The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  Hubbert was very pessimistic on the prospects for future supply. In tones reminiscent of the State Geologist of Pennsylvania in 1885, he warned that the era of oil would be only a brief blip in mankind’s history. In 1978 he predicted that children born in 1965 would see all the world’s oil used up in their lifetimes. Humanity, he said, was about to embark upon “a period of non-growth.”13

  WHY SUPPLIES CONTINUE TO GROW

  Hubbert used a statistical approach to project the kind of decline curve that one might encounter in some—but not all—oil fields, and then assume that the United States was one giant oil field. Hubbert’s followers have adopted that approach to global supplies. Hubbert’s original projection for U.S. production was bold and, at least superficially, accurate. His modern-day adherents insist that U.S. output has “continued to follow Hubbert curves with only minor deviations.” But it all comes down to how one defines “minor.” Hubbert got the date right, but his projection on supply was far off. Hubbert greatly underestimated the amount of oil that would be found—and produced—in the United States.

  By 2010, U.S. production was four times higher than Hubbert had estimated—5.9 million barrels per day versus Hubbert’s 1971 estimate of no more than 1.5 million barrels per day—a quarter of the actual number.14

  Critics point out that Hubbert left two key elements out of his analysis—technological progress and price. “Hubbert was imaginative and innovative in his use of mathematics in his projection,” recalled Peter Rose. “But there was no concept of technological change, economics, or how new resource plays evolve. It was a very static view of the world.” Hubbert also assumed that there was an accurate estimate of ultimately recoverable resources, when in fact it is a constantly moving target.

  Although he seemed a stubborn iconoclast, even a contrarian, Hubbert was actually a man of his times. He made his key projections during the 1950s, an era of relatively low, and flat, prices and a period of technological stagnation. He claimed that he had fully assumed innovation, including innovation that had not yet occurred. Yet the impact of technological change was missing from his projections. The mid-1960s marked the beginning of a new era in technological advance and capabilities.15

  Hubbert also insisted that price did not matter. Economics—the forces of supply and demand—were, Hubbert maintained, irrelevant to the finite physical cache of oil that can be extracted from the earth. Indeed, in the same spirit, those today who question the imminence of decline are often dismissed by peak adherents as “economists”—even if they are in fact geologists. Yet it is not clear why price—with all the messages it sends to people about allocating resources and making choices and developing new technologies—would apply in so many other realms but not in terms of oil. Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply. The often-cited “proved reserves” are not just a physical concept, accounting for a fixed amount in the “storehouse.” They are also an economic concept—how much can be recovered at prevailing prices—and they are booked only when investment is made. And they are a technological concept, for advances in technology will take resources that were not physically accessible or economically viable and turn them into recoverable reserves.

  The general history of the oil and gas industry, as with virtually all industries, is one of technological advance. New technologies are developed to identify new resources and to produce more from existing fields. For instance, in a typical oil field, only about 35 to 40 percent of the oil in place is produced using traditional methods. Much technology is being developed and applied to raising that recovery rate. That includes the introduction of the digital oil field of the future. Sensors are deployed in all parts of the field, including in the wells. This dramatically improves the clarity and comprehensiveness of data and the communication between the field and a company’s technology centers, and allows operators to utilize more powerful computing resources to process incoming data. If widely adopted, the “digital oil field” could also make it possible to recover, worldwide, an enormous amount of additional oil—by one estimate, an extra 125 billion barrels of oil—almost equivalent to Iraq’s reserves.16

  THE SUPERGIANT

  In the 2000s, the imminent decline of output from Saudi Arabia became a central tenet of peak oil theory. The argument focused on the supergiant Ghawar field, the largest oil field in the world. The first well was drilled in Ghawar in 1948, ten years after the original discovery of oil in Saudi Arabia. It took decades to really understand the extent of this extraordinary field, made more complicated by the fact that it is really a network of five fields, which have been developed over decades owing to Ghawar’s colossal size. The latest segment went into development only in 2006.17

  The contention that Saudi Arabia’s overall production is in decline is somewhat odd, for Saudi capacity has increased in recent years. After more than sixty years, Ghawar is still, in the words of Saudi Aramco President Khalid Al-Falih, “robust in middle age.” Investment requirements are going up. But at a production rate of over 5 million barrels per day, Ghawar continues to be highly productive. The application of new technologies continues to unlock resources and open up new horizons.18

  DISCOVERIES VERSUS ADDITIONS

  As proof for peak oil, its advocates argue that the discovery rate for new oil fields is declining. But this obscures a crucial point. Most of the world’s supply is not the result of discoveries, but of reserves and additions. When a field is first discovered, very little is known about it, and initial estimates are limited and generally conservative. As the field is developed, better knowledge emerges about its reserves and production. More wells are drilled, and with better knowledge, proven reserves are very often increased.

