1

Nationalization of oil supplies

From Wikipedia, the free encyclopedia

The nationalization of oil supplies refers to the process of deprivatization of oil

production operations, generally in the purpose of obtaining more revenue from oil for

oil producing countries. This process, which should not be confused with restrictions on

crude oil exports, represents a significant turning point in the development of oil policy.

Nationalization eliminates the concession system—in which private international

companies control oil resources within oil-producing countries—and allows oil-

producing countries to regain control. Once these countries become the sole owners of

their resources, they have to decide how to maximize the net present value of their

known stock of oil in the ground.[1]

Several key implications can be observed as a result

of oil nationalization. On the home front, national oil companies are often torn between

national expectations that they should carry the flag and their own ambitions for

commercial success, which might mean a degree of emancipation from the confines of a

national agenda.[2]

According to consulting firm PFC Energy, only 7% of the world's estimated oil and gas

reserves are in countries that allow private international companies free rein. Fully 65%

are in the hands of state-owned companies such as Saudi Aramco, with the rest in

countries such as Russia and Venezuela, where access by Western companies is

difficult. The PFC study implies political factors are limiting capacity increases in

Mexico, Venezuela, Iran, Iraq, Kuwait and Russia. Saudi Arabia is also limiting

capacity expansion, but because of a self-imposed cap, unlike the other countries.[3]

As a

result of not having access to countries amenable to oil exploration, ExxonMobil is not

making nearly the investment in finding new oil that it did in 1981.[4]

Contents

1 History

o 1.1 Pre-nationalization

o 1.2 Early nationalizations

2 Reasons for nationalization

o 2.1 Exploitation

o 2.2 Change in oil prices

o 2.3 Structural change of oil producing countries

2.3.1 Strategic control

2.3.2 Increased capabilities

2.3.3 Expansion of the oil industry

2.3.4 Changes in supply and demand

o 2.4 Diffusion of ideas between oil producing countries

3 Implications of nationalization

o 3.1 Vertical integration of the oil industry was broken

o 3.2 Oil companies lost access to oil supplies

o 3.3 Change in the horizontal integration of the oil industry

2

o 3.4 Restructuring of the refining sector

o 3.5 Change in the spot market

4 OPEC countries

o 4.1 Ecuador

o 4.2 Iran

o 4.3 Iraq

o 4.4 Libya

o 4.5 Nigeria

o 4.6 Saudi Arabia

o 4.7 Venezuela

5 Non-OPEC countries

o 5.1 Argentina

o 5.2 Canada

o 5.3 Mexico

o 5.4 Russia

6 See also

7 References

History

The nationalization of oil supplies has been a gradual process. Before the discovery of

oil, Middle Eastern countries such as Iraq, Iran, Saudi Arabia, and Kuwait were all poor

and underdeveloped. They were desert kingdoms that had few natural resources and

were without adequate financial resources to maintain the State. Poor peasants made up

a majority of the population.[5]

When oil was discovered in these developing nations during the early twentieth century,

the countries did not have enough knowledge of the oil industry to make use of the

newly discovered natural resources. The countries were therefore not able to mine or

market their petroleum.[5]

Major oil companies saw this as an opportunity for profit and they negotiated

concession agreements with the developing countries; the companies were given

exclusive rights to explore and develop the production of oil within the country. The

concession agreements made between the oil producing country and the oil company

specified a limited area the company could utilize, lasted a limited amount of time, and

required the company to take all the financial and commercial risks as well as pay the

host governments surface taxes, royalties, and production taxes. Despite all of this,

however, the countries were able to claim any of the oil they mined.[5]

As a result, the

world’s oil was largely in the hands of seven corporations based in the United States

and Europe.[6]

Five of the companies were American (Chevron, Exxon, Gulf, Mobil,

and Texaco), one was British (British Petroleum), and one was Anglo-Dutch (Royal

Dutch/Shell).[5]

These companies have since merged into four common oil companies:

Shell, ExxonMobil, Chevron, and BP.[6]

The established contracts between oil companies and nations with oil reserves gave the

oil companies an advantageous position, leading to the inclusion of choice-of-law

clauses.

3

In other words, disputes over contract details would be settled by a third party instead of

the host country. The only way for host countries to alter their contracts was through

nationalization. Most of the countries, with the exception of Venezuela, even signed

away their right to tax the companies in exchange for one time royalty payments.[5]

Although undeveloped nations originally welcomed concession agreements, the

movement for nationalism began once the developing countries realized that the oil

companies were exploiting them. Led by Venezuela, oil producing countries realized

that they could control the price of oil by limiting the supply. The countries joined

together as OPEC and gradually they gained control of their own oil supplies rather than

allowing the oil companies to control them.[5]

Before the 1970s there were only two major incidents of successful oil

nationalization—the first following the Bolshevik Revolution of 1917 in Russia and the

second in 1938 in Mexico.[7]

Due to the swift growth of the energy economy, resources

shifted to becoming nationalized to protect themselves from adjustments in demand

worldwide.

Pre-nationalization

Due to the presence of oil, the Middle East has been the center of international tension

even before the nationalization of oil supplies. Britain was the first country that took

interest in Middle Eastern oil. In 1908, oil was discovered in Persia by the Anglo-

Persian oil company under the stimulus of the British government. Britain maintained

strategic and military domination of areas of the Middle East outside Turkish control

until after World War I when the former Turkish Empire was divided between the

British and the French. It turned out that many of the areas controlled by the French had

little oil potential.[8]

On the other hand, Britain continued to expand oil interests into other parts of the

Persian Gulf. Although oil resources were found in Kuwait, there was not enough

demand for oil at the time to develop in this area.[8]

Due to political and commercial pressure, it did not take long before the United States

secured an entry into Middle Eastern oil supplies. The British government was forced to

allow the US into Iraq and the Persian Gulf states. Iraq became dominated by US oil

companies while Kuwait consisted of a 50/50 split between British and American

companies.[8]

Up until 1939, Middle Eastern oil remained relatively unimportant in world markets.

According to “The Significance of Oil,” the Middle East at the time

“was contributing only 5 percent of total world oil production and its exports were

limited to countries within the immediate region and, via the Suez Canal, in western

Europe.” [8]

The real significance of pre-1939 developments in the Middle East is that they

established the framework for the post-1945 oil expansion.[8]

4

After WWI, the demand for oil increased significantly as the result of an energy

shortage. Due to war-time oil development, which proved the great potential for oil

discovery in the Middle East, there was little hesitation in investing capital in Iran, Iraq,

Kuwait, and Saudi Arabia.[8]

Huge investments were made to improve the infrastructure needed to transport Middle

Eastern oil. For example, investment was made on the Suez Canal to ensure that larger

tankers could utilize it. There was also an increased construction of oil pipelines. The

expansion of infrastructure to produce and transport Middle East oil was mainly under

the operation of the seven major international oil companies.[8]

Early nationalizations

Prior to 1970, there were ten countries that nationalized oil production: the Soviet

Union in 1918, Bolivia in 1937 and 1969, Mexico in 1938, Iran in 1951, Iraq in 1961,

Burma and Egypt in 1962, Argentina in 1963, Indonesia in 1963, and Peru in 1968.

Although these countries were nationalized by 1971, all of the “important” industries

that existed in developing countries were still held by foreign firms. In addition, only

Mexico and Iran were significant exporters at the time of nationalization.[9]

The government of Brazil, under Getúlio Vargas, nationalized the oil industry in 1953,

thereby creating Petrobras.

Reasons for nationalization

Exploitation

The original contracts held between an oil producing country and an oil company were

unfair to the producing country. Contracts, which could not be altered or ended in

advance of the true end date, covered huge expanses of land and lasted for long

durations. Nationalist ideas began once producing countries realized that the oil

companies were exploiting them.[5]

The first country to act was Venezuela, which had the most favorable concession

agreement. In 1943, the country increased the total royalties and tax paid by the

companies to 50% of their total profits. However, true equal profit sharing was not

accomplished until 1948. Because oil companies were able to deduct the tax from their

income tax, profits acquired by the oil companies did not change significantly and, as a

result, the oil companies did not have any major problems with the change imposed by

Venezuela. Even with increased oil prices, the companies still held a dominant position

over Venezuela.[5]

Change in oil prices

The posted price of oil was originally the determinant factor of the taxes that oil

companies had to pay. This concept was beneficial to the oil companies because they

were the ones who controlled the posted prices. Companies could increase the actual

price of oil without changing the posted price, thus avoiding an increase in taxes paid to

the producing country.[5]

5

Oil producing countries did not realize that the companies were adjusting oil prices until

the cost of oil dropped in the late fifties and companies started reducing posted prices

very frequently.[5]

The main reason for the reduction in oil prices was the change in the

world’s energy situation after 1957 that led to competition between energy sources.

Efforts to find markets led to price cuts. Price cutting was first achieved by shaving

profit margins, but soon prices were reduced to levels far lower than posted prices as

companies producing oil in the Middle East started to offer crude to independent and

state-owned refineries.[8]

Producing countries became aggravated when the companies would reduce the prices

without warning. According to “The Significance of Oil,”

“small reductions in posted prices in 1958 and 1959 produced some indications of

disapproval from certain Middle East governments, but it was not until major cuts—of

the order of 10 to 15 percent—were announced in 1960 that a storm broke over the

heads of the companies whose decisions would reduce the oil revenues of the countries

by 5 to 7 ½ percent.” [8]

High oil prices, on the other hand, raise the bargaining power of oil-producing

countries. As a result, some say that countries are more likely to nationalize their oil

supplies during times of high oil prices. However, nationalization can come with

various costs and it is often questioned why a government would respond to an oil price

increase with nationalization rather than by imposing higher taxes. Contract theory

provides reasoning against nationalization.[10]

Structural change of oil producing countries

The Third World went through dramatic structural change between the time oil was first

discovered and decades later. Rising nationalism and the emergence of shared group

consciousness among developing countries accompanied the end of the formal colonial

relationships in the fifties and sixties. Shared group consciousness among the oil

exporting countries was expressed through the formation of OPEC, increased contact

and communication between countries, and attempts of common action countries during

the 1960s. The structure of the industry, which led to increased nationalistic mentality,

was affected by the following important changes:[9]

Strategic control

Originally, oil-producing countries were poor and needed oil companies to help them

manage the oil reserves located within the country. However, as the countries began to

develop, their demands for revenue increased. The industry became integrated into a

local economy that required strategic control by the host country over pricing and the

rate of production. Gradually, foreign investors lost the trust of oil-producing countries

to develop resources in the national interest. Oil-producing countries demanded

participation in the control of the oil within their country.[9]

6

Increased capabilities

Furthermore, technological innovation and managerial expertise increased dramatically

after World War II, which increased the bargaining power of producing countries.

Increased bargaining power allowed the companies to change their mode of operation.[9]

Expansion of the oil industry

Stephen J. Kobrin states that

“During the interwar period and through the 1950s, international petroleum was a very

tight oligopoly dominated by seven major international oil companies (Exxon, Shell,

BP, Gulf, Texaco, Mobil and Chevron—as they are known today). However, between

1953 and 1972 more than three hundred private firms and fifty state-owned firms

entered the industry, drawn by the explosion in oil consumption and substantially

diminished barriers to entry.” [9]

The new, independent companies disturbed the equilibrium between the major

companies and the producing countries. Countries became aware of their options as

these companies offered better agreement terms.[9]

Changes in supply and demand

The shortage of oil in the 1970s increased the value of oil from previous decades. The

bargaining power of producing countries increased as both the country governments and

the oil companies became increasingly concerned about the continued access to crude

oil.[9]

Diffusion of ideas between oil producing countries

Rogers defines diffusion as “the process by which (1) an innovation (2) is

communicated through certain channels (3) over time (4) among members of a social

system.” [9]

Innovations may consist of technology, philosophy, or managerial

techniques. Examples of communication channels include the mass media,

organizations such as OPEC or the U.N., or educational institutions. Due to diffusion,

attempts at oil nationalization from producing countries, and whether or not these

attempts were successful, affected decisions to nationalize oil supplies. [9]

Two attempts of nationalization that had clear inhibiting effects on other producing

countries was the nationalization of Mexico in 1938 and of Iran in 1951, which occurred

prior to the important structural change in the oil industry. The Mexican nationalization

proved that although it was possible to accomplish nationalization, it came at the cost of

isolation from the international industry, which was dominated by the major companies

at the time. The Iranian nationalization also failed due to the lack of cooperation with

international oil companies. These two incidences proved to other oil producing

countries that until the structure of the oil industry changed to rely less upon

international oil companies, any attempts to nationalize would be a great risk and would

likely be unsuccessful.[9]

7

Once the structure of the oil industry changed, oil-producing countries were more likely

to be successful in nationalizing their oil supplies. The development of OPEC provided

the medium in which producing countries could communicate and diffusion could occur

rapidly.[9]

The first country to successfully nationalize after the structural change of the industry

was Algeria, who nationalized 51% of the French companies only ten days after the

Teheran agreement and later was able to nationalize 100% of their companies. The

nationalization of Algerian oil influenced Libya to nationalize British Petroleum in 1971

and the rest of their foreign companies by 1974. A ripple effect quickly occurred,

spreading first to the more militant oil producers like Iraq and then followed by more

conservative oil producers like Saudi Arabia. Stephen J. Kobrin states that

“By 1976 virtually every other major producer in the mid-East, Africa, Asia, and Latin

America had followed nationalizing at least some of its producers to gain either a share

of participation or to take over the entire industry and employ the international

companies on a contractual basis.” [9]

Implications of nationalization

Vertical integration of the oil industry was broken

Due to the overall instability of supply, oil became an instrument of foreign policy for

oil-exporting countries.[7]

Nationalization increased the stability in the oil markets and

broke the vertical integration within the system. Vertical integration was replaced with a

dual system where OPEC countries controlled upstream activities such as the

production and marketing of crude oil while oil companies controlled downstream

activities such as transportation, refining, distribution, and sale of oil products.[1]

Under the new dual structure, OPEC was neither vertically or horizontally integrated

and was not able to take over the entire oil sector from the oil companies. The

temporary fear of an oil shortage during the 1970s helped to hide this consequence. In

addition, relations between producing countries of the Persian Gulf and previous

concessionary companies induced an “artificial” vertical integration. These relations

included long-term contracts, discount of official prices, and phase-out clauses. Free

markets started to become prevalent in 1981 after the trade in oil switched from being a

sellers’ to a buyers’ market.[1]

Oil companies lost access to oil supplies

According to the Energy Studies Review,

"between 1973 and 1982, companies lost around 50% of their share of the crude oil

market, from 30 million barrels per day (MMbbl/d) to around 15.2 MMbbl/d, while 'free

world' demand decreased only 15% over the same time period. Even more significant,

in 1982 the major (oil companies) could rely on 6.7 MMbbl/d of production from the

reserves under their control, while the corresponding number in 1973 was 25.5

MMbbl/d—a decrease of 74% in less than 10 years." [1]

8

As a result, important oil companies were became important net buyers of crude oil

after a long time of being vertically integrated sellers to their own refineries.[1]

Change in the horizontal integration of the oil industry

The increase in oil prices of the 70s attracted non-OPEC producers—Norway, Mexico,

Great Britain, Egypt, and some African and Asian countries—to explore within their

country. In 1965, the Herfindahl index of horizontal integration for the crude oil

production industry was 1600 and the horizontal integration for the exploration industry

was 1250. By 1986, it decreased to around 930 for the crude oil production industry and

600 for the exploration industry. This created a further destabilizing factor for OPEC.[1]

Restructuring of the refining sector

The world refining capacity of the major oil companies in 1973 was 23.2 Mbbl/d

(3,690,000 m3/d). However, by 1982, their world refining capacity had decreased to

14 Mbbl/d (2,200,000 m3/d). This decrease was a result of their decreased access to the

oil reserves of OPEC countries and, subsequently, the rationalization of their world

refining and distribution network in order to decrease their dependence on OPEC

countries. The increase in the refining capacity of OPEC countries that wanted to sell

not only crude oil but also refined products further reinforced this trend towards

rationalization.[1]

Change in the spot market

The nationalization of oil supplies and the emergence of the OPEC market caused the

spot market to change in both orientation and size. The spot market changed in

orientation because it started to deal not only with crude oil but also with refined

products. The spot market changed in size because as the OPEC market declined the

number of spot market transactions increased.[1]

The development of the spot market

made oil prices volatile. The risks involving oil investment increased. In order to protect

against these potential risks, parallel markets such as the forward market developed. As

these new markets developed, price control became more difficult for OPEC. In

addition, oil was transformed from a strategic product to a commodity.[1]

Changes in the

spot market favored competition and made it more difficult for oligopolistic

agreements. The development of many free markets impacted OPEC in two different

ways:

1. A destabilizing effect occurred that made it easier for OPEC members not to

respect their own quota if they did not want to.[1]

2. A stabilizing effect occurred that provided an incentive for cooperation among

OPEC members. Decreased prices due to free markets made it more profitable

for OPEC countries to work together rather than to seek profit individually.[1]

9

OPEC countries

Ecuador

Ecuador has had one of the most volatile oil policies in the region, partly a reflection of

the high political volatility in the country.[11]

Petroecuador accounts for over half of oil

production, however, as a result of financial setbacks combined with a drop in oil price,

private companies increased oil investments in Ecuador. In the early 1990s annual

foreign investment in oil was below US$ 200 million, by the early 2000s it had

surpassed US $1 billion (Campodónico, 2004).[11]

Changes in political power led to an

increase in government control over oil extraction. In particular, the election of

President Rafael Correa, on a resource-nationalism platform, prompted increases in

government control and the approval of a windfall tax.[11]

Iran

Since its beginning, Iran's oil industry has experienced expansion and contraction.

Rapid growth at the time of World War I declined soon after the start of World War II.

Recovery began in 1943 with the reopening of supply routes to the United Kingdom.

The oil was produced by what became the Anglo-Iranian Oil Company, but political

difficulties arose with the Iranian government in the postwar period.[12]

In the late 19th century, when interest in petroleum as an industrial grade fuel first

emerged, Iran under the Qajar dynasty was in economic and political disarray.[13]

Iran,

now among the world's leading crude-oil exporters, could become a net importer of oil

within the next decade due to rising demand and slow-growing production.[14]

Possessing the world's second-biggest proven reserves of oil, it infuriated its people

when the government brought in petrol rationing on two hours notice.[15]

Due to limited

refinery capacity, it has discouraged gasoline usage. Shortly after the petrol/gasoline

rationing, which has reduced demand in some areas by 20%-30%, it announced it will

not be producing cars powered only by gasoline.[16]

10

Iraq

The properties of the majors were nationalized totally in Iraq, in 1972.[17]

Worldwide oil

shortages major oil supplies in the 1970s forced major oil suppliers to look elsewhere

for ways to acquire the resource. Under these circumstances, NOCs often came forward

as alternative suppliers of oil.[17]

Nationalization of the Iraq Petroleum Company (IPC)

in 1972 after years of rancor, together with restrictions on oil liftings by all but one of

the IPC's former partners, put Iraq at the forefront of direct marketing.[17]

Iraq's oil

production suffered major damage in the aftermath of the Gulf War. In spite of United

Nations sanctions, has been rebuilding war-damaged oil facilities and export

terminals.[12]

Iraq plans to increase its oil productive capacity to 4 Mbbl/d (640,000

m3/d) in 2000 and 6 Mbbl/d (950,000 m

3/d) in 2010.

[12]

Libya

Libya, in particular, sought out independent oil firms to develop its oilfields; in 1970,

the Libyan government used its leverage to restructure radically the terms of its

agreements with these independent companies, precipitating a rash of contract

renegotiations throughout the oil-exporting world.[17]

Nigeria

The discovery of oil in Nigeria caused conflict within the state. The emergence of

commercial oil production from the region in 1958 and thereafter raised the stakes and

generated a struggle by the indigenes for control of the oil resources.[18]

The northern

hegemony, ruled by Hausa and Fulani, took a military dictatorship and seized control of

oil production. To meet popular demands for cheaper food during the inflationary

period just after the civil war, government created a new state corporation, the National

Nigerian Supply Company (NNSC).[19]

While oil production proceeded, the region by

the 1990s was one of the least developed and most poor.[18]

The local communities

responded with protests and successful efforts to stop oil production in the area if they

did not receive any benefit. By September 1999, about 50 Shell workers had been

kidnapped and released.[18]

Not only are the people of Nigeria affected, but the

environment in the area is also affected by deforestation and improper waste treatment.

Nigerian oil production also faces problems with illegal trade of the refined product on

the black market. This is undertaken by authorized marketers in collusion with

smuggling syndicates.[18]

Activities such as these severely affect the oil industries of

both the state and MNCs. Oil production deferments arising from community

disturbances and sabotage was 45mm barrels in 2000 and 35mm barrels in 2001.[18]

The

state has not been a very effective means of controlling incursions such as these. The

illegal oil economy in such a circumstance may continue to exist for a long time, albeit

in curtailed and small scales.[18]

Saudi Arabia

By 1950, Saudi Arabia had become a very successful producing area with an even

greater oil production potential remaining to be developed. Because of favorable

geological conditions and the close proximity of oil fields to the coast, Saudi Arabia

operations were low cost. American companies therefore heavily valued the oil.

