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(The online version of this article appears in three parts. Click here to go to part one or part two.)

Bush-Bush was one of the early Giddings horizontals, but it had played out after producing perhaps 200,000 barrels -- maybe five times what a typical vertical well might have produced. When I appeared on the scene, Union Pacific was drilling a second horizontal well about 500 feet deeper than the first: a new well within an old well. The driller had re-entered the old well and bored down about 9,000 feet, and now was branching off horizontally to run more than a mile to the north. Meanwhile, the gas flare, which burns off waste methane from downhole, was showing a wisp of black smoke: a good sign of oil.

Photograph by John AcursoDirectional-drilling technology, like seismic imaging, was not new in the late 1980s, when Union Pacific and others began exploiting its possibilities. Rockefeller himself died only two years shy of seeing the first horizontal hole, in 1939. Still, until the late 1980s the use of directional drilling for horizontal wells was negligible. And then something happened. In 1989 a horizontal well could replace, on average, anywhere from two to five vertical wells, but at a cost four to eight times as high. Quite suddenly the balance tipped, and by 1993 the cost premium to drill horizontally had fallen to a factor of two or less, but the productivity advantage remained. The effect was to bring all kinds of previously inaccessible or uneconomical reserves within reach.

What happened in those years typifies change in the New Old Economy. There was no quantum technological leap, no blinding breakthrough. Instead a suite of interlocking technologies improved incrementally, but to revolutionary effect. One of those technologies was 3-D seismic imaging. It was not much good, after all, for people to spend a lot of money drilling fancy trajectories if they did not know where they wanted to go or whether they would find oil once they got there. By the late 1980s 3-D seismic imaging was revealing targets accurately enough to make directional drilling worth considering. Just as important, however, was the parallel emergence of what in the oil business is known as measurement-while-drilling.

If you think about pushing several miles of pipe into the ground behind a drill bit, it may occur to you that after you get a few hundred feet, you are likely to have some difficulty knowing precisely where your bit is. Not so long ago a driller would point his bit in the indicated direction, bore a few hundred feet, and stop. Then he would push an instrument downhole that amounted to a camera that took a picture of a compass, and then he would pull the instrument out and check his location. Each survey could mean halting drilling for hours at a stretch, and the results were approximate.

Measurement-while-drilling appeared on the scene around twenty years ago. Behind the drill bit rode one or more instruments that kept track of the bit's location and reported back to the surface. Engineers then added a series of sensors to tell drillers and geologists what sort of conditions the bit was encountering as it moved forward; the sensors' capabilities and sophistication have grown by the month. Then the devices acquired brains that allowed them to process data downhole. A high-end downhole tool today may carry the equivalent of three Pentium PCs of processing power -- this spinning in high-pressure muck behind a drill bit any number of miles underground in a tunnel of rock at a temperature of, often, 300 or higher.

A few years ago engineers at a rig site would collect the drilling data, known as the logs, and periodically fax it into town. "And someone in the geophysical department would have to review the log and say, 'Oh, yeah, I think there's oil there,'" Ray Newton, of Baker Hughes, an oil-technology company, told me. The process ate up expensive time. Now Baker Hughes and some of its competitors link the log to the Internet. "The rig site becomes a server," Newton said. Geologists and executives in the home office can click on their Web browsers and see what the driller is seeing somewhere in the Gulf of Mexico, or in Prudhoe Bay, or in the North Sea. They can plug into the rig from laptops at the airport. They can instruct the rig to let them know by e-mail or pager when the hole reaches 20,000 feet, or when resistivity suggests oil, or when anything else of interest happens. Rigs recently began talking to Palm Pilots.

Although it would be correct to say that the modern rig and bottom-hole assembly are a drill with a computer attached, it would probably be more accurate to call them a computer with a drill attached. It is not hard to imagine instruments, programmed with seismic data and loaded with sensors, that could sniff their way to oil. No one I talked to thought that robot rigs and robot wells are far off.

