Energy
5:17 pm
Sat February 1, 2014

How The U.S. Oil Boom Is Changing The Industry's Landscape

Originally published on Mon February 3, 2014 10:02 am

Transcript

ARUN RATH, HOST:

It's ALL THINGS CONSIDERED from NPR West. I'm Arun Rath.

There is an oil rush in North Dakota right now. That state is pumping out 10 times the crude oil it did just 10 years ago. Fortunes are being made and once-sleepy towns are now bursting at the seams. This week, NPR is exploring how this oil-drilling boom is changing North Dakota.

NPR's Jeff Brady is one of the reporters working on the series, and he joins me. Jeff, why is this rush for oil happening in North Dakota?

JEFF BRADY, BYLINE: Well, the reason is something called the Bakken Shale Formation. This is a layer of very compact shale about two miles underground. And in most places, it's just about 140 feet thick; in some places, a little thinner than that. But this layer of shale is spread over a huge area, most of it in western North Dakota, but it also extends into Montana, Saskatchewan and Manitoba. And locked within this shale is a huge amount of oil, possibly billions of barrels of oil.

RATH: Now, geologists have known for decades that there's been oil under North Dakota and there have been wells there even since the '50s. So why is the boom happening now?

BRADY: Well, over the past 15 years or so, two technologies have converged to sort of make this rush for oil possible. The first is horizontal drilling. In the past, an oil company would drill a vertical hole down in the ground and hoped that they'd find a rich area with lots of oil. But now, they can drill down and then turn that drill bit sideways and bore horizontally through that layer of shale.

And this is where the second technology comes in, hydraulic fracturing. You've probably heard the term fracking. Well, drillers, they pump huge amounts of water along with a type of sand and some chemicals into that well. And this creates a lot of pressure, and that pressure breaks up or fractures the shale. And that allows the oil to escape from the shale and flow up to the surface. Often, we're talking about huge amounts of oil. And right now, crude prices are pretty high. They've been around $100 a barrel for a while.

So the reason why this is happening now and why it's happening in North Dakota is that it's very profitable, and everyone in the oil industry wants to get a piece of the action.

RATH: So consequently, there's a lot of money flowing into North Dakota. You saw some evidence of that on your reporting trip, yes?

BRADY: I did see evidence of it. There's new construction everywhere you look - houses, businesses and even some manufacturing facilities. Companies are investing billions of dollars to take advantage of all this new oil. One example of this is a diesel refinery that I went to in Dickinson, North Dakota. It's the first refinery of its type to be built in the U.S. in more than three decades.

And now, the U.S. refining industry claims that environmental regulations for building new facilities are too expensive to justify the cost of a new refinery. That makes what's happening at this plant all the more remarkable.

(SOUNDBITE OF MACHINERY)

BRADY: The $300 million Dakota Prairie Refinery is under construction here. Once finished, it'll process 20,000 barrels of crude a day from nearby oil wells. That means oil that right now is shipped out of the state by rail will stay in North Dakota instead. A refinery like this hasn't been built from the ground up since the Carter administration. Jeff Rust is the project director.

JEFF RUST: We have cranes from as far away as Milwaukee, Wisconsin. We have just equipment from all over the United States as well as craft people.

BRADY: Rust says workers moved about a million yards of dirt to level the 320-acre site. Construction started last spring as crews raced to finish the underground work before the ground froze.

RUST: It's very expensive to do below-grade construction in the wintertime. It's just cost-prohibitive, and it tears up equipment.

BRADY: Timing is key, because the two companies building the project - MDU Resources and Calumet - hope to finish construction by the end of this year. The refinery has surprisingly little opposition in North Dakota. Environmental groups are more focused on issues like pollution at well sites and moving oil by rail. Supporters, though, including the state's Republican Governor Jack Dalrymple, are quick to highlight economic benefits.

GOVERNOR JACK DALRYMPLE: And I have a picture right over here in my office of myself on a Caterpillar dozer.

BRADY: Photos of the governor on a bulldozer were taken during the groundbreaking ceremony. This is not the only refinery under construction in North Dakota. The tribes on the Fort Berthold Indian Reservation hope to build one too. A decade back, the plan was to process tar sands oil from Canada. But with the oil rush well under way, the tribes would refine local crude. Governor Dalrymple says this oil rush is transforming his state's economy.

DALRYMPLE: As we approach one million barrels of oil production per day, we are definitely equivalent to a small OPEC nation.

BRADY: Per capita personal income in North Dakota has more than doubled in the past decade, far outpacing income growth in the rest of the country.

(SOUNDBITE OF MACHINERY)

BRADY: Back at the Dakota Prairie Refinery site, there are hundreds of workers trying to get it completed. It will employ about 90 when finished. MDU Resources official John Stumpf says this refinery will produce diesel, something North Dakota is now burning a lot of.