11

The joint concessionary company, ARAMCO, agreed to the government’s demand to

use the introduced posted price as a way to calculate profits. Profit-sharing between

ARAMCO and Saudi Arabia was established as a 50/50 split.[8]

Venezuela

In 1958 a revolution in Venezuela brought an end to their military dictatorship.[5]

The

newly elected Minister of Mines and Hydrocarbons, Juan Pablo Pérez Alfonso, acted to

raise the income tax on oil companies and introduced the key aspect of supply and

demand to the oil trade. Nationalization of oil supplies was achieved in 1976. Major oil

companies operating in Venezuela have had difficulty with the spreading resource

nationalism. After decades of high investment, in the 1960s and 1970s oil taxation of

the IOCs was significantly increased and oil concessions were not renewed.[11]

Exxon

Mobil and ConocoPhilips have said they would walk away from their large investment

in the Orinoco heavy-oil belt rather than accept tough new contract terms which raise

taxes and oblige all foreign companies to accept minority shares in joint ventures with

the state oil company, Petróleos de Venezuela (PDVSA).[20]

The projects offered to

foreign investors were often those which entailed high costs for extraction, leading to

lower implicit tax rates. In the late 1990s, private investment substantially increased,

adding 1.2 million BD of production by 2005.[11]

While private investors were

producing more oil and PDSVA decreased oil production, Venezuela still managed to

increase its oil fiscal take for each barrel. Continued shortcomings for PDSVA spurred

an effort to eliminate the company, leading to a strike which severely reduced

investment and production. This gave to government opportunity to seize control and,

as a result, in the last two years the contractual framework of the oil opening has been

significantly changed, considerably increasing the government-take and control over

private investments.[11]

Non-OPEC countries

Argentina

Nationalization of oil resources in Argentina began in 1907, when upon the discovery of

the nation's first sizable oil field near Comodoro Rivadavia, President José Figueroa

Alcorta declared the area around the oil field public property. YPF, the first oil company

in the world to be established as a state enterprise, was established by President Hipólito

Yrigoyen and General Enrique Mosconi in 1922. The nation's mineral resources were

nationalized in toto with Article 40 of the Argentine Constitution of 1949 promulgated

by President Juan Perón. The latter was abrogated in 1956, but oil and natural gas were

renationalized in 1958 during President Arturo Frondizi's self-described "oil battle" for

self-sufficiency in the staple, and private firms operated afterward via leases.[21]

YPF

was privatized in 1993, and Madrid-based Repsol acquired a majority stake in 1999. Oil

and gas production subsequently weakened while demand increased, and in 2011

Argentina recorded the first energy trade deficit since 1987.[22]

President Cristina Fernández de Kirchner of introduced a bill on April 16, 2012, for the

partial renationalization of YPF, the nation's largest energy firm and . The state would

purchase a 51% share, with the national government controlling 51% of this package

and ten provincial governments receiving the remaining 49%.[23]

12

Investment in exploration at YPF as a percentage of profits had been far below those in

most other Repsol subsidiaries,[24]

and declines in output at the firm represented 54% of

the nation's lost oil production and 97% in the case of natural gas.[25]

Market analysts

and Repsol blamed the decline in exploration and production on government controls on

exports and prospecting leases, as well as price controls on domestic oil and

gas.[26][27][28]

YPF increased its estimates of oil reserves in Argentina in 2012, but

warned that government policies would have to change in order to allow investment in

new production. The government announced instead that it would acquire a majority

stake in YPF.[23]

Argentine Economy Minister Hernán Lorenzino claimed that asset

stripping at YPF had financed Repsol's expansion in other parts of the world,[29]

while

Repsol officials denied charges of underinvestment in its YPF operations.[27]

Argentine Deputy Economy Minister Axel Kicillof rejected Repsol's initial demands for

payment of US$10.5 billion for a controlling stake in YPF, citing debts of nearly US$9

billion.[30]

The book value of YPF was US$4.4 billion at the end of 2011;[31]

its total

market capitalization on the day of the announcement was US$10.4 billion.[32]

The bill

was overwhelmingly approved by both houses of Congress, and was signed by the

president on May 5.[33]

Canada

Canada reigns as the United States' leading oil supplier, exporting some 707,316,000

barrels (112,454,300 m3) of oil per year (1,937,852 barrels per day (308,093.8 m

3/d)),

99 percent of its annual oil exports, according to the EIA.[34]

Following the OPEC oil

embargo in the early 1970s, Canada took initiative to control its oil supplies. The result

of these initiatives was Petro-Canada, a state-owned oil company. Petro-Canada put

forth national goals including, increased domestic ownership of the industry,

development of reserves not located in the western provinces, that is to say, the

promotion of the Canada Lands in the north and offshore, better information about the

petroleum industry, security of supply, decrease dependence on the large multinational

oil corporations, especially the Big Four, and increase revenues flowing to the federal

treasury from the oil and gas sector.[35]

Petro-Canada has been met with opposition mainly from Alberta, home to one of the

main oil patches in Canada. After negotiating a royalty increase on oil and price

increases for natural gas, Lougheed asserted Alberta’s position as the centre of Canada’s

petroleum industry.[35]

Alberta had since been the main source of oil in Canada since the

1970s. The clashing viewpoints of resource control has resulted in conflict over the

direction of Canada's oil industry.

Mexico

13

Main article: Mexican oil expropriation

Mexico nationalized its oil industry in 1938, and has never privatized, restricting

foreign investment. Important reserve additions in the 1970s allowed a significant

increase in production and exports, financed by the high oil prices.[11]

Despite producing

more oil than any other country in Latin America, oil does not carry a relevant

proportion of Mexico's exports. Since the giant Cantarell Field in Mexico is now in

decline, the state oil company Pemex has faced intense political opposition to opening

up the country's oil and gas sector to foreign participation. The lack of financial

autonomy has limited Pemex’s own investment capacity, inducing the company to

become highly indebted and to use an out of budget mechanism of deferred payment of

projects (PIDIREGAS) to finance the expansion of production.[11]

Some feel that the

state oil company Pemex does not have the capacity to develop deep water assets by

itself, but needs to do so if it is to stem the decline in the country's crude production.[36]

Russia

Since Putin assumed the Russian Presidency in January 2000, there has been what

amounts to a creeping re-nationalization of the Russian oil industry.[37]

14

In Russia, Vladimir Putin's government has pressured Royal Dutch Shell to hand over

control of one major project on Sakhalin Island, to Russia's Gazprom in December. The

founder of formerly private Yukos has also been jailed, and the company absorbed by

state-owned Rosneft.[38]

Such moves strain the confidence of international oil

companies in forming partnerships with Russia.[14]

Russia has taken notice of their

increasing foreign oil investment improving politics with other countries, especially

former states of the Soviet Union. Oil industry in Russia is one of the top producers in

the world, however, the proven reserves in Russia are not as prevalent as in other areas.

Furthermore, previously accessible oil fields have been lost since the Cold War. With

the collapse of the USSR, Russia has lost the rich Caspian Basin off-shore and on-shore

oil fields in the Central Asian states and Azerbaijan.[37]

See also

Energy security

Energy security and renewable technology

Petroleum

Peak oil

U.S. Energy Independence

References

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e&q=algeria%20nationalized%20oil&f=false.

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Or the Domino Effect Rides Again". Journal of Conflict Resolution (Sage Publications) 29 (3):

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in the Oil Sector: A Theory and Evidence from Panel Dat". Journal of Law, Economics, and

Organization (Oxford University Press): 1–23.

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15

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Production in Latin America". LACEA’s Journal.

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.pdf. Retrieved 2010-12-20.

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Crisis?". CRS Report for Congress.

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%20after%202000.pdf. Retrieved 2010-11-20.

13. ^ Brumberg, Daniel; Ahram, Ariel I. (2007). The National Iranian Oil Company in Iranian

Politics. The National Iranian Oil Company in Iranian Politics.

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studies/docs/NOCs/Papers/NOC_NIOC_Brumberg-Ahram.pdf. Retrieved 2010-12-20.

14. ^ a b Mark Trumbull (2007-04-03). "Risks of rising oil nationalism". Christian Science Monitor.

http://www.csmonitor.com/2007/0403/p04s01-usec.html.

15. ^ Mark Colvin and Sabra Lane (2007-06-28). "Iran's oil restrictions 'a warning for Australia'".

Energy Bulletin. http://www.energybulletin.net/31374.html.

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http://news.bbc.co.uk/2/hi/middle_east/6278120.stm.

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(Cambridge University Press) 36 (1): 113–133. http://www.jstor.org/sici?sici=0020-

8183%28198224%2936%3A1%3C113%3AWOMIT%3E2.0.CO%3B2-M. Retrieved 2010-12-

20.

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Region of Nigeria". Nordic Journal of African Studies 14 (2): 208–234.

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Indigenization in Africa". Comparative Politics (Ph.D. Program in Political Science of the City

University of New York) 22 (4): 401–419. JSTOR 421971.

20. ^ "It's our oil". The Economist. 2007-06-28.

http://www.economist.com/world/la/displaystory.cfm?story_id=9410681.

21. ^ Solberg, Carl (1979). Oil and Nationalism in Argentina. Stanford University Press.

ISBN 0804709858.

22. ^ "Cristina presentó un proyecto para la "expropiación" de las acciones de YPF" (in Spanish).

Info News. 16 April 2012. http://www.infonews.com/2012/04/16/politica-18075-cristina-

presento-un-proyecto-para-la-expropiacion-de-las-acciones-de-ypf.php. Retrieved 20 April 2012.

23. ^ a b "Energy crisis provokes Argentine YPF expropriation". Yahoo! News. 22 April 2012.

http://news.yahoo.com/energy-crisis-provokes-argentine-ypf-expropriation-155636784.html.

Retrieved 22 April 2012.

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http://www.pagina12.com.ar/diario/suplementos/cash/17-5831-2012-03-04.html.

25. ^ "El proyecto para nacionalizar YPF" (in Spanish). El Mundo. 16 April 2012.

http://www.elmundo.es/america/2012/04/16/argentina/1334600261.html. Retrieved 20 April

2012.

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http://www.thedeal.com/content/energy/ypf-expropriation-endorsed-by-argentine-

senate.php#ixzz1tY5a5QSr.

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Retrieved 2 May 2012.

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April 2012. "Repsol says that the real cause of Argentina’s declining energy trade balance is its

maze of price controls and subsidies, which makes investment unprofitable and encourages

excess consumption. Most independent energy analysts agree with this analysis."

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April 2012. http://www.ambito.com/noticia.asp?id=633578.

30. ^ "Kicillof advirtió: No vamos a pagar lo que Repsol quiera" (in Spanish). Clarín. 17 April

2012. http://www.clarin.com/politica/Kicillof-directivos-Repsol-ocultaban-

petrolera_0_683931808.html. Retrieved 20 April 2012.

16

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32. ^ Tracy Rucinski and Julien Toyer (17 April 2012). "Incensed Spain threatens Argentina after

YPF seizure". Reuters. http://www.reuters.com/article/2012/04/17/spain-argentina-ypf-

idUSL2E8FHD9420120417. Retrieved 20 April 2012.

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http://www.truth-out.org/the-top-seven-suppliers-oil-us61794.

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Upstream Oil and Gas Industry". Canadian Political Science Review 1: 91–106.

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20.

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http://news.bbc.co.uk/2/hi/europe/country_profiles/1102275.stm.

The Peak oil theory

From Wikipedia, the free encyclopedia

A logistic distribution shaped production curve, as originally suggested by M. King

Hubbert in 1956

Historical US crude oil production showing similarity to a Hubbert curve

17

Peak oil is the point in time when the maximum rate of petroleum extraction is reached,

after which the rate of production is expected to enter terminal decline.[1]

Every oil well

and field exhibits similar characteristics of being discovered, the logistics to extract the

oil being put in place, a peak or plateau of production, followed by a decline.[2]

US

domestic oil production peaked in 1970.[3]

Global production of oil fell from a high

point in 2005 at 74 mb/d, but has since rebounded, and 2011 figures show slightly

higher levels of production than in 2005.[4]

There is active debate as to how to measure

peak oil, and which types of liquid fuels to include. Most of the remaining oil is from

unconventional sources. Rough estimates indicate that out of an available 2 trillion

barrels of oil, about half has been consumed.

Peak oil is determined by the observed production rates of individual oil wells,

projected reserves and the combined production rate of a field of related oil wells. In

order to understand physical peak oil, the growing effort for production must be

considered. Physical peak oil occurs earlier, because the overall efforts for production

have increased, expanding production.[5][6]

The aggregate production rate from an oil field over time usually grows exponentially

until the rate peaks and then declines—sometimes rapidly—until the field is depleted.

This concept is derived from the Hubbert curve, and has been shown to be applicable to

the sum of a nation’s domestic production rate, and is similarly applied to the global

rate of petroleum production. Peak oil is often confused with oil depletion; peak oil is

the point of maximum production, while depletion refers to a period of falling reserves

and supply. When production declines in one country, the world can change to another

country. When world production declines, there is no where else to turn, and either

other sources for oil need to be found, such as synthetic oil, or other sources of energy

need to be used, such as renewable energy. Fortunately the world will never run out of

energy. Almost all of the energy we use from all sources is from the Sun, and more

solar energy reaches the surface of the Earth in an hour than we use in a year. Oil is

stored up energy that took millions of years to create.

M. King Hubbert created and first used the models behind peak oil in 1956 to accurately

predict that United States oil production would peak between 1965 and 1970.[7]

His

logistic model, now called Hubbert peak theory, and its variants have described with

reasonable accuracy the peak and decline of production from oil wells, fields, regions,

and countries,[8]

and has also proved useful in other limited-resource production-

domains. According to the Hubbert model, the production rate of a limited resource will

follow a roughly symmetrical logistic distribution curve (sometimes incorrectly

compared to a bell-shaped curve) based on the limits of exploitability and market

pressures.

Some observers, such as petroleum industry experts Kenneth S. Deffeyes and Matthew

Simmons, predict negative global economy implications following a post-peak

production decline—and oil price increase—due to the high dependence of most

modern industrial transport, agricultural, and industrial systems on the low cost and

high availability of oil. Predictions vary greatly as to what exactly these negative effects

would be.

18

In 2008 speculators drove oil prices to a record high of $145/barrel. Governments

sought alternatives to oil, particularly the use of ethanol, but that had the unintended

consequence of creating higher food prices, particularly in the third world.

Optimistic estimations of peak production forecast the global decline will begin after

2020, and assume major investments in alternatives will occur before a crisis, without

requiring major changes in the lifestyle of heavily oil-consuming nations. These models

show the price of oil at first escalating and then retreating as other types of fuel and

energy sources are used.[9]

Pessimistic predictions of future oil production are that either

the peak has already occurred,[10][11][12][dead link][13]

that oil production is on the cusp of the

peak, or that it will occur shortly.[14][15]

The International Energy Agency (IEA) says

production of conventional crude oil peaked in 2006.[16][17]

Throughout the first two

quarters of 2008, there were signs that a global recession was being made worse by a

series of record oil prices.[18]

Contents

1 Demand for oil

o 1.1 Population

1.1.1 Agricultural effects and population limits

o 1.2 Limited demand substitution between energy sources

2 Supply of oil

o 2.1 Overall supply levels

o 2.2 Discoveries

o 2.3 Reserves

2.3.1 Concerns over stated reserves

2.3.2 Unconventional sources

2.3.3 Synthetic sources

o 2.4 Production

2.4.1 Worldwide production trends

2.4.1.1 Oil field decline

o 2.5 Control over supply

2.5.1 Nationalization of oil supplies

2.5.2 Cartel influence on supply

2.5.3 Increasingly assertive energy producers

3 Timing of peak oil

4 Possible consequences of peak oil

o 4.1 High oil prices

4.1.1 Historical oil prices

4.1.2 Effects of rising oil prices

o 4.2 Long-term effects on lifestyle

o 4.3 Mitigation

o 4.4 Positive aspects of peak oil

5 Criticisms

6 See also

o 6.1 Prediction

o 6.2 Energy policy

19

o 6.3 Economics

o 6.4 Others

7 Further information

o 7.1 Books

o 7.2 Articles

o 7.3 Documentary films

8 Notes

9 References

10 External links

Demand for oil

Petroleum: top consuming nations, 1960-2006

Further information: Oil consumption rates, Industrialization, and Developing

countries

The demand side of peak oil is concerned with the consumption over time, and the

growth of this demand. World crude oil demand grew an average of 1.76% per year

from 1994 to 2006, with a high of 3.4% in 2003-2004. After reaching a high of 85.6

million barrels (13,610,000 m3) per day in 2007, world consumption decreased in both

2008 and 2009 by a total of 1.8%, due to rising fuel costs.[19]

Despite this lull, world

demand for oil is projected to increase 21% over 2007 levels by 2030 (104 million

barrels per day (16.5×106 m

3/d) from 86 million barrels (13.7×10

6 m

3)), due in large

part to increases in demand from the transportation sector.[20][21][22]

A study published in

the journal Energy Policy predicted demand would surpass supply by 2015 (unless

constrained by strong recession pressures caused by reduced supply).[15]

The world increased its daily oil consumption from 63 million barrels (10,000,000 m

3)

(Mbbl) in 1980 to 85 million barrels (13,500,000 m3) in 2006.

20

Energy demand is distributed amongst four broad sectors: transportation, residential,

commercial, and industrial.[23][24]

In terms of oil use, transportation is the largest sector

and the one that has seen the largest growth in demand in recent decades. This growth

has largely come from new demand for personal-use vehicles powered by internal

combustion engines.[25]

This sector also has the highest consumption rates, accounting

for approximately 68.9% of the oil used in the United States in 2006,[26]

and 55% of oil

use worldwide as documented in the Hirsch report. Transportation is therefore of

particular interest to those seeking to mitigate the effects of peak oil.

United States crude oil production peaked in 1970. By 2005, imports were twice as

great as production.

Although demand growth is highest in the developing world,[27]

the United States is the

world's largest consumer of petroleum. Between 1995 and 2005, U.S. consumption

grew from 17,700,000 barrels per day (2,810,000 m3/d) to 20,700,000 barrels per day

(3,290,000 m3/d), a 3,000,000 barrels per day (480,000 m

3/d) increase. China, by

comparison, increased consumption from 3,400,000 barrels per day (540,000 m3/d) to

7,000,000 barrels per day (1,100,000 m3/d), an increase of 3,600,000 barrels per day

(570,000 m3/d), in the same time frame.

[28]

As countries develop, industry and higher living standards drive up energy use, most

often of oil. Thriving economies, such as China and India, are quickly becoming large

oil consumers.[29]

China has seen oil consumption grow by 8% yearly since 2002,

doubling from 1996-2006.[27]

In 2008, auto sales in China were expected to grow by as much as 15-20%, resulting in

part from economic growth rates of over 10% for five years in a row.[30]

Although swift, continued growth in China is often predicted, others predict China's

export-dominated economy will not continue such growth trends due to wage and price

inflation and reduced demand from the United States.[31]

India's oil imports are expected

to more than triple from 2005 levels by 2020, rising to 5 million barrels per day

(790×103 m

3/d).

[32]

The International Energy Agency estimated in January 2009 that oil demand fell in

2008 by 0.3%, and that it would fall by 0.6% in 2009. Oil consumption had not fallen

for two years in a row since 1982-1983.[33]

21

The Energy Information Administration (EIA) estimated that the United States' demand

for petroleum-based transportation fuels fell 7.1% in 2008, which is "the steepest one-

year decline since at least 1950." The agency stated that gasoline usage in the United

States may have peaked in 2007, in part due to increasing interest in and mandates for

use of biofuels and energy efficiency.[34][35]

The EIA now expects global oil demand to increase by about 1,600,000 barrels per day

(250,000 m3/d) in 2010. Asian economies, in particular China, will lead the increase.

[36]

China’s oil demand may rise more than 5% compared with a 3.7% gain in 2009, the

CNPC said.[37]

Population

World population

Another significant factor on petroleum demand has been human population growth. Oil

production per capita peaked in 1979.[38]

The United States Census Bureau predicts that

the world population in 2030 will be almost double that of 1980.[39]

In 2007, author

Matt Savinar predicted that oil production in 2030 will have declined back to 1980

levels as worldwide demand for oil significantly out-paces production.[40][41]

Physicist

Albert Bartlett argues that the decline of the rate of oil production per capita has gone

undiscussed because population control is considered politically incorrect by some.[42]

Oil production per capita has declined from 5.26 barrels per year (0.836 m3/a)in 1980 to

4.44 barrels per year (0.706 m3/a) in 1993,

[39][43] but then increased to 4.79 barrels per

year (0.762 m3/a) in 2005.

[39][43] In 2006, the world oil production took a downturn from

84.631 to 84.597 million barrels per day (13.4553×106 to 13.4498×10

6 m

3/d) although

population has continued to increase. This has caused the oil production per capita to

drop again to 4.73 barrels per year (0.752 m3/a).

[39][43]

One factor that has so far helped ameliorate the effect of population growth on demand

is the decline of population growth rate since the 1970s. In 1970, the population grew at

2.1%. By 2007, the growth rate had declined to 1.167%.[44]

However, oil production

was, until 2005, still outpacing population growth to meet demand. World population

grew by 6.2% from 6.07 billion in 2000 to 6.45 billion in 2005,[39]

whereas according to

BP, global oil production during that same period increased from 74.9 to 81.1 million

barrels (11.91×106 to 12.89×10

6 m

3), or by 8.2%.

[45] or according to EIA, from 77.762

to 84.631 million barrels (12.3632×106 to 13.4553×10

6 m

3), or by 8.8%.

[43]

22

Agricultural effects and population limits

Further information: Food vs fuel, 2007–2008 world food price crisis, Energy and

agriculture, and Food security

Since supplies of oil and gas are essential to modern agriculture techniques, a fall in

global oil supplies could cause spiking food prices and unprecedented famine in the

coming decades.[46][note 1]

Geologist Dale Allen Pfeiffer contends that current population

levels are unsustainable, and that to achieve a sustainable economy and avert disaster

the United States population would have to be reduced by at least one-third, and world

population by two-thirds.[47][48]

The largest consumer of fossil fuels in modern agriculture is ammonia production (for

fertilizer) via the Haber process, which is essential to high-yielding intensive

agriculture. The specific fossil fuel input to fertilizer production is primarily natural gas,

to provide hydrogen via steam reforming. Given sufficient supplies of renewable

electricity, hydrogen can be generated without fossil fuels using methods such as

electrolysis. For example, the Vemork hydroelectric plant in Norway used its surplus

electricity output to generate renewable ammonia from 1911 to 1971.[49]

Iceland currently generates ammonia using the electrical output from its hydroelectric

and geothermal power plants, because Iceland has those resources in abundance while

having no domestic hydrocarbon resources, and a high cost for importing natural gas.[50]

Limited demand substitution between energy sources

Beyond the steady rise of world energy demand, World Pensions Council (WPC)

research suggests that most experts and policy makers expect oil and natural gas to

improve their global market position vis-a-vis renewable and nuclear energy, notably

because of the “natural bottlenecks hindering the exploitation of renewable energy

sources such as the biofuel vs. food on the table paradox in California and Latin

America, the rapid denuclearization of Japan and Germany and the natural limitations of

hydro and geo supplies in Europe and the Americas” [51]

Supply of oil

Overall supply levels

According to the IEA's Oil Market Report dated 13 December 2011, global oil supply

had risen to a record high of 90.0 mb/day by November 2011. Of this, oil supply from

OPEC nations represented only 30.68 mb/day (34.1% of the total).[52]

23

Discoveries

Growing gap between discovery and production

“ All the easy oil and gas in the world has pretty much been found. Now

comes the harder work in finding and producing oil from more challenging

environments and work areas. ”

— William J. Cummings, Exxon-Mobil company spokesman, December

2005[53]

“ It is pretty clear that there is not much chance of finding any significant

quantity of new cheap oil. Any new or unconventional oil is going to be

expensive. ” — Lord Ron Oxburgh, a former chairman of Shell, October 2008

[54]

To pump oil, it first needs to be discovered. The peak of world oilfield discoveries

occurred in 1965[55]

at around 55 billion barrels (8.7×109 m

3)(Gb)/year.

[56] According to

the Association for the Study of Peak Oil and Gas (ASPO), the rate of discovery has

been falling steadily since.

24

Less than 10 Gb/yr of oil were discovered each year between 2002-2007.[57]

According

to a 2010 Reuters article, the annual rate of discovery of new fields has remained

remarkably constant at 15-20 Gb/yr.[58]

Reserves

Main articles: Oil reserves and List of largest oil fields

Proven oil reserves, 2009.

2004 U.S. government predictions for oil production other than in OPEC and the former

Soviet Union.

