What's new in production

 Vol. 233 No. 11

Writers used to describe war as the “great leveler.” Then, later, the expression was applied to baseball, which is nicer. It’s one of those human endeavors that brings together rich and poor, saint and heathen, slob and sophisticate, left and right.

At least that used to be true. Nowadays, the great uniter of men is antipathy to Big Oil. Unless a person happens to be one of those 1.7 million souls with a job directly supported by the oil industry (an IHS estimate), he or she likely will find common ground with many others from across the social and political spectrum in general dislike, or at least grumpy distrust, of the folks who drill for, transport and sell you fuel.

I’m not here to defend Big Oil. They don’t need it. (And, of course, that’s mostly who I’m talking to.) But they must be doing something right, because U.S. production is on a course to rise 7% this year, which is not only the fourth straight year of increases, but the biggest one-year increase since “Frosty the Snowman” was a hit. (1951. Doesn’t everybody know that?) Since 2008, crude oil production has risen about 14%.

It has been pointed out, correctly, that 2008 represented something of an artificial low in oil production, as a couple of particularly brutal hurricanes in the Gulf of Mexico put the squeeze on the offshore industry, briefly sending U.S. crude production below 5 million bopd, an anomalous dip. Most of the production increase of 2009 can be attributed to prolific deepwater projects coming to fruition, so that year would have seen real gains even if the previous year’s weather had been more benign. But then a Bad Thing happened in the Gulf of Mexico in April 2010, putting regulatory brakes on the offshore industry. Offshore oil production was choked (temporarily), yet overall production increased in 2010, significantly.

Everybody knows why. The onshore petroleum industry had gotten horizontal, and concurrently began a deliberate switch to oil drilling. The technology, rigs and crews that gave us too much gas were transitioned to liquids without much fuss. The Bakkan beckoned, and the Eagle Ford called, and, most importantly, the price was right.

This is all well and fine. But then, last month, a flurry of stories started hitting the news outlets. There were a lot of headlines, but they can be boiled down to one: “Energy Dept.: U.S. could surpass Saudi Arabia as the world’s Number One oil producer”.

Here’s API: U.S. production of crude and other liquid hydrocarbons, which includes biofuels, will average 11.4 million barrels per day next year. That would be a record for the U.S. and just below Saudi Arabia’s output of 11.6 million barrels. Citibank forecasts U.S. production could reach 13 million to 15 million barrels per day by 2020, helping to make North America “the new Middle East.”

The New Middle East? What? Where did 11.4 million bbl come from? Last time I looked (10 minutes ago), U.S. oil production had just peeked over the 6-million-bpd hill. That’s remarkable, a real achievement, but nowhere near Saudi Arabia’s capability, and nowhere close to putting the U.S. within plausible reach, as a New York Times article suggested last spring, of becoming “a top energy exporter, rivaling some members of [OPEC]”. That would be an amazing switch for the world’s number one energy importer and consumer (18.7 million bpd, at the moment).

There seems to be a general lack of understanding among media (and hence, public) about what is meant by “oil.” The key phrase is: “and other hydrocarbon liquids.” That category includes natural gas liquids (NGLs) separated from dry gas, about 2.2 million bpd; biofuels, consisting of all sorts of liquids, but mostly ethanol from grain, about 1.1 million bpd; and “processing gains,” contributing another 1.1 million bpd.

The great majority of oil, produced or imported, goes for motor fuel. Of the various categories of NGLs—ethane, propane, butane, isobutene, pentane and heavier hydrocarbons—roughly 30% are used to make motor fuel. Ethane is highly useful in the chemical industry, butane is used in producing car tires as well as lighting cigars, and propane is great for home heating and barbecue. But in terms of energy content, the contribution of NGLs to transportation is only about 20%.

Biofuels, particularly corn ethanol, are used as motor fuels, but again, in terms of energy content, a barrel of biofuel equates to only about 77% of a barrel of crude oil. Plus, they are more energy-intensive to produce, and that eats in to the net result.

“Refinery gains” refers to volume increases that occur to crude oil when it’s processed. Generally speaking, the product fills more barrels, but does not gain energy value. (It’s more complicated, but that’s the gist of it.)

So, getting back to the 11.4 million bbl of liquids that EIA projects the U.S. will produce in 2013—it might be reasonable to compare that to the 11.6 million bbl of hydrocarbon liquids that Saudi Arabia is expected to produce. After all, you’re including NGLs, biofuels, etc., in both cases. The problem is that Saudi production is mostly crude oil. NGLs are significant, but biofuels are negligible (they produce some ethanol from waste products). And when Saudi oil is refined in a U.S. facility, the processing gains are counted as our processing gains.

To be clear, the boom in U.S. oil and gas production has been a real economic positive. IHS estimates that the energy sector may add 1.3 million more jobs by the end of this decade. Some of the most attractive places for exploration have been in North Dakota, Texas, Wyoming, Oklahoma and Wyoming, and investment has driven real economic growth in those areas, as well as reduced the trade deficit.

The reality is that Saudi Arabia is in absolutely no danger of being overtaken by the U.S. as an oil producer. No need to start filling out our OPEC membership application just yet.