An Energy Policy for the United States (updated)

The following was written by my dad (we have the same name, not to be confused)

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By: Nat S. Turner

July 25, 2008

 

 

In my mind the greatest threat and danger to the United States is related to the importation of approximately 14 million barrels of oil and distillates every day (some 68% of our total --- and growing).  Using an oil price of $135/bbl, this translates into the direct transfer of approximately $690 billion per year to foreign suppliers, many of which are hostile to the US.  (For reference, the US’s balance of trade deficit for 2007 was $711 billion --- a number that would in essence be zero, or in balance, if not for oil importation).  This “exportation” of American wealth is clearly growing and has dire long-term consequences in domestic and international policy as well as our long-term economic viability.

 

Currently the world produces, and consumes, approximately 87 million barrels of oil per day (of which the US consumes approximately 25% of this amount).  To make the above more compelling and urgent is the fact that supply/demand balances are severely strained and any current excess production capacity is all but non-existent.  The ability for the oil markets to handle the projected future demand and growth profiles (and the inherent depletion of existing fields) is a huge challenge.

 

A detailed study of global production capacity along with lower yielding exploration results over the last several decades, suggest to me and many other fellow geoscientists, that we are very near a plateau in the global production capacity of conventional oil---or at best, incremental production increases will be much more expensive and capital intensive relative to the past.  If this is even close to being true, then there are very severe consequences given the fact that global demand has been on a near continuous increase of approximately 1.6% per year for the past several decades, while at the same time existing fields are depleting at an average global rate of approximately 4% per year.  (Some very disturbing recent data suggest that this historic average depletion rate may actually be accelerating to levels greater than 4%.  Additionally, the rapid increase in oil consumption from Asian and OPEC countries suggest that demand rates may actually increase beyond the historic levels of 1.6%.)

 

A 1.6% annual demand increase from current levels would place global demand at approximately 120 million barrels per day in 2028, up from 87 million barrels today.  Over this same period, this current “base production” of 87 million barrels per day will decline to approximately 40 million barrels per day by 2028 based upon the historic decline and depletion rates of 4% per annum.  This leads to a gap of 80 million barrels per day of new production that must be sourced and filled over just the next 20 years --- a number that rivals the entire globe’s current daily production today.  In essence, over the next 20 years we will effectively need to replace barrel for barrel the entire global production capacity existent today.  Unfortunately, global exploration results over the last several decades cast great doubt as to whether this volumetric increase in conventional oil will be feasible or obtainable.

 

Based on the foregoing, a very severe energy and economic dislocation could occur in this country if our policy is to continue to rely on foreign imports of oil for our primary energy source. Basically, countries (i.e., global consumers) will continue to bid up the price of oil so that resultant demand destruction will bring demand into balance with the available supply.   Having said this, it is my strongest opinion the US will not be able to singularly drill its way to energy stability.   Drilling is part of the solution but is not solely a long term and sustainable route to energy or economic security. 

 

Significant “carbon” energy potential exists in the US and North America in the form of oil shale and tar sands (i.e., non-conventional oil) and coal.  These forms of energy in combination with nuclear (fission and fusion) and “alternative” energy sources (i.e., solar and ‘power-sat’, wind, geothermal, tidal, biomass, etc.) will need to increasingly become a larger part of the overall energy mix, in combination with conservation, as the costs and supply of oil becomes more and more restrictive.   Many of these technologies will require significant amounts of fundamental R&D efforts as well as enormous capital expenditures for full development and implementation. I will loosely categorize all of these sources listed above as “non-oil” alternatives.

 

Okay, now down to some specifics. Were I to be President, I would immediately launch the proverbial “Manhattan Project” to begin the fundamental R&D to address many of these non-oil energy sources.  The US is very clearly an “oil economy” and will be for the foreseeable future (i.e., 10 -20 years?).  During this time period, I would do as much as possible to reduce the levels of oil importation while at the same time significantly increasing the amount of R&D and capital investments into “non-oil” alternatives, which would need to take a bigger burden of our energy load over the next 20 years and beyond.

 

Oil is clearly a finite resource and we are unfortunately beginning to see the ramifications of this fact.  Again, I do not believe that simply increasing the levels of drilling will singularly solve the  “energy” problem.  It is imperative to take a long-term view (i.e., 20 plus years) when developing and formulating an energy policy.  We are clearly going to need a much greater percentage of “non-oil” sources of energy over the next 20 years or so --- if not sooner.  From this perspective, I believe that we must rely on existing exploration opportunities as not the solution but the “bridge” to alternatives.

 

Put into this overall context, I believe that ANWR and the Outer Continental Shelf (“OCS”) must be part of the solution as we strive towards longer-term “non-oil” sources.  To this end, I would proceed with exploration in these current areas of moratoria and dedicate the bonus monies, royalties, and taxes from such endeavors to the funding of our energy R&D efforts.  (While I believe there is strong need for a governmental role in supporting and funding the larger R&D efforts, I strongly believe that, in the main, the capital investments for eventual implementation and delivery of such energy should come from the private sector.)

