Friday, September 8, 2006

A year and a week after Hurricane Katrina ravaged oil and gas production in the Gulf of Mexico, Chevron (the second-largest oil company in the United States) and two of its partners announced a deepwater discovery in the Gulf that will generate between 3 billion and 15 billion barrels’ worth of oil and gas reserves. Industry experts said the discovery will likely prove to be the largest in the United States since oil was found nearly 40 years ago in Alaska’s Prudhoe Bay.

In an industry well known for its “gigantism,” and increasingly so in recent years, the breakthrough in the Gulf of Mexico is stunning. Sounding like an Olympics press release summarizing the performance of American swimmers, Chevron boasted in its announcement that “more than a half-dozen deepwater world records [were] set,” culminating in the drilling of the Jack #2 well.

“This is frontier stuff,” Daniel Yergin, the author of “The Prize: The Epic Quest for Oil, Money and Power” and the president of Cambridge Energy Research Associates, told the New York Times. “This would have been unthinkable 10 years ago, but the technology keeps advancing.” His firm has estimated that production in the Gulf’s deepwater area could reach 800,000 barrels a day within seven years. Crude-oil output in Alaska, by way of comparison, peaked at 2 million barrels per day in 1988 and totaled nearly 900,000 barrels a day last year.

Located in the Gulf of Mexico 270 miles southwest of New Orleans and 175 miles offshore, the Jack #2 well was drilled to a total depth of 28,175 feet (more than 5.25 miles). The drill pipe descends first through 7,000 feet of water and then another 21,000 feet below the sea floor. Costing more than $100 million, the Jack #2 well extends through numerous rock and salt formations hundreds of feet thick and between 24 million and 65 million years old. Geologists estimate that the sediments date to the Eocene epoch of the lower Tertiary period. Appropriately, in the current context, Eocene comes from the Greek words ceno (new) and eos (dawn).

With U.S. proved oil reserves estimated to be between 21.4 billion barrels (according to the U.S. Energy Information Administration) and 29.3 billion barrels (BP Statistical Review), the upper limit (15 billion barrels) of Chevron’s deepwater discovery would increase U.S. proved oil reserves between 50 and 70 percent. That’s a big jump, but by Middle East standards the United States remains in big oil’s minor leagues. Saudi Arabia, according to Oil and Gas Journal, has 267 billion barrels of proved oil reserves. Other major reserves in the Middle East include Iran’s 133 billion barrels, Iraq’s 115 billion barrels, Kuwait’s 104 billion barrels and United Arab Emirates’ 98 billion barrels.

Including an estimated 175 billion barrels of oil locked in Alberta’s tar sands, which are extremely costly to develop, Canada’s oil reserves approach 180 billion barrels. Most Middle Eastern oil can be produced for well under $5 per barrel. However, like Canada’s tar sands, the deepwater oil reserves discovered by Chevron will require a price of at least $40 per barrel, industry experts have estimated.

Devon Energy of Oklahoma is one of Chevron’s deepwater partners (the other is Norway’s Statoil, which along with Devon has a 25 percent share, with Chevron owning 50 percent), and estimates that a deepwater production facility in the Gulf would cost as much as $500 million. In addition, wells would cost up to $120 million each. Having earned $8.35 billion in profits during the first six months of 2006, Chevron clearly has the financial capital to pursue these investments, even if it must reduce its plans to spend $5 billion this year buying back its stock to boost its share price.

The deepwater Gulf discovery must be put in another context. At the rate of 20.5 million barrels per day, the United States consumes 7.5 billion barrels of petroleum each year. Through July, for the first time in history, the United States imported more than 14 million barrels of petroleum a day for three months in a row. That import rate exceeds 5 billion barrels a year; each barrel contains 42 gallons. At its upper limit of 15 billion barrels, Chevron’s discovery in the Gulf’s deep water represents the equivalent of total U.S. consumption for only two years and U.S. petroleum imports for only three years.

While deepwater exploration in the Gulf of Mexico will clearly not eliminate U.S. dependence on foreign oil suppliers; it will reduce it. For that reason, more offshore areas, including along the Atlantic and Pacific coasts and the Gulf close to the Florida coast must be opened for exploration. An energy bill passed by the House makes great strides in this direction, while a Senate-passed bill is limited to 8.3 million acres in the Gulf.

To fully exploit the remarkable technology developed by the oil companies, and to further reduce America’s dependence on foreign suppliers, we must search for oil everywhere it is likely to be found, and that includes Alaska’s Arctic National Wildlife Refuge, where an estimated 10 billion barrels are located. In the light of Chevron’s recent discovery, the House’s more expansive offshore-drilling bill has now become far superior to the Senate’s.

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