To view these technological developments as a series of coincidences is to miss the story. Measurement-while-drilling, directional drilling, and 3-D seismic imaging not only developed simultaneously but also developed one another. That is, improvements in each increased the payoff for improving the others. Higher-resolution seismic imaging increased the payoff for accurate drilling, and so companies scrambled to invest in high-tech downhole sensors; powerful sensors, in turn, increased yields and hence the payoff for expensive directional drilling; and faster, cheaper directional drilling increased the payoff for still higher resolution from 3-D seismic imaging. None of the technologies was anything like new when, collectively, they took off. What was new was the way in which they energized one another, and then chased one another upward in a virtuous spiral. The result has been to create the feeling that technological time is accelerating -- and it is.

Margarita

DRILLING began on Margarita last June. BP's people decided to attempt two innovations. For one thing, they hoped simply to see the reservoirs, obscured as they were beneath an overhang of salt. For another, they planned to use a tool that they hoped would allow them to bore through salt as quickly as through sediment.

Margarita's finished length, from drill floor to end point, would be more than three miles. The well would stretch about 11,000 feet almost due east of Pompano, and its objective would be almost 10,000 feet underground. Of the three miles that the drill bit would traverse, about a third would be through salt. Staying on course in salt typically requires frequent fine-tuning of direction, and though such adjustments can be made much faster now with measurement-while-drilling, they still slow the process down. In Margarita's case, Doug Stauber told me, standard equipment would be able to drill through about twenty feet of salt an hour, versus perhaps a hundred feet an hour in sediment. As it happens, Baker Hughes in the late 1990s introduced a system, called AutoTrak, that can adjust direction at full speed. Just behind the drill bit rides a programmable collar, from which sprout three rudderlike fins. Guided by computer (what else?), the fins bulge or retract to point the drill bit in any direction without slowing it down. Margarita's engineers thought that the tool might shave days off the schedule -- which, at $100,000 a day, would amount to more than lunch money. More important, if they could drill through salt as quickly and accurately as through sediment, subsalt exploration and development would move a step closer to being cheap and routine.

Sure enough, the drillers got through the salt in five days, instead of the ten to fourteen that would normally have been required. Once past the salt, they had to make a tight turn to set a course that would intersect both their target zones, each about 200 feet in diameter. With some effort they managed to hit both targets -- but they did not find oil. They found water. This was more of the salt's treachery. Even under optimal conditions seismic imaging is imprecise, and salt presents anything but optimal conditions.

Stauber and his colleagues could tell, however, from the sensors' logs and from the cuttings that came back with the mud returns, that the hole had nipped oil for a few feet on the way down, just near the top of the upper target zone. The geologists thought they understood what had happened: the computer's maps had put the promising formations a few hundred feet lower than where they actually were. Stauber and the drillers decided to try sidetracking. They would pull back a few thousand feet to the edge of the salt and then make a sharper turn, cutting a new approach about 300 feet to the northwest of the first one. That ought to let them catch the sloping reservoir higher up, where water, they thought, should give way to oil.

Expandable Earth

I CAME of age in the 1970s, the era of limits. In 1976, when I was on my high school's debating team, the national topic was "Resolved: that the development and allocation of scarce world resources should be controlled by an international organization." In 1977 the Carter Administration's National Energy Plan said,

The diagnosis of the U.S. energy crisis is quite simple: demand for energy is increasing, while supplies of oil and natural gas are diminishing. Unless the U.S. makes a timely adjustment before world oil becomes very scarce and expensive in the 1980s, the nation's economic security and the American way of life will be gravely endangered.

At the time of the first Earth Day, in 1970, an ecologist and zoologist named Kenneth E.F. Watt said, "We're going to be out of crude oil about the year 2000 or shortly thereafter. What happens then?" He spoke for the times, and to some extent for common sense, when he said, "We in fact live on a small round ball that logic dictates must have limited resources, yet we are proceeding to behave as if there were absolutely infinite resources. There aren't."