Total possible conventional crude oil reserves include all crude oil with 90-95%

certainty of being technically possible to produce (from reservoirs through a wellbore

using primary, secondary, improved, enhanced, or tertiary methods), all crude with a

50% probability of being produced in the future, and discovered reserves which have a

5-10% possibility of being produced in the future. These are referred to as 1P/Proven

(90-95%), 2P/Probable (50%), and 3P/Possible (5-10%).[59]

This does not include

liquids extracted from mined solids or gasses (oil sands, oil shales, gas-to-liquid

processes, or coal-to-liquid processes).[60]

Many current 2P calculations predict reserves to be between 1150-1350 Gb, but because

of misinformation, withheld information, and misleading reserve calculations, it has

been reported that 2P reserves are likely nearer to 850-900 Gb.[11][15]

Reserves in effect

peaked in 1980, when production first surpassed new discoveries, though creative

methods of recalculating reserves have made this difficult to establish exactly.[11]

25

Current technology is capable of extracting about 40% of the oil from most wells. Some

speculate that future technology will make further extraction possible,[61][verification needed]

but this future technology is usually already considered in Proven and Probable (2P)

reserve numbers.

In many major producing countries, the majority of reserves claims have not been

subject to outside audit or examination.

Most of the easy-to-extract oil has been found.[53]

Recent price increases have led to oil

exploration in areas where extraction is much more expensive, such as in extremely

deep wells, extreme downhole temperatures, and environmentally sensitive areas or

where high technology will be required to extract the oil. A lower rate of discoveries per

explorations has led to a shortage of drilling rigs, increases in steel prices, and overall

increases in costs due to complexity.[62][63]

Concerns over stated reserves

“ [World] reserves are confused and in fact inflated. Many of the so-called

reserves are in fact resources. They're not delineated, they're not accessible,

they’re not available for production. ”

— Sadad I. Al-Husseini, former VP of Aramco, presentation to the Oil and

Money conference, October 2007.[12]

Al-Husseini estimated that 300 billion barrels (48×109 m

3) of the world's 1,200 billion

barrels (190×109 m

3) of proven reserves should be recategorized as speculative

resources.[12]

Graph of OPEC reported reserves showing refutable jumps in stated reserves without

associated discoveries, as well as the lack of depletion despite yearly production. One

difficulty in forecasting the date of peak oil is the opacity surrounding the oil reserves

classified as 'proven'. Many worrying signs concerning the depletion of proven reserves

have emerged in recent years.[64][65]

This was best exemplified by the 2004 scandal

surrounding the 'evaporation' of 20% of Shell's reserves.[66]

26

For the most part, proven reserves are stated by the oil companies, the producer states

and the consumer states. All three have reasons to overstate their proven reserves: oil

companies may look to increase their potential worth; producer countries gain a stronger

international stature; and governments of consumer countries may seek a means to

foster sentiments of security and stability within their economies and among consumers.

Major discrepancies arise from accuracy issues with OPEC's self-reported numbers.

Besides the possibility that these nations have overstated their reserves for political

reasons (during periods of no substantial discoveries), over 70 nations also follow a

practice of not reducing their reserves to account for yearly production. Analysts have

suggested that OPEC member nations have economic incentives to exaggerate their

reserves, as the OPEC quota system allows greater output for countries with greater

reserves.[61]

Kuwait, for example, was reported in the January 2006 issue of Petroleum Intelligence

Weekly to have only 48 billion barrels (7.6×109 m

3) in reserve, of which only 24 were

fully proven. This report was based on the leak of a confidential document from Kuwait

and has not been formally denied by the Kuwaiti authorities. This leaked document is

from 2001,[67]

so the figure includes oil that has been produced since 2001, roughly 5-6

billion barrels (950×106 m

3),

[28] but excludes revisions or discoveries made since then.

Additionally, the reported 1.5 billion barrels (240×106 m

3) of oil burned off by Iraqi

soldiers in the First Persian Gulf War[68]

are conspicuously missing from Kuwait's

figures.

On the other hand, investigative journalist Greg Palast argues that oil companies have

an interest in making oil look more rare than it is, to justify higher prices.[69]

This view

is contested by ecological journalist Richard Heinberg.[70]

Other analysts argue that oil

producing countries understate the extent of their reserves to drive up the price.[71]

In November 2009, a senior official at the IEA alleged that the United States had

encouraged the international agency to manipulate depletion rates and future reserve

data to maintain lower oil prices.[72]

In 2005, the IEA predicted that 2030 production

rates would reach 120,000,000 barrels per day (19,000,000 m3/d), but this number was

gradually reduced to 105,000,000 barrels per day (16,700,000 m3/d). The IEA official

alleged industry insiders agree that even 90 to 95,000,000 barrels per day (15,100,000

m3/d) might be impossible to achieve. Although many outsiders had questioned the IEA

numbers in the past, this was the first time an insider had raised the same concerns.[72]

A

2008 analysis of IEA predictions questioned several underlying assumptions and

claimed that a 2030 production level of 75,000,000 barrels per day (11,900,000 m3/d)

(comprising 55,000,000 barrels (8,700,000 m3) of crude oil and 20,000,000 barrels

(3,200,000 m3) of both non-conventional oil and natural gas liquids) was more realistic

than the IEA numbers.[13]

The EUR reported by the 2000 USGS survey of 2,300 billion barrels (370×109 m

3) has

been criticized for assuming a discovery trend over the next twenty years that would

reverse the observed trend of the past 40 years. Their 95% confidence EUR of 2,300

billion barrels (370×109 m

3) assumed that discovery levels would stay steady, despite

the fact that discovery levels have been falling steadily since the 1960s. That trend of

falling discoveries has continued in the ten years since the USGS made their

assumption.

27

The 2000 USGS is also criticized for introducing other methodological errors, as well as

assuming 2030 production rates inconsistent with projected reserves.[11]

Unconventional sources

Main articles: Unconventional oil, Heavy crude oil, Oil sands, Oil shale, and Fischer-

Tropsch process

Syncrude's Mildred Lake mine site and plant near Fort McMurray, Alberta

Unconventional sources, such as heavy crude oil, oil sands, and oil shale are not

counted as part of oil reserves. However, with rule changes by the SEC,[73]

oil

companies can now book them as proven reserves after opening a strip mine or thermal

facility for extraction. These unconventional sources are more labor and resource

intensive to produce, however, requiring extra energy to refine, resulting in higher

production costs and up to three times more greenhouse gas emissions per barrel (or

barrel equivalent) on a "well to tank" basis or 10 to 45% more on a "well to wheels"

basis, which includes the carbon emitted from combustion of the final product.[74][75]

While the energy used, resources needed, and environmental effects of extracting

unconventional sources has traditionally been prohibitively high, the three major

unconventional oil sources being considered for large scale production are the extra

heavy oil in the Orinoco Belt of Venezuela,[76]

the Athabasca Oil Sands in the Western

Canadian Sedimentary Basin,[77]

and the oil shales of the Green River Formation in

Colorado, Utah, and Wyoming in the United States.[78][79]

Energy companies such as

Syncrude and Suncor have been extracting bitumen for decades but production has

increased greatly in recent years with the development of Steam Assisted Gravity

Drainage and other extraction technologies.[80]

Chuck Masters of the USGS estimates that, "Taken together, these resource

occurrences, in the Western Hemisphere, are approximately equal to the Identified

Reserves of conventional crude oil accredited to the Middle East."[81]

Authorities

familiar with the resources believe that the world's ultimate reserves of unconventional

oil are several times as large as those of conventional oil and will be highly profitable

for companies as a result of higher prices in the 21st century.[82]

In October 2009, the

USGS updated the Orinoco tar sands (Venezuela) recoverable "mean value" to 513

billion barrels (8.16×1010

m3), with a 90% chance of being within the range of 380-652

billion barrels (103.7×109 m

3), making this area "one of the world's largest recoverable

oil accumulations".[83]

28

Unconventional resources are much larger than conventional ones.

[84]

Despite the large quantities of oil available in non-conventional sources, Matthew

Simmons argues that limitations on production prevent them from becoming an

effective substitute for conventional crude oil. Simmons states that "these are high

energy intensity projects that can never reach high volumes" to offset significant losses

from other sources.[85]

Another study claims that even under highly optimistic

assumptions, "Canada's oil sands will not prevent peak oil," although production could

reach 5,000,000 bbl/d (790,000 m3/d) by 2030 in a "crash program" development

effort.[86]

Moreover, oil extracted from these sources typically contains contaminants such as

sulfur and heavy metals that are energy-intensive to extract and can leave tailings -

ponds containing hydrocarbon sludge - in some cases.[74][87]

The same applies to much

of the Middle East's undeveloped conventional oil reserves, much of which is heavy,

viscous, and contaminated with sulfur and metals to the point of being unusable.[88]

However, recent high oil prices make these sources more financially appealing.[61]

A

study by Wood Mackenzie suggests that within 15 years all the world’s extra oil supply

will likely come from unconventional sources.[89]

Synthetic sources

Main articles: Synthetic fuel, Gas to liquids, Fischer-Tropsch process, Bergius process,

Karrick process, and Synthetic Liquid Fuels Act

Currently, two companies SASOL and Shell, have synthetic oil technology proven to

work on a commercial scale. Sasol's primary business is based on CTL (coal-to-liquid)

and GTL (natural gas-to-liquid) technology, producing US$4.40 billion in revenues

(FY2009). Shell has used these processes to recycle waste flare gas (usually burnt off at

the refinery) into usable synthetic oil.

A 2003 article in Discover magazine claimed that thermal depolymerization could be

used to manufacture oil indefinitely, out of garbage, sewage, and agricultural waste. The

article claimed that the cost of the process was $15 per barrel.[90]

29

A follow-up article in 2006 stated that the cost was actually $80 per barrel, because the

feedstock that had previously been considered as hazardous waste now had market

value.[91]

A 2007 news bulletin published by Los Alamos Laboratory proposed that hydrogen

(possibly produced using hot fluid from nuclear reactors to split water into hydrogen

and oxygen) in combination with sequestered CO2 could be used to produce methanol,

which could then be converted into gasoline. The press release stated that in order for

such a process to be economically feasible, gasoline prices would need to be above

$4.60 "at the pump" in U.S. markets. Capital and operational costs were uncertain

mostly because the costs associated with sequestering CO2 are unknown.[92]

Another

problem is that an energy source will be required for both carbon capture and water

splitting processes.

Production

Main articles: Petroleum, Means of production, and Extraction of petroleum

OPEC Crude Oil Production 2002-2006 (in 1,000s barrels/day). Source: Middle East

Economic Survey

The point in time when peak global oil production occurs defines peak oil. This is

because production capacity is the main limitation of supply. Therefore, when

production decreases, it becomes the main bottleneck to the petroleum supply/demand

equation.

World wide oil discoveries have been less than annual production since 1980.[11]

According to several sources, worldwide production is past or near its

maximum.[10][11][12][14]

World population has grown faster than oil production. Because

of this, oil production per capita peaked in 1979 (preceded by a plateau during the

period of 1973-1979).[38]

The increasing investment in harder-to-reach oil is a sign of oil

companies' belief in the end of easy oil.[53]

Additionally, while it is widely believed that

increased oil prices spur an increase in production, an increasing number of oil industry

insiders are now coming to believe that even with higher prices, oil production is

unlikely to increase significantly beyond its current level.

30

Among the reasons cited are both geological factors as well as "above ground" factors

that are likely to see oil production plateau near its current level.[93]

Recent work points to the difficulty of increasing production even with vastly increased

investment in exploration and production, at least in mature petroleum regions. A 2008

Journal of Energy Security analysis of the energy return on drilling effort in the United

States points to an extremely limited potential to increase production of both gas and

(especially) oil. By looking at the historical response of production to variation in

drilling effort, this analysis showed very little increase of production attributable to

increased drilling. This was due to a tight quantitative relationship of diminishing

returns with increasing drilling effort: as drilling effort increased, the energy obtained

per active drill rig was reduced according to a severely diminishing power law. This fact

means that even an enormous increase of drilling effort is unlikely to lead to

significantly increased oil and gas production in a mature petroleum region like the

United States.[94]

Worldwide production trends

World oil production growth trends were flat from 2005 to 2008. According to a

January 2007 International Energy Agency report, global supply (which includes

biofuels, non-crude sources of petroleum, and use of strategic oil reserves, in addition to

crude production) averaged 85.24 million barrels per day (13.552×106 m

3/d) in 2006, up

0.76 million barrels per day (121×103 m

3/d) (0.9%), from 2005.

[95] Average yearly gains

in global supply from 1987 to 2005 were 1.2 million barrels per day (190×103 m

3/d)

(1.7%).[95]

In 2008, the IEA drastically increased its prediction of production decline

from 3.7% a year to 6.7% a year, based largely on better accounting methods, including

actual research of individual oil field production throughout the world.[96]

Oil field decline

Texas oil production has declined 72% since peaking in 1972

Of the largest 21 fields, at least 9 are in decline.[97]

In April 2006, a Saudi Aramco

spokesman admitted that its mature fields are now declining at a rate of 8% per year

(with a national composite decline of about 2%).[98]

This information has been used to

argue that Ghawar, which is the largest oil field in the world and responsible for

approximately half of Saudi Arabia's oil production over the last 50 years, has

31

peaked.[61][99]

The world's second largest oil field, the Burgan field in Kuwait, entered

decline in November 2005.[100]

According to a study of the largest 811 oilfields conducted in early 2008 by Cambridge

Energy Research Associates (CERA), the average rate of field decline is 4.5% per year.

The IEA stated in November 2008 that an analysis of 800 oilfields showed the decline

in oil production to be 6.7% a year, and that this would grow to 8.6% in 2030.[101]

There

are also projects expected to begin production within the next decade that are hoped to

offset these declines. The CERA report projects a 2017 production level of over 100

million barrels per day (16×106 m

3/d).

[102]

Kjell Aleklett of the Association for the Study of Peak Oil and Gas agrees with their

decline rates, but considers the rate of new fields coming online—100% of all projects

in development, but with 30% of them experiencing delays, plus a mix of new small

fields and field expansions—overly optimistic.[103]

A more rapid annual rate of decline

of 5.1% in 800 of the world's largest oil fields was reported by the International Energy

Agency in their World Energy Outlook 2008.[104]

Mexico announced that its giant Cantarell Field entered depletion in March 2006,[105]

due to past overproduction. In 2000, PEMEX built the largest nitrogen plant in the

world in an attempt to maintain production through nitrogen injection into the

formation,[106]

but by 2006, Cantarell was declining at a rate of 13% per year.[107]

Alaska's oil production has declined 70% since peaking in 1988

OPEC had vowed in 2000 to maintain a production level sufficient to keep oil prices

between $22–28 per barrel, but did not prove possible. In its 2007 annual report, OPEC

projected that it could maintain a production level that would stabilize the price of oil at

around $50–60 per barrel until 2030.[108]

On 18 November 2007, with oil above $98 a

barrel, King Abdullah of Saudi Arabia, a long-time advocate of stabilized oil prices,

announced that his country would not increase production to lower prices.[109]

Saudi

Arabia's inability, as the world's largest supplier, to stabilize prices through increased

production during that period suggests that no nation or organization had the spare

production capacity to lower oil prices. The implication is that those major suppliers

who had not yet peaked were operating at or near full capacity.[61]

32

Commentators have pointed to the Jack 2 deep water test well in the Gulf of Mexico,

announced 5 September 2006,[110]

as evidence that there is no imminent peak in global

oil production. According to one estimate, the field could account for up to 11% of U.S.

production within seven years.[111]

However, even though oil discoveries are expected

after the peak oil of production is reached,[112]

the new reserves of oil will be harder to

find and extract. The Jack 2 field, for instance, is more than 20,000 feet (6,100 m) under

the sea floor in 7,000 feet (2,100 m) of water, requiring 8.5 kilometers (5.3 mi) of pipe

to reach. Additionally, even the maximum estimate of 15 billion barrels (2.4×109 m

3)

represents slightly less than 2 years of U.S. consumption at present levels.[113]

A proposed arctic wilderness zone would make off limits all exploration above and

below the 65th parallels, the mean Arctic/Antarctic circles. There is about a 30 day to 3

year supply of oil north of the arctic circle. Environmentalists ask if it is worth the risk,

as it does not fundamentally change the need to stop using oil.[114]

Control over supply

Entities such as governments or cartels can reduce supply to the world market by

limiting access to the supply through nationalizing oil, cutting back on production,

limiting drilling rights, imposing taxes, etc. International sanctions, corruption, and

military conflicts can also reduce supply.

Nationalization of oil supplies

Main article: Nationalization of oil supplies

Another factor affecting global oil supply is the nationalization of oil reserves by

producing nations. The nationalization of oil occurs as countries begin to deprivatize oil

production and withhold exports. Kate Dourian, Platts' Middle East editor, points out

that while estimates of oil reserves may vary, politics have now entered the equation of

oil supply. "Some countries are becoming off limits. Major oil companies operating in

Venezuela find themselves in a difficult position because of the growing nationalization

of that resource. These countries are now reluctant to share their reserves."[115]

According to consulting firm PFC Energy, only 7% of the world's estimated oil and gas

reserves are in countries that allow companies like ExxonMobil free rein. Fully 65% are

in the hands of state-owned companies such as Saudi Aramco, with the rest in countries

such as Russia and Venezuela, where access by Western European and North American

companies is difficult. The PFC study implies political factors are limiting capacity

increases in Mexico, Venezuela, Iran, Iraq, Kuwait, and Russia. Saudi Arabia is also

limiting capacity expansion, but because of a self-imposed cap, unlike the other

countries.[116]

As a result of not having access to countries amenable to oil exploration,

ExxonMobil is not making nearly the investment in finding new oil that it did in

1981.[117]

Cartel influence on supply

Further information: Organization of the Petroleum Exporting Countries

33

OPEC is an alliance between 12 diverse oil producing countries (Algeria, Angola,

Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab

Emirates, and Venezuela) to control the supply of oil. OPEC's power was consolidated

as various countries nationalized their oil holdings, and wrested decision-making away

from the "Seven Sisters," (Anglo-Iranian, Socony-Vacuum, Royal Dutch Shell, Gulf,

Esso, Texaco, and Socal) and created their own oil companies to control the oil. OPEC

tries to influence prices by restricting production. It does this by allocating each

member country a quota for production. All 12 members agree to keep prices high by

producing at lower levels than they otherwise would. There is no way to verify

adherence to the quota, so every member faces the same incentive to ‘cheat’ the

cartel.[118]

Washington kept the oil flowing and gained favorable OPEC policies mainly

by arming, and propping up Saudi regimes. According to some, the purpose for the

second Iraq war is to break the back of OPEC and return control of the oil fields to

western oil companies.[119]

Alternately, commodities trader Raymond Learsy, author of Over a Barrel: Breaking

the Middle East Oil Cartel, contends that OPEC has trained consumers to believe that

oil is a much more finite resource than it is. To back his argument, he points to past

false alarms and apparent collaboration.[71]

He also believes that peak oil analysts are

conspiring with OPEC and the oil companies to create a "fabricated drama of peak oil"

to drive up oil prices and profits. It is worth noting oil had risen to a little over

$30/barrel at that time. A counter-argument was given in the Huffington Post after he

and Steve Andrews, co-founder of ASPO, debated on CNBC in June 2007.[120]

Increasingly assertive energy producers

Think-tanks such as the World Pensions Council (WPC) have argued that, unlike

previous recessionary cycles, the price of gas could remain at a high level as Gulf Arab,

Latin American and Asian governments are less inclined to accommodate the US on the

supply front, which could hamper a fragile recovery in the oil-dependent nations of

Europe and North America [121]

Timing of peak oil

Main article: Predicting the timing of peak oil

Peak oil depletion scenarios graph, which depicts cumulative published depletion

studies by the ASPO and other depletion analysts (Oil Shock Model is elaborated in

"The Oil Conundrum" [122]

).

34

In Feb 2010 the US Joint Forces Command issued the Joint Operating Environment

2010[123]

warning US military commands "By 2012, surplus oil production capacity

could entirely disappear, and as early as 2015, the shortfall in output could reach nearly

10 million barrels per day.

"A severe energy crunch is inevitable without a massive expansion of production and

refining capacity. While it is difficult to predict precisely what economic, political, and

strategic effects such a shortfall might produce, it surely would reduce the prospects for

growth in both the developing and developed worlds. Such an economic slowdown

would exacerbate other unresolved tensions, push fragile and failing states further down

the path toward collapse, and perhaps have serious economic impact on both China and

India. At best, it would lead to periods of harsh economic adjustment. To what extent

conservation measures, investments in alternative energy production, and efforts to

expand petroleum production from tar sands and shale would mitigate such a period of

adjustment is difficult to predict. One should not forget that the Great Depression

spawned a number of totalitarian regimes that sought economic prosperity for their

nations by ruthless conquest.

"Energy production and distribution infrastructure must see significant new investment

if energy demand is to be satisfied at a cost compatible with economic growth and

prosperity.

"The discovery rate for new petroleum and gas fields over the past two decades (with

the possible exception of Brazil) provides little reason for optimism that future efforts

will find major new fields."

International Energy Agency prediction of future oil

The military warning of timing issue is graphically noted in the International Energy

Agency's (IEA) World Energy Outlook 2010.[124]

The IEA graph notes that depleting

conventional oil will be replaced by "fields yet to be found" and "fields yet to be

developed."

M. King Hubbert initially predicted in 1974 that peak oil would occur in 1995 "if

current trends continue."[125]

However, in the late 1970s and early 1980s, global oil

consumption actually dropped (due to the shift to energy-efficient cars,[126]

the shift to

electricity and natural gas for heating,[127]

and other factors), then rebounded to a lower

level of growth in the mid 1980s. Thus oil production did not peak in 1995, and has

climbed to more than double the rate initially projected. This underscores the fact that

the only reliable way to identify the timing of peak oil will be in retrospect. However,

predictions have been refined through the years as up-to-date information becomes

more readily available, such as new reserve growth data.[128]

35

Predictions of the timing of peak oil include the possibilities that it has recently

occurred, that it will occur shortly, or that a plateau of oil production will sustain supply

for up to 100 years. None of these predictions dispute the peaking of oil production, but

disagree only on when it will occur.

According to Matthew Simmons, former Chairman of Simmons & Company

International and author of Twilight in the Desert: The Coming Saudi Oil Shock and the

World Economy, "...peaking is one of these fuzzy events that you only know clearly

when you see it through a rear view mirror, and by then an alternate resolution is

generally too late."[129]

Possible consequences of peak oil

Further information: Hirsch Report and Malthusian catastrophe

The wide use of fossil fuels has been one of the most important stimuli of economic

growth and prosperity since the industrial revolution, allowing humans to participate in

takedown, or the consumption of energy at a greater rate than it is being replaced. Some

believe that when oil production decreases, human culture, and modern technological

society will be forced to change drastically. The impact of peak oil will depend heavily

on the rate of decline and the development and adoption of effective alternatives. If

alternatives are not forthcoming, the products produced with oil (including fertilizers,

detergents, solvents, adhesives, and most plastics) would become scarce and expensive.

In 2005, the United States Department of Energy published a report titled Peaking of

World Oil Production: Impacts, Mitigation, & Risk Management.[130]

Known as the

Hirsch report, it stated, "The peaking of world oil production presents the U.S. and the

world with an unprecedented risk management problem. As peaking is approached,

liquid fuel prices and price volatility will increase dramatically, and, without timely

mitigation, the economic, social, and political costs will be unprecedented. Viable

mitigation options exist on both the supply and demand sides, but to have substantial

impact, they must be initiated more than a decade in advance of peaking."

