Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in the sands of the desert...

And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
     — from The Second Coming, W. B. Yeats

Americans are easily misled about domestic "supply-side" solutions to rising oil prices and dwindling global exports. Their confusion is understandable. Oil company executives like Shell's John Hofmeister have called for opening up now restricted areas in Alaska or on the outer continental shelves, implying that salvation is only a few oil wells away.

The United States Geological Survey (USGS) or the Mineral Management Service (MMS) routinely assign huge reserves numbers to unexploited, presumably prospective, areas, but it is not clear to people who do not follow the oil industry that these agencies are talking about undiscovered oil.

The age of easy, cheap oil in the United States is over and done with (ASPO-USA, May 26, 2008). The Lower-48 peaked in 1970. The volatile shallow-water oil production in the Gulf of Mexico last peaked in 1998, forcing operators to move out to deeper and deeper water. The impressive development of Alaska's Prudhoe Bay in the 1970s will not be repeated elsewhere in Alaska onshore or off. Prudhoe Bay peaked in about 1989.

An Exemplary Story

Promoting supply-side solutions to America's oil crisis creates a dangerous delusion. Before turning to the Arctic National Wildlife Refuge (ANWR), I want to tell you an exemplary story because both time and memories are short. This article runs long as a result, but it's a good story.

I have marked up the NYMEX monthly oil price curve I used in The Age of Aquarius, where I explained the market fundamentals driving the oil price (ASPO-USA, May 14, 2008). Here is the new version.

The oil price took a downward turn in August, 2006. As you can see, the price had been volatile but rising from mid-2004 on. The August downturn could have been yet another price blip, but on September 5th, Chevron announced the successful Jack-#2 test well in the Walker Ridge area of the ultra-deepwater Gulf of Mexico. To a world starved for good news on the oil front, the Jack discovery was treated like the Second Coming.

I was writing for The Oil Drum (TOD) back then, and I duly penned (after consulting with oil industry insider "Bubba") Jack-2 and the Lower Tertiary of the Deepwater Gulf of Mexico on September 11th. I did not think Jack would have a significant impact on domestic supply in 2006 and I have not changed my mind in 2008.

The media repeated the tentative claim of Chevron's geologists that there could be anywhere between 3 and 15 billion recoverable barrels in the Gulf lower tertiary play, emphasizing the high end of this exceptionally broad range. An energy illiterate public thought that sounded like a lot of oil. We could all continue to cruise to Wal-Mart in our GMC Yukons to buy cheap stuff made in China, no problemo.

The hype surrounding the Jack flow test was like a tsunami washing over peak oil people stranded on beaches all over the world. Business Week said there was plenty of oil, just drill deeper. Cambridge Energy Research Associates (CERA) played up the discovery, which was no surprise, asking whether this might be the biggest oil play in 38 years. Little did I know that CERA had some other tricks up their sleeve.

The dip in the oil price which had started in August became a nosedive as the Autumn progressed and the Jack discovery guided market sentiment on oil. CERA moved in for the kill, releasing their report Why the "Peak Oil" Theory Falls Down — Myths, Legends and the Future of Oil Resources on November 10,  2006. This was just what the world wanted to hear—these "peak oil" people are a bunch of nutters, we're all whackos. Soon we would be swimming in new oil, Adam Smith's free market having worked its magic once again. Daniel Yergin had a field day in the fall of 2006. CERA report sales were no doubt brisk.

Picking myself off the floor, and after consulting with Professor Goose and other Oil Drum editors, I sat down in a single marathon writing session to produce Does the Peak Oil "Myth" Just Fall Down? — Our Response to CERA, which was published at TOD on November 16, 2006. But the damage had been done. Take another look at the annotated price graph above.

The downward price momentum spurred on by the Jack discovery and the CERA report finally bottomed out in January, 2007 when the average monthly NYMEX price fell to $54.57/barrel. I have added a rough curve fit (dotted line) to the graph which shows that if the price had continued to rise on the trend since mid-2004, the oil price would be just about where it is today, about $124/barrel. The market fooled itself into thinking happy days were here again. Precious time required to address the oil crisis was wasted. Oil became, for a time, underpriced. Now, you can't even trade in the Yukon (Wall Street Journal, June 2, 2008).