Photograph by John AcursoSophisticated observers in those days knew better than to imagine that the oil spigots would suddenly run dry, but they expected that the price of oil would rise steadily, and probably sharply, as oil became scarcer and harder to reach. That was not a fringe view; it was good economics. Concern about oil prices merged with a related point of conventional wisdom, which was that the economy could no longer expand without bumping into supply constraints, which cause dangerous inflationary pressures. So-called supply-siders of the right blamed the government's tax policies for creating bottlenecks, while intellectuals of the left said that the time had come to adjust public expectations downward; but all agreed that, for whatever reason, the economy's potential for non-inflationary growth had fallen below the level that obtained from the end of World War II to the late 1960s.

The New Economy hypothesis challenges the supply-constraint model and, in effect, inverts it. The notion is that in the Old Economy growing demand soon meets bottlenecks that take months or years to ease as companies invest in new capacity, or as technologists search for workarounds. In New Economy industries, in contrast, the marginal cost of additional capacity falls rapidly toward zero, because the product is informational rather than physical. The first megabyte of data storage, or the first megahertz of processing speed, or the first copy of a new spreadsheet program, is expensive, but before long the cost of one more megabyte or one more megahertz or one more copy is negligible. Production can be ramped up at very little additional cost. That is Larry Summers's avalanche.

Oil, of course, is not information. It is a finite resource that technically becomes more difficult to find with each barrel pumped. If any industry should behave according to the old rather than the new model, it is the oil industry. Yet several ostensible paradoxes suggest that it is not behaving that way at all.

For example, the world has burned about 820 billion barrels of oil since the first strike at Oil Creek, Pennsylvania, in 1859, and 600 billion of those barrels -- almost three fourths of the total -- have been burned since 1973. Yet the world's proven oil reserves are about half again as large today as they were in the 1970s, and more than ten times as large as in 1950. It is as if using up oil has somehow created more, although obviously that cannot be true.

A second paradox: Each decade produces fewer of the very large discoveries known in the industry as elephant fields. "No field with more than 27 billion barrels -- one year of global consumption, at present rates -- has been found anywhere since Safaniya, in Saudi Arabia, was discovered in 1951," Gregg Easterbrook wrote recently in The New Republic. Today, indeed, a find of merely one billion barrels is considered cause for rejoicing. Yet the average exploratory well yielded four times as much oil in 1998 as in 1980, according to the Energy Information Administration, with the big jump starting about ten years ago.

A third paradox: We know there is less oil in the ground every year. Other things being equal, that should make finding additional barrels more expensive every year. But finding costs have dropped sharply since the 1970s, even in the United States, a region that has been drilled practically to death. According to the Energy Department, the average cost of finding new oil has fallen from $12-$16 a barrel in the 1970s and 1980s to $4-$8 today. (Oil prices have recently risen quite a bit, of course, but that is because of OPEC's machinations and turbulence in the Middle East. Finding and development costs give a much clearer picture of oil's real scarcity.)

If oil were truly and fully a part of the New Economy, its marginal finding and production costs would be falling toward zero. If oil were truly and fully a part of the Old Economy, its marginal costs would be rising toward unpleasantness. But since oil is part of the New Old Economy, its marginal finding and production costs are falling, though not toward zero -- falling because of New Economy technological magic, though not toward zero because oil, unlike information, is a physical substance in limited supply.

Thus the reason the average new oil find grows larger even as the average new oil field grows smaller is that the industry is drilling fewer dry holes and extracting more oil from the new wells it drills. Exploration success rates grew from 23 percent in the 1970s to 29 percent in the 1990s. That increment sounds modest, but remember that explorers in the 1990s were shooting at much more difficult targets. Success rates could rise even as difficulty increased because improvements in seismic imaging gave geologists a much clearer shot -- as if a new rifle scope enabled them to shoot targets at 1,000 yards that previously they couldn't hit at 500. Meanwhile, techniques such as directional drilling and enhanced recovery (in which water or gases or chemicals are injected into reservoirs to force out more oil) increased the yield per new well. Thus did the growing ingenuity of human beings outpace the earth's growing reluctance to relinquish its treasure.