  The difference in the balance between discoveries and revisions and additions is dramatic. According to one study by the United States Geological Survey, 86 percent of oil reserves in the United States are the result not of what is estimated at time of discovery but of the revisions and additions that come with further development. The difference was summed up by Mark Moody-Stuart, the former chairman of Royal Dutch Shell, recalling his own days as an exploration geologist out in the field: “We used to joke all the time that much more oil was discovered by the petroleum engineers, developing and expanding the fields, than by us explorers, who actually found the fields.”

  The examples provided by many fields and basins point to another fundamental weakness of Hubbert’s argument and its application to the entire world. In 1956 Hubbert drew a bell-shaped curve; the decline side would be the mirror image of the ascending side. Indeed, he made it so sharp on both sides that for some years it was called “Hubbert’s Pimple.” Some oil fields do decline in this symmetrical fashion. Most do not. They eventually do reach a physical peak of production and then often plateau and more gradually decline, rather than falling sharply in output. As one student of resource endowments has observed, “There is no inherent reason why a curve that plots the history of production of a type of fossil energy should have a symmetrical bell-shaped curve.”19

  The plateau is less dramatic. But, based on current knowledge, it is a more appropriate image for what is ahead than the peak. And the world is still, it would seem, many years away from ascending to that plateau.

  HOW MUCH OIL?

  At the end of 2009, after a year’s worth of production, the world’s proved oil reserves were 1.5 trillion barrels, slightly more than were at the beginning of that year. That means that the discoveries and revisions and additions were sufficient to replace all the oil that was produced in 2009—a pattern common to many years. Replacing that production is one of the fundamental jobs of the worldwide oil industry. It is challenging and requires enormous investment—and a long time horizon. Work on a field whose reserves were judged proved in 2009 might have begun more than a decade earlier. Replacing reserves is even more challenging because of a natural
decline rate in oil fields—on a worldwide basis, about 3 percent.

  What are the prospects for the future? One answer is drawn from an analysis using a database that includes 70,000 oil fields and 4.7 million individual wells, combined with existing production and 350 new projects. The conclusion is that the world is clearly not running out of oil. Far from it. The estimates for the world’s total stock of oil keep growing.

  The world has produced about 1 trillion barrels of oil since the start of the industry in the nineteenth century. Currently, it is thought that there are at least 5 trillion barrels of petroleum resources, of which 1.4 trillion is sufficiently developed and technically and economically accessible to count as proved plus probable reserves. Based upon current and prospective plans, it appears the world liquid production capacity should grow from about 93 million barrels per day in 2010 to about 110 mbd by 2030. This is about a 20 percent increase.20

  But—and there are many buts—beginning with all the political and other aboveground risks that have been enumerated earlier. Moreover, attaining such a level in 2030 will require further development of current and new projects, which in turn requires access to the resources. Without access, the future supply picture becomes more problematic.

  WORLD LIQUIDS PRODUCTIONS* 1946–2011

  Millions of barrels per day

  Source: IHS CERA, EIA

  Achieving that level also requires the development of more challenging resources and a widening of the definition of oil to include what are called non-traditional or unconventional oils. But things do not stand still. With the passage of time, the unconventionals become, in all of their variety, one of the pillars of the world’s future petroleum supply. And they help explain why the plateau continues to recede into the horizon.

  12

  UNCONVENTIONAL

  H. L. Williams was both a spiritualist and a shrewd businessman. In the 1880s he began to organize séances on a ranch he had bought south of Santa Barbara, California, which he had named Summerland. He also went into real estate. He wrote other spiritualists, promising that Summerland could be “a beacon light to the world” and that there they could “better both the spiritual and material condition of mankind.” To make it easy for prospective members to gather for séances and summer camps, he sold them lots to build their own cottages for $25 each. But soon the lots were being feverishly resold for up to $7,500 each. Oil had been discovered beneath the lots.

  Williams jumped into the oil business. The most productive wells were the ones closest to the beach. Why not go right out into the ocean? Williams built a series of piers and began drilling into the seabed.

  Unfortunately, the offshore drilling did not work out that well, and production petered out within a decade or so. The piers were left derelict for many decades until they were finally washed away in a fierce storm. Yet while Summerland never fulfilled Williams’s great vision, he had achieved something else. He had pioneered offshore drilling.1

  Today about 30 percent of total world oil production—26 million barrels per day—is produced offshore, in both shallow and deep waters. The total global deepwater output in 2010 was almost six million barrels per day— larger than any country except for Saudi Arabia, Russia, and the United States. Altogether, deepwater production could reach 10 million barrels by 2020.

  Deepwater production is one of the building blocks of what is known as unconventional supply. These unconventionals are a varied lot. What joins them is that their development depends on the advance of technology. The unconventionals are an important part of today’s petroleum supply and will become even more important in the future.

  LIQUIDS WITH GAS

  The biggest source of nonconventional oil is something that has been part of the energy business for a long time, though not very well known. These are the liquids that accompany the production of natural gas. Condensates are captured from gas when it comes out of the well. Natural gas liquids are separated out when the gas is processed for injection into a pipeline. Both are similar to high-quality light oils.

