Oil and Gas Bubble Up All Over

Wall Street Journal
3 January 2012
By Russell Gold

You'll know the U.S. energy industry is really on the rebound when North Dakota's newfangled Bakken oil field starts pumping more crude than Alaska's stalwart Prudhoe Bay. Energy experts expect it to happen in 2012.

Dwindling production from the once-mighty Alaskan field has been a symbol of what was once seen as the slow, inexorable decline of U.S. oil. But new technologies have turned that overall decline into an increase, led by the Bakken shale, which in July produced 424,000 barrels a day, to Alaska's 453,000.

Rising oil production from the Bakken and other nontraditional fields is expected to add 250,000 barrels of oil a day to U.S. production, according to the International Energy Agency, even as conventional oil production falls. If overall trends continue, daily U.S. oil output could be up by 1 million barrels a day by 2016, to 6.6 million.

"I didn't see it, and I don't know anyone else who saw it coming," said James L. Williams of WTRG Economics, an energy consultancy in London, Ark.

Crude-oil imports are falling, balance-of-trade payments are improving and thousands of oil-field jobs are being created from Texas to Ohio, from West Virginia to Wyoming. Moreover, the U.S. is beginning to export a significant amount of diesel and gasoline refined from crude and could begin exporting chilled natural gas next year.

The Bakken wasn't discovered so much as unlocked. The energy industry figured out that a combination of technologies — hydraulic fracturing and vertical wells that turn underground to run horizontally through oil-rich rock — could free petroleum and natural gas trapped in dense rock formations.

The vast majority of this new oil and gas is coming from shale, which must be cracked open using hydraulic fracturing, or fracking. The new year should see an increase in government regulation of the fracking industry, covering air emissions, water disposal and well construction. Early in 2012, New York State is expected to issue new rules for fracking operations that could set the tone for a year of regulatory scrutiny. Around March, the federal government is expected to issue rules for fracking on federal lands.

New technologies are now being applied to the Eagle Ford oil field in South Texas. In August, the field produced about 109,000 barrels a day, according to state records, compared with 3,100 barrels two years earlier. Output is expected to quadruple over the next five years.

Next up: The Utica oil field in eastern Ohio and Pennsylvania. Its existence was disclosed last July, and activity is just starting to ramp up.

Chesapeake Energy Corp.'s chief executive, Aubrey McClendon, said last summer that "pound for pound, foot for foot, the Utica rock is going to be better than the Eagle Ford." As more wells are drilled in 2012, this boast will be tested.

Activity is also expected to pick up slightly in the Gulf of Mexico, where drilling has returned after an extended lull following the Deepwater Horizon disaster. Meanwhile, BP PLC,Halliburton Corp., Transocean Ltd. and federal prosecutors will meet in a federal courtroom in New Orleans in February to begin the lengthy process of divvying up blame for the 2010 accident that killed 11 and unleashed the worst offshore oil spill in U.S. history.

President Barack Obama has indicated that he wants to see shale development move forward, but in a "safe, environmentally sound way." This year, the industry will get its first peek at what he means, and how much it might cost.

Write to Russell Gold at russell.gold@wsj.com