Part 2: U.S. Oil Output to Overtake Saudi Arabia?


In the second half of his interview with The Financialist, Credit Suisse Global Head of Energy Research Jan Stuart talks about where American oil production is booming, environmental factors and implications for the economy and gas prices. (Read the first half of the interview here.)


The Financialist: Where, geographically, is U.S. production growing?


Jan Stuart: Between the Rocky Mountains and Appalachians, millions of years ago, you had an ocean. What you’re now drilling up is effectively the sedimentary beds in those different pieces of ocean between the mountain ranges. So, it’s the mid-continent, stretching all the way from western Pennsylvania down into Texas and then to North Dakota and even the fringes of Montana. It also stretches up into Canada.


There is a terrific oil field in North Dakota called the Bakken. The Bakken is a very conventional, relatively thin layer of oil-bearing sands sandwiched between shales. In the past, it was quite difficult to get at. Horizontal drilling technology and the ability to frack some of the shales around it to make the oil flow a little better has made it more doable in many places. As oil prices rose, and those prices began to stick, the industry began to mobilize. In 2006, you began to get a real effort at plays in the Bakken.


An area there hasn’t been as much talk about is the good, old-fashioned oil provinces across Texas — the Permian Basin around Midland, Texas; the Eagleford in the southwest, the old Barnett north of Dallas-Fort Worth. In all these areas, the shale oil revolution, the shale gas revolution and the shale liquids revolution are bearing fruit.


You have new plays in the Niobarra, east of Denver. You have liquids coming out of your ears in the Barnett, which is mostly western Pennsylvania, but stretches up to New York. That’s mostly a natural gas play, but it has an awful lot of liquid associated with it, which is very light oil like propanes and butanes.


It’s a mixture of very new technology and very new practices applied to old fields, or new technologies applied to fields that you couldn’t even get the oil out of. Much of what’s driving it is, a) high prices, and b) the fact that the U.S. is a stable, investable country with a terrifically large, flexible and multi-faceted industry.


The Financialist: What role do new production techniques and technologies, such as horizontal drilling, play in the U.S. production boom?


JS: I think the new technology, particularly the drilling technology, is crucial. If you were only punching vertical holes, you simply wouldn’t be able to get at enough of the reservoir rock to make it worth your while. You need to be able to steer that drill bit and expose an enormous amount more of this source rock to get enough oil out.


Number two, in many places you need to be able to make the rock more porous to free up the carbon molecules to flow, and that’s where fracking technology comes in. Fracking itself is not a new idea, but the industry is getting far, far better at it. Every aspect of fracking has seen terrific progress in terms of understanding the chemistry and physics behind it and coming up with better, more efficient ways of doing things.


The Financialist: Could political and environmental worries about drilling and fracking threaten future growth?


JS: I don’t think there is an ipso facto environmental disaster waiting to happen. I think industry’s best practices allow you to drill most of these reservoirs in an environmentally sound way.


We need to ensure there are codified best practices and that people who routinely cut corners and endanger folks aren’t allowed to participate in the business. I find it fascinating that the industry associations themselves began asking more than a year and a half ago for more and better regulation.


There are going to be competing interests, as always. This industry generates a large number of jobs in an environment in which job creation is at a premium. Whoever has the idea that there is an environmental nightmare waiting to happen through any and all fracking is going to be fighting an uphill battle to get federal legislation in place.


I strongly suspect we are going to get more regulation, but that the regulation will simply allow for better practices, add marginally to costs and therefore, not impede the large-scale development of these resources.


The Financialist: How will increased oil production impact the U.S. economy? 


JS: The U.S. economy is enormous — fantastically large. (Shale gas and oil) will not affect things at a big GDP accounting level any more than at the margin. You’re going to get some sectoral redistribution in industries for which low-cost energy is a catalyst to growth. If you give me very low-cost natural gas, I’ll give you an investment in fertilizer manufacturers on the Gulf Coast that I would not have had otherwise. Oil and gas drilling itself will generate jobs, but as a share of GDP, probably not big at all.


It might contribute to what I would argue is already a little bit of a drive toward a Renaissance of American manufacturing. In a similar vein, importing less high-cost energy means you are affecting your trade balance in what I would argue is a positive way.


The Financialist: Will we see cheaper gasoline in the U.S.?


JS: I don’t see the U.S. becoming a net exporter, which implies that we stay connected to the global world of oil, and we freely import and export gasoline. For that reason, gasoline prices stay connected to the global world of oil. In a global context, I don’t expect oil prices to come down significantly any time soon. With that, I expect to see gasoline prices to stay high.


In short, I don’t expect to see $1 gasoline or $8 gasoline anytime soon.


*Interview edited and condensed for space.




Photo courtesy of Flickr–Katsrcool