High oil prices

36

Main articles: Oil price increases since 2003 and Price of petroleum

Historical oil prices

Average Price of West Texas Intermediate Crude Oil, 1995-2011

Long-term oil prices, 1861-2008 (top line adjusted for inflation).

The oil price historically was comparatively low until the 1973 oil crisis and the 1979

energy crisis when it increased more than tenfold during that six year timeframe. Even

though the oil price dropped significantly in the following years, it has never come back

to the previous levels. Oil price began to increase again during the 2000s until it hit

historical heights of $143 per barrel (2007 inflation adjusted dollars) on 30 June

2008.[131]

As these prices were well above those that caused the 1973 and 1979 energy

crises, they have contributed to fears of an economic recession similar to that of the

early 1980s.[18]

These fears were not without a basis, since the high oil prices began

having an effect on the economies, as, for example, indicated by gasoline consumption

drop of 0.5% in the first two months of 2008 in the United States.[132]

compared to a

drop of .4% total in 2007.[133]

It is agreed that the main reason for the price spike in 2005-2008 was strong demand

pressure. For example, global consumption of oil rose from 30 billion barrels

(4.8×109 m

3) in 2004 to 31 billion in 2005. The consumption rates were far above new

discoveries in the period, which had fallen to only eight billion barrels of new oil

reserves in new accumulations in 2004.[134]

Oil price increases were partially fueled by reports that petroleum production is

at[10][11][12]

or near full capacity.[14][135][136]

In June 2005, OPEC stated that they would 'struggle' to pump enough oil to meet

pricing pressures for the fourth quarter of that year.[137]

From 2007 to 2008, the decline

in the U.S. dollar against other significant currencies was also considered as a

significant reason for the oil price increases,[138]

as the dollar lost approximately 14% of

its value against the Euro from May 2007 to May 2008.

Besides supply and demand pressures, at times security related factors may have

contributed to increases in prices,[136]

including the War on Terror, missile launches in

North Korea,[139]

the Crisis between Israel and Lebanon,[140]

nuclear brinkmanship

between the U.S. and Iran,[141]

and reports from the U.S. Department of Energy and

others showing a decline in petroleum reserves.[142]

37

Effects of rising oil prices

Main article: Effects of oil price

World consumption of primary energy by energy type in terawatts (TW), 1965-

2005.[143]

In the past, the price of oil has led to economic recessions, such as the 1973 and 1979

energy crises. The effect the price of oil has on an economy is known as a price shock.

In many European countries, which have high taxes on fuels, such price shocks could

potentially be mitigated somewhat by temporarily or permanently suspending the taxes

as fuel costs rise.[144]

This method of softening price shocks is less useful in countries

with much lower gas taxes, such as the United States.

Researchers at the Stanford Energy Modeling Forum found that the economy can adjust

to steady, gradual increases in the price of crude better than wild lurches.[145]

Some economists predict that a substitution effect will spur demand for alternate energy

sources, such as coal or liquefied natural gas. This substitution can only be temporary,

as coal and natural gas are finite resources as well.

Prior to the run-up in fuel prices, many motorists opted for larger, less fuel-efficient

sport utility vehicles and full-sized pickups in the United States, Canada, and other

countries. This trend has been reversing due to sustained high prices of fuel. The

September 2005 sales data for all vehicle vendors indicated SUV sales dropped while

small cars sales increased. Hybrid and diesel vehicles are also gaining in popularity.[146]

38

Disposable Energy measures family disposable income's ability to buy gasoline. Source

data: US Government

EIA published Household Vehicles Energy Use: Latest Data and Trends[147]

in Nov

2005 illustrating the steady increase in disposable income and $20–30 per barrel price

of oil in 2004. The report notes "The average household spent $1,520 on fuel purchases

for transport." According to CNBC that expense climbed to $4,155 in 2011.[148]

This

dramatic increase in the cost of transportation impacts every other use of family

disposable income. The diversion of disposable energy to gasoline purchases must pull

funds from other aspect of the largely consumer driven US economy.

In 2008, a report by Cambridge Energy Research Associates stated that 2007 had been

the year of peak gasoline usage in the United States, and that record energy prices

would cause an "enduring shift" in energy consumption practices.[149]

According to the

report, in April gas consumption had been lower than a year before for the sixth straight

month, suggesting 2008 would be the first year U.S. gasoline usage declined in 17

years. The total miles driven in the U.S. peaked in 2006.[150]

The Export Land Model states that after peak oil petroleum exporting countries will be

forced to reduce their exports more quickly than their production decreases because of

internal demand growth. Countries that rely on imported petroleum will therefore be

affected earlier and more dramatically than exporting countries.[151]

Mexico is already in

this situation. Internal consumption grew by 5.9% in 2006 in the five biggest exporting

countries, and their exports declined by over 3%. It was estimated that by 2010 internal

demand would decrease worldwide exports by 2,500,000 barrels per day (400,000

m3/d).

[152]

Canadian economist Jeff Rubin has stated that high oil prices will likely result in

increased consumption in developed countries through partial manufacturing de-

globalisation of trade. Manufacturing production would move closer to the end

consumer to minimise transportation network costs, and therefore a demand decoupling

from Gross Domestic Product would occur. Higher oil prices would lead to increased

freighting costs and consequently, the manufacturing industry would move back to the

developed countries since freight costs would outweigh the current economic wage

advantage of developing countries.[153][154]

Chinese Export data released on 10 March

2012 confirmed a deep slowdown in exports, as China entered an unexpectedly large

trade deficit.[155]

Economic research carried out by the International Monetary Fund puts overall price

elasticity of demand for oil at -0.025 short term and -0.093 long term.[156]

Long-term effects on lifestyle

A majority of Americans live in suburbs, a type of low-density settlement designed

around universal personal automobile use. Commentators such as James Howard

Kunstler argue that because over 90% of transportation in the U.S. relies on oil, the

suburbs' reliance on the automobile is an unsustainable living arrangement. Peak oil

would leave many Americans unable to afford petroleum based fuel for their cars, and

force them to use bicycles or electric vehicles.

39

Additional options include telecommuting, moving to rural areas, or moving to higher

density areas, where walking and public transportation are more viable options. In the

latter two cases, suburbia may become the "slums of the future."[157][158]

The issues of

petroleum supply and demand is also a concern for growing cities in developing

countries (where urban areas are expected to absorb most of the world's projected 2.3

billion population increase by 2050). Stressing the energy component of future

development plans is seen as an important goal.[159]

Rising oil prices will also affect the cost of food, heating, and electricity. With prices

rising for these necessities, a high amount of stress will be put on current middle to low

income families and even furthermore as economies contract from the decline in excess

funds, decreasing employment rates. The Hirsch/US DoE Report concludes that

"without timely mitigation, world supply/demand balance will be achieved through

massive demand destruction (shortages), accompanied by huge oil price increases, both

of which would create a long period of significant economic hardship worldwide".[160]

With the presumably inevitable deterioration that rising oil prices will cause, there can

be a positive assumption to correlate with the decrease in the amount of "Vehicle Miles

Traveled" (VMT) and the rise of prices, more families will spend time at home creating

a new type of lifestyle for the young and old.

Methods that have been suggested[161]

for mitigating these urban and suburban issues

include the use of non-petroleum vehicles such as electric cars, battery electric vehicles,

transit-oriented development, Car-free Cities, bicycles, new trains, new pedestrianism,

smart growth, shared space, urban consolidation, urban villages, and New Urbanism.

An extensive 2009 report by the United States National Research Council of the

Academy of Sciences, commissioned by the United States Congress, stated six main

findings.[162]

First, that compact development is likely to reduce "Vehicle Miles

Traveled" (VMT) throughout the country. Second, that doubling residential density in a

given area could reduce VMT by as much as 25% if coupled with measures such as

increased employment density and improved public transportation. Third, that higher

density, mixed-use developments would produce both direct reductions in CO2

emissions (from less driving), and indirect reductions (such as from lower amounts of

materials used per housing unit, higher efficiency climate control, longer vehicle

lifespans, and higher efficiency delivery of goods and services). Fourth, that although

short term reductions in energy use and CO2 emissions would be modest, that these

reductions would become more significant over time. Fifth, that a major obstacle to

more compact development in the United States is political resistance from local zoning

regulators, which would hamper efforts by state and regional governments to participate

in land-use planning. Sixth, the committee agreed that changes in development that

would alter driving patterns and building efficiency would have various secondary costs

and benefits that are difficult to quantify. The report recommends that policies

supporting compact development (and especially its ability to reduce driving, energy

use, and CO2 emissions) should be encouraged.

An economic theory that has been proposed as a remedy is the introduction of a steady

state economy. Such a system would include a tax shifting from income to depleting

natural resources (and pollution), as well as the limitation of advertising that stimulates

demand and population growth.

40

It also includes the institution of policies that move away from globalization and toward

localization to conserve energy resources, provide local jobs, and maintain local

decision-making authority. Zoning policies would be adjusted to promote resource

conservation and eliminate sprawl.[163][164]

Mitigation

Main article: Mitigation of peak oil

To avoid the serious social and economic implications a global decline in oil production

could entail, the 2005 Hirsch report emphasized the need to find alternatives, at least ten

to twenty years before the peak, and to phase out the use of petroleum over that

time.[130]

This was similar to a plan proposed for Sweden that same year. Such

mitigation could include energy conservation, fuel substitution, and the use of

unconventional oil. Because mitigation can reduce the use of traditional petroleum

sources, it can also affect the timing of peak oil and the shape of the Hubbert curve. The

less we use, the longer it will last.

Iceland was the first country to suggest transitioning to 100% renewable energy, using

hydrogen for vehicles and their fishing fleet, in 1998.[165]

By 2009 the concept of using

wind, water, and solar was proposed, with a little bit of biofuel for that segment of

transportation that is difficult to electrify, such as large ships and airplanes.

Positive aspects of peak oil

Permaculture, particularly as expressed in the work of Australian David Holmgren, and

others, sees peak oil as holding tremendous potential for positive change, assuming

countries act with foresight. The rebuilding of local food networks, energy production,

and the general implementation of 'energy descent culture' are argued to be ethical

responses to the acknowledgment of finite fossil resources.[166]

The Transition Towns movement, started in Totnes, Devon[167]

and spread

internationally by "The Transition Handbook" (Rob Hopkins), sees the restructuring of

society for more local resilience and ecological stewardship as a natural response to the

combination of peak oil and climate change.[168]

41

Criticisms

Canadian conventional oil production peaked in 1973, but non-conventional oil sands

production continues to increase total oil production

Oil industry representatives have criticised peak oil theory, at least as it has been

presented by Matthew Simmons. The president of Royal Dutch Shell's U.S. operations

John Hofmeister, while agreeing that conventional oil production will soon start to

decline, has criticized Simmons's analysis for being "overly focused on a single country:

Saudi Arabia, the world's largest exporter and OPEC swing producer."

42

He also points to the large reserves at the U.S. outer continental shelf, which holds an

estimated 100 billion barrels (16×109 m

3) of oil and natural gas. As things stand,

however, only 15% of those reserves are currently exploitable, a good part of that off

the coasts of Louisiana, Alabama, Mississippi, and Texas. Hofmeister also contends that

Simmons erred in excluding unconventional sources of oil such as the oil sands of

Canada, where Shell is already active. The Canadian oil sands—a natural combination

of sand, water, and oil found largely in Alberta and Saskatchewan—is believed to

contain one trillion barrels of oil. Another trillion barrels are also said to be trapped in

rocks in Colorado, Utah, and Wyoming,[169]

but are in the form of oil shale. These

particular reserves present major environmental, social, and economic obstacles to

recovery.[170][171]

Hofmeister also claims that if oil companies were allowed to drill more

in the United States enough to produce another 2 million barrels per day

(320×103 m

3/d), oil and gas prices would not be as high as they are in the later part of

the 2000 to 2010 decade. He thinks that high energy prices are causing social unrest

similar to levels surrounding the Rodney King riots.[172]

In 2009, Dr. Christoph Rühl, chief economist of BP, argued against the peak oil

hypothesis:[173]

Physical peak oil, which I have no reason to accept as a valid statement either on

theoretical, scientific or ideological grounds, would be insensitive to prices. (...) In fact

the whole hypothesis of peak oil – which is that there is a certain amount of oil in the

ground, consumed at a certain rate, and then it's finished – does not react to anything....

(Global Warming) is likely to be more of a natural limit than all these peak oil theories

combined. (...) Peak oil has been predicted for 150 years. It has never happened, and it

will stay this way.

According to Rühl, the main limitations for oil availability are "above ground" and are

to be found in the availability of staff, expertise, technology, investment security,

money and last but not least in global warming. The oil question is about price and not

the basic availability. This is entirely compatible with Hubbert's empirical method,

which focuses on observed patterns of extraction rather than their causes. Rühl's views

are shared by Daniel Yergin of CERA, who added that the recent high price phase might

add to a future demise of the oil industry - not of complete exhaustion of resources or an

apocalyptic shock but the timely and smooth setup of alternatives.[174]

Note that this

"timely and smooth" setup will only start once people acknowledge the need for it.

From there, it will take many decades to build an alternative infrastructure, as it has

taken around a century to build up fossil-fuel infrastructure.

Clive Mather, CEO of Shell Canada, said the Earth's supply of hydrocarbons is "almost

infinite", referring to hydrocarbons in oil sands.[175]

Engineer Peter Huber believes the

Canadian oil sands can fuel all of humanity's demands for over 100 years.[175]

This small

figure suggests that even he believes that peak oil will occur within the next 150 years.

Industry blogger Steve Maley echoed some of the points of Yergin, Rühl, Mather and

Hofmeister.[176]

43

Environmentalist George Monbiot holds the view on peak oil (citing a report of 110

million barrels per day in 2020[177]

) that there is more than enough oil to fuel capitalism,

and the 20 years of moral efforts to prevent ecologic disaster have failed.[178]

Further information

Books

Campbell, Colin J (2004). The Essence of Oil & Gas Depletion. Multi-Science

Publishing. ISBN 0-906522-19-6.

Campbell, Colin J (1997). The Coming Oil Crisis. Multi-Science Publishing.

ISBN 0-906522-11-0.

Campbell, Colin J (2005). Oil Crisis. Multi-Science Publishing. ISBN 0-

906522-39-0.

Deffeyes, Kenneth S (2002). Hubbert's Peak: The Impending World Oil

Shortage. Princeton University Press. ISBN 0-691-09086-6.

Deffeyes, Kenneth S (2005). Beyond Oil: The View from Hubbert's Peak. Hill

and Wang. ISBN 0-8090-2956-1.

Goodstein David (2005). Out of Gas: The End of the Age Of Oil. WW Norton.

ISBN 0-393-05857-3.

Heinberg Richard (2003). The Party's Over: Oil, War, and the Fate of Industrial

Societies. New Society Publishers. ISBN 0-86571-482-7.

Heinberg, Richard (2004). Power Down: Options and Actions for a Post-Carbon

World. New Society Publishers. ISBN 0-86571-510-6.

Heinberg, Richard (2006). The Oil Depletion Protocol: A Plan to Avert Oil

Wars, Terrorism and Economic Collapse. New Society Publishers. ISBN 0-

86571-563-7.

Heinberg, Richard and Leich, Daniel (2010). The Post Carbon Reader:

Managing the 21st Centery Sustainability Crisis. Watershed Media. ISBN 978-

0-9709500-6-2.

Huber Peter (2005). The Bottomless Well. Basic Books. ISBN 0-465-03116-1.

Kunstler James H (2005). The Long Emergency: Surviving the End of the Oil

Age, Climate Change, and Other Converging Catastrophes. Atlantic Monthly

Press. ISBN 0-87113-888-3.

Leggett Jeremy K (2005). The Empty Tank: Oil, Gas, Hot Air, and the Coming

Financial Catastrophe. Random House. ISBN 1-4000-6527-5.

Leggett, Jeremy K (2005). Half Gone: Oil, Gas, Hot Air and the Global Energy

Crisis. Portobello Books. ISBN 1-84627-004-9.

Leggett Jeremy K (2001). The Carbon War: Global Warming and the End of the

Oil Era. Routledge. ISBN 0-415-93102-9.

Lovins Amory et al. (2005). Winning the Oil Endgame: Innovation for Profit,

Jobs and Security. Rocky Mountain Institute. ISBN 1-881071-10-3.

Pfeiffer Dale Allen (2004). The End of the Oil Age. Lulu Press. ISBN 1-4116-

0629-9.

Newman Sheila (2008). The Final Energy Crisis (2nd ed.). Pluto Press.

ISBN 978-0-7453-2717-4. OCLC 228370383.

Roberts Paul (2004). The End of Oil. On the Edge of a Perilous New World.

Boston: Houghton Mifflin. ISBN 978-0-618-23977-1.

44

Ruppert Michael C (2005). Crossing the Rubicon: The Decline of the American

Empire at the End of the Age of Oil. New Society. ISBN 978-0-86571-540-0.

Simmons Matthew R (2005). Twilight in the Desert: The Coming Saudi Oil

Shock and the World Economy. Hoboken, N.J.: Wiley & Sons. ISBN 0-471-

73876-X.

Simon Julian L (1998). The Ultimate Resource. Princeton University Press.

ISBN 0-691-00381-5.

Stansberry Mark A, Reimbold Jason (2008). The Braking Point. Hawk

Publishing. ISBN 978-1-930709-67-6.

Tertzakian Peter (2006). A Thousand Barrels a Second. McGraw-Hill. ISBN 0-

07-146874-9.

Vassiliou, Marius (2009). Historical Dictionary of the Petroleum Industry.

Scarecrow Press (Rowman & Littlefield). ISBN 0-8108-5993-9.

Articles

Tinker Scott W (25 June 2005). "Of peaks and valleys: Doomsday energy

scenarios burn away under scrutiny". Dallas Morning News.

http://www.jsg.utexas.edu/news/rels/062505a.html.[dead link]

Benner Katie (7 December 2005). "Lawmakers: Will we run out of oil?". CNN.

http://money.cnn.com/2005/12/07/markets/peak_oil/index.htm.

Benner Katie (3 November 2004). "Oil: Is the end at hand?". CNN.

http://money.cnn.com/2004/11/02/markets/peak_oil/.

"The future of oil". Foreign Policy.

http://www.foreignpolicy.com/story/cms.php?story_id=3233.

Robert Hirsch (2008-06). "Peak oil: "A significant period of discomfort"".

Allianz Knowledge.

http://knowledge.allianz.com/en/globalissues/safety_security/energy_security/hi

rsch_peak_oil_production.html.[dead link]

Didier Houssin, International Energy Agency (2008-05). "Oil: "If you invest

more, you find more"". Allianz Knowledge.

http://knowledge.allianz.com/en/globalissues/safety_security/energy_security/ie

a_energy_houssin.html.[dead link]

Campbell Colin, Laherrère Jean. "The end of cheap oil". Scientific American.

http://dieoff.org/page140.htm.

Williams Mark. "The end of oil?". Technology Review (MIT).

http://www.technologyreview.com/articles/05/02/issue/review_oil.asp.

Appenzeller Tim. "The end of cheap oil". National Geographic.

http://ngm.nationalgeographic.com/ngm/0406/feature5/.

Lynch Michael C. "The new pessimism about petroleum resources".

http://www.gasresources.net/Lynch(Hubbert-Deffeyes).htm.[dead link]

Leonardo Maugeri (20 May 2004). "Oil: Never Cry Wolf—Why the Petroleum

Age Is Far from over". Science. http://www.energybulletin.net/node/347.

Roberts Paul (August 2004). "Last Stop Gas". Harper's Magazine: 71–72.

http://www.harpers.org/LastStopGas.html.

Porter, Adam (10 June 2005). "'Peak oil' enters mainstream debate". BBC News.

http://news.bbc.co.uk/1/hi/business/4077802.stm. Retrieved 26 March 2010.

Alex Kuhlman (2006-06). "Peak oil and the collapse of commercial aviation"

(PDF). Airways. http://www.oildecline.com/airways.pdf.

45

Cochrane Troy (4 January 2008). "Peak oil?: Oil supply and accumulation".

Cultural Shifts. http://culturalshifts.com/archives/205.

Jaeon Kirby & Colin Campbell (30 May 2008). "Life at $200 a barrel".

Maclean's.

http://www.macleans.ca/business/economy/article.jsp?content=20080528_21002

_21002.

Stefan Schaller (28 September 2010). "The Theory behind Peak Oil".

http://stefan-schaller.com/2010/09/28/the-theory-behind-peak-oil.

Ariel Schwartz (9 February 2011). "WikiLeaks May Have Just Confirmed That

Peak Oil Is Imminent". Fast Company.

http://www.fastcompany.com/1725372/wikileaks-may-have-just-confirmed-the-

existence-of-peak-oil.

D. de San Miguel (1 August 2011). "Oil Supply Analysis". Balance of Planet.

http://www.balanceofplanet.com/news/na_110801_0001.htm.

Documentary films

The End of Suburbia: Oil Depletion and the Collapse of the American Dream

(2004)

Crude Awakening: The Oil Crash (2006)

The Power of Community: How Cuba Survived Peak Oil (2006)

Crude Impact (2006)

What a Way to Go: Life at the End of Empire (2007)

PetroApocalypse Now? (2008)

Blind Spot (2008)

Gashole (2008)

Collapse (2009)

Oil Education Television: Series of video interviews with international oil

industry experts: http://oileducation.tv,

http://www.youtube.com/user/OilEducationTV

Notes

1. ^ A list of over 20 published articles and books from government and journal sources

supporting this thesis have been compiled at Dieoff.org in the section "Food, Land,

Water, and Population."

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46

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47

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External links

Association for the Study of Peak Oil International

Eating Fossil Fuels FromTheWilderness.com

Energy Bulletin Peak Oil related articles

Evolutionary psychology and peak oil: A Malthusian inspired "heads up" for

humanity An overview of peak oil, possible impacts, and mitigation strategies,

by Dr. Michael Mills

Energy Export Databrowser-Visual review of production and consumption

trends for individual nations; data from the British Petroleum Statistical Review

Peak Oil For Dummies - concise quotes from renowned politicians, oil

executives, and analysts

Cantarell Field

From Wikipedia, the free encyclopedia

Cantarell

Cantarell offshore rigs, November 2007

Country Mexico

Region North America

Offshore/onshore Offshore

55

Operator(s) Pemex

Field history

Discovery 1976

Start of production 1981

Peak of production 2004

Production

Current production of oil

(barrels per day)

464,000 bbl/d (73,800

m3/d) (Nov 2010)[1]

Producing formations Jurassic

Cantarell Field or Cantarell Complex is an aging supergiant oil field in Mexico. It

was discovered in 1976 by a fisherman, Rudesindo Cantarell. It was placed on nitrogen

injection in 2000, and production peaked at 2.1 million barrels per day (330,000 m3/d)

in 2003. In terms of cumulative production to date, it is by far the largest oil field in

Mexico, and one of the largest in the world. However, production has declined since

2003, falling to 464,000 barrels per day (73,800 m3/d) by the end of 2010, making it

Mexico's second most productive oil field after Ku-Maloob-Zaap.[1]

Contents

1 Location

2 History

3 Production decline

4 See also

5 References

6 External links

Location

Cantarell is located 80 kilometres (50 mi) offshore in the Bay of Campeche. This

complex comprises four major fields: Akal (by far the largest), Nohoch, Chac and Kutz.