 

The funding capabilities and economic impact of the OCS and ANWR could be enormous.  The current mean reserve estimate for ANWR is 10.4 billion barrels of recoverable oil.  At oil prices of $135 per barrel, the usage of ANWR could result in an approximate $1.4 trillion dollar savings over a 20-year production life that would otherwise be spent on foreign imports.   Perhaps equally important, several groups have estimated that the bonus, royalty, and tax revenues for this reserve estimate could exceed $200+ billion, again funds that I would solely dedicate to the R&D of “non-oil” alternatives.

 

Additional to ANWR, a tremendous potential exists in many currently restricted areas of the OCS.  Many of these areas lend themselves to significant potential reserves plus a fairly rapid cycle-time for first production.  By way of example, I was personally involved in the exploration and drilling of a series of dry gas discoveries approximately 25 miles due south of Pensacola, Florida.  This discovery and nearby geologic features are estimated to contain upwards of 1 trillion cubic feet of dry natural gas.   Immediately after making these discoveries (and capital investments), this area was made subject to a drilling and production moratoria.  This discovered field and many other equally compelling geologic features offer significant reserve potential and rapid cycle-time to first production.   Again, I would use the proceeds from bonuses, royalties and tax the same as suggested for ANWR.

 

Approximately one-third of the US’s daily oil production is currently produced from the portions of the OCS Gulf of Mexico that are not subject to moratoria.   The track record of safety and environmental stewardship from this offshore production has been exemplary. This track record combined with current technologies appear to clearly suggest that continued offshore development can be done in an equally safe and proficient manner.  If one thinks back to previous national and international oil spill incidents over the past 25 years, the overall preponderance of any spills have been from tanker accidents---not drilling and pipeline incidents.   The irony of the offshore debate, and a fact that is never referenced, is that any barrel of oil that we do not allow to be produced from the safety of the OCS is a barrel that must be subsequently imported via tanker from a foreign supplier.

 

As to ANWR, one only has to look to Prudhoe Bay as a starting point for future ANWR production and development.  Since the 1970’s, drilling and production from Prudhoe Bay has recorded a very strong environmental track record, while at the same time delivering 15 billion barrels of oil.  The minimal impact to the tundra, wildlife, and the environment in general has been well documented at Prudhoe Bay.  ANWR drilling and production would be done with even stronger protection to the environment with technologies and methods that are far more developed than 30 years ago.

 

Prudhoe Bay utilized a combined footprint of approximately 5000 acres.  Using current drilling technologies (extended reach drilling, multilateral wells, temporary ice roads, etc.), the footprint for ANWR is estimated to be 60% less than Prudhoe Bay, or approximately 2000 acres --- about the size of a large metropolitan airport. As with Prudhoe Bay, much of this area would be concentrated in several large composite sites.

 

An often-cited reason for not pursuing ANWR is the length of time to first production.  An interesting point that never seems to make the news is that this length of time is directly related to the environmental manner in which the development would take place. Because of sensitivities to the tundra and the overall environment, drilling and seismic operations would only take place for 3-4 months per year during the winter months.  By working during this time, activities would be conducted over “hard ice” conditions so as to protect the tundra (such ice, both natural and from temporary roads and pads would simply melt during the summer months, thus leaving the underlying tundra untouched or harmed.)  Correspondingly, the predominance of transportation would take place during the 3-4 months of summer at which time barging and marine shipping operations could take place.

 

Oil production from Prudhoe Bay utilizes the Trans-Alaska Pipeline System (“TAPS”), which covers some 800 miles and was completed in 1977 at a cost of $8 billion (at the time the largest private investment project in the world).   Production from ANWR, which lies slightly over 50 miles east of Prudhoe Bay, would take place through the TAPS system.   Anticipated oil production from ANWR would tie into and flow through the TAPS system (and basically be accommodated by the production declines that have taken place at Prudhoe Bay).   In my mind, it would be an absolute shame to outwait the economic and mechanical life of TAPS to develop ANWR; at which point an entire new system may need to be constructed.

 

In summary, global oil production capacity combined with increasing levels of demand and lower yielding exploration results have severely strained supply and demand balances.  Resultant price increases have and will continue to inflict damage to the US as we continue to import increasing levels of foreign oil.  I strongly believe that our nation needs a well-formulated energy policy based upon a multi-decade view of these supply/demand issues and the recognition that we will need to increasingly add more and more non-oil sources of energy to our overall blend.  This increase in non-oil sources will undoubtedly require significant levels of R&D and capital investments over the next 20 years.  Increased drilling cannot solely solve this energy gap but can provide a bridge towards the development of increased levels of non-oil alternatives.

 

 

Nat S. Turner

Certified Petroleum Geophysicist

 

 

nturner [ at ] paradigmstrategic [dot] com

 

 

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Comments

[Gerald Buckley]

Props to Nat Turner Sr. He clearly gets it. What else would you expect from a Certified Petro Geophysicist?!

I live in Tulsa, work for the AAPG (Petroleum Geologists) and know the SEG crew across town. Sure your dad's gone to a couple of their national meetings in his day.

Saw your background pic on Twitter and figured I had to know more about you. Glad I did. Fellow entrepreneur and all! Go get em! and good luck with the demo today.