It is certainly true that elephant fields are growing scarce. But that is increasingly beside the point. In the Old Economy model of resource extraction, if you needed more of some resource, you invaded and pillaged new reaches of the planet to get it. Every day, however, virgin resources grow scarcer and thus more expensive, while human ingenuity grows more plentiful. In the New Old Economy the cost advantage increasingly tips away from rapine and toward cleverer and more efficient exploitation of existing resources -- which, after all, are already discovered, leased, and equipped with infrastructure. Thus forestry is becoming more like high-tech farming, as it moves away from the logging of virgin forest and toward the harvesting of intensively managed plantations, which can produce yields five to ten times as high. Sawmills are starting to use x-rays and computers to scan logs and extract an average of 10 percent more usable wood from them. The U.S. copper industry was saved from near extinction in the 1970s and early 1980s by, among other things, rapid advances in a process called solvent extraction-electrowinning, which uses chemicals rather than smelters to draw new copper from old mines and also -- no less important -- from the heaps of waste left behind by old mines. Nowadays almost half of all American steel is produced by so-called minimills, not from ore but from scrap metal, such as junked cars and appliances, construction debris, and so on. In the New Old Economy, intensivity displaces extensivity.

Oil is no exception. "Despite the fact that the United States is the most mature hydrocarbon region in the world," the Energy Department reported last year, "11 percent of all the petroleum reserves ever added in the United States (since 1859) have been added in just the last eight years." And where is all this new oil coming from? Fully 89 percent, the department says, is from old fields. William L. Fisher, a prominent petroleum geologist at the University of Texas at Austin, has found that in theory about 70 percent of the oil in an average reservoir should be recoverable; at present the average well actually drains about half that amount, and often a good deal less. "What we now understand," Fisher told me recently, "is that owing to the complexities of reservoirs, there's a lot of oil unrecovered in existing reservoirs."

In the past an oil well was disposable, like a drinking straw: drillers stuck it in, sucked out the oil, and then threw it away. Nowadays, in deep water and other environments where drilling is expensive, oil companies are beginning to view wells as being less like straws and more like roads, to be used and reused as new sections of reservoir are opened up and as old sections are redeveloped with new technologies. "When I started, twenty years ago," Mark Vella, a well-completion specialist with Schlumberger, told me, "if you left fifty million barrels behind because of bad practices, it was still commercial. Today you can't do that." Yesterday's scraps are today's meal. And the threshold at which scraps become meals drops all the time, because technology keeps creating new efficiencies.



Elsewhere on the Web
Links to related material on other Web sites.

"Microdrilling Technology Advances in Los Alamos Field Test" (Fossil Energy Techline, October 20, 1999)
An article in a U.S. Department of Energy publication about microdrilling advances at Los Alamos National Laboratory.

So technologists are busy looking for a way to separate oil and gas from water downhole, in the well itself, rather than expensively pumping water to the surface only to extract it and pump it back down again. No one doubts that this grail will soon be found. Meanwhile, researchers at Los Alamos National Laboratory have designed a "microdrilling" apparatus that replaces heavy rigs and skyscraper derricks with a coiled-tubing system that can be towed around on a tandem trailer behind a large pickup truck. And although it took oil engineers 129 years, until 1988, to learn how to drill for oil profitably in a quarter mile of water, it took them only another nine years to reach one mile -- a depth that by last year was considered boring.

Thus is the world I grew up in, the world of scarcity and constraint, stood on its head. "The end of the oil age," says Julian West, a senior director at Cambridge Energy Research Associates, "is not going to come because we run out of barrels." West is a good person to ask about the errors of the 1970s and 1980s. "I believe I was the first person to call the peak of UK North Sea production," he told me in a telephone interview from his London office. "This was in 1981, and I called it for 1982." And how, I wondered, did he do? "It hasn't peaked yet."

It may be as wrong to project today's optimism into the future as it was to project yesterday's gloom. "Forecasting with a pencil and a straightedge has had a very checkered track record," West told me ruefully. But the most common view, and the one that I find most plausible, is that the demand for oil will peter out well before any serious crimp is felt in the supply. Something cheaper and cleaner, perhaps the hydrogen-based fuel cell, will come along, and the oil age will end with large amounts of oil left unwanted in the ground.