And what of Jack? Chevron plans to drill another appraisal well sometime later this year. Commercial oil production is on hold pending the results and a development plan must be put together because the Walker Ridge is way out there in the Gulf many miles from nowhere—just like ANWR. And if BP's delayed Thunder Horse is any guide, don't get your hopes up for any oil from Jack (together with St. Malo) before 2014.

And what of CERA? Now they say oil has as reached a turning point—

What is now unfolding is an oil shock. The fact that the world could take $80 in its stride in the context of strong economic growth does not mean that a price that is 60 per cent higher at a time of a credit crunch will be so easily assimilated. The economic toll is mounting. Airlines are certainly in shock as they start charging for checked luggage to find a way to pass on their biggest cost. Carmakers are reeling. Retailers are tracking the shrinking wallets of their customers. The rising prices for food reflect, in part, the impact of higher energy costs.

My goodness, it's an oil shock! ἐδάκρυσεν ὁ ἰησοῦς—Jesus Wept (John's Gospel, 11:35).

The Jack story serves as a cautionary tale for those who believe supply-side solutions to America's oil supply problem are a magic bullet that will end our energy suffering. Let's turn now to ANWR to see what the future might hold for supply-side solutions there should the area be opened up for development.

ANWR Is Not The Answer

Realistic expectations about ANWR needn't come as any surprise to the media, oil company executives, elected officials or anyone else. The Energy Information Administration updated their 2004 report on the ANWR 10-02 area in May, 2008 (graph left). Their Analysis of Crude Oil Production in the Arctic National Wildlife Refuge is abundantly clear on what we can expect from ANWR.

The era of easy, cheap oil has come and gone. You don't have to take my word for it, just read what the EIA says about the timing of production at ANWR. I will only quote the highlights. Look at page 3 of the EIA's report for the whole story. This section gets a bit technical. Sorry about that.

This analysis assumes that enactment of the legislation in 2008 would result in first production from the ANWR area in 10 years, i.e., 2018. The primary constraints to a rapid development of ANWR oil resources are the limited weather “windows” for collecting seismic data and drilling wells (a 3-to-4 month winter window) and for ocean barging of heavy infrastructure equipment to the well site (a 2-to-3 month summer window).

The assumption that ANWR oil production would begin 10 years after legislation approves the Federal oil and natural gas leasing in the 1002 Area is based on the following 8-to-12 year timeline:

• 2 to 3 years to obtain leases, including the development of a U.S. Bureau of Land Management (BLM) leasing program, which includes approval of an Environmental Impact Statement, the collection and analysis of seismic data, and the auction and award of leases.
• 2 to 3 years to drill a single exploratory well. Exploratory wells are slower to drill because geophysical data are collected during drilling, e.g., rock cores and well logs. Typically, Alaska North Slope exploration wells take two full winter seasons to reach the desired depth...
• 3 to 4 years to construct the feeder pipelines; to fabricate oil separation and treatment plants, and transport them up from the lower-48 States to the North Slope by ocean barge; construct drilling pads; drill to depth; and complete the wells...

[And so on]

In the mean resource case, ANWR production would commence in 2018 if all of these steps happened without delay. Supposed production would ramp up slowly, culminating in a peak of 780,000 barrels per day in 2027. Production would then decline to 710,000 barrels per day by 2030 (happy graph left).

As with Jack in the Gulf, the timing of this vision provides no help in an oil crisis that gets worse by the day. And this is the EIA making these predictions. The glass is never half empty for Department of Energy analysts.

What is the mean resource case? You need to know because this is the sticky point where the public gets mixed up. The EIA explains what the mean resource case, which is based on a 1998 USGS study, actually means.

In the mean [probability] oil resource case, the total volume of technically recoverable crude oil projected to be found within the coastal plain area is 10.4 billion barrels, compared to 5.7 billion barrels for the 95-percent probability estimate, and 16.0 billion barrels for the 5-percent probability estimate. Because the USGS 5-percent and 95-percent probability oil resource estimates are asymmetric around the mean estimate, the expected field size distribution and, in turn, the distribution of projected oil production are also asymmetric with respect to the mean estimate’s field sizes and projected production...

