put of 10 mil­lion bar­rels a day, ac­cord­ing to the In­ter­na­tional En­ergy Agency.

“This is a 180-de­gree turn for the United States and the im­pacts are be­ing felt around the world,” said Daniel Yer­gin, an eco­nomic his­to­rian and the au­thor of “The Prize: The Epic Quest for Oil, Money and Power.” “This not only con­trib­utes to U.S. en­ergy se­cu­rity but also con­trib­utes to world en­ergy se­cu­rity by bring­ing new sup­plies to the world.”

At the same time, the United States is be­com­ing a ma­jor ex­porter of nat­u­ral gas, another out­growth of the shale revo­lu­tion, un­der­cut­ting Rus­sian en­ergy dom­i­nance over Eastern Europe.

The im­prov­ing en­ergy pic­ture comes as the Trump ad­min­is­tra­tion is at­tempt­ing to in­crease off­shore drilling and loosen other reg­u­la­tions on fos­sil fuel devel­op­ment. But just as the surge in oil and gas pro­duc­tion in shale fields dur­ing the Barack Obama ad­min­is­tra­tion had lit­tle to do with Wash­ing­ton, the cur­rent rise is the re­sult of pri­vate com­pa­nies re­spond­ing to global mar­kets.

Shale fields can be de­vel­oped rel­a­tively quickly and at mod­est cost rel­a­tive to the gi­ant projects, whether on land or off­shore, that were once fa­vored by big oil com­pa­nies.

That makes it eas­ier to turn in­vest­ment spig­ots on or off to ad­just to mar­ket fluc­tu­a­tions. Com­pa­nies like Exxon Mo­bil and Chevron are putting in­creas­ing amounts of cap­i­tal in shale fields, par­tic­u­larly in West Texas and New Mex­ico.

The re­sults go far be­yond the eco­nomic, of­fer­ing Wash­ing­ton strate­gic weapons once un­think­able.

The United States and its al­lies now have a sup­ply cush­ion at a time when po­lit­i­cal tur­moil in Venezuela, Libya and Nige­ria threat­ens to in­ter­rupt flows to mar­kets.

Only a few years ago, such threats — along with a re­cent pipe­line fail­ure in the North Sea and storms in the Gulf of Mex­ico — would have sent the price of crude soar­ing. In­stead, the rise has been muted, and gaso­line at the pump re­mains be­low $2.60 a gal­lon across most of the United States.

The new en­ergy power also re­lieves pres­sure on Wash­ing­ton to act mil­i­tar­ily if ten­sions be­tween Iran and Saudi Ara­bia break out into war. And it gives Wash­ing­ton the lee­way to ap­ply sanc­tions on other pro­duc­ers — as it has in Rus­sia, and may in Iran or Venezuela — with far less risk to the global econ­omy.

It is a strik­ing con­trast to the 1970s, when Arab oil em­bar­goes forced mo­torists to line up for blocks to fill their tanks and the econ­omy went into a tail­spin. Even more re­cently, dur­ing the pres­i­dency of Ge­orge W. Bush, do­mes­tic oil out­put was de­clin­ing so rapidly that the coun­try set a course to re­place oil with bio­fu­els such as ethanol.

Many en­vi­ron­men­tal­ists ar­gue that by in­creas­ing oil and gas sup­plies and low­er­ing prices for con­sumers, shale drilling is ex­tend­ing the life of fos­sil fu­els to the detri­ment of the en­vi­ron­ment and the devel­op­ment of cleaner en­ergy.

The shale drilling revo­lu­tion has re­made the global en­ergy mar­ket, with im­ports from mem­bers of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries plung­ing by 20 per­cent from late 2016 to late 2017. At the same time, ex­ports rose by hun­dreds of thou­sands of bar­rels a day.

Noth­ing like the cur­rent sit­u­a­tion was fore­seen in late 2014, when ris­ing do­mes­tic pro­duc­tion be­gan weigh­ing on global oil prices.

In re­sponse, Saudi Ara­bia led OPEC in a new di­rec­tion. In­stead of throt­tling back to sup­port prices as the car­tel had done so of­ten, it left the mar­ket alone and even in­creased pro­duc­tion for a time.

Prices fell be­low $40 a bar­rel, as the Saudis and their al­lies hoped to drive U.S. op­er­a­tions out of busi­ness by mak­ing shale drilling un­eco­nom­i­cal. U.S. ex­plo­ration quickly dropped, but the price squeeze made com­pa­nies more in­no­va­tive in the use of drilling tech­nolo­gies, ro­bot­ics and sen­sors to max­i­mize out­put and re­duce costs.

While scores of smaller com­pa­nies went out of busi­ness, the sur­vivors length­ened hor­i­zon­tal wells to yield more oil, and used clever hedg­ing and drilling strate­gies to max­i­mize prof­its even when prices slumped.