56

The reservoirs are formed from carbonate breccia of Upper Cretaceous age, the rubble

from the asteroid impact that created the Chicxulub Crater. The recently discovered

Sihil (1-15,000 million barrels) contains light oil in Jurassic strata below the other

reservoirs and is generally referred to as a separate field, although its development will

obviously benefit from the infrastructure already in place above it. Cantarell's oil

production peaked in 2004 and has declined in subsequent years, with further decline

expected in the future.[2]

History

This article's tone or style may not reflect the encyclopedic tone used on

Wikipedia. See Wikipedia's guide to writing better articles for suggestions. (February 2011)

This article needs additional citations for verification. Please help improve

this article by adding citations to reliable sources. Unsourced material may be

challenged and removed. (February 2011)

The first field was discovered in 1976 by Rudesindo Cantarell, Sr., a fisherman who

complained that the oil seepage was ruining his fishing nets. PEMEX, the national oil

company of Mexico, finally investigated it and found the oil deposit.

The Cantarell Field's porosity - or holes in the rock where the oil is located - is believed

to be the result of a rubble pile from an asteroid strike that took place some 65 million

years ago. This asteroid, which led to the formation of what has become known as the

Chicxulub Crater on the Yucatán Peninsula, is thought to have been 6 miles (9.7 km) in

diameter. Many scientists[who?]

attribute this particular asteroid strike as being the

“extinction event” that took out the dinosaurs. The impact energy from the strike is

believed to have been some 2 million times that of the largest man-made explosion, that

of the Tsar Bomba, a 50 megaton hydrogen device set off by Russia in 1961.

By 1981 the Cantarell complex was producing 1.16 million barrels per day (180,000

m3/d). However, the production rate dropped to 1 million barrels per day (160,000 m

3/d)

in 1995. The nitrogen injection project started operating in 2000, and it increased the

production rate to 1.6 million barrels per day (250,000 m3/d), to 1.9 million barrels per

day (300,000 m3/d) in 2002 and to 2.1 million barrels per day (330,000 m

3/d) of output

in 2003, which ranked Cantarell the second fastest producing oil field in the world

behind Ghawar Field in Saudi Arabia.[3]

However, Cantarell had much smaller oil

reserves than Ghawar, so production began to decline rapidly in the second half of the

decade.

Production decline

Luis Ramírez Corzo, head of PEMEX's exploration and production division, announced

on August 12, 2004 that the actual oil output from Cantarell was forecast to decline

steeply from 2006 onwards, at a rate of 14% per year. In March 2006 it was reported

that Cantarell had already peaked, with a second year of declining production in 2005.

For 2006, the field's output declined by 13.1%, according to Jesús Reyes Heróles, the

director-general of PEMEX.[4]

57

In July 2008, daily production rate fell sharply by 36% to 973,668 barrels per day

(155,000 m3/d) from 1.526 million barrels per day (243×10

3 m

3/d) a year earlier.

[5]

Analysts theorize that this rapid decline is a result of production enhancement

techniques causing faster short-term oil extraction at the expense of field longevity. By

January 2009, oil production at Cantarell had fallen to 772,000 barrels per day (123,000

m3/d), a drop in production of 38% for the year, resulting in a drop in total Mexican oil

production of 9.2%, the fifth year in a row of declining Mexican production.[1]

In 2008, Pemex expected Cantarell's decline to continue to 2012 and eventually

stabilizing at an output level of around 500,000 barrels per day (80,000 m3/d).

[5] By

September 2009 this figure was already achieved, marking one of the most dramatic

declines ever seen in the oil industry.[6]

Production is now expected to stabilize at

400,000 barrels per day (60,000 m3/d). However the production had fallen to 408,000

barrels per day (60,000 m3/d) by April 2012.

[7] The shortfall is having a negative effect

on Mexico's annual government budget and sovereign-credit rating.[6]

In order to try to maintain heavy crude production in the Bay of Campeche, PEMEX is

focusing its efforts on the development of the Ku-Maloob-Zaap complex in an adjacent

area, which can be connected to the existing facilities of Cantarell. Ku-Maloob-Zaap

complex is expected to produce 0.8 million barrels per day (130,000 m3/d) by the end of

decade. In 2009, Ku-Maloob-Zaap replaced Cantarell as Mexico's most productive oil

field.[1][6]

References

1. ^ a b c Andres R. Martinez; Carlos M. Rodriguez (2009-02-22). "Pemex’s Cantarell

Drops at Fastest Rate in 14 Years". Bloomberg.

http://www.bloomberg.com/apps/news?pid=20601086&sid=afoFo1pYB4dY&refer=ne

ws.

2. ^ Marla Dickerson (2007-02-08). "Production decline worsens at Mexico's biggest oil

field". L.A. Times. http://www.latimes.com/business/la-fi-

pemex8feb08,1,3031907.story?coll=la-headlines-business.

3. ^ Tom Standing (2006-10-09). "Mexico's Cantarell field: how long will it last?".

Energy Bulletin. http://www.energybulletin.net/21299.html.

4. ^ Elizabeth Malkin (2007-02-08). "Mexico: Pemex Oil Field Declining". NY Times.

http://www.nytimes.com/2007/02/08/business/worldbusiness/08fobriefs-

PEMEXOILFIEL_BRF.html.

5. ^ a b Thomas Black (2008-08-28). "Pemex Cantarell to Stabilize at 500,000 Barrels a

Day". Bloomberg.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a92IBMpF.hl8.

6. ^ a b c David Luhnow (16-09-2009). "Mexico's fading oil output squeezes exports,

spending". Oil Online:Digest. Atlantic Communications.

http://www.oilonline.com/News/NewsArticles/ctl/ArticleView/mid/517/articleId/22144

/categoryId/16/Mexicos-fading-oil-output-squeezes-exports-spending.aspx. Retrieved

2009-10-25.[dead link]

7. ^ Fernando Pérez Corona (2012-05-24). "Alcanza Pemex en Chicontepec récord

histórico de producción diaria(Spanish". e-consulta.com. http://www.e-

consulta.com/index.php?option=com_k2&view=item&id=34461:alcanza-pemex-en-

chicontepec-r%C3%A9cord-hist%C3%B3rico-de-producci%C3%B3n-petrolera-

diaria&Itemid=332.

58

External links

Peak Oil is Now Official by Trey Shaughnessy, 18 March 2006.

Mexico Oil Production going down January 2007

Cantarell main data

Rigzone Article on Decline

Cantarell is Dying (Article)

Cantarell History and FACTS Pemex

Petroleum industry in Mexico

From Wikipedia, the free encyclopedia

Jump to: navigation, search

A gas station in Puerto Vallarta

The petroleum industry in Mexico makes it the sixth largest producer of oil in the

world and the tenth largest in terms of net export as of 2007. It is the second largest oil

producer in the Western Hemisphere behind only the United States and just ahead of

Canada. However, Mexico is not a member of OPEC or any petroleum production

related organizations.

The oil sector is crucial to the Mexican economy; while its importance has been reduced

in recent years, oil revenues generate over 10% of Mexico's export earnings.[1]

Contents

[hide]

1 History

o 1.1 Oil expropriation

o 1.2 Post-nationalization

2 Oil production

3 See also

4 Notes and references

59

5 External links

History

Exploratory wells were first drilled in Mexico in 1869, but oil was not discovered until

the turn of the twentieth century. By 1901, commercial production of crude oil in

Mexico had begun. By 1910, prospectors had identified the Panuco-Ebano and Faja de

Oro fields located near the central Gulf of Mexico coast town of Tuxpán. Systematic

explorations by foreign companies (mainly American) came to supersede the

uncoordinated efforts of speculative prospectors. Mexico became an oil exporting

nation in 1911.[citation needed]

Legally, Article 27 of the constitution of 1917 granted the Mexican government the

permanent and complete rights to all subsoil resources. This would cause conflicts

between the Mexican government and foreign companies - especially American oil

companies - until the matter was resolved in the 1930s. In 1925, President Plutarco

Elías Calles decreed that foreign oil companies must register their titles and limited their

concessions to fifty years.[citation needed]

During the 1930s, Mexico was second behind the United States in petroleum output and

led the world in oil exports. However, as a consequence of worldwide economic

depression, the lack of new oil discoveries, increased taxation, political instability, and

Venezuela's emergence as a more attractive source of petroleum, output during the early

1930s had fallen to just 20% of its 1921 level.[2]

Production began to recover with the

1932 discovery of the Poza Rica field near Veracruz, which would become Mexico's

main source of petroleum for the next several decades.

Oil expropriation

In 1935, all companies in the business of oil production in Mexico were foreign

companies. Labor practices in these companies poorly benefited the workers since the

companies were able to block the creation of labor unions through legal and illegal

tactics. Despite legal opposition, the Confederation of Mexican Workers was created

and proposed a project of general contracts for each oil company. A strike was planned

to push towards an agreement but the matter went to the court instead. On December 18,

the Arbitration Board declared in favor of the union and ordered the oil companies had

to pay 26 million pesos in lost wages because of the strike. Mexican President Lázaro

Cárdenas intervened in the legal preceding by expropriating the oil industry and

nationalized the petroleum industry, giving the Mexican government a monopoly in the

exploration, production, refining, and distribution of oil and natural gas, and in the

manufacture and sale of basic petrochemicals. Between 1938 and 1971, Mexico's oil

output expanded at an average annual rate of 6%.[3]

In 1957, Mexico became a

petroleum net importer after domestic demands exceeded domestic production.

However, production rose to 177 million barrels (28.1×106 m

3) by 1971 with the

exploitation of new oil fields in the isthmus of Tehuantepec and natural gas reserves

near the northeastern border city of Reynosa, but the gap between domestic demand and

production continued to widen.

60

Post-nationalization

1973 witnessed Mexican oil production surpassing the peak of 190 million barrels

(30×106 m

3) achieved in the early 1920s. In 1974 Pemex announced petroleum

discoveries in Veracruz, Baja California, Chiapas, and Tabasco. In 1976, President

López Portillo announced that Mexico's proven hydrocarbon reserves had risen up to 11

billion barrels (1.7×109 m

3). By 1983, that figure further rose to 72.5 billion barrels

(11.53×109 m

3). Portillo then decided to increase Mexican petroleum production and

use the value of the reserves as collateral for acquiring large international loans, most of

which went to Pemex. From 1977 to 1980, Pemex received $12.6 billion in international

credit, representing 37% of Mexico's total foreign debt but nevertheless used the money

to construct and operate offshore drilling platforms. Pemex further expanded by

building onshore processing facilities, enlarging its refineries, and vastly improving its

production capabilities. These investments led to an increase in petroleum output from

400 million barrels (64×106 m

3) in 1977 to 1.1 billion barrels (170×10

6 m

3) by 1982. By

2007, Mexico had a net oil export of 1.756 million barrels per day (279.2×103 m

3/d).

[4]

Oil production

Mexican production peaked in 2004 and is now in decline

Mexico produces three grades of crude oil: heavy Maya-22 (accounting for more than

half of the total production); light, low-sulfur Isthmus-34 (28% of production); and

extra-light Olmeca-39 (20% of production). At the beginning of 2002 Mexico had the

second largest proven oil reserves in the Western Hemisphere with 30.8 billion barrels

(4.90×109 m

3). However, according to Pemex, Mexico’s reserves/production ratio fell

from 20 years in 2002 to 10 years in 2006, and Mexico had only 12.4 billion barrels

(1.97×109 m

3) of proven oil reserves left by 2007.

[5] Mexico stands ninth in the

worldwide ranking of conventional oil reserves with only Venezuela higher in the

Western Hemisphere (although Canada ranks higher if proven reserves of

unconventional oil in oil sands are included).

Pemex is Mexico's state-owned petroleum company and the sole supplier of all

commercial gasoline (petrol/diesel) stations in the country. Cantarell Field is the largest

oil field in Mexico and one of the largest in the world producing. As of Jan 2001,

Mexico has approximately 10.42 billion barrels (1.657×109 m

3) in proven oil reserves

[6].

61

In November 2006, Pemex reported that Cantarell has produced 11.492 billion barrels

(1.8271×109 m

3) of oil.

[7] Several oil fields have also been discovered in the

Chicontepec Basin. The Chicontepec fields contains Mexico's largest, certified

hydrocarbon reserve, totaling more than 19,000,000,000 barrels of oil equivalent

(1.2×1011

GJ) with original oil in place of over 139,000,000,000 barrels of oil

equivalent (8.5×1011

GJ); recovery is complicated by challenging, low recovery rate

reservoirs, but is made more attractive due to the presence of light and super-light oil.[8]

In 2002, the Ku-Maloob-Zaap oil field was discovered offshore in the Bay of

Campeche, 105 kilometers from Ciudad del Carmen. Pemex plans to drill 82 fields and

install 17 oil platforms, as well as build an oil pipeline of 166 kilometers to transport the

oil produced. By 2011, production is expected to reach 800 thousand barrels per day

(130×103 m

3/d) and 282 million cubic feet (8.0×10

6 m

3) of natural gas.

In an interview on the oil news website, oilcast.com, in November 2005, an anonymous

Pemex employee revealed the company's inability to increase production, stating that

the country is at Hubbert's Peak.[9]

The individual interviewed believed export levels

could not be recovered once peak had passed, as the size of current fields that have been

discovered or are coming online represent a fraction of the size of the oil fields going

into terminal decline.

Offshore platform in the Gulf of Mexico

Annual production has dropped or failed to increase each year since 2004.[10]

Furthermore, it has been reported the 2005-2006 daily oil production was down by

approximately 500 thousand barrels per day (79×103 m

3/d) on the previous year.

Nevertheless, Mexico still produced approximately 2.98 million barrels (474×103 m

3) of

oil per day (2010 est.) ranking it seventh in the world in terms of total production.[11]

62

Year

Oil Production

Rank Percentile

Change million barrels per

day

thousand cubic meters per

day

2003 3.59 571 5 N/A

2004 3.59 571 5 0.00%

2005 3.46 550 5 -3.62%

2006 3.42 544 6 -1.16%

2007 3.50 556

+2,3%

2009 3.00 477

2010

(est) 2.98 474 7 -0,1%

2011

(est) 2.5 400

See also

Chart of exports and production of oil by nation

Economy of Mexico

Energy in Mexico

Electricity sector in Mexico

List of oil-producing states

Notes and references

1. ^ Mexico Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal

2. ^ Mexico Oil

3. ^ "Mexico Oil". http://www.country-studies.com/mexico/oil.html.

4. ^ EIA - International Energy Outlook 2007 - Petroleum and Other Liquid Fuels Section

5. ^ "Mexico - Oil". Country Analysis Briefs. U.S. Energy Information Administration.

December 2007. http://www.eia.doe.gov/emeu/cabs/Mexico/Oil.html. Retrieved 2008-

08-01.

6. ^ | Mexico Oil - proved reserves

7. ^ "Pemex:".

http://www.pemex.com/index.cfm?action=content&sectionID=8&catID=40&subcatID

=3672.

8. ^ "Mexico's northern region launches massive development". World Oil. 2001.

http://findarticles.com/p/articles/mi_m3159/is_11_222/ai_80326155.

9. ^ http://www.oilcast.com www.oilcast.com

10. ^ http://www.eia.doe.gov/emeu/ipsr/t22.xls

11. ^ Mexico Oil - production - Country comparation

External links

Mexico's crude oil production chart (1980-2004) - Data sourced from the US

Department of Energy

Energy Secretariat (SENER)

Energy Regulatory Commission (CRE)

Energy Savings National Commission (CONAE)

63

Mexican oil expropriation

From Wikipedia, the free encyclopedia

The Mexican oil expropriation (Spanish: expropiación petrolera) (also petroleum

expropriation, petroleum nationalization, etc.) was the expropriation of all oil

reserves, facilities, and foreign oil companies in Mexico in 1938. It took place when

President and General Lázaro Cárdenas declared that all mineral and oil reserves found

within Mexico belong to the nation.

It is one of the Fiestas Patrias of Mexico, celebrating the date when the President,

General Lázaro Cárdenas, declared that all oil reserves found in Mexican soil belonged

to the nation, following the principle stated in the Article 27 of the Constitution of 1917.

This measure caused an international boycott of Mexican products in the following

years, especially by the United States, the United Kingdom and the Netherlands.

Contents

[hide]

1 Background

2 Legal conflicts

3 March 18, 1938

4 Opposition

o 4.1 International

o 4.2 Local

5 See also

6 References

Background

History of Mexico

Pre-contact Mexico[show]

Spanish rule[show]

First Mexican Republic[show]

64

Second Federal Republic[show]

1864-1928[show]

The political support of labor unions and the founding of Petromex (before Pemex)

immediately after taking power by President Lazaro Cardenas, were the proximate

events closest to the Petroleum Expropriation.

In 1924, after several failed strike efforts and break-ups by the Mexican Army, a strike

began in Tampico against the refinery “El Aguila”, in which workers emerged

triumphant and achieved recognition from the management for the labor union and

reached a collective bargaining agreement.

On August 16, 1935, the Petroleum Workers Union of Mexico (Sindicato de

Trabajadores Petroleros de la República Mexicana) was formed and one of the first

actions was the writing of a lengthy draft contract transmitted to the petroleum

companies demanding a 40 hour working week, a complete paid salary in the event of

virtually unlimited time off for personal or family sickness, and claimed to replace the

distinct collective contracts governing labor relations.

On November 3, 1937, the union demanded that the companies sign the collective

agreement and on May 17, the union summoned a strike in case their demands were not

met. In the early days of June, the union sued the companies before the General

Arbitration and Conciliation Board (Junta General de Conciliacion y Arbitraje). The

aforementioned strike started on a limited basis on May 31 and fully burst open on June

9.

The petroleum workers struggle was well regarded by the President and the population

despite problems caused by the petroleum shortage. In July, as instructed by the

arbitration board, a commission of financial experts was formed that investigated the

petroleum companies finances, concluding that their profits easily permitted them to

cover the demands of the workers. The companies, however, insisted the demands

would cripple production and bankrupt them.

But, on December 8, the companies hired other unemployed workers and had not

responded to the arbitration board. On December 18, 1937, the board gave a verdict in

favor of the union by means of a “laudo” (binding judgment in arbitration) which

demanded that the companies fulfill the requirements of the petitions and pay 26 million

pesos in lost salaries. The petroleum companies initiated a lawsuit on January 2, 1938

before the Mexican Supreme Court to protect their property from the labor union and

arbitration board, which denied the request.

Consequently, the foreign companies rebelled against the imposed contract, and the

maximum Judicial Authority responded by rendering a decision on March 1, giving the

companies until March 7 to pay the 26 million pesos penalty.

65

In 1935, all companies in the business of extraction, processing, and exporting of oil in

Mexico were foreign companies with foreign capital. These companies attempted to

block the creation of labor unions and used legal and illegal tactics to do so. However,

the creation of individual unions within each company was made possible, but work

conditions differed from one another.

On December 27, 1935, the Sindicato Único de Trabajadores Petroleros was created,

despite the legal opposition in the states of Tamaulipas and Veracruz. On January 29,

1936, this union joined the Comité de Defensa Proletaria ("Committee of Proletarian

Defense") which would become in February the Confederation of Mexican Workers

(CTM). On July 20, the union celebrated its first convention, in which it was proposed a

project of general contracts for each oil company and it was decided on a strike to push

towards an agreement.

Lázaro Cárdenas intervened between the union and the oil companies in order to force

an agreement on the contract. The strike was delayed for six months, but the companies

never agreed to the contract and on May 28, the strike took place. The entire country

was paralyzed for 12 days, with consumers unable to buy gasoline. Cárdenas convinced

the union to end the strike until a decision by the companies could be made. However,

the companies declared themselves unable to meet the demands because of financial

problems. Cárdenas ordered an investigation and on August 3, the findings were that the

Mexican oil industry produced higher returns than the U.S. oil industry.

Legal conflicts

After the publication of the findings, the oil companies threatened to leave Mexico and

take all of their capital with them. The government entity in charge of the conflict

between these companies and the union, the Junta Federal de Conciliación y Arbitraje

(Federal Conciliation and Arbitration Board), was not able to make a decision quickly

and the union declared a 24-hour strike in protest on December 8.

On December 18, the Arbitration Board declared in favor of the union. The oil

companies had to pay 26 million pesos of wages lost because of the strike, but they

appealed to the Supreme Court. The Supreme Court then rejected the appeal and

ordered them to raise salaries and improve working conditions for the union members.

The oil companies protested this decision and President Cárdenas mediated a

compromise; the union would accept 26 million. Cárdenas offered to end the strike if

the oil companies paid the sum. According to witnesses of this meeting, representatives

of the oil companies asked the President "Who can guarantee that the strike will be

over", to which the President replied "I, the President of the Republic." After the

businessmen asked with sarcasm "You?" President Cárdenas ended the meeting saying

"Sirs, we are finished!".

As a result, Cárdenas decided to expropriate the oil industry and create a national oil

company.

66

March 18, 1938

On March 18, 1938 President Cárdenas embarked on the expropriation of all oil

resources and facilities by the state, nationalizing the U.S. and Anglo-Dutch (Mexican

Eagle Petroleum Company) operating companies. Two hours before informing his

cabinet of his decision, he made the announcement on the radio to the rest of the

country. Five days later, a crowd of 100,000 (according to the press) rallied in support

of Cárdenas (see photo).

67

On April 12, 1938, a crowd of thousands of women gathered in front of the Palacio de

Bellas Artes to make donations to pay the debt to foreign companies. Donations varied

from chickens to jewelry, since the women encompassed all social classes.

On June 7, 1938, President Cárdenas issued a decree creating Petróleos Mexicanos

(PEMEX), with exclusive rights over exploration, extraction, refining, and

commercialization of oil in Mexico. On June 20, PEMEX started operations.

Opposition

International

In retaliation, the oil companies initiated a public relations campaign against Mexico,

urging people to stop buying Mexican goods, and lobbying to embargo US technology

to Mexico. Many foreign governments closed their markets to Mexican oil, hoping that

PEMEX would drown in its own oil. Between 1938 and 1939, PEMEX survived by

trading oil for money and machinery to European countries with fascist governments. In

spite of the boycott, PEMEX developed into one of the largest oil companies in the

world and helped Mexico become the world's fifth largest oil exporter.

During World War II, American and British governments blocked Mexican oil exports

to their allies and dependencies. The US stopped buying Mexican silver for the

Treasury.

Local

Saturnino Cedillo, a cacique from San Luis Potosí and former Secretary of Agriculture,

showed the strongest opposition to Cárdenas's measures. Cedillo had in the past

supported Cárdenas in a conflict with ex-President Plutarco Elías Calles, but disagreed

with his plan of reforms. On May 15 of the same year, the state congress of San Luis

Potosí issued a decree where it refused to recognize Cárdenas as President and declared

that the expropiación petrolera did not benefit the economy of Mexico. Cárdenas did

not consider this a serious threat and minimized efforts to suppress the rebellion, instead

choosing persuasion. The US government did not support the rebellion because it was

more concerned that fascist and communist movements from Europe would spread to

Mexico.

