Oil—The Global Energy Resource

Oil dominated the energy news for 1968. Both abundant and mobile, petroleum has proved to be the most flexible energy resource available on an international scale. However, the fear of critical dependence on Middle Eastern supplies has spurred the quest for sources outside that area, and in the past year attention has shifted to North America. For the United States, there was news of a major oil discovery in Alaska.

Those who delight in reporting how many times over Alaska's resources have paid for the original $7 million cost of the state, will soon have to revise their figures. Apparently a major field has been discovered on Alaska's North Slope area, 150 miles from Point Barrow and 300 miles north of the Arctic Circle. Estimates of recoverable reserves made by a highly reputable consulting organization were in the range of 5 to 10 billion barrels. By comparison, Texas proved reserves in 1967 were figured at 15 billion barrels.

It is likely that the original discovery is only part of a vast Arctic oil province. The Alaskan discovery, in conjunction with developments in northern Siberia, has led to one prominent US oil expert suggesting that the "center of gravity" of both North American and Russian oil will shift to the Arctic and that the area, once it is fully explored and developed, may rival the Middle East in size of fields and total.

So far much of this is conjectural, but one thing is certain: there are enormous difficulties to be overcome if large-scale Arctic production is to materialize. Frigid temperatures, darkness, poor transportation, and icebound seas will test the skill and ingenuity of the oilmen. Most concern focuses on the problem of transporting the crude to market. One approach calls for a 600-mile pipeline across Alaska to a terminal on Cook Inlet. Difficulties similar to those posed by the Brooks Range have been surmounted in European Alpine construction. Such a pipeline would give access through subsequent tanker transport to what may be promising markets for Alaskan oil on the US West Coast and in Japan. Another, longer pipeline connecting with facilities in Canada's province of Alberta would be more costly and would feed into a market already served by producers in other areas. It might also present policy problems arising from the availability of nearby foreign oil from Canada (much of it "shut-in" for lack of markets), as opposed to the more distant US domestic oil from Alaska. Proposals have also been made for ice-breaking tankers or, more exotic still, for submarine tankers operating beneath the polar ice cap. In either case northern Alaska's oil could reach East Coast markets and indeed would be closer to Europe than is oil from the Middle East.

If Alaskan oil fields prove to be as productive as some believe possible, this will pose a difficult domestic policy issue, welcome as the discoveries may be as a vast new addition to sagging oil reserves in this country. Existing state prorationing arrangements are oriented to the survival of high-cost wells in the oil producing states, as a conservation measure. If Alaskan oil from highly productive wells moves into the US market in volume, it could great strain upon the system.

Plainly there is much optimism about the prospects for the North Slope and the nearby McKenzie River Delta in Canada. For example, British Petroleum, one of the major international oil companies, which has not been a marketer in the United States, is seeking to acquire 5,000 US service stations and two refineries to be made through the merger of American oil firms. The acquisition apparently is premised on having available a supply of US crude oil from BP's 90,000-acre lease on the North Slope which it is now exploring. The maneuver is seen as a $300 million bet that its Alaskan operations will prove successful.

Despite its inconvenient location, northern Alaskan oil is a resource that can be produced with extensions and modifications of present technology geared to the difficult terrain. The tar sands and oil shale farther south dwarf Alaskan oil, both in size of deposits and technical problems. But the Alaskan discovery may have slowed the forward thrust towards economic exploitation of these resources.

Commercial production from the Athabasca (Alberta) tar sands began in 1967 at a $260-million plant designed for a daily yield of 45,000 barrels. Technical troubles have plagued the operation, but by late 1968 it was claimed that they had been overcome. In December, an application by a consortium of firms to operate a plant producing 80,000 barrels per day was turned down by the Alberta government. It has been reported that the rejection was prompted by the improved prospects for crude oil supplies from the United States and Canadian Arctic, in the wake of the Alaskan discovery. Meanwhile, a Japanese government-controlled group has also been expressing interest in the tar sands. Total potential reserves in the deposit are estimated at 300-600 billion barrels, and if even a small portion can be recovered they represent an enormous resource.

The size of the potential US shale oil reserves is even more spectacular, with known deposits containing at least 1.8 trillion barrels. The disposition of shale reserves is the subject of continuing policy discussion within the government. The Interior Department's study of shale oil development prospects, released in May, was not highly optimistic. The Department's experts foresaw the earliest operation by 1972, producing oil in the range of $2.68-$3.28 per barrel. By the late 1970's, they estimated, costs might go down to $2.00 or less. They saw no immediate prospects for in situ extraction of oil from the rock. On the basis of this report, the Interior Department decided to delay widespread sale of leases pending further technical advances. As an initial step, Secretary Udall did invite competitive bids for three test leases. These applied to federal shale lands in Colorado, with the leases to be of a size to supply a commercial plant during its period of amortization. The lease sale was regarded as providing a clue to the industry's assessment of commercial prospects. On the basis of the bids received (in December), that assessment appeared far from enthusiastic. With only two out of the three sites bid on at all, and those at prices drastically below Interior's apparent expectation, Secretary Udall just before the year's end announced rejection of the bids, terming them "patently inadequate."

Although North America's longer-run prospects have improved during this year, the main shape of the international oil trade remains as before. Within the past decade, Libya, Nigeria, Algeria, and Abu Dhabi have joined the list of major suppliers. Western Europe gets half of its energy from oil, and 85 percent of that comes from the Middle East and North Africa. Japan, also heavily dependent on the Middle East, imports three-fourths of its total energy. The three-way interdependence of supplying countries, importing countries, and international oil companies gives rise to constant maneuvering for greater assurance of supplies and markets and to bargaining over prices and profits.

Petroleum-supplying countries grouped in the Organization of Petroleum Exporting Countries (OPEC) continue to press for more effective control over the activities and earnings of concessionary companies and for greater government participation in operations. The agreements with newcomers now typically include the national oil company as a participating partner with the companies. At its conference in July 1968, OPEC stated as a primary objective the introduction of such participation in the operations of the old concessions of the major companies, without going into the means by which it could be brought about or the forms it might take.

Other OPEC objectives were stated as (1) close government control over the posted, or "tax reference," prices used to determine company profits and the tax revenues there-from, (2) the right to renegotiate agreements which yield "excessively high net earnings," (3) the accelerated relinquishment by companies of undeveloped areas within their concession boundaries, and (4) more extensive activities of governments in developing their own resources through national oil companies.

Changes are not likely to come suddenly. Continuous jockeying can be assumed, with none of the parties able to ignore the consequences of precipitous action. If over time this were to result in the erosion of the position of the international oil companies, it might also result in the erosion of oil prices and consequently of earnings by the exporting countries. Awareness of these possibilities no doubt will continue to temper the action if not the rhetoric of international oil politics.