The re­sponse sur­prised the global oil com­mu­nity. OPEC, Rus­sia and al­lied pro­duc­ing coun­tries changed course and be­gan cut­ting back again in 2016.

“OPEC missed the point,” said René Or­tiz, a for­mer OPEC sec­re­tary-gen­eral and for­mer Ecuadorean en­ergy min­is­ter. “They thought they could re­cover the U.S. mar­ket by bring­ing the prices down. Now the U.S. has gained the lead­ing po­si­tion in the world oil mar­ket re­gard­less of what OPEC does.”

“This dis­place­ment of Saudi oil, Nige­rian oil, Libyan oil and Venezue­lan oil,” Or­tiz con­cluded, “was never an­tic­i­pated.”

A week ago, OPEC lead­ers met in Oman to dis­cuss a prob­a­ble ex­ten­sion of pro­duc­tion cuts into 2019 to sup­port prices. Their big­gest ob­sta­cle is the United States.

Tech­no­log­i­cal ad­vances that un­lock oil from tight rock such as shale has led to a drilling frenzy en­abling a dou­bling of out­put in a decade, trans­form­ing un­likely places such as North Dakota and New Mex­ico into world-class petroleum hubs.

Pipe­lines are be­ing built across Texas to serve ports where oil can be pumped onto tankers headed for China, In­dia and other mar­kets.

Do­mes­tic pro­duc­tion last year av­er­aged 9.3 mil­lion bar­rels a day, and the En­ergy De­part­ment projects that the fig­ure will climb to 10.3 mil­lion bar­rels a day this year, sur­pass­ing the record set in 1970.

In the mean­time, since a 40-year ex­port ban was lifted in 2015, ex­ports of U.S. oil have risen to roughly 2 mil­lion bar­rels a day — more than many OPEC mem­bers.

The de­part­ment projects an ad­di­tional in­crease in do­mes­tic pro­duc­tion of 500,000 bar­rels a day in 2019.

Con­cerns over cli­mate change as well as the grow­ing pop­u­lar­ity of elec­tric cars and the even­tual ag­ing of the best shale fields will prob­a­bly curb pro­duc­tion and de­mand over the next few decades. But in the short term, the boom has changed the land­scape.

The En­ergy De­part­ment projects that the re­cent surge will hold the price of Brent crude, the global bench­mark, to $60 a bar­rel in 2018 and $61 a bar­rel in 2019 — a mod­est in­crease from $54 last year. (The Brent price rose above $70 a bar­rel this month, but few an­a­lysts see a re­turn to $100-a-bar­rel oil.)

The emerg­ing order in the en­ergy realm is a sta­ble bal­ance of power. Saudi Ara­bia, which es­sen­tially runs OPEC, has put a floor un­der the oil price — prob­a­bly around $50 a bar­rel — with its lim­its on out­put and ex­ports over the last four years.

But now the United States, by the sheer force of its pro­duc­tion, the supremacy of its tech­nol­ogy, and an un­matched pipe­line, re­fin­ery and stor­age struc­ture, has put a ceil­ing to the price.

Experts note that when oil climbs to $60 a bar­rel and higher, as it has lately, a drilling rush com­mences — the na­tional rig count has climbed by over a third in the last year — promis­ing to re­fill do­mes­tic and even global en­ergy in­ven­to­ries. Only a ma­jor war or other disruption is likely to send prices soar­ing.

“We have all suf­fered these de­pressed prices over the last two years and we are ex­cited to see the new prices and we will re­spond ac­cord­ingly,” said Har­ald Jor­dan, vice pres­i­dent for en­gi­neer­ing at Peak En­ergy, a Colorado-based pro­ducer. “You will see rig ac­tiv­ity con­tinue to in­crease.”


A pump­jack stands on the out­skirts of Mid­land. Af­ter a painful shake­out in the oil and gas in­dus­try that in­cluded scores of bank­rupt­cies and a sig­nif­i­cant loss of jobs, a stead­ier shale-drilling sec­tor is aris­ing, an­chored by bet­ter-fi­nanced com­pa­nies.


The Pat­ter­son 298 drilling rig in Men­tone, which went into ser­vice at the start of 2015, was the first drilling rig in Texas to be fu­eled solely by nat­u­ral gas. At the time, U.S. ex­plo­ration was fall­ing due to a deep slump in prices, but the squeeze made com­pa­nies more in­no­va­tive in the use of drilling tech­nolo­gies, ro­bot­ics and sen­sors to max­i­mize out­put and re­duce costs.


Work­ers stand on the plat­form of a frack­ing rig in the Per­mian Basin oil field in Mid­land in Jan­uary 2016, when crude oil plum­meted be­low $27 a bar­rel. The price of West Texas in­ter­me­di­ate crude is now above $65 a bar­rel.

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