The key to the success of the measures taken by Cárdenas was not just to control the

opposition, but to keep afloat an industry in the absence of qualified personnel.

The government had to depend on the Sindicato de Trabajadores Petroleros de la

República Mexicana (STPRM, or the Union of Oil Workers of the Mexican Republic)

to resolve disagreements over the management of oil resources, and deal with threats of

strikes and sabotage. In spite of these and technical challenges, local workers who

replaced the foreign technicians were successful in making the new nationalized oil

industry work. Josephus Daniels, U.S. ambassador to Mexico, explained to President

Franklin D. Roosevelt and Secretary of State Cordell Hull that Cárdenas' reforms could

not be undone, since his position as president and the position of PEMEX were secure.

68

Critics of the expropriation point out that since Pemex took control of the nation's

petroleum, the company has been rife with corruption through every administration

since that of Cárdenas, including both the PRI (Partido Revolucionario Institucional)

and the PAN (Partido Accion Nacional). A recent book, Camisas Azules, Manos Negras

(Blue Shirts, Black Hands), details the massive corruption that continues to this day.

References

(Spanish) Opposition to the Expropiación Petrolera at red escolar.

(Spanish) History of the Expropiación Petrolera at the Instituto Mexicano del

Petróleo ("Mexican Oil Institute").

(Spanish) Presidential decree.

The Cardenista Utopia: 1934-1940.

Mexican public holidays

Statutory holidays

Año Nuevo ·

Día de la Constitución ·

Natalicio de Benito Juárez ·

Día del Trabajo ·

Día de Independencia ·

Día de la Revolución ·

Transmisión del Poder Ejecutivo Federal ·

Navidad

Civic holidays

Día del Ejército ·

Día de la Bandera ·

Aniversario de la Expropiación petrolera · Heroica Defensa de Veracruz ·

Cinco de Mayo ·

Natalicio de Miguel Hidalgo ·

Día de la Marina ·

Grito de Dolores ·

Día de los Niños Héroes ·

Consumación de la Independencia ·

Natalicio de José Ma. Morelos y Pavón ·

Descubrimiento de América

Festivities

Día de los Santos Reyes ·

Día de San Valentín ·

Día del Niño ·

Día de las Madres ·

Día del Maestro ·

Día del estudiante ·

Día del Padre ·

Día de Todos los Santos ·

Día de los Fieles Difuntos ·

Día de la Virgen de Guadalupe ·

Las Posadas ·

69

Nochebuena ·

Dia de los Santos Inocentes

Retrieved from

"http://en.wikipedia.org/w/index.php?title=Mexican_oil_expropriation&oldid=5009381

35"

Poza Rica, Veracruz

From Wikipedia, the free encyclopedia

(Redirected from Poza Rica)

Poza Rica

Poza Rica de Hidalgo

— Municipality —

View over Poza Rica

Coordinates: 20°32′N 97°27′W20.533°N

97.45°WCoordinates: 20°32′N 97°27′W20.533°N 97.45°W

Country Mexico

State Veracruz

70

Municipality Poza Rica de Hidalgo

Founded November 20, 1951

Government

• President Dr. Pablo Anaya

Elevation 50 m (160 ft)

Population (2005)

• Total 181,438

• Demonym Pozarricense

Time zone CST (UTC-6)

Postal code 93261

Area code(s) 782

Website www.municipiopozarica.gob.mx

Poza Rica (formally: Poza Rica de Hidalgo) is a city and its surrounding municipality

in the Mexican state of Veracruz. Its name means "rich pool", because it was a place

known for its abundance of fish. In this century oil was discovered in the area. It has

since been almost completely extracted. This resulted in the decline of oil well

exploration and drilling activities but there are many oil facilities.

It shares borders with the municipalities of Papantla, Tihuatlán, and Coatzintla, and

stands on Federal Highway 180. The archaeological zone of El Tajín is located

approximately 15 kilometers (9.3 mi) from Poza Rica. The area is intensely tropical,

with two popular beaches within one hour, Tuxpan, and Tecolutla, and one within 40

minutes, Cazones. Mexico City is about 220 kilometers (140 mi) from Poza Rica.

Unlike most Mexican cities, it does not have old buildings because it is a new city

founded officially on November 20, 1951. For that reason it has contemporary

architecture with well-lined and designed streets with a modern look. While the

petroleum industry features heavily amongst the industrial landscape in Poza Rica, the

city also has a wide variety of other industries. As one of the largest and most populous

cities in Veracruz, Poza Rica is an important industrial and commercial center, and

central hub for several road transportation lines. The city has recently seen a lot of

growth, with several commercial centers opening around the city. The city had an

official population of 174,512 inhabitants and the municipality had 181,438 at the

census of 2005. However, the Poza Rica metropolitan area, which includes the

municipalities of Papantla, Tihuatlán, and Coatzintla, showed a total population of

458,330.

71

Cantarell, The Third Largest Oil

Field in the World Is Dying

My Blog on Global Warming issues http://themigrantmind.blogspot.com/

Copyright 2004, 2007 G.R. Morton This can be freely distributed so long as no changes

are made and no charges are made.

http://home.entouch.net/dmd/cantarell.htm

The third largest producing field in the world is the Cantarell complex in Mexico. It lies

85 kim from Ciudad del Carmen. The field was discovered in 1976 and put on

production in 1979. This is one of the geologically interesting oil fields because the

producing formation was created when the Chicxulub meteor impacted the earth. The

upper reservoir is a brecciated dolomite of Uppermost Cretaceous age. The breccia is

from a shelf failure (underwater landslide) when the meteor hit. This 950 foot thick

rubble became the reservoir for one of the biggest fields in the world. The lowermost

part of the field is a Lower Cretaceous dolomitic limestone. The field is made up of a

number of sub-fields or fault blocks. It has an overthrusted geological setting. These

are Akal, Chac, Kutz and Nohoch. Akal was found first and the original well started

producing at the rate of 34,000 barrels per day. A cross section of this field from

Guzman and Marquez-Dominguez (2001, p. 346) is shown below:

Originally the field had 35 billion barrels of oil in place. Now, in place oil is not

reserves. They expect to get around 50% of that oil out of the ground to market. The

field reached an early peak in production of 1.1 million barrels per day in April of 1981

from 40 oil wells. By 1994 the production was down to 890,000 barrels of oil per day.

At that time, cumulative production was 4.8 billion barrels. In 1995 it was producing 1

million barrels per day and the Mexican government decided to invest in that field to

72

raise the production level. They built 26 new platforms, drilled lots of new wells and

built the largest nitrogen extraction facility capable of injecting a billion cubic feet of

nitrogen per day to maintain reservoir pressure. Doing this raised the oil production rate

in 2001 to 2.2 million barrels per day. Today the field produces 2.1 million barrels.

To put this amount of production into perspectives, the largest field discovered in the

US Gulf of Mexico will produce about 250,000 barrels per day. That field has about a

billion barrels of reserves. If I were to find a field of that size, the company I worked

for would probably make me president. For the world production, Cantarell represents

4 of the largest fields ever found in the US side of the Gulf. In 50 years of exploration in

the US side of the Gulf of Mexico, only one one-billion-barrel oil field has been found.

Bear this in mind as you read the rest.

A couple of weeks ago I ran into this from the oil industry rags I read. It is a chilling

thought since this is the 2nd biggest producer of oil on earth. Ghawar produces 4.5

million bbl/day, Cantarell, 2.2 million bbl/day, Da Qing and Burgun around 1 million

per day.

"Supergiant Cantarell continues to be the mainstay of Mexican oil production, with

2.1 MMb/d of output in 2003 up from 1.9 MMb/d in 2002. However, Cantarell is

expected to decline rapidly over the next few years, falling as far as 1 MM b/d by 2008.

This has given particular urgency to Pemex's efforts to develop other fields and move

into deepwater." For now, Pemex's best alternative project is the heavy-oil complex

known as Ku-Maloob-Zaap, in Campeche Bay close to Cantarell. Output from this

complex was 288,000 b/d in 2003 and is expected to rise to about 800,000 b/d by the

end of the decade." David Shields, "Pemex Ready to Drill in Deepwater Perdido Area,"

Offshore, June 2004, p. 38

Even the largest fields we find offshore in the deepwater today only produce about

250,000 bbl/day. It will take about 4 of them to replace this decline in Cantarell.

And even the heavy oil field they mention won't replace the loss of Cantarell by the end

of the decade. And one must remember that all oil fields which are producing today, are

in the process of declining.

The implications of this upcoming decline are tremendous to the world. This field

produces half of what Ghawar does and it won't be doing that much longer. The effect

on the energy supply will be felt and there is no way for that not to happen. On Aug. 3,

2004, the OPEC president stated that OPEC has no more spare capacity. They are

pumping all out and can't satisfy the demand for oil. If fields like Cantarell begin

declining, the problem of supplying the world with oil will only get worse.

UPDATE 1 (Update 2 below)

Since I originally wrote this page in 2004, several things have happened. First, Cantarell

has actually begun to decline. The most recent Upstream (May 11, 2007) quotes Jesus

Reyes Heroles, the Pemex leader as saying that Cantarell would produce only 1.5

million barrels per day in 2007. This is compared with over 2 million in 2004.

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Secondly, the fall of Cantarell has begun to cause Mexico's overall production to drop.

It is off 300,000 barrels per day over the past couple of years. Obviously, Mexico is

spending money drilling elsewhere to try to stop the country's fall in oil production.

This fall can be seen in the following chart which is up-to-date as of April 2008

Update 2 (Feb 2008)

I quoted this above in 2004.

"Supergiant Cantarell continues to be the mainstay of Mexican oil production, with

2.1 MMb/d of output in 2003 up from 1.9 MMb/d in 2002. However, Cantarell is

expected to decline rapidly over the next few years, falling as far as 1 MM b/d by 2008.

This has given particular urgency to Pemex's efforts to develop other fields and move

into deepwater." For now, Pemex's best alternative project is the heavy-oil complex

known as Ku-Maloob-Zaap, in Campeche Bay close to Cantarell. Output from this

complex was 288,000 b/d in 2003 and is expected to rise to about 800,000 b/d by the

end of the decade." David Shields, "Pemex Ready to Drill in Deepwater Perdido Area,"

Offshore, June 2004, p. 38

It is now 2008. Time to check the prediction:

From Reuters http://uk.reuters.com/article/oilRpt/idUKN2638112220080226

74

MEXICO CITY (Reuters) - Crude oil output from Mexico's huge but aging Cantarell

offshore field fell again to 1.243 million barrels per day in January, the lowest average

monthly output level in several years, the energy ministry reported on Tuesday.

And we are only 2 months into 2008!

It is now June 2008 and Cantarell gets worse.

"No big exporter is struggling more than Mexico, where net exports dropped 15% in

2007. Mexican officials announced Monday that output from the country's once-mighty

offshore Cantarell field had plunged by a third in less than a year." Nick King and

Spencer Schwartz, "Oil Exporters Are Unable

To Keep Up With Demand," Wall Street Journal, May 29, p. A8

Updated April 2009

"Total Mexican crude output declined 9% to 2.8 million barrels per day last year,

with output on Cantarell down nearly a third by February, when it was running at

759,000 barrels per day." Gareth Chetwynd, Decline of Cantarell a Sore Point,"

Upstream, March 27, 2009, p. 8

References.

Alfredo E. Guzman, and Benjamin Marquez-Dominguez, "The Gulf of Mexico Basin South of the

Border: The Petroleum Province of the Twenty-First Century," in M. W. Downey , J. C. Threet and W. A.

Morgan, editors, (Tulsa: AAPG, 2001).

E. Manceau, et al "Implementing Convection in a Reservoir Simulator: A Key Feature in Adequately

Modeling the Exploitation of the Cantarell Complex," SPE International Petroleum Conference and

Exibition in Villahermosa, Mexico, Feb. 1-3, re 2000, SPE paper 59044

G. Murillo-Muneton et al, Stratigraphic Architecture and Sedimentology of hte Main Oil-Producing

Stratigraphic Interval at the Cantarell Oil Field: the K/T Boundary Sedimentary Succession," SPE

International Petroleum Conference and Exhibition in Villahermosa,Feb. 10-12, 2002, SPE paper 74431

A. G. Rojas and A. R. Torres, "Akal Field (Cantarell Complex) Conditions of Exploration, Analysis, and

Prediction," SPE International Petroleum Conference and Exhibition in Veracruz, Mexico, Oct. 10-13,

1994. SPE paper 28714

Shale gas: Halliburton’s weapon of mass

devastation

Shale gas: Halliburton’s weapon of mass

devastation

by F. William Engdahl

75

Across the United States the exploitation of gas and oil from shale rocks

using Halliburton’s hydraulic fracturing technology continues amid rising

disasters. Unregulated drilling practices, rendered legal by the "Halliburton

Loophole" engineered in 2005 by Vice President Dick Cheney, have had

staggering consequences for ground water, public health, earthquake

induction and the environment in general. Lured by the prospect of reducing

oil dependence, President Obama’s ambivalent approach has ultimately

yielded ground to industry. Lured by the same prospect, countries all around

the world have joined the shale-gas craze, and many use the fact that the

U.S. has been "fracking" as proof that it is safe. William Engdahl provides

the full picture.

VOLTAIRE NETWORK | 17 MAY 2012

Workers step through the maze of hoses used at a remote fracking site being run

by Halliburton. The U.S. Environmental Protection Agency announced on Dec. 8,

2011, for the first time, that fracking may be to blame for causing groundwater

pollution.

There is a global rush to embrace a new source of extracting hydrocarbons from the

Earth. From Germany to Poland and France, from China and above all in the USA

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where the technique of hydraulic fracturing of shale rocks is most developed,

governments and major oil companies are producing huge volumes of gas.

A number of energy importing countries around the world are planning a major

investment in extracting natural gas from their shale rock formations. The most

ambitious plans are coming from China and from Poland in the EU.

The US Government’s Department of Energy together with a Washington energy

consultancy has just released a mammoth global report estimating resources of shale

gas. Significantly, the report estimates that the largest untapped shale gas reserves

worldwide lie in China. The study puts Poland and France at the top of the shale gas list

in the EU. The rest of Europe they estimate simply lacks the geology where substantial

shale rock is present. [1]

Even in Germany some cash-strapped states are seriously looking at Shale gas.

ExxonMobil, the world’s largest oil company is planning major projects in the densely-

populated North-Rhein Westphalia region. The company’s head for Central Europe,

Gernot Kalkoffen in a recent interview stated, "Germany is most definitely an

interesting market. We cannot achieve the energy strategy shift without gas."

ExxonMobil estimates shale gas is potentially available in six of Germany’s 16

states. [2] The US Energy Department estimates that Germany could have some 8

trillion cubic feet of technically recoverable shale gas, three years’ total consumption.

Citizen protest groups and Parliamentary skepticism about health and safety of shale gas

so far is braking a German shale gas bonanza. [3] Not only ExxonMobil but also

BASF’s Wintershall, Gaz de France, BNK Petroleum from the US and a daughter of

Britain’s Royal Dutch Shell are salivating over German shale gas prospects.

The Polish government is in a state of near euphoria over the prospects of exploiting its

shale gas resources. Prime Minister Donald Tusk calls shale gas Poland’s "great

chance," because it could cut its dependence on Russian gas, create tens of thousands of

jobs and fill state coffers. In tests at one well in northern Poland done last August, the

Polish Geological Institute claimed that Hydraulic fracturing didn’t affect the quality or

quantity of surface and ground water and didn’t cause tremors that would pose a threat

to buildings or other infrastructure. The US oilfield services giant Schlumberger did the

fracking. [4] Of course one test in one well is hardly conclusive, though the Tusk

government doesn’t seem to care as they push Brussels to launch a major Polish shale

gas exploitation program.

In China, shale gas looks about to take off as a major new focus for the country’s

enormous energy requirements. The governing State Council has recently approved

shale gas as an “independent mineral resource” and the Ministry of Land and Resources

will conduct an appraisal of shale gas resources this year to expedite discovery and

development of China shale deposits. Until now China’s rough mountainous terrain and

lack of shale gas fracking know-how has kept it out of the shale gas, with coal far the

major source of electric power. The French oil giant, Total, has just signed a deal with

China’s Sinopec to produce shale gas in China. China has around 31 trillion cubic

meters of natural gas trapped in shale, some 50% greater than the United States

according to the US Department of Energy estimate. [5] These are volumes to make the

head of any respectable state official spin.

One exception to the shale gas rush is Germany where the Federal Government just

decided to prohibit ExxonMobil, the world’s largest oil company, from fracking in the

eastern part of the country, stating they were “very skeptical” of industry claims it

would not poison ground water or cause earthquake damage. [6]

77

Myth and reality: The Halliburton Loophole

Fracking techniques have been around since the end of World War II. Why then

suddenly is the world going gaga over shale gas hydraulic fracking? One answer is the

record high oil and gas prices of the recent few years have made the costly fracking

profitable. The second reason is the advance of various horizontal underground drilling

techniques that allow companies like Schlumberger to enter a large shale rock formation

and inject substances to “free” the trapped gas.

But the real reason for the recent explosion of fracking in the country where it has most

been applied, the United States, is the passage of legislation in 2005 by the US Congress

that exempts the oil industry’s hydraulic fracking activity from regulatory supervision

by the US Environmental Protection Agency (EPA) under the Safe Drinking Water Act.

The oil and gas industry is the only industry in America that is allowed by EPA to inject

known hazardous materials — unchecked — directly into or adjacent to underground

drinking water supplies. [7]

Rural resident flicking on cigarette lighter next to his kitchen faucet and watching

his drinking water, infused with gas and chemicals, ignite in flames as high as 3

feet.

Source: HBO Documentary film "Gasland," Directed by Josh Fox. Winner of Special Jury Prize - Best

US Documentary Feature - Sundance 2010. Screening at Cannes 2010. See extended trailer "Gasland:

Dangers of Natural Gas Extraction."

The law is known as the “Halliburton Loophole.” That’s because it was introduced on

massive lobbying pressure from the company that produces the lion’s share of chemical

hydraulic fracking fluids—Dick Cheney’s old company, Halliburton. When he became

78

Vice President under George W. Bush in early 2001, Bush immediately gave Cheney

responsibility for a major Energy Task Force to make a comprehensive national energy

strategy. Aside from looking at Iraq oil potentials as documents later revealed, Cheney’s

task force used Cheney’s considerable political muscle and industry lobbying money to

win exemption from the Safe Drinking Water Act. [8].

During Cheney’s term as vice president he moved to make sure the Government’s

Environmental Protection Agency (EPA) would give a green light to a major expansion

of shale gas drilling in the US. In 2004 the EPA issued a study of the environmental

effects of fracking. That study has been called "scientifically unsound" by EPA

whistleblower Weston Wilson. In March of 2005, EPA Inspector General Nikki Tinsley

found enough evidence of potential mishandling of the EPA hydraulic fracturing study

to justify a review of Wilson’s complaints. The Oil and Gas Accountability Project

conducted a review of the EPA study which found that EPA removed information from

earlier drafts that suggested unregulated fracturing poses a threat to human health, and

that the Agency did not include information that suggests “fracturing fluids may pose a

threat to drinking water long after drilling operations are completed.” [9]

The Halliburton Loophole is no minor affair. The process of hydraulic fracking to

extract gas involves staggering volumes of water and of some of the most toxic

chemicals known. During the uproar over the BP Deepwater Horizon Gulf of Mexico

oil spill, the Obama Administration and the Energy Department formed an advisory

commission on Shale Gas. Their report was released in November 2011. It was what

could only be called a “whitewash” of the dangers of shale gas.

The commission was headed by former CIA director John Deuss. Deuss sits on the

board of Citigroup, one of the world’s most active energy industry banks, tied to the

Rockefeller family. He also sits on the board of Schlumberger, along with Halliburton,

the major company doing hydraulic fracking. In fact, of the seven panel members, six

had ties to the energy industry. Little surprise that the Deuss report called shale gas, "the

best piece of news about energy in the last 50 years." Deuss added, "Over the long term

it has the potential to displace liquid fuels in the United States." [10]

In the US oil industry people have forgotten the scare about oil and gas depletion,

popularly known as the Peak Oil theory in their new euphoria over huge new volumes

of gas and also oil obtained by fracking of shale and coal beds. Now even the Obama

Administration is talking about a renaissance in domestic oil production. The reason is

the dramatic rise in domestic extraction of gas from hydraulic fracking of shale, using

new fracking techniques first developed by Dick Cheney’s old company, Halliburton,

made financially lucrative with the advent of $100 a barrel oil since 2008. Reportedly

under pressure from then Vice President Cheney, chemical or hydraulic fracking of

shale rock and coal beds has been left unregulated under what has become known as the

Halliburton Loophole in the 2005 US National Energy Bill. [11]

To access the gas, the shale needs to be fractured using a mixture of hot water, sand and

chemical additives, some of which are highly poisonous. Attempts by citizen

organizations and individual litigants to force oil services company disclosure of the

composition of chemicals used in hydraulic fracking have met a stone wall of silence.

The companies argue that the chemicals are proprietary secrets and that disclosing them

would hurt their competitiveness. They also insist the process is “basically safe and that

regulating it would deter domestic production.” [12] This legal sleight of hand lets the

fracking lobby have their cake and eat it too. They claim it is safe, refuse to say what

chemicals are used and insist it be free from the Environmental Protection

Administration rules under the Safe Drinking Water Act.

79

If they are right about how safe their chemical fracking fluids are why are they afraid of

regulation like other chemical companies?

This diagram depicts methane gas and toxic water contaminating the drinking

water as the fracturing cracks penetrate the water table. With a 103-36 vote in the

House of Representatives, Vermont became the first state to ban hydraulic

fracturing to extract oil or natural gas. The bill passed the Senate earlier this

month.

Fracking toxic waste

To understand what is going on, in a typical shale gas fracturing operation, a company

drills a hole several thousand meters below surface; then they drill a horizontal branch

perhaps one kilometer in length. As one expert described the fracking, once the

horizontal drilling into the shale formation is done, “you send down a kind of

subterranean pipe bomb, a small package of ball-bearing-like shrapnel and light

explosives. The package is detonated, and the shrapnel pierces the bore hole, opening up

small perforations in the pipe. They then pump up to 7 million gallons of a substance

known as slick water to fracture the shale and release the gas. It blasts through those

perforations in the pipe into the shale at such force—more than nine thousand pounds of

pressure per square inch—that it shatters the shale for a few yards on either side of the

pipe, allowing the gas embedded in it to rise under its own pressure and escape.” [13]

The shale rock in which the gas is trapped is so tight that it has to be broken in order for

the gas to escape. Therein come the problems. A combination of sand and water laced

with chemicals — including benzene — is pumped into the well bore at high pressure,

shattering the rock and opening millions of tiny fissures, enabling the shale gas to seep

into the pipeline.

Not only does it liberate gas or in the case of Bakken, oil. It floods the shale formation

with millions of gallons of toxic fluids. A study conducted by Theo Colburn, PhD,

director of the Endocrine Disruption Exchange in Paonia, Colorado, identified 65

chemicals that are probable components of the fracking fluids used by shale gas drillers.

