Thursday, October 03, 2013

As US Oil Production Revives, New Vulnerabilities Appear

  • The expansion of US oil production is centered in a handful of states, and in particular two whose gains more than offset declines in two former production leaders.
  • For various reasons the West Coast has missed out on this revival, straining infrastructure and creating new vulnerabilities that should be addressed.
On the front page of today's Wall St. Journal I see that "US Rises To No. 1 Energy Producer." This news builds on a number of recent headlines such as, "US oil production reaches highest level in 24 years." Stories like these aren't as attention-grabbing as they were when this streak began more than a year ago, once shale oil production ramped up dramatically.  What occurred to me this time, however, was how different the current distribution of US oil output is than it was in the late 1980s.

A handful of states still account for the lion's share of US oil production. Then and now, Texas tops the list, exceeding its 1989 output by 37%. At nearly 2.6 million barrels per day (MBD) in the most recent reported month --140% above at its low point in 2007--its share of US oil production had grown to around 35% by June. However, beneath Texas  the list of top oil states has been jumbled in ways few would have anticipated two decades ago.

Alaska, California and Louisiana, the second-, third- and fourth-ranked producers in 1989, then supplied 41% of total US crude oil output. After decades of decline, the same three states now contribute just 17%, excluding production from the federal waters off Louisiana's coast.

Meanwhile, thanks to the development of the Bakken shale, North Dakota has jumped from the number  6 spot just five years ago to number two, eclipsing Alaska early in 2012.  Traditional mid-tier producers like Colorado, Oklahoma and New Mexico are also contributing to the overall US oil revival. This surge of highly productive drilling in roughly the middle third of the country, on top of a million-plus barrels per day from the Gulf of Mexico --mainly from deepwater rigs--has scrambled existing oil transportation arrangements. 
When onshore production in Texas and the rest of the mid-Continent shrank in the 1990s and 2000s, the region's pipeline network gradually evolved into the country's principal oil-import conduit. The growth of production in the federal waters of the Gulf of Mexico, which had reached 1.6 MBD at the time of the Deepwater Horizon accident in 2010 but subsequently declined to about 1.2 MBD, meshed well with that model.

Today's big challenge goes against that grain: moving the growing surplus of oil in the upper plains states to markets on the West, Gulf and East Coasts, increasingly by rail. Much of the turbulence we've seen in the US oil market  in the last two years reflects the delays inherent in realigning and expanding that network to accommodate newly abundant domestic supplies.

Yet on the other side of the Rockies, the picture looks very different. When I was trading crude oil for Texaco's west coast refining system in the late 1980s, balancing the crude oil surplus on the Pacific coast required shipping multiple tankers a month of Alaskan North Slope oil to the Gulf, where production was shrinking, and prompted the construction of a new pipeline to send surplus oil to east Texas over land. After two decades of decline from mature fields, along with moratoria on tapping new offshore fields, imports now make up roughly half of west coast refinery supply, even though regional petroleum demand is essentially back to 1989 levels. It remains unclear whether and when California will allow producers to tap the state's potentially game-changing oil resources in the Monterey shale deposit.

Barring further change, the regional nature of these shifts means that the energy security benefits accompanying the revival of US oil production are a party to which the West Coast has not been invited, or has perhaps declined the invitation. That's significant, because it leaves residents of California, Oregon, Nevada and Washington much more exposed to any disruptions in global oil trade, since the existing US Strategic Petroleum Reserve was never intended to provide coverage west of the Rockies. In this light, the appetite of west coast refiners for trainloads of Bakken and Eagle Ford crude looks strategic, rather than just a temporary response to market conditions.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

11 comments:

sathyam shonkho said...
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Geoffrey Styles said...

sathyam shonko,
If you want to advertise on this site, please contact me. All comments containing unauthorized advertising will be deleted.

Grace Monteiro said...

the increase in oil production may have its disadvantages but there are some advantages that follow such as increased employment

Geoffrey Styles said...

Grace,
To be sure. And it looks like refiners on the west coast are gearing up to take advantage of the crude surge east of the Rockies: http://online.wsj.com/articles/california-finally-to-reap-frackings-riches-1412700677?mod=djem_EnergyJournal

Christopher Pelser said...

We need to look for alternatives sources of energy. Oil is by far the most economical at the moment but in the long run we are busy doing serious damage to the planet and need to find a substitute because it is a non-renewable recourse which will run out at some point. All the millions of dollars which are benefiting the oil rich countries needs to be ploughed back into research and development of sustainable energy solutions. There is a lot of promise being shown in nuclear as well as solar energy. The human race has achieved amazing things and with the correct effort and funding who knows what else we can do.

Farai Musekiwa 14296064 said...

It may seem to be very beneficial when oil production is increasing but we have to know everything comes with its consequences.In the meantime we are reaping the benefits that is increased employment thus improved standards of living because of the increased GDP but in the long-run it has repercussions like we will be destructing the ecosystem that may result in global warming. So we have bear it.

Irvin Njerekai said...

Although increasing oil production has massive benefits, its not without its costs. North Dakota, which has jumped to second place from sixth place according to volumes of oil produced in the United States. Indeed the state has seen massive increases in employment levels and improvements in infrastructure. However, the increase in production has also caused problems, for example, air pollution has risen. It is also a fact that these natural resources will be used up as has been witnessed in other states. Therefore more research needs to be channeled to finding alternative sources of energy for the globe's ever increasing demand.

Anonymous said...

We need to look for alternatives sources of energy. Oil is by far the most economical at the moment but in the long run we are busy doing serious damage to the planet and need to find a substitute because it is a non-renewable recourse which will run out at some point. All the millions of dollars which are benefiting the oil rich countries needs to be ploughed back into research and development of sustainable energy solutions. There is a lot of promise being shown in nuclear as well as solar energy. The human race has achieved amazing things and with the correct effort and funding who knows what else we can do.

Sahil Sook said...

Although it seems great that the US is the number one energy producer, we must not forget that we are slowly running out of oil. Therefore the US now has a significant advantage over the rest of the world. The oil industry has been a source of much advanced technology and many new products that have changed our lives for the better.

Geoffrey Styles said...

Sahil,
Your basic premise isn't borne out by the statistics. US proved oil reserves (a measure of oil available for future production, and a much higher accounting standard than the "resources" figures often cited) are now at their highest level in over 30 years.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCRR01NUS_1&f=A

More fundamentally, while oil is certainly a finite resource on human timescales, we are now able to produce it directly from source rock, rather than only the conventional reservoirs that have been depleting and becoming harder to find. And recovery rates from source rock (shale) are low but still increasing.

All of which suggests that Sheik Yamani's oft-cited remark about the stone age not ending due a lack of stones seems even more applicable to oil than ever.

J-C Fitchat said...

The U.S. should look to furthering its usage of alternative sources and should spill this over to the developing nations. Oil is running out and developed nations should be the leaders in converting to green energy. Very good article though.