  Their output is increasing very fast, owing to the growth of natural-gas production worldwide and the building of new facilities in the Middle East. In 2010 these gas-related liquids added up to almost 10 million barrels per day. By 2030 they could be over 18 million barrels per day, roughly 15 percent of total world oil—or liquids—production.2

  OUT OF SIGHT OF LAND

  In the first decades of the twentieth century, following the early efforts of H. L. Williams and other pioneers, oil had continued to move offshore, but offshore had been limited to platforms in lakes in Texas and Louisiana and in Venezuela’s oil-rich Lake Maracaibo.

  Drilling out in the ocean on freestanding platforms, subject to wave pressures and the tides, was an altogether different matter. After World War II, an independent company named Kerr-McGee decided to go out to sea because it figured that its best shot at “real class-one” acreage was offshore—mainly because the larger companies thought drilling offshore, out of sight of land, was probably impossible.

  On a bright Sunday morning in October 1947, working ten and a half miles offshore with a cobbled-together little flotilla of surplus World War II ships and barges, Kerr-McGee struck oil. “Spectacular Gulf of Mexico Discovery,” headlined Oil and Gas Journal. “Revolutionary” was its judgment.3

  An extended legal battle between the federal government and the coastal states, which went all the way up to the Supreme Court, slowed the development of the offshore industry in the United States. The fight was over turf—that is, as to whom the waters “belonged” and thus to whom would go the royalties and tax revenues. One result was the invention of the concept of the outer-continental shelf—the OCS—which was deemed the exclusive province of the federal government. The coastal waters of the states extended out just three miles—except in the cases of Florida and Texas, both of which had the heft to wrest nine miles from their struggle with Washington. By the end of the 1960s, the shallow waters of the offshore were starting to become a significant source of oil.

  In January 1969 drillers at work on a well off the coast of Santa Barbara, not far from the original Summerland play, lost control. The well suffered a blowout, an uncontrolled release of oil. The well itself was capped. But then oil started to leak through a nearby fissure, creating an oil spill that blackened local beaches, put a halt to new drilling off the coast of California, and increased offshore regulation. The ooze on the beaches—and on oil-soaked birds—became one of the emblematic images in the nation’s new environmental consciousness. Santa Barbara also marked the beginning of a never-ending battle over offshore drilling that pitted environmental activists against oil and gas companies.

  THE NORTH SEA AND THE BIRTH OF NON-OPEC

  Yet nine months after Santa Barbara, toward the end of 1969, a new era opened in waters much harsher and challenging than those found off Santa Barbara—the stormy North Sea, between Norway and Britain. By then, oil companies had drilled 32 expensive wells in the Norwegian sector of the North Sea. All had come up dry. One of the companies, Phillips Petroleum, after drilling yet another dry hole, was about to give up and go back home to Bartlesville, Oklahoma. But then it decided to drill one more well—since it had already prepaid for the drilling rig. At the end of October 1969, it struck the Ekofisk oil field. It turned out to be a giant.

  The offshore industry developed with remarkable speed—spurred by the 1973 oil embargo and the quadrupling of price, and by the push by Western governments for the development of secure, new sources of oil. Giant platforms, really mini-industrial cities, were built, some of them hundreds of miles out at sea. These structures, and the infrastructure that supported them, had to be designed to withstand winds up to 130 miles per hour and the terrifyingly destructive “100 Year Wave.” The North Sea came on line extraordinarily fast. By 1985 the North Sea—British and Norwegian sectors combined—was producing 3.5 million barrels per day, and it had become one of the pillars of what had already become kn
own as “non-OPEC.”

  TO THE FRONTIER

  The North Sea was still in relatively shallow waters. In the United States, it seemed as though the “offshore” had gone about as far as it could—into depths of 600 feet of water, at the edge of the continental shelf. Beyond that the seabed falls away sharply, to depths of thousands of feet, which seemed well beyond the reach of any technology. Despondent about what seemed bleak future prospects, oilmen began to refer to the Gulf of Mexico as the “dead sea.”

  But a few companies were trying to find a way to push beyond the shallow waters—both in the Gulf of Mexico and elsewhere, most notably the Campos Basin off the northeast coast of Brazil. Petrobras, Brazil’s state-owned oil company, was charged with reducing the nation’s heavy dependence on petroleum imports. In 1992, after years of work, Petrobras broke the deepwater barrier by successfully placing the Marlim platform in 2,562 feet of water.

  Meanwhile, Shell Oil was using new seismic technologies to identify promising prospects in the deeper waters of the Gulf of Mexico. In 1994 its Auger platform—which towered twenty-six stories above the sea—went into production in 2,864 feet of water. It had taken nine years from the acquisition of the leases and an expenditure of $1.2 billion, and even within Shell it had been regarded as a huge gamble. Yet the resource proved much richer than anticipated, and eventually the complex was producing over 100,000 barrels a day. Augur opened up the deepwater frontier in the Gulf of Mexico and turned it into a global hot spot of activity and technological advance. The federal government’s lease sales for the deep waters of the Gulf of Mexico led to intense competitions for prospects among companies. The bonus payments and royalties made it a major revenue source for the government.4