How deep and how far do we really want to drill for oil?
Mars is Shell Oil's $ 1.2 bn baby of an oil rig, an ocean-going vessel whose steel legs stretch through 2,940 feet of
azure water to the sea floor. From the ocean bottom to the top of the rig, Mars stands twice as high as the Sears
Tower. The rig sucks more than 193 mm cf of natural gas and 183,000 barrels of oil out of the seabed each day and
snakes it through pipelines that supply far-flung refineries, such as Tosco's Wood River, Illinois, facility near St.
Louis, which supplies gasoline to the Chicago market.
Technology, propelled by the nation's thirst for more oil and gas, has pushed oil companies farther into the central and western Gulf of Mexico in an effort to plumb waters more than 7,000 feet deep. But how deep and how far, some experts wonder, do we really want to go?
Record oil-industry profits from high gasoline prices the past two years have helped the big oil companies amass huge capital budgets for exploration. Couple those with generous incentives offered by the Bush administration's energy plan, experts say, and the country appears to be poised for a drilling binge of epic proportions.
"I don't agree that we should go and drill holes in every part of the earth," said Hamid Arastoopour, professor of energy, environment and economics at the Illinois Institute of Technology. "There are places that we have to really conserve, like the Arctic National Wildlife Refuge."
Yet that's the very place the oil industry may drill next. The Bush administration -- and the oil industry -- won a
victory in the House of Representatives: approval of the administration's proposal to allow oil and gas exploration
on a 2,000-acre swath of the wildlife refuge.
While the measure faces uncertain prospects in the Democrat-controlled Senate, the oil industry is pushing ahead with other ambitious plans. In particular, oil companies are looking to the eastern Gulf of Mexico, where, over the protests of Florida Gov. Jeb Bush and environmentalists, a 1.47 mm-acre stretch of water could be leased for drilling in December.
In fact, oil and gas companies more than doubled their capital spending in North America last year. Exploration activity jumped 72 %, to $ 36.2 bn, according to the Andersen consulting group. In the rest of the world, exploration increased only 1 %, to $ 44.9 bn.
Underlying this push for new close-to-home oil sources were the chronic supply shortages of the past two years, when $ 30-a-barrel oil, $ 2.50-a-gallon gasoline and record natural gas prices incited consumer uproar. In announcing its package of energy-industry exploration incentives in May, the Bush administration cited the heavy toll of high energy prices on consumers, businesses and the economy in general as reasons for its aggressive approach.
Only two months later, the energy crisis appears, by some measures, to be over, motorists nationwide on average paid $ 1.39 for a gallon of regular unleaded gasoline, with Chicago prices averaging a penny less than the rest of the country, according to the AAA Chicago Motor Club. Crude oil prices dropped so quickly that OPEC said that it would cut production for the third time this year.
The sudden respite from the energy crunch has some experts rethinking long-term energy needs. On balance, most
believe that it's prudent to mount an exploration push now, while prices are stable, to plan for future supply in the
notoriously cyclical energy business. They are concerned that the US is importing 60 % of its oil, and suggest that
the country is becoming more vulnerable to potential supply disruptions from unrest in the Middle East.
But some experts are arguing for moderation as well -- that while it may be wise to ensure future supply and less dependence on foreign oil, it is not necessary to plop down oil and gas wells in the Great Lakes, the Arctic National Wildlife Refuge, off the coast of Florida and in other environmentally sensitive areas.
Severin Borenstein, director of the University of California's Energy Institute, argues that drilling for more domestic oil would have a negligible impact on the US gasoline supply. "There isn't any oil crisis," Borenstein said. "It's hard to say there is even an oil shortage. The price of oil adjusted for inflation is at fairly moderate to low levels by historical standards. The futures market is the best indicator of that, with the delivery price for a barrel of oil in 2006 at $ 21 a barrel."
More directly to blame for the past year's supply shocks, many experts contend, are pipeline disruptions and the
complicated logistics of making and distributing federally required "boutique" gasoline blends for various markets.