These chemicals included benzene, glycol-ethers, toluene, 2-(2-methoxyethoxy)

ethanol, and nonylphenols. All of those chemicals have been linked to health disorders

when human exposure is too high. [14] Dr. Anthony Ingraffea, D. C. Baum Professor of

80

Engineering at Cornell University, who has researched fracture mechanics for more than

30 years, has said that drilling and hydraulic fracturing “can liberate biogenic natural

gas into a fresh water aquifer.” [15]

Not only possibly poisoning the fresh water underground aquifers, hydraulic fracking is

done with such force that it has been known to cause earthquakes. In the UK, Cuadrilla

was doing shale gas drilling in Lancashire. They suspended their shale gas test drilling

in June 2011, following two earthquakes—one tremor of magnitude 2.3 hit the Fylde

coast on 1 April, followed by a second of magnitude 1.4 on 27 May. [16] A UK

Government study of the earthquakes, released in April concluded that the fracking

drilling operations had caused the quakes. [17] Earthquake activity in fracking regions

across the US have also been reported.

Alarmingly, in the case of exploiting shale gas in China, the largest shale formation lies

in Sechuan Province in China’s east, one of the most active earthquake zones in Asia.

Additionally, given the documented dangers to ground water from extensive fracking,

China’s chronic water shortages are threatened as well.

The new technique of hydraulic fracking was first used successfully in the late 1990s in

the Barnett Shale in Texas, and is now being used to liberate oil from beneath the

Bakken Shale in North Dakota. But the largest shale gas fracking activity in the US has

been a literal gas bonanza drilling boom in the Marcellus Shale that runs from West

Virginia into upstate New York, estimated estimated to hold as much gas as the whole

United States consumes in a century. [18] More recent estimates put the figure at half

that or lower, suggesting the energy industry is using hype to promote its methods.

Good news bad news

Good news is shale gas shows how wrong the peak oil lobby is about depletion of global hydrocarbons.

Gas like coal and oil are according to their definition all “fossil fuels.” While we leave aside whether in

fact they are from dinosaur detritus or fossilized algae, clearly the Earth is far from peaking in its

hydrocarbon resources. Bad news is diverting valuable resources from finding abundant conventional gas

or oil using advanced new methods.

F. William Engdahl

[1] Vello Kuuskraa, et al, "World Shale Gas Resources: An Initial Assessment of 14 Regions

Outside the United States," Advanced Resources International, Inc. prepared for U. S. Energy

Information Administration, Office of Energy Analysis, U.S. Department of Energy, Washington,

DC, April 2011.

[2] Reuters, "ExxonMobil to press on with German shale gas," January 26, 2012.

[3] Stefan Nicola, "Public slows Exxon’s German shale gas bid," UPI, April 13, 2011.

[4] Dow Jones Newswires, "Poland: Hydraulic Fracking Found Not To Affect Environment," March

02, 2012.

[5] Forbes, "China Closer To Joining Shale Gas Fracking Craze," February 13, 2012.

[6] Der Spiegel, "German Government to Oppose Fracking," May 7, 2012.

[7] Earthworks, Halliburton loophole.

[8] Ibid

[9] Lisa Sumi, Our Drinking Water at Risk: What EPA and the Oil and Gas Industry Don’t Want Us

to Know About Hydraulic Fracturing, Earthworks, April 7, 2005.

[10] John Deuss, quoted in "Shale Gas Has Challenges But Study Group Holds Out Hope,"

81

globalresourcesnews, November 18, 2012.

[11] Ibid. See also Editorial: The Halliburton Loophole, The New York Times, November 3, 2009.

[12] Ibid.

[13] Bill Mckibben, "Why Not Frack?," The New York Review of Books, March 8, 2012.

[14] Cited in Water Contamination from Shale Gas Drilling.

[15] Cited in "Gasland," Wikipedia.

[16] BBC News, "Fracking water pollution in Lancashire ‘extremely unlikely.’"

[17] John Daly, "UK Govt Seismic Fracking Report Certain to Sharpen Debate," oilprice.com, 20

April 2012.

[18] Ibid.

Shale Gas, new rush fever

China Closer To Joining Shale Gas Fracking Craze The Chinese government will step into fifth gear this year when it comes exploring

for natural gas hidden under thick shale rock beneath the earth’s surface, an official

said over the weekend. China’s been promising to move forward on shale gas production for the past two years.

The Ministry of Land and Resources said Sunday that China will strengthen the survey

and appraisal of shale gas in 2012 to expedite discovery and development of China

shale deposits. The move comes after the recent approval of the State Council in the

capital to list shale gas as an independent mineral resource. China is slowly moving

towards producing shale gas.

Currently, the country does not have any shale natural gas production, adding to the

country’s overall lack of natural gas in its energy matrix. China’s rough terrain and lack

of technological know-how has kept it out of the shale gas biz.

82

The country is largely beholden to coal to keep the lights on.

China’s Ministry of Land estimates the country holds around 31 trillion cubic meters of

natural gas hidden under shale, equivalent to the total amount of conventional natural

gas. If developed, the country’s shale gas output could exceed 100 billion cubic meters

by 2020, Land Ministry’s second in command, Wang Min, told reporters during a

national geological survey conference in Beijing this weekend.

China’s reserves are almost 50% greater than those of the U.S., according to the U.S.

Energy Information Administration.

Shale gas is natural gas trapped within shale rock formations deeper under ground.

Shales are fine-grained sedimentary rocks that can be rich sources of petroleum and

natural gas.

At the end of of 2011, China energy majors Sinopec (SNP) and Cnooc (CEO) have

expressed interest in acquiring a 30% stake in privately held Texas-based fracking

company Frac Tech International to operate in the U.S. If that deal ever closed, China

would gain the necessarily expertise to pursue shale gas exploration at home.

Shale gas production has become all the rage in the U.S. because it potentially increases

the U.S. supply of natural gas, a clean burning energy source. But drilling through shale

is nothing like drilling for conventional natural gas. New technologies have made shale

gas production possible.

Oil and gas companies use traditional horizontal drilling techniques to bore into the land

were gas is trapped. But for shale gas, once the drill reaches the shale rock underground,

the drill bit is turned horizontally to bore a well that stretches through the natural gas

producing shale. That’s where the controversial method of hydraulic fracturing comes

into play. Fracking pushes water, chemicals, and sand into the well to expose the gasses

trapped in the shale.

To do so, fracking actually cracks the rock to allow for the natural gas to flow from the

shale into the well. Without fracking, natural gas does would flow to the well properly,

making it too time consuming and costly to be of any commercial value.

Environmental groups like Food & Water Watch in Washington DC have come out

against fracking in the U.S. They say that fracking chemicals are toxic and can

contaminate water from spills or accidents. And that fracking can cause natural gas to

migrate into drinking water sources.

See: The Dangers Of Natural Gas Fracking–60 Minutes via YouTube

http://www.youtube.com/watch?v=iNl6sx059bE

60 Minutes Video Piece on Dangers of Natural Gas Fracking

60 minutes CBS news piece on the dangers of fracking. Fracking is a process that results in the fracturing

of rock to gain access to natural gas and oil. The chemicals that are used for fracking have been reported

seeping into the water supplies of surrounding areas, contaminating resident's water supply. In addition,

the natural gas has leaked through cracks into water aquifers causing a phenomenon called "Tap Water

Catching on Fire".

83

84

The history of federal regulation

In 1997, the U.S. Court of Appeals for the 11th Circuit (Atlanta) ordered the EPA to

regulate hydraulic fracturing under the Safe Drinking Water Act. This decision followed

a 1989 CBM fracturing operation in Alabama that landowners say contaminated a

residential water well.

In 2000, in response to the 1997 court decision, the EPA initiated a study of the threats

to water supplies associated with the fracturing of coal seams for methane production.

The primary goal of the study was to assess the potential for fracturing to contaminate

underground drinking water supplies.

Meanwhile, in 2001, a special task force on energy policy convened by Vice President

Dick Cheney recommended that Congress exempt hydraulic fracturing from the Safe

Drinking Water Act.

The EPA completed its study in 2004, finding that fracturing "poses little or no threat"

to drinking water. The EPA also concluded that no further study of hydraulic fracturing

was necessary.

The 2004 EPA study has been called "scientifically unsound" by EPA whistleblower

Weston Wilson. In an October 2004 letter to Colorado's congressional delegation,

Wilson recommended that EPA continue investigating hydraulic fracturing and form a

new peer review panel that would be less heavily weighted with members of the

regulated industry. In March of 2005, EPA Inspector General Nikki Tinsley found

enough evidence of potential mishandling of the EPA hydraulic fracturing study to

justify a review of Wilson's complaints.

The Oil and Gas Accountability Project (OGAP) has conducted a review of the EPA

study. As reported in Our Drinking Water at Risk, we found that EPA removed

information from earlier drafts that suggested unregulated fracturing poses a threat to

human health, and that the Agency did not include information that suggests fracturing

fluids may pose a threat to drinking water long after drilling operations are completed.

OGAP's review of relevant data on hydraulic fracturing suggests that there is

insufficient information for EPA to have concluded that hydraulic fracturing does not

pose a threat to drinking water.

Efforts to close the Halliburton loophole

In 2005, a national energy bill included the exemption of hydraulic fracturing from the

Safe Drinking Water Act. This bill passed, with the exemption, although it left the door

open for the EPA to regulate the use of diesel in hydraulic fracturing operations.

Representatives DeGette, Salazar and Hinchey, and Senators Casey and Schumer have

introduced legislation to protect drinking water from oil and gas development --

including ending hydraulic fracturing's exemption to the Safe Drinking Water Act.

85

H.R. 1084 and S. 587, the Fracking Responsibility and Awareness of Chemicals Act

(FRAC Act), would close the Halliburton loophole and require oil and gas companies to

disclose the chemicals they use during the fracking process.

Local governments have written resolutions and letters supporting ending the hydraulic

fracturing exemption to the Safe Drinking Water Act and requiring public disclosure of

hydraulic fracturing

Why we need the Fracturing Responsibility and Awareness of Chemicals Act (H.R.

1084 and S. 587)

Published: May 2, 2011

A loophole for oil & gas

Hydraulic fracturing – often called “fracking” – is an industrial practice in which water,

sand, and chemicals are injected at high pressure into underground rock formations like

shale to blast them open and increase the flow of oil and gas.

Despite the widespread use of this practice, and increasing evidence of the risks that the

hydraulic fracturing process can pose to drinking water, the U.S. Environmental

Protection Agency (EPA) does not regulate the injection of fracturing fluids under the

Safe Drinking Water Act (SDWA). The oil and gas industry is the only industry in the

United States that is allowed by EPA to inject known hazardous materials -- unchecked

-- directly into or adjacent to underground drinking water supplies.

This exemption from the SDWA is known as the "Halliburton loophole" because it

came about in large part as a result of the efforts of Vice President Dick Cheney's

Energy Task Force and resulting energy legislation in 2005. Before taking office,

Cheney was CEO of Halliburton, which patented the original type of hydraulic

fracturing in the 1940s and remains one of the three largest manufacturers of fracturing

fluids.

The FRAC Act would make our waters safer

The injection of unknown and often toxic chemicals (such as diesel fuel and benzene)

frequently occurs near drinking water resources like household wells and aquifers.

Many disturbing incidents have been documented around the country in which water

has become contaminated and people have become ill after fracking occurred in their

communities or near their homes.

H.R. 1084/S. 587, the Fracturing Responsibility and Awareness of Chemicals Act

(FRAC) Act would amend the SDWA to repeal the exemption provided for the oil and

gas industry. As a result, the EPA would be able to regulate hydraulic fracturing and oil

and gas companies would be required to publicly disclose the types, amounts, and

combinations of chemicals they use in their hydraulic fracturing processes.

By requiring full, public disclosure of the chemicals used in the hydraulic fracturing

process, the FRAC Act would give regulatory agencies and the public—including the

people living near and directly impacted by oil and gas operations—the information

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they need to conduct comprehensive water testing and trace potential contamination.

Without this information, oil and gas companies can continue to deny potential links

between their activities and water contamination and, as a result, avoid liability for

damage caused. And under the FRAC Act, companies would be allowed ¬to keep

specific proprietary formulas secure except in cases of a health-related emergency.

In addition, oil and gas companies would be required to apply for a permit from EPA

before they inject chemicals near drinking water supplies. The oil and gas industry

already complies with the SDWA for other processes, such as when they inject waste

fluids after a well has been completed. The industry has already obtained approval for

more than 150,000 injection wells including wells used to inject waste fluids from

drilling such as fracturing fluids to ensure that these fluids do not pollute underground

sources of drinking water

A well-regulated industry

Passing the FRAC Act is a critical step toward ensuring that oil and gas drilling in the

United States occurs in the cleanest, safest, and most responsible manner possible.

Federal regulatory changes are needed to ensure that drinking water, streams, rivers,

wildlife, and the air we breathe are not polluted by dirty drilling practices.

While some states are stepping up and adopting chemical disclosure laws and other

regulations on oil and gas production, these standards—and the protections they offer

communities and the environment—vary widely. For this reason, a federal minimum

standard is needed to prevent harm from occurring in the more than 30 oil and gas

producing states.

What is hydraulic fracturing?

Hydraulic fracturing is an oil and natural gas production technique that involves the

injection of millions of gallons of water, plus chemicals and sand, underground at very

high pressure in order to create fractures in the underlying geology to allow natural gas

to escape. The sand is used to keep the fractures open and allow oil or gas to flow more

efficiently. Hydraulic fracturing is commonly used in many types of geologic

formations such as coalbeds, shale plays, and previously-drilled wells to further

stimulate production.

Where does hydraulic fracturing take place?

Thirty-three states have oil and/or natural gas production and, according to the Interstate

Oil and Gas Compact Commission, more than 90% of U.S. oil and natural gas wells use

hydraulic fracturing. Tens of thousands—if not hundreds of thousands— more wells are

planned across the country over the next decade.

What are the concerns about hydraulic fracturing?

Hydraulic fracturing fluids can contain a variety of toxic chemicals such as diesel fuel,

acids, and acetone.

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Though industry proponents of the practice assert that only a small fraction of the fluid

volume used in any fracturing operation consists of chemicals, because of the large

volume of fluids needed for each "frack job"—sometimes millions of gallons—the

chemical components of fracturing fluid can amount to tens of thousands of gallons.

Hundreds of different types of chemicals are used in fracturing operations, many of

which can cause serious health problems—some are also known carcinogens.

After hydraulic fracturing takes place, both the waste fluid that is brought back to the

surface as "flowback" as well as the fluids that remain underground can contain toxic

substances that may come from the fracturing fluids. In addition, hydraulic fracturing

can release hazardous substances that are naturally occurring into the environment, such

as arsenic, mercury, and naturally-occurring radioactive materials (NORMs).

All of these substances present risks to underground sources of drinking water and need

to be regulated properly, especially because each well may be hydraulically fractured as

many as 15 times.

Hydraulic fracturing has been suspected in cases of drinking water contamination

around the country, and in some areas where there has been hydraulic fracturing,

residents have reported illnesses.

Does hydraulic fracturing really threaten drinking water?

In many places, hydraulic fracturing takes place on private property, even in backyards

where children play or where a drinking water well is located.

Depending on local circumstances, property owners have little or no leverage in

determing where hydraulic fracturing operations may take place.

Hydraulic fracturing frequently necessitates drilling through drinking water aquifers,

exposing such aquifers to the risk of contamination from the tens of tousands of gallons

of chemicals typically employed in a single fracturing operation or from naturally--

occuring hazardous substances.

Is hydraulic fracturing regulated?

Hydraulic fracturing is one of only two underground injection processes exempted from

the federal Safe Drinking Water Act.

States where hydraulic fracturing occurs have varying regulatory requirements, some of

which are weak. For example, in most states oil and gas companies are not required to

publicly disclose the types and amounts of chemicals that are injected underground in

the fracturing process. In other words, nearby residents or landowners have no way of

knowing what kinds of chemicals are being injected underground that may have

contaminated their drinking water.

What is the FRAC Act?

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The Fracturing Responsibility and Awareness of Chemicals Act (FRAC Act) was

introduced in March 2011 in both the United States House (H.R. 1084) and Senate (S.

587). The bill has two purposes:

1. To require companies to disclose the chemicals injected underground, and 2. To eliminate the exemption of hydraulic fracturing operations from regulation under

the federal the Safe Drinking Water Act (SDWA).

The FRAC Act also ensures that medical professionals can access information about the

chemicals in hydraulic fracturing fluids if an individual has been harmed and needs

medical care – which is not now the case.

Does the FRAC Act require new bureaucratic red tape?

No, the FRAC Act allows considerable flexibility.

For example, the FRAC Act would allow states to administer the provisions of the Act.

Importantly, states would be able to develop their own regulatory programs, tailoring

them to their local conditions, with oversight from EPA. States with deficient

regulations would need to strengthen them to meet EPA requirements.

What does the industry say about the bill?

The oil and gas industry claims that the FRAC Act is unnecessary and overly

burdensome. While the American Petroleum Institute claims that regulation will

increase production costs by over $100,000 per well, its analysis was criticized by

independent economic experts as ignoring important information, exaggerating costs,

and being "untenable from an economic perspective."

Under questioning from Representative Diana DeGette at a Congressional hearing,

ExxonMobil CEO Rex Tillerson could not state how much it would cost his company to

comply with more protective regulations.

The industry claims that state regulations are sufficient, but state regulations vary

widely and some, as pointed out above, are weak and generally do not provide for

public disclosure. According to IHS Cambridge Energy Research Associates, federal

regulation of hydraulic fracturing is unlikely to halt shale gas development.

Why does industry say that hydraulic fracturing does not contaminate drinking

water?

In some cases, no one denies that groundwater has been contaminated—but the industry

claims that the hydraulic fracturing process is not the cause.

This has become a game of semantics.

Independent scientists and regulators have not had access to information about the

chemicals used in the fluids and thus cannot adequately investigate cases of

groundwater contamination, even where signs clearly point to hydraulic fracturing.

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Some cases where groundwater was contaminated during hydraulic fracturing

operations have been attributed to faulty well structure and other oil and gas production

causes instead of hydraulic fracturing per se, or have never been resolved.

Much better oversight and investigation is needed to fully determine the role of

hydraulic fracturing in drinking water contamination incidents;; the FRAC Act will give

the EPA the authority to oversee them.

Didn't EPA study this issue in 2004 and conclude there were no problems?

A 2004 EPA study of hydraulic fracturing in coalbed methane wells concluded that

hydraulic fracturing "poses little or no threat" to drinking water and that no further study

was necessary.

There have been many criticisms of this study as being insufficient and scientifically

unsound—in fact, an EPA whistleblower noted that the conclusions were

"unsupportable" and that some members of the study's review panel had conflicts of

interest.

It is also critical to note that the study only considered coalbed methane wells, not shale

gas plays or other locations where hydraulic fracturing takes place.

Should new regulation be put on hold while EPA completes the study urged by

Congress?

Although Congress has directed EPA to investigate the impacts of hydraulic fracturing,

we have enough information now to move forward to pass the FRAC Act.

Groundwater is being contaminated, the natural gas industry is moving to new areas

with this technology, and many states have inadequate regulatory programs which do

not even provide for public disclosure of the toxic chemicals used in this process.

Do supporters of this bill want to shut down oil or natural gas development?

No—natural gas is an important part of our energy economy, but its extraction must be

"done right."

This means that drinking water aquifers must be protected from contamination from the

chemicals used in hydraulic fracturing operations, and that people living in communities

where such operations take place have a right to know what chemical compounds are

being used.

The FRAC Act ensures that wider production of natural gas throughout the U.S. will not

impair the safety of drinking water.

The FRAC Act ensures that wider production of natural gas throughout the U.S. will not

impair the safety of drinking water.

90

Why Not Frack? March 8, 2012

Bill McKibben

The End of Country

by Seamus McGraw

Random House, 245 pp., $26.00

Under the Surface: Fracking, Fortunes, and the Fate of the Marcellus

Shale

by Tom Wilber

Cornell University Press, 272 pp., $27.95 (to be published in May 2012)

Gasland

a documentary film by Josh Fox

Docurama, DVD, $29.95

In one sense, the analysts who forecast that “peak oil”—i.e., the point at which the rate

of global petroleum extraction will begin to decline—would be reached over the last

few years were correct. The planet is running short of the easy stuff, where you stick a

drill in the ground and crude comes bubbling to the surface. The great oil fields of Saudi

Arabia and Mexico have begun to dwindle; one result has been a rising price for energy.

We could, as a civilization, have taken that dwindling supply and rising price as a

signal to convert to sun, wind, and other noncarbon forms of energy—it would have

made eminent sense, most of all because it would have aided in the fight against global

warming, the most difficult challenge the planet faces. Instead, we’ve taken it as a

signal to scour the world for more hydrocarbons. And it turns out that they’re there—

vast quantities of coal and oil and gas, buried deep or trapped in tight rock formations or

mixed with other minerals. Getting at them requires ripping apart the earth: for instance,

by heating up the ground so that the oil in the tar sands formation of Canada can flow to

the surface. Or by tearing holes in the crust a mile beneath the surface of the sea, as BP

was doing in the Gulf of Mexico when the Deepwater Horizon well exploded. Or by

literally removing mountaintops to get at coal, as has become commonplace across the

southern Appalachians. Or, in the case of the books under review, by “fracking” the

subsurface geology in order to make natural gas flow through new cracks. The word is

short for “hydraulic fracturing” and in the words of Seamus McGraw, it works like this:

having drilled a hole perhaps a mile deep, and then a horizontal branch perhaps half a

mile in length, you send down a kind of subterranean pipe bomb, a small package of

ball-bearing-like shrapnel and light explosives.

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The package is detonated, and the shrapnel pierces the bore hole, opening up small

perforations in the pipe. They then pump up to 7 million gallons of a substance known

as slick water to fracture the shale and release the gas. It blasts through those

perforations in the pipe into the shale at such force—more than nine thousand pounds of

pressure per square inch—that it shatters the shale for a few yards on either side of the

pipe, allowing the gas embedded in it to rise under its own pressure and escape.

This new technique allowed the industry to exploit terrain that it had previously

considered impenetrable. It was used first in the late 1990s in what’s called the Barnett

Shale in Texas, and is also being widely used to liberate oil from beneath the Bakken

Shale in North Dakota. But the industry’s biggest excitement has come in the East,

where a boom has been underway for several years in the so-called Marcellus Shale that

runs from West Virginia into upstate New York. This gas-trapping shale formation has

been estimated to hold as much gas as the whole United States consumes in a century.

(The estimates are highly contested; some analysts are insisting that new data show

them to be considerably smaller, though still vast, and indeed at the end of January the

federal government slashed its earlier predictions in half.)

The gas is also ideally situated along the route of many existing natural gas pipelines

and near the heavy-consumption eastern megalopolis. If you’re an energy company, it’s

about the best place on the planet to find a huge pool of gas—it’s like discovering an

underground deposit of beer directly beneath Yankee Stadium. Because of the potential

profits, the agents of various companies have fanned out across the back roads of the

region in a remarkable land rush, seeking to lock up drilling rights on the hitherto not-

very-valuable acreage of marginal dairy farms and cut-over woodlots.