The mean probability estimate refers to a 1-in-2 chance of there being oil resources at least equal to the size of that estimate; the 95-percent probability estimate refers to a 19-in-20 chance of there being oil resources at least equal to the size of that estimate; and the 5-percent probability estimate refers to a 1-in-20 chance of there being oil resources at least equal to the size of that estimate.

The bottom line for ANWR, as for all the other unexplored protected areas in the U.S, is that we are talking about probabilities of how much recoverable oil will actually be discovered. The USGS presumes that there is a 95% probability of finding 5.7 billion recoverable barrels, and a 1 in 2 chance of finding 10.4 billion barrels. Other assumptions must be made as well. The mean resource case of 10.4 billion barrels is the supposed volume of oil that will ultimately be recovered. How much of this imaginary oil does the USGS guess will be produced by 2030?

The 1998 USGS ANWR assessment assumed an average recovery factor of 37 percent of the original-oil-in-place. This recovery factor is based on primary (pressure-driven) and secondary (water-injection) recovery techniques, but does not included tertiary (enhanced oil recovery) techniques, which can increase oil recovery by an additional 5 to 15 percentage points...

Between 2018 and 2030, cumulative additional oil production is 2.6 billion barrels for the mean oil resource case...

Using the Geological Survey's 37% recovery factor, the supposed original-oil-in-place is on the order of 28 billion barrels (10.4 / .37). The EIA's 2.6 billion barrels is only 25% of the 10.4 billion barrels that we may ultimately lift out of the ground, so the EIA has further assumed that most of this hypothetical oil will be produced in the years after 2030. ANWR is thus the gift that keeps on giving in the far-off future. All of this not-yet-discovered oil comes too late to change the fate of the current generation of Americans.

Evaluating ANWR is a crapshoot¹ until you've drilled some test wells and assessed the oil flows, for "there is little direct knowledge regarding the petroleum geology of the ANWR region." That's why a significant part of the delay in developing ANWR comes from drilling these appraisal wells, as the EIA acknowledges.

It's still possible to drill a dry hole in the age of advanced 3-D seismic subsurface imaging, or drill a well which doesn't produce oil flows that justify commercial development. (Failed tests have occurred several times in the Gulf of Mexico.) One reason people got inordinately excited about Jack is that the #2 test well did indeed indicate commercial oil flows.

Press accounts, even fairly good ones like Arctic Drilling Wouldn't Cool High Oil Prices, assume that the 10.4 billion barrels is "the most likely scenario," parroting the EIA's production flows for the mean resource case (US News & World Report, May 23, 2008). I have described this kind of behavior before, where the media "treats a (probabilistic, geological) abstraction as if it had concrete or material existence." This is the definition of the verb to reify.

I could make similar remarks for other areas of Alaska, e.g. the Beaufort Sea, the NPR-A north slope area to the west of Prudhoe Bay, or the Chukchi Sea, where MMS leasing round #193 recently took place. At least Shell put their money where their mouth is, paying over $105.3 million for a single exploration block offshore. The MMS believes "there is up to 15 billion barrels of recoverable oil reserves ... beneath the Chukchi Sea." Now you know how to evaluate this statement—see ANWR above.

The Best Answers are on the Demand-Side

In the future we're going to throw every supply-side solution (wind, solar, etc. assuming mostly electric cars) we've got at the energy scarcity problem, but the oil situation is special. Oil is so precious that we owe it to future generations to save some for their use. ANWR is a good case in point. We could start the development now and get some oil in the 2020s, or we can wait a little longer and see oil flows (of unknown volumes) some years later. I suspect our elected leaders will succumb to pressure within a few years and authorize development of the resource, but it will do nothing to alleviate our predicament in the next 15 years.

Americans have run through all their easily obtainable, cheap oil. Therefore, the best solutions are on the demand-side. We must consume less oil, that's all there is to it. Telecommuting, 4-day workweeks, car pooling, new mass transit systems, long-haul railroads to replace the airlines, you name it. All of this is a no-brainer. ANWR is not the answer.

Contact the author at [the original article]

Notes

1. The text continues: "The USGS oil resource estimates are based largely on the oil productivity of geologic formations that exist in the neighboring State lands and which continue into ANWR. Consequently, there is considerable uncertainty regarding both the size and quality of the oil resources that exist in ANWR. Thus, the potential ultimate oil recovery and potential yearly production are highly uncertain." [emphasis added]