In a report this year, the Federal Trade Commission concluded that some oil companies deliberately withheld supplies
of the special fuels to jack up prices.
From Borenstein's point of view, it does make sense to take measures to ensure a steady supply of natural gas, a North American commodity that is rapidly becoming the fuel of choice for the nation's electricity needs. Substantial quantities of natural gas are available to meet the need on Alaska's North Slope and in Alaska's Prudhoe Bay, sites where oil drilling is already occurring and which stir less environmental controversy than the wildlife refuge.
BP, operator of the Prudhoe Bay field, estimates there are 47 tcf of natural gas stranded underground, with no place to go for lack of a pipeline. "We don't need a drilling policy, we need a pipeline policy," Borenstein said. "The gas is trapped there, and it can't be brought to market until a pipeline is built."
Ed Kelly, director of research for Cambridge Energy Research Associates, cited the rapid depletion of natural gas wells and the pressure of an economic recovery on supply as reasons to begin additional drilling for natural gas now. "When the economy rebounds, natural gas supplies will be tighter and prices will go up," said Kelly, who believes the proposed drilling in the wildlife refuge could be done in an environmentally sound manner.
Rep. Sherwood Boehlert, a moderate Republican from New York, has been outspoken against the Bush administration's
efforts to open vast, virgin areas of the US to drilling, including the wildlife refuge. Boehlert opposed the Bush
administration's initial plan to allow drilling in the eastern Gulf of Mexico off Florida's coast, and joined other
members of the House in voting it down.
Originally a Clinton administration proposal, the first plan called for drilling in a 5.9 mm-acre site. The new proposal has been scaled back to only a quarter of that size. Boehlert favours the compromise plan to lease some eastern Gulf waters for oil and gas exploration, which pushes the boundaries for drilling at least 100 miles from the Florida and Alabama shorelines.
"This new configuration comes closer to protecting Florida," Boehlert said. "I do think we need to do certain things to increase supply. The Gulf is an area that is generally open for oil drilling--it's not setting a precedent like going into the [Arctic wildlife refuge]."
Last month, the Senate approved the new lease plan by a strong margin. A conference committee is expected to resolve the difference in the House and Senate plans and allow the drilling. The industry believes that the western and central Gulf alone contain roughly 40 bn barrels of oil and gas. Only 10 bn have been found to date.
"This is a tremendous prize that we and the industry have been chasing," said Hugh Depland, a spokesman for BP in Houston. Shell, which is the biggest producer in the Gulf, extracts the equivalent of 450,000 bpd of oil and natural gas. BP is second, pumping about 250,000 bpd of oil out of the deep water. But two years ago, BP discovered the single largest field ever found in the Gulf: Crazy Horse, a 1.5 bn-barrel field in more than 6,000 feet of water. By 2007, BP plans to produce 750,000 bpd, just from discoveries already made, Depland said.
Relative to the Gulf of Mexico, the yield of oil and gas from the Great Lakes seems trivial. The Great Lakes are
believed to contain only about 82 bn cf of natural gas and 11 mm barrels of oil. The Great Lakes already have 13
directional wells, which are wells drilled from the shore, not on top of the water. Only about six are active.
The issue came to the fore earlier this year, when Michigan Gov. John Engler, a Republican, said he would consider lifting a moratorium on new drilling leases that he had himself imposed. The state legislature subsequently voted to lift it. The issue turned into a political football for environmental and energy interests, ultimately ending with Congress in June voting to block the US Army Corps of Engineers from issuing new leases.
Neither Shell nor BP are likely interested in mounting an exploration in the Great Lakes for such a relatively small deposit. Shell is more interested in pushing ahead into the eastern Gulf, while BP wants to press farther into the Alaska frontier. "The fact is that there is money to be made in the Great Lakes for the small local companies that drill there," said Lynn Walter, a professor ofgeological sciences at the University of Michigan. "But it is not the Gulf of Mexico or even" the Alaskan wildlife refuge.