JOHN STUMPF: The state went from 15,000 to - round numbers - 55 to 60,000 barrels a day.

BRADY: That's almost triple the amount of diesel the state was using before the oil rush. All those drilling rigs and trucks account for nearly all the increase, but Stumpf says having more diesel in the state should help farmers and ranchers here too.

STUMPF: They've kind of been impacted because sometimes there's - they need diesel for farming and they can't get it because it's in short supply.

BRADY: Healthy demand for diesel and a plentiful supply of local crude oil, a combination that companies behind this project think will bring them profits for years to come.

RATH: NPR's Jeff Brady. He just returned from that reporting trip in North Dakota.

Since the 1970s, there's been a ban that prevents American oil from being exported. The increase in U.S. oil production has made some people wonder if that ban still makes sense, and they want it lifted.

And as Christopher Werth reports, the way energy economists and policymakers visualize the global oil market has changed a lot since the ban first took effect.

CHRISTOPHER WERTH, BYLINE: To understand the export ban on American crude oil, let me take you back to a day in 1973.

(SOUNDBITE OF TV SHOW, "NBC NIGHTLY NEWS")

UNIDENTIFIED MAN #1: This is "NBC Nightly News," Wednesday, October 17th.

WERTH: War had broken out in the Middle East, and Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries or OPEC did something that shocked the global economy.

(SOUNDBITE OF NBC NEWS)

UNIDENTIFIED MAN #2: The oil producing countries of the Arab world decided to use their oil as a political weapon.

WERTH: That weapon turned out to be an oil embargo that blocked oil exports to the U.S. and helped push the country into an energy crisis. Oil prices quadrupled. Lines of cars snaked outside gas stations with empty pumps. And it led to something of a national obsession with energy independence.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT RICHARD NIXON: Good evening.

WERTH: Then President Richard Nixon addressed the nation with a plan.

(SOUNDBITE OF ARCHIVED RECORDING)

NIXON: By the end of this decade, Americans will not have to rely on any source of energy beyond our own.

WERTH: Not long after that, the export ban on American crude oil was born. And it's a move that tells you a lot about the way policymakers viewed the world's oil market at the time.

PAUL STEVENS: People saw it basically in terms of physical battles of crude oil.

WERTH: Paul Stevens is an energy expert at Britain's Royal Institute of International Affairs. He says politicians tended to imagine those barrels of crude like a game of chess played out across a map of the world. And the goal was to control as many barrels as possible to achieve energy security.

STEVENS: It was felt that if you're obsessed by having physical security of crude oil, well, you don't want your crude oil going out to all these nasty foreigners. You want to hang on to it for yourself.

WERTH: But over time, the predominant metaphor for picturing the world oil market shifted from those little barrels of crude to what Yale energy economist Bill Nordhaus calls the global bathtub of oil.

BILL NORDHAUS: The idea is you have this big, huge pool of oil, and you have these spigots going into it that are from different places.

WERTH: Places like big oil producing countries, such as Saudi Arabia, Russia and Nigeria. And as long as that oil is traded freely, those spigots turn on and fill the global bathtub while big oil consuming countries, such as the U.S., act like drains taking the oil out.

(SOUNDBITE OF DRAIN)

NORDHAUS: And the thing about the oil bathtub is that it doesn't really matter who the spigots and who the drains are. It's really the total amount coming in and the amount coming out that determines world oil prices.

WERTH: Nordhaus tracked world oil prices over two decades. And he says the global price for a barrel of crude tends to be the same whether the oil is from Saudi Arabia or from Scotland.

NORDHAUS: The extent to which these prices move together is really phenomenal.

WERTH: Which, according to bathtub theory, means no one supplier can completely disrupt the oil market. And the more oil that goes in the bathtub, the better for energy security. With the boom in shale oil as a result of fracking in the U.S., American oil production is forecast to break its record high of 9.6 million barrels a day, a figure last seen in 1970.

Nordhaus says since U.S. refineries struggle to process all of that crude, Washington should lift the export ban and add American oil to the global bathtub.

NORDHAUS: You have a really valuable resource sitting there, whether it's in Texas or North Dakota or wherever. It's something that people will pay a lot of money for, but there's no way to get it out.

WERTH: Those opposed worry that lifting the ban would raise gas prices for consumers. But Jonathan Chanis of Columbia University says if the oil market really is a bathtub, it's a very strange bathtub.

JONATHAN CHANIS: There really isn't a single global oil market. There's a series of regional oil markets. So when you think about it in terms of a bathtub, you really have to think about these different compartments with different levels of water and the size of the walls between the compartments can change.

WERTH: Nonetheless, he says the U.S. should still lift the export ban on American crude. For NPR News, I'm Christopher Werth. Transcript provided by NPR, Copyright NPR.