It is natural to think of oil the way a miser thinks of gold -- as a limited physical resource whose price must rise or at least hold steady. But that is no longer a good way to think of oil, or of any other resource in the New Old Economy. Most people understand intuitively that the essential resource in Silicon Valley is not magnetic particles on floppy disks, or hard drives in servers, or lines of code or bits of data; it is human ingenuity. The oil business cannot be information-based to the extent that the software industry is, but increasingly it is dominated by the same principle. Knowledge, not petroleum, is becoming the critical resource in the oil business; and though the supply of oil is fixed, the supply of knowledge is boundless. In every sense except the one that is most literal and least important, the planet's resource base is growing larger, not smaller. Every day the planet becomes less an object and more an idea.

Margarita

THE drillers on Pompano began sidetracking on July 18. The results came in on July 20. That evening the Margarita team was at an Astros game and had just settled in for the first pitch when the report arrived from the rig. The group spent the first inning looking over the data and the next three innings celebrating. "The sand" -- that is, the oil-bearing sediment -- "that we actually found in the well is better than we projected we'd find," Rick Bartlett, one of Doug Stauber's colleagues, told me a few days later. The large upper reservoir not only contained oil but would probably exceed expectations. The lower reservoir held a surprise: gas. How much, and whether there might also be oil in the lower sands, were not immediately clear.

Photograph by John AcursoIt took several weeks for the engineers to perforate the well liner, install screens to keep sand out, fracture the rock formation, install production tubing, and flush drilling mud and debris and completion fluids from the hole. On September 8 the engineers at Pompano opened the tap, and Margarita came on line. "Looks like it's almost five thousand barrels a day now," Stauber said, "and it will go up. For Pompano, that's a pretty good well, and it'll get better." The engineers expected Margarita to yield something like six million barrels of new reserves, at the fairly modest cost of about $13 million. That was all new oil from an old field; and at around two dollars a barrel, it cost less than half as much to find as the oil from the original Pompano development. Having succeeded with Margarita, the geologists would use the same techniques to go after more.

The great question about the surge in American productivity since 1996 is, Will it last, or is it simply a brief, blessed pop that will disappear forever when the next recession comes? That is essentially another way of asking whether the New Economy and the New Old Economy are real, or are just the Old Economy on adrenaline. In the oil business right now thousands of economists and executives and engineers are asking their own versions of the same question. The industry's recent rapid productivity advances can be read in at least two ways. It may be that the computer-driven leap to 3-D seismic imaging in the late 1980s triggered a one-time series of follow-on innovations, like a string of firecrackers, which will end before long. Or it may be that the pace of innovation and adaptation has accelerated for good, thanks to the microprocessing miracle and to the oil industry's rapid merger with the information economy. Either story may be true -- or neither. No one will know for some years. But I can tell you how it feels to the drillers on the rigs and the geologists in the 3-D seismic-visualization environments and the engineers building computerized sensor systems that guide whirling drill bits in three-mile mud-filled pipes through hot rock. It feels as though something has changed and there is no going back.

After Margarita was finished, the drillers on Pompano turned to an exploration well called Subsalt. Not an evocative name, but informative. Margarita was 10,000 feet underground, but Subsalt was more like 20,000. Margarita was tucked under a salt overhang, but Subsalt was buried under the main body of salt. The underground salt structure acted as a sort of umbrella, casting a seismic shadow that obscured the formations beneath. Even with the latest seismic runs the image was blurry, and in patches there was no image at all. "There are still areas we can't see," Stauber told me. "But it's a whole lot better than being able to see nothing, which is all we had until January." The presence of a promising geologic trap, the geologists thought, could now be inferred with enough confidence to justify taking a shot. The drilling of Subsalt began on November 16.

(The online version of this article appears in three parts. Click here to go to part one or part two.)


Jonathan Rauch is a senior writer and columnist for National Journal and a writer-in-residence at The Brookings Institution. His most recent book is Government's End: Why Washington Stopped Working (1999).

Photographs by John Acurso.

Copyright © 2001 by The Atlantic Monthly Company. All rights reserved.
The Atlantic Monthly; January 2001; The New Old Economy - 01.01 (Part Three); Volume 287, No. 1; page 35-49.