May 7, 2014
Bloomberg View

In January 2011, during his State of the Union speech, President Barack Obama called oil “yesterday’s energy.” Here’s the reality: Oil has been “yesterday’s energy” for more than a century. And yet, it persists -- because of continuing innovation that allows drillers to produce more oil and gas faster and more cheaply than ever before.

If oil didn’t exist, we would have to invent it. No other substance comes close when it comes to scale, energy density, ease of handling and flexibility. Those properties explain why oil provides more energy to the global economy than any other fuel. (It accounts for about 33 percent, compared with coal at 30 percent, natural gas at 24 percent and hydro at 7 percent. The balance comes from nuclear and renewables.) It also explains why more than 90 percent of all transportation continues to be fueled by petroleum products.

Oil and natural gas will continue to dominate the global energy market for decades to come, because the convergence of several technologies -- from better drill bits and seismic techniques to robotic rigs and nanotechnology -- is enabling the production of ever-increasing quantities at lower cost. Furthermore, the industry is spending enormous sums every year to find, refine and transport the fuel.

Advocates of renewable technologies like to point to the rapid growth that has occurred in the solar- and wind-energy sectors over the past few years. In 2011, global investment in “clean energy” totaled $302 billion, a record, according to Bloomberg New Energy Finance. (In 2012, investment fell slightly to $268.7 billion.) That’s a lot of money. But in 2012, global spending on oil and gas drilling totaled more than $1.2 trillion. About a quarter of that amount, roughly $300 billion a year, is being spent on drilling wells in the U.S. Thus, every year, America alone spends as much just drilling oil and gas wells as the entire world spends on clean energy. And drillers are getting more efficient all the time.

More oil and gas wells have been drilled in the U.S. than anywhere else. No other country even comes close. From 1949 to 2010, more than 2.6 million wells were drilled, and that number has been increasing by about 41,000 new wells per year. During the same period, thanks to ongoing technological innovation, the percentage of dry wells, or “dusters,” dropped to 11 percent from 34 percent.

Perhaps the most important recent innovation in the oil patch has occurred in the design of drilling rigs. Rigs are relatively simple devices that range in size from truck-mounted units that drill water wells to massive 100,000-ton drill ships that prospect for oil and gas beneath 10,000 feet of water. But the principles on which all of them work are basically the same: They must be stable, precise and capable of producing enough torque to punch a hole in the earth.

The latest, most important innovation has been the AC top drive, which moved the main drive mechanism from the floor of the rig to the mast. This technology consolidates the rig’s drive and hoist mechanism into one unit, which allows the automation of several mundane processes that used to require human intervention. Although roughnecks still need to handle many operations on the rig, computers monitor key data points such as rotational speed on the bit, drilling rate and flow rates. The computers feed that data into a control system that keeps the optimum amount of weight on the drill bit and keeps it spinning at optimal speed.

If you’ve ever drilled a hole in a piece of wood, you know the importance of applying proper pressure. Press too hard, and the drill freezes or gets stuck. Press too lightly, and the bit makes no progress. The same factors are at play on a drill that’s boring a 4-mile-long well. By moving the machine's prime mover from the floor to the mast, the AC top drive allows digital controllers to continually weigh the entire drill string and adjust the pressure applied to the bit, as well as the rotational speed -- assuring the maximum rate of penetration. Add in the rig’s ability to use longer sections of pipe and its modular design -- which allows it to be transported more quickly -- and it’s easy to see how companies are able to drill more wells faster and more cheaply than ever.

Innovation has also speeded up the work of drill bits, seismic tools, telemetry systems, proppants, pumps and many other technologies that are needed to extract hydrocarbons. Back in 2007, it took about 57 days to drill an average well in the Cana Woodford Shale, for example. By 2012, it took just 30 days.

The fruits of innovation can be seen in the production data. In 2012, U.S. oil output rose by 790,000 barrels per day, the biggest annual increase since the business began in 1859. Domestic natural gas production is also at record levels.

In 1929, the economic historian Abbott Payson Usher wrote: “The limitations of resources are relative to the position of our knowledge and of our technique.” The perceived limits of available resources, he explained, “recede as we advance, at rates that are proportionate to the advance in our knowledge.” The history of the oil and gas sector is one of advancing knowledge and increased resource availability. And that has brought us cheaper energy.

(This is the first of three excerpts from "Smaller Faster Lighter Denser Cheaper: How Innovation Keeps Proving the Catastrophists Wrong," which will be published May 13 by PublicAffairs.)

Original story may be found here.

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