Global oil markets are flooded with cheap crude and concerns about climate change are growing louder. The last thing the world seems to be craving is the discovery of new large oil and natural gas fields.
However, such fields have been found in the last month. And two of them are in the US — one in Texas and the other off Alaska.
The new finds, while still preliminary and in need of more testing, could further cement two realities of the energy business: oil prices could stay low for a long time and oil companies will keep seeking to increase their reserves for future production.
Illustration: Yusha
The discoveries have been hailed by the oil industry, even though companies have largely cut back on exploration over the past two years in an effort to reduce costs as oil prices fell from more than US$100 to roughly US$50 per barrel. Along with that enthusiasm is the view that prices could recover by the end of the decade.
Yet that view contradicts the opinions of many environmentalists and independent energy experts. They say that the world needs to keep most of the remaining hydrocarbons in the ground to meet the broad targets of the Paris climate conference in December last year, unless extraordinary technological breakthroughs are made to capture carbon emissions from fossil fuels.
In addition, some of those experts say demand for oil will never fully recover because of the emergence of electric cars and conservation measures.
“In today’s energy world, there is a distinctive clash between those who are pushing forward technologies to keep oil and gas squarely under the ground and those who are deploying capital to ensure that there is enough oil and gas if we stay with the internal combustion engine that we have today,” said Amy Myers Jaffe, director for energy and sustainability at the University of California, Davis.
“In the short term,” she said, “both sides are going to have victories but, in a long time scale, my belief is we will transition away from oil and gas.”
The new discoveries now fall into the center of that debate. On Tuesday last week, Caelus Energy announced it had found a field in the shallow waters off the North Slope in Alaska that could produce as much as 2.4 billion barrels of oil, more than half the reserves of Ecuador, an OPEC producer.
A few weeks earlier, Apache Corp said a long-overlooked field in West Texas contained at least 3 billion barrels of oil and 2,124 billion cubic meters of gas.
Together, the discoveries are relatively modest compared with the new field production earlier in the decade from shale fields opened up by hydraulic fracturing — the high-pressure mix of water, sand and chemicals that blasts hard oil-bearing rocks — but some analysts say they could well be precursors to more discoveries in West Texas and Arctic Alaska.
Both companies began plowing money into exploring their prospects before the price of oil collapsed, and their new fields might have economic advantages lacking in other places. They have ample existing pipeline networks to take products to market, for example.
The Caelus find is in Alaska state waters, giving the state government a strong incentive to encourage drilling to earn royalty and tax benefits and to aid the state’s slumping economy. Under Alaska law, new oil production does not have to begin to pay taxes until North Slope oil prices reach US$73 a barrel — more than US$20 above current prices.
Apache took advantage of the low oil prices to quietly buy 141,640 hectares of drilling rights for as little as US$1,300 per 0.40 hectares in an area that is adjacent to the giant Permian Basin oil fields, but has long been overlooked. Acreage in the Permian Basin can cost nearly 40 times that much.
Apache explored its new find, called the Alpine High, at a time when it was cutting back investments in exploration and production elsewhere and selling off assets to raise cash.
“Our discovery is a testament to American ingenuity,” Apache CEO John Christmann said. “Through technology and innovation, the oil and gas industry continues to innovate and find opportunities even in mature areas like the Permian Basin.”
Caelus, a private firm backed by the private equity fund Apollo Global Management, reported that it based its resource claim on two exploration wells and 326km2 of 3D seismic testing.
It said that the field could produce 200,000 barrels of oil per day, more than 60 percent of what Alaska’s giant Prudhoe Bay field currently produces.
The discovery has particular significance for Alaska, whose production has declined steadily since 1988, when Prudhoe Bay’s 1.6 million barrels per day of production was the backbone of the US oil industry. Alaska missed out on the doubling of national oil production between 2006 and 2014, a rise that resulted mostly from a drilling frenzy in shale fields in other states.
“This discovery could be really exciting for the state of Alaska,” Caelus CEO James Musselman said in a statement. “It has the size and scale to play a meaningful role in sustaining the Alaskan oil business over the next three or four decades.”
The new discoveries have also reinforced the confidence within the industry that the US will remain a major oil power — capable of producing substantial amounts for itself and exporting major quantities around the world.
“I definitely believe that finding a lot of oil is going to give us national security,” said Melvin Moran, manager of Moran Oil Enterprises in Oklahoma. “We’re not going to turn back.”
Meaningful amounts of oil will probably not be produced from the two fields for at least several years.
Caelus has said that it needs to build a 124km pipeline, at a cost of US$800 million, to attach production from its new find to existing pipelines.
Still, the two finds are good news during hard times for the industry.
Last year, US petroleum producers wrote down US$177 billion in assets, according to a recent report by IHS Energy, a leading consulting firm.
A new report by the international law firm Haynes and Boone said that 102 US and Canadian oil and gas producers have filed for bankruptcy since the beginning of last year, involving more than US$50 billion in debts. As of Sept. 7, 58 producers had filed for bankruptcy this year.
The price of crude has risen in recent days, after last week’s tentative agreement among OPEC members to cut output modestly later in the year.
Industry executives express skepticism that the countries will succeed in getting commitments from individual members to cut production. They add that even if there is a final agreement, cheating by many countries can be expected.
There are already signs that Libyan exports are growing, and there is little hope that Iran will curb its production and exports now that nuclear sanctions have been lifted.
However, oil executives also said that with the industry cutting investment in exploration and production by US$250 billion last year and another US$70 billion this year, it is only a matter of time before demand outstrips supplies and prices rise again significantly, although not until 2018 to 2020 at the earliest. That is when more oil will need to be available, from Texas, Alaska and other places.
“You do need new discoveries to feed the supply system,” said Scott Sheffield, chief executive of Pioneer Natural Resources, a major Texas producer. “We have very little supply coming on.”
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