The two books under review tell the story of that land rush. In fact, they manage to tell

exactly the same story, with exactly the same set of characters—a few neighbors along a

rural road in Dimock, Pennyslvania. Pennsylvania has been the very epicenter of this

boom, less for geological than for political reasons: the powers that be in Harrisburg

have been remarkably congenial hosts to the new fracking industry, rolling out the red

carpet. (They’re so generous that, unlike Louisiana or Texas, they don’t even charge a

severance tax on the gas that’s generated in the state. In fact, they’ve even offered up

official state forests for use as drill sites.)

That means that some people have come into unexpected riches, including McGraw’s

mother, who leased her land for a large sum—for some farmers looking for an easier

retirement it’s been a blessing. But the money has also divided communities in painful

ways, since those who don’t reap a bonanza suffer the side effects: the noise and squalor

of an industrialized countryside, the danger of quiet roads now overrun with trucks. And

even the fortunate run the risk that something will go wrong with the wells on their

land. For example, Victoria Switzer and Ken Ely, neighbors who leased their land to

Cabot Oil and Gas in the early days of the boom, then turned into adversaries of the

company that did the drilling. They had good reason: before long, drinking water from

their wells had turned brown. A neighbor’s well exploded, apparently because of

“methane migration” from the fracking operations. Cabot insisted it wasn’t at fault; for

a while it bought bottled water for the neighborhood, but eventually it stopped doing

even that. It was, in other words, a kind of horror show, the sort of tragedy that usually

accompanies largely unregulated booms. (And this one has been largely unregulated—

the Pittsburgh newspaper reported in January that the state doesn’t even know where

many of the wells in the state have been drilled, because companies, which are supposed

to report on their operations, often don’t bother.)

The accounts in these two books are complementary. McGraw is the better writer, and

because he grew up in the region he has a better story to tell; he describes believable

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characters and provides a perceptive account of what rural poverty feels like. Wilber is

the better reporter; he covered the shale story for the Binghamton newspaper for years,

and grounds it in the setting of both Pennsylvania and New York politics.

The two books, however, don’t manage to cover some important aspects of the fracking

issue. In fact, the most remarkable work on the subject has been done by Ian Urbina, a

New York Times journalist, and by the rebel filmmaker Josh Fox.

Urbina’s stories, which seem likely to win a Pulitzer, demonstrate why we can’t do

without serious newspapers. Beginning last spring, he documented the health risks, lax

regulation, industry overstatement, and general corruption that have surrounded the

boom.

Fox, for his part, grew up in rural Pennsylvania, and when a drilling company offered

$100,000 for rights to his family land, he took his camera to Dimock, and then out west

to communities where fracking had been underway for a few years longer, to

investigate. The documentary he produced, Gasland, earned an Emmy and much critical

praise. In the key sequence a Colorado homeowner opens his tap and water comes out,

but also gas—which becomes obvious when he lights the stream on fire. One film critic,

from Bloomberg News, said that Fox “may go down in history as the Paul Revere of

fracking,” and indeed he has emerged as one of the principal organizers in the fight to

limit the spread of the technique. Other opponents—mostly from grassroots

environmental groups—have had the most luck in New York, which enacted a

moratorium on fracking that may end later this year, and in the Delaware River Basin,

whose governing commission has yet to approve widespread drilling.

The emerging movements against fracking, and the science that informs them, raise

three key concerns. In ascending order of importance they are:

First, how much damage is being done to water wells and underground aquifers from

methane migration and the chemicals mixed with water and then injected into fracking

wells under high pressure? You might call this the “flaming faucet” question, and it has

understandably and rightly galvanized many of the local people fighting fracking. The

industry claims that there’s no problem—that the cement casings they put in the wells

keep the chemicals out of layers of soil where drinking water might be found. But

rigorous scientific study has been scant, in part because since 2005 (at the urging of

then Vice President Dick Cheney, whose former company Halliburton is a major player

in the fracking boom), drilling companies have been exempt from federal safe drinking

water statutes and hence not required to list the chemicals they push down wells.

Preliminary research from Duke University seemed to indicate that indeed methane was

showing up in drinking water; in December, the EPA released its first thorough study,

conducted in the Wyoming town of Pavilion, where residents had reported brown,

undrinkable water after nearby fracking operations. The EPA concluded that the

presence in the water of synthetic compounds such as glycol ethers and the assortment

of “other organic components” were “the result of direct mixing of hydraulic fracking

fluids with ground water,” and told local residents to stop drinking from their wells.

The company involved insisted that the EPA had introduced the contaminants itself;

Oklahoma Senator James Inhofe, best known for decrying global warming as a “hoax,”

added that the EPA report was part of “President Obama’s war on fossil fuels.” But the

evidence from Pavilion was a powerful indictment of the industry, and it led several

leading doctors to call for a moratorium on fracking pending more health research. “We

don’t have a great handle on the toxicology of fracking chemicals,” said Vikas Kapil,

chief medical officer at the National Center for Environmental Health, an arm of the

Centers for Disease Control.

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December, then, was a tough month for the fracking industry, and it ended on a

particularly low note—on New Year’s Eve a magnitude 4.0 earthquake in Youngstown,

Ohio, was blamed on the injection of high-pressure fracking water along a seismic fault,

a phenomenon also documented in Arkansas and Oklahoma.

A second concern has to do with the damage being done to rivers and streams—and the

water supply for homes and industries—by the briny soup that pours out of the fracking

wells in large volume. Most of the chemical-laced slick water injected down the well

will stay belowground, but for every million gallons, 200,000 to 400,000 gallons will be

regurgitated back to the surface, bringing with it, McGraw writes, not only the

chemicals it included in the first place, but traces of the oil-laced drilling mud, and all

the other noxious stuff that was already trapped down there in the rock: iron and

chromium, radium and salt—lots of salt.

Al Granberg/ProPublica

The question is what to do with that volume of bad water. If it leaks into small streams,

disaster results: the classic case is Dunkard Creek, which rambles for forty miles along

the Pennsylvania–West Virginia border. In Wilber’s words, “its clear, green eddies and

swimming holes, shaded by hemlock and sycamore trees, attracted generations of

anglers, paddlers, picnickers, and nature lovers” who enjoyed the 161 aquatic species

found in its waters.

In September 2009, however, pretty much everything died in the course of a few days—

everything except an invasive microscopic algae that normally lives in estuaries along

the Texas coast. This bloom of “golden algae” that killed everything else was a

mystery—how could a species that usually lives in brackish water on the ocean’s edge

have survived in a freshwater Appalachian creek? The answer emerged swiftly: drilling

companies had been illegally dumping wastewater in the region, turning it into brine.

Instead of simply dumping the water, the companies could have sent it to the local

sewage treatment plant—but these were generally not set up to handle high volumes of

briny water. Along the Monangahela River, for instance, when treatment plants started

accepting tanker trucks loaded with waste-water, “workers at a steel mill and a power

plant in Greene County were the first to notice something strange: river water began

94

corroding equipment.” The state eventually had to put the Monongahela on a list of

“impaired rivers,” and 325,000 residents of the region were at one point told to drink

bottled water.

As Ian Urbina reported in the Times last February, the water returning from deep

underground can carry naturally occurring “radioactivity at levels higher than

previously known, and far higher than the level that federal regulators say is safe

for…treatment plants to handle.” Despite a 2009 EPA study never made public, the

federal agency has continued to allow “most sewage treatment plants that accept drilling

waste not to test for radioactivity.” And most drinking-water intake plants downstream

from the sewage treatment plants, with the blessing of regulators, have not tested for

radioactivity since 2006, even though the drilling boom began in 2008.

Industry, as usual, is unconcerned, at least in public. “These low levels of radioactivity

pose no threat to the public,” said the CEO of Triana Energy. They are “more a public

perception issue than a real health threat.” But as Urbina pointed out, a confidential

industry study from 1990, which looked at radium in drilling water dumped into the

ocean off the Louisiana coast, found that it posed “potentially significant risks” of

cancer for people eating fish from those waters.

The natural gas wells can cause air pollution problems too: Wyoming, for instance, no

longer meets federal air quality standards because of fumes seeping from the state’s

27,000 wells, vapors that contain benzene and toluene, according to Urbina.

In sparsely populated Sublette County in Wyoming, which has some of the highest

concentrations of wells, vapors reacting to sunlight have contributed to levels of ozone

higher than those recorded in Houston and Los Angeles.

In a county without a single stoplight, regulators this time last year were urging the

elderly and children to stay indoors.

There are steps that industry could take to reduce some of the pollution—wastewater,

for instance, can be captured in huge on-site tanks and pushed back down so-called

“injection wells,” precisely the process that apparently set off the Youngstown temblor.

Even this process, however, leaves large quantities of salty residue, and the wells can

keep oozing out their toxic load for many years after drilling is done. Some enterprising

drilling companies have, Urbina wrote, “found ready buyers [for wastewater] in

communities that spread it on roads for de-icing in the winter and for dust suppression

in the summer. When ice melts or rain falls, the waste can run off roads and end up in

the drinking supply.”

In any event, overmatched regulators who can’t even keep an accurate count of the

number of wells are having a hard time coping with waste products—especially since

the political power of the industry just keeps growing. Pennsylvania inaugurated a new

governor last year, Republican Tom Corbett, who had taken more gas industry

contributions than all his competitors combined. Not only did he quickly reopen state

land to new drilling, he claimed regulation of the industry had been too aggressive. “I

will direct the state’s Department of Environmental Protection to serve as a partner with

Pennsylvania business, communities and local governments,” he said.1

What is the effect of this surge of gas on national and global efforts to cope with climate

change? Though New York and other states will make their decisions on drilling largely

on the basis of local effects, this may be the most important question of all, since the

implications will extend far beyond the borders of particular geologic formations or

specific watersheds. Four years ago, when word of the spectacular potential scale of the

gas finds began to filter out, many environmentalists were thrilled. Robert F. Kennedy

Jr., for instance, who founded the Waterkeeper Alliance and who has been a leader in

the fight against mountaintop removal coal mining, wrote an Op-Ed for the Financial

95

Times in the summer of 2009 declaring that “a revolution in natural gas production over

the past two years has left America awash with natural gas and has made it possible to

eliminate most of our dependence on deadly, destructive coal practically overnight.”

The reason environmentalists prefer gas to coal is simple: when burned, it produces

about half as much carbon dioxide per unit of energy. That is, if we could convert our

coal-fired power plants to natural gas (which in most cases is not that hard to do),

carbon emissions would drop.

But it’s actually not that simple. Natural gas—CH4—in its unburned state is a

remarkably powerful greenhouse gas itself, molecule for molecule many times stronger

than CO2. So if even a little bit leaks out to the atmosphere in the drilling process, gas,

according to some estimates, can cause even more global warming than coal.

The data showing just how much it would do so are scarce. An early study from Robert

Howarth at Cornell found that fracked gas might do 20 percent more damage to the

climate, at least over the next few crucial decades, than coal; earlier this winter another

Cornell team, using different leakage rates, found that it might be only half as bad as

coal. More data may eventually clarify the extent of the threat. But fracked gas is not as

clear a winner in this fight as many had originally assumed.

There’s a deeper question still. If we increased the use of natural gas, it would replace

some coal from the planet’s power-generating mix. But it would also crowd out truly

low-carbon sources of power: abundant and cheap natural gas would make it that much

harder to get sun and wind (or, if it’s your cup of hot water, nuclear power) up and

running on a large scale.

As the International Energy Agency reported last summer, the numbers are significant:

their projections for a “Golden Age of Gas” scenario have atmospheric concentrations

of CO2 peaking at 650 parts per million and temperature rising 3.5 degrees Celsius, far

higher than all the experts believe is safe. In September, the National Center for

Atmospheric Research tried to combine all the known data—everything from methane

leakage in coal mines to the cooling effects of coal-fired sulfur pollution—and

concluded, in the words of the scientist Tom Wigley, that the switch to natural gas

“would do little to help solve the climate problem.”

As a result of such findings, and of all the on-the-ground problems in Pennsylvania and

out west, environmental groups are backing away from their earlier support for gas.

Robert F. Kennedy Jr., for instance, has grown increasingly critical; and at the

grassroots tens of thousands of highly organized activists with visible and articulate

spokesmen (the actor Mark Ruffalo has been especially notable) are making an

impressively strong stand against further drilling.2

Their efforts come up against the staggeringly deep pockets of the fossil fuel industry,

which is used to winning battles. Bowing to that pressure, and trying to ward off the

appeal of the GOP’s “drill, baby, drill” rhetoric, the president praised fracking in his

State of the Union address, promising to “develop this resource without putting the

health and safety of our citizens at risk.”

The rush to exploit “extreme energy,” and to rip the planet apart to get at it, knows no

national boundaries. Urbina reported last year that the big energy companies have

spread the fracking technology around the planet, finding new shale deposits in more

than thirty countries.

One can reasonably expect that if regulators are overwhelmed in Pennsylvania, the same

may be the case among the shale deposits in Papua New Guinea. In any event, it should

by now be clear that fracked gas is not a “bridge fuel” to some cleaner era, but a rickety

pier extending indefinitely out into a hotter future. This is one of those (not rare) cases

where abundance may prove a great problem.

96

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Finds that form a bedrock of hope

By Sylvia Pfeifer

FT series: Shale could bring energy independence for many nations, freeing them from a

reliance on imports

Gateway to the windswept wilds of Patagonia, Neuquén knows the power of oil money.

Hydrocarbon riches have helped make the city the biggest in an Argentine region that

has been producing oil and gas for roughly a century, with a bustling downtown packed

with tower blocks and new four-by-four vehicles.

Now Neuquén is on the brink of a modern-day oil rush. Explorers are looking for oil

and gas trapped in shale rock formations thousands of feet below the surrounding

plains. Argentina’s reserves are believed to be the third biggest in the world, after those

of the US and China.

Just as nuclear scientists hoped atomic power was the answer to the world’s energy

needs in the 1950s, oil and gas producers believe this new resource could bring plentiful

low-cost power. Shale could also bring energy independence for many nations, freeing

them from a reliance on imports.

More than 50 years ago energy experts began speaking of “peak oil” – the idea that the

world was passing the point of maximum production and that supplies would decline.

Today, shale calls that assumption into question. In the US new extraction techniques

have transformed gas production, opening reserves that some estimates will last 100

years. Liquid-rich shales – ones that also contain oil – have enabled the US significantly

to cut its dependence on crude imports.

97

Shale also has the potential to reshape domestic economies. In this year’s State of the

Union address. President Barack Obama said experts predicted it would support

600,000 jobs, with more to follow as industries that rely on cheap energy were brought

back onshore. Lord Browne, the former chief executive of BP and now a partner at

Riverstone – backer of Cuadrilla Resources, a company exploring for shale gas in the

UK – is convinced it is a prize worth pursuing.

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Ultimately, shale gas gives us options for the future. It puts our energy supply in our

own hands, as well as providing obvious economic benefits. It is clear that shale will be

one of the linchpins of global energy supply in the 21st century, alongside nuclear and

renewables,” he says.

Shales are the most abundant form of sedimentary rock on earth, serving also as the

source rocks for hydrocarbons that migrate into conventional reservoirs. Nigel Smith at

the British Geological Survey, a research council, uses the analogy of looking for

something to eat in a house. “All the food in the kitchen, the cupboards, the fridge and

the freezer – that’s the hydrocarbon source rock kitchen. The conventional

hydrocarbons that we have used so far have migrated to the dining room. We are going

back into the kitchen to see what is still left in the source rocks or shales.”

The apparent abundance of riches in the “kitchen” is causing a stir around the world.

Aside from Argentina, significant reserves have been identified in Australia, South

Africa, northern Africa and eastern Europe as well as in the UK and France. After an

assessment of the potential in 32 countries the Energy Information Administration, a US

federal agency, has estimated shale could increase the world’s technically recoverable

gas resources by more than 40 per cent.

Shale is recasting geopolitics and influencing companies’ investment decisions.

National oil companies and international groups have spent tens of billions of dollars

acquiring shale gas resources in North America.

In eastern Europe, the prospect of greater energy independence has spurred Poland and

Ukraine to investigate their resources. Washington is watching the developments

closely. “Energy security within Europe is important to the US just as energy security in

the US would be important to Europe. We have the strongest mutual trade and

investment relationship in the world,” says Richard Morningstar, the special envoy for

Eurasian energy to Hillary Clinton, US secretary of state.

In the longer term, Russia’s dominance of Europe’s gas market is also in question if

countries such as Poland develop commercial resources of shale. This month Vladimir

Putin, Russian president, in a speech to parliament called on local energy producers to

“rise to the challenge” posed by shale, saying it could “seriously” restructure supply and

demand in global hydrocarbons.

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The big unknown is China, the world’s biggest consumer of energy. Its vast territories

are thought to possess rich shale reserves – the government says an extensive appraisal

has found potentially recoverable resources of 25tn cubic metres, enough to meet the

country’s current consumption for nearly 200 years. If China ended its traditional

reliance on coal and switched to gas, which is cleaner burning, it could have significant

ramifications for carbon emissions and forecasts of global warming.

Just as nuclear power has its drawbacks, however, there are also uncertainties around

shale. Chief of these is the potential environmental toll. The industry is dogged by

accusations that the technique used to extract the gas from the rock – hydraulic

fracturing, or “fracking” – will pollute ground water, plunder water supplies and trigger

earthquakes. Further questions surround methane leakage.

So far there is little evidence that fracking automatically causes such damage – but more

than enough to suggest poorly constructed wells are a threat and that a clear need exists

for more research to establish the practice’s impact more precisely. As one review by

Massachusetts Institute for Technology researchers concluded last year: “With over

20,000 shale wells drilled in the last 10 years, the environmental record of shale gas

development has for the most part been a good one – but it is important to recognise the

inherent risks and the damage that can be caused by just one poor operation.”

Until those risks are better understood, the techniques are likely to remain contentious,

leaving ample room for critics such as Josh Fox, maker of Gasland, a documentary

about the impact of fracking. “This is a game-changer in terms of escalating the call for

renewable energy because now people realise either we put solar panels on our roofs or

we’re going to get fracked,” says Mr Fox.

Amid all this, public anxiety is on the rise. France and Bulgaria have both banned

fracking. “The industry has not been quick to acknowledge the concerns of the

communities that are impacted by tight and shale gas developments,” admits Graeme

Smith, vice-president of “tight” gas and oil at Royal Dutch Shell.

Andrew Gould, recently retired chairman of the US-listed Schlumberger and chairman-

designate at BG Group of the UK, says the industry needs to make the process more

efficient. “Today’s approach to shale gas development is unsustainable, being more akin

to the use of brute force. As a result it is far from being optimal in terms of resource use,

environmental footprint, production efficiency and cost.”

...

Today’s gas boom in the US is attributable in large part to George Mitchell, a maverick

entrepreneur and son of a Greek immigrant who persisted in his quest despite

widespread scepticism. He and his team perfected the technique of hydraulic fracturing,

a process of pumping water, sand and chemicals deep underground to allow otherwise

trapped natural gas to flow out.

Then Mr Mitchell sold his company in 2002 to Devon Energy, an onshore explorer that

specialised in horizontal drilling – sending wells up to a mile sideways as well as more

than a mile below the surface. This combination of horizontal drilling and improved

fracking meant gas could be extracted in commercially viable quantities.

99

The rest of the industry began to take notice. But that was partly because the US has

benefited from a happy combination of circumstances. First, there was the raw material

– good source rock stuffed with gas and oil. But there was also a well-developed, low-

cost service industry to drill the wells and provide the necessary equipment. In addition,

a network of pipelines permitted the connection of new fields, while accommodating

regulation allowed landowners to be offered lucrative compensation in exchange for the

use of their plots.

This combination does not exist elsewhere. “In some parts of the world, shale has the

potential of becoming significant ... but not all shales are created equal,” says Daniel

Yergin, author of The Quest, an examination of the industry’s implications.

One of the greatest challenges the shale business faces is the dearth of accurate data.

While the US has decades of data gathered during exploration for conventional

hydrocarbons, the knowledge base elsewhere is low. The path from exploration to

production will be a long one. Mr Gould predicts that the industry is two to three years

away from being able to identify the best producing zones. “It’s a question of designing

and building hardware,” he adds.

Cost is also an issue. Industry estimates suggest drilling a well for shale gas in Poland,

for example, is three times more expensive than in the US, given the absence of a

competitive service industry. Still, Menno Koch at Lambert Energy, a London advisory

company, is one who believes shale will become competitive with gas imports. His best

guess for European shale production in 2020 is 25bn cu m – more than 5 per cent of

today’s European Union gas demand.

While sharing that sort of estimate, Günther Oettinger, EU energy commissioner, says

Brussels has to respect the “different development of public opinion” in member states

and sees it as too early to become involved in regulation. “Shale gas in the US totally

changed the market. In Europe it can’t,” he says. “It is an additional element, maybe 5-

10 per cent.”

The policy picture is different in China, where Beijing has earmarked unconventional

gas as a bedrock of its future energy policy. It has set a target of 6.5bn cu m of annual

output by 2015, equivalent to 2-3 per cent of its projected gas production for that year.

“Unconventional oil and gas are the key hydrocarbon resource for China’s future

development,” says Fu Chengyu, chief executive of Sinopec, the nation’s largest oil

group by revenue.

China’s policy environment may be right but there are significant physical difficulties.

Many early exploratory projects are in the quake-prone Sichuan basin. The country also

lacks the extensive pipeline infrastructure needed to bring the gas to market. Another

concern is the availability of water, where China faces growing shortages.

A reminder that energy is a strategically sensitive industry carrying political risks came

last week when Argentina acted to renationalise YPF, its biggest oil company, sending

shock waves round the boardrooms of the industry worldwide. Given the nature and

scale of the resource, expectations were high that Argentina would be the next country

to experience the shale revolution.

100

But there are signs that at least parts of the industry remain undeterred. “Shale resource

development has attracted a lot of capital investment the past 12 to 18 months,” says

Michael Bose, Argentina country manager for Apache of the US, which plans an

aggressive shale oil drilling programme there. “As long as the government puts together

a solid energy policy with fundamentals that support a fair economic return, these

projects will be developed.”

In any event, though developments within the US may have demonstrated shale’s

potential, it is still unclear whether and how fast that success story will spread around

the world. Most analysts do not expect commercial production until the middle of this

decade at the earliest. It will take longer for shale to become a significant contributor to

energy needs.

Shale’s supporters still have to demonstrate conclusively that its benefits outweigh any

environmental cost, and it faces opposition from climate change activists opposed to the

greater use of hydrocarbons. Yet the tantalising promise of energy independence, job

creation and cheaper power will spur many governments to push ahead regardless.

“It is always a good idea to explore for and develop resources within national borders. It

increases security, tax take, jobs and it might even reduce power prices,” says Lord

Browne. “Nothing is perfect. This is pretty good.”

Additional reporting by Pilita Clark, Leslie Hook and Jude Webber

Collage by JR Jimenez-UNAM

Economics, Business School

MXC Aug 8, 2012