Tuesday, June 08, 2004

The Next North Sea?
Another posting from January, discussing the impact of declining oil production in the US and other mature non-OPEC regions:

US energy policy seems to lack a fundamental vision for what our federal energy funding should be buying us. I suggest that the goal should be to expand our energy options to keep our reliance on hydrocarbons from the Middle East from growing much further than it has. When we experienced our first energy crisis in the 1970s, this goal seemed clear. We lost sight of it when new non-OPEC supplies, from places like Alaska, the North Sea, the Gulf of Mexico and West Africa bailed us out. But we should have always seen that the bailout was only temporary.

Now the North Slope is deep in decline, producing less than half what it did in 1988. The North Sea is entering decline, and Gulf of Mexico production is only propped up by new technology allowing access to deeper water depths. Today it is Russia and the Caspian Sea region that appear as the bright hopes for keeping OPEC at bay for the next 20 years or so. But sooner or later the geological fact of the heavy concentration of oil reserves in the Middle East will become destiny, and there won't be another North Sea or Caspian waiting in the wings.

So let's not waste the next two decades that Russia and the Caspian can give us. It will take that long to make the transition to ways to produce and use energy that will make us less dependent, whether it's hydrogen, renewables (not alcohol--see Monday's post) or something more exotic.

But we can't just rely on foreign producers to limit the power of OPEC; we need to slow the decline of our own production, to preserve some leverage in the oil markets. It won't be easy. We have to begin with the inescapable truth that the US--at least the "lower 48"--is the most heavily explored and produced petroleum region in the world. Since Col. Drake's first well in PA in 1857, we have produced 80-90% of the oil that current technology can exploit. That amounts to about 200 billion barrels of oil, putting the US in a very exclusive club indeed; we were the world's Saudi Arabia before oil was ever found in the Kingdom.

While those days are past, it is hardly pointless--as some suggest--to try to find more oil here and to bring on production from areas currently off limits (e.g. offshore Florida.) Despite great improvements in oilfield technology, we still need new volumes to offset the severe decline from oilfields that have been producing for 20 or 30 years. Lifting environmental and land use restrictions on access to such reserves could also be linked directly to more funding for alternatives to oil, or to higher efficiency standards for cars.

The biggest challenge to slowing the decline of US oil production is that the oil industry sees much more attractive opportunities elsewhere, and has shed thousands of excellent jobs in the US in pursuit of a major geographical realignment of focus. Just watch the excitement Libya will generate once we drop sanctions.

Can we make investment in smaller, riskier US oil opportunities attractive, again? Tax breaks, accelerated depreciation, environmental offsets, and a host of other low-cost options could help enormously, but all would require a revised "sniff test" concerning "corporate welfare." That won't be easy in the current political climate, but the results could be extremely helpful while we wait for the Hydrogen Economy.

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