The Offshore Imperative: Shell Oil’s Search for Petroleum in Postwar America

Introduction

1 Introduction In 1956, Shell Oil geologist M. King Hubbert made a startling prediction. In a presentation before a regional meeting of the American Petroleum Institute in San Antonio, Hubbert estimated that U.S. oil production would peak in 1970. Plotting historical production statistics and his calculations of future production on a bell curve, based on ultimate discoveries of two hundred billion barrels of oil, he warned that oil output in the United States would drop at the same rate it had risen. Henceforth, companies would drill for dwindling supplies that were harder to find. Critics ridiculed and dismissed “Hubbert’s peak” at the time, citing the erroneous warnings of oil shortages by earlier forecasters. But when it became clear U.S. oil production had indeed peaked in 1970, Hubbert became a prophet. “This time the wolf is here,” wrote State Department oil expert James Akins in acknowledgment of this fact.1 The confirmation of Hubbert’s prediction, however, was soon overshadowed by the continuing transition of the U.S. oil market from a domestic to an international one. Industry commentators shifted their attention from the United States to the Organization of Petroleum Exporting Countries (OPEC) and the Middle East, especially Saudi Arabia, which seized control of world oil production and prices through an OPEC embargo in 1973. Similarly , historical studies of petroleum in the United States during the post-1945 period have largely been subsumed by a predominant focus on the Middle East.2 M. King Hubbert’s famous 1956 prediction and his 1969 forecast that world oil production (based on a total endowment of 2.1 trillion barrels) would peak in 2000 have received renewed attention in recent years as economists and geologists have debated the timing of the impending peak in world production and speculated about the extent of Middle Eastern reserves.3 But little effort has been made to assess the implications of Hubbert’s accurate 1956 prediction for the historical evolution of the U.S. oil industry in the late twentieth century. This evolution revolved around the efforts of U.S. oil firms to stave off 2 The Offshore Imperative the decline in domestic production through intensive exploration and technological innovation.4 These efforts had several important effects. They extended U.S. reserves and production, tempered OPEC’s control over world prices, revolutionized exploration and production technology, and pioneered the move into new oil and gas frontiers, namely offshore, in the United States and elsewhere. The center of gravity in oil production may have moved from the United States to the Middle East in the early 1970s, and Saudi Arabia may have replaced Texas as the swing producer in the world oil market, but the center of financial and technological dynamism has remained in the United States. Houston is still recognized as the capital of the world oil industry. One Houston-based firm distinguished itself in the industry’s race against depletion. This was M. King Hubbert’s employer, Shell Oil Company. The semi-autonomous U.S. affiliate of the worldwide Royal Dutch/Shell Group, Shell Oil was long one of the most successful oil operators in the United States. Widely respected and envied throughout the industry, the company’s chief strength was in the upstream business of exploring for and producing hydrocarbons , as opposed to downstream refining, transportation, and marketing, although it was strong in those areas too. Shell Oil appeared to have a knack for finding productive reserves in the United States and doing it profitably. Hubbert’s bosses at Shell were initially skeptical of his peak oil prediction, but they soon started taking it seriously. The company went after unconventional deposits in difficult and risky environments as well as in older, seemingly played-out fields. In the process, Shell made a name for itself in geophysical prospecting, petroleum geology, enhanced and heavy oil recovery, pipelining, even coal mining and alternative energy. The jewel in the company’s portfolio of oil and gas interests, however, was offshore Gulf of Mexico. Shell Oil pioneered many of the early moves offshore and continued to lead the way into deeper waters and new geologic trends. For decades, the company dominated the Gulf of Mexico, discovering and producing more oil and gas than any other firm. Barring future major discoveries elsewhere in the United States, which seems unlikely, the Gulf of Mexico will have provided the most significant extensions to U.S. petroleum reserves in the